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Tether (USDT) is only 74% backed by cash and securities as stated in the affidavit filed with the Supreme Court of the State of New York by Stuart Hoegner, the general counsel to Tether and major bitcoin exchange Bitfinex. On April 25, New York Attorney General Letitia James accused that the companies behind the USD pegged stablecoin Tether and cryptocurrency exchange Bitfinex engaged in efforts to cover up a loss of $850 million of client and corporate funds.
The news sent shockwaves across the crypto community. According to CoinMarketCap, cryptocurrencies as a whole lost $10 billion in value within an hour of James’ statement. Tether itself lost 1.4% of its value.
Tether, the company behind the stablecoin, and Bitfinex have filed an affidavit with the Supreme Court of the State of New York as a response to the allegations. the affidavit reads:
“As of the date [April 30] I am signing this affidavit, Tether has cash and cash equivalents (short term securities) on hand totaling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers.”
The affidavit sparked debate in the crypto community. Some argue that Tether runs the risk of being compared to fractional banking since it’s 74% holding can be considered relatively high. Other have said that Tether can’t be compared to fractional banking due to the fact that Tether is a stablecoin backed by the USD at a 1:1 ratio.
Macro analysts including Alex Krüger argue that Tether has an asset-liability mismatch. He said, “Confirmed, from the horse’s mouth. Tether is not fully backed by cash and cash equivalents. Tether has an asset-liability mismatch (i.e. liquidity concerns) and is possibly insolvent as well (i.e. liabilities > assets).”
Zoe Phillips, an attorney at Morgan Lewis representing Tether, defended Tether’s stance. She said that the company does not need to hold a dollar for every Tether issued to guarantee the redemption of users. She stated the following:
“According to the Attorney General, the line of credit needed to be frozen because it improperly impairs the reserves Tether would use for redemptions. The Attorney General appears to believe that Tether must hold $1 in cash fiat currency for every dollar of tether. These allegations are wrong on multiple levels.”
Experts fear that the loss of faith in Tether, which is used by many crypto traders, to hold value in the hours of high volatility would deliver a body blow to the crypto sector as a whole.