A look at Tether’s Q1 2023 performance

The company behind the largest stablecoin (USDT) in terms of market cap, Tether, recently published an attestation report based on its first-quarter performance in 2023.  Apart from shedding light on its reserves, the company also mentioned its holdings of gold and Bitcoin for the first time in history. Here’s a deeper dive into Tether’s Q1 2023 performance.

Tether's market cap, which was $66.24 billion on January 1st, increased to $82.83 billion as of May 16. Additionally, it achieved a record net profit of $1.48 billion, which is double the $700 million net profit the company recorded in Q4 2022.

The report was released during a tumultuous time for both, the US stock market, which has been affected by an ongoing banking crisis, and the crypto market, which has seen restrained growth amid wider economic uncertainties.

However, figures reported by Tether indicated that its stablecoin had gained dominance in the crypto market amidst these uncertainties. Analyst at digital asset research firm Kaiko, Conor Ryder, said in a note that Tether has become the ‘most trusted’ stablecoin in the market due to its perceived safety from the SEC and due to its peg safety as of late.

For context, a number of cryptocurrency-related firms have been targeted by US regulators for their perceived connection to the US banking turmoil. The idea was sparked by the fact that Silvergate, Silicon Valley Bank, and Signature Bank, the trio who just shut down their businesses, all had cryptocurrency clientele. Weak crypto prices were thought to have led these institutions into liquidity crunches. However, most analysts feel that the failure of these institutions was caused by bad economic conditions and poor risk management.

Getting back to the Tether, the company first disclosed its profit figures last year in a report. It mentioned that its $700 million profit in Q4 2022 was part of shareholder equity, representing additional capital in the reserves to strengthen the company. However, it was not clear how the profits were realised.

In December 2022, the Wall Street Journal reported that Tether had been lending its own coins to customers instead of selling them for fiat money. This suggested that Tether may not have sufficient liquid assets and that there was a risk that increasing loans might prevent the company from paying redemptions during a crisis.

Tether addressed this issue by stating that it will remove all secured loans from its backing in 2023. In its Q4 2022 report, Tether demonstrated a reduction of $300 million in secured loans. The recent Q1 2023 report mentioned a further reduction of 25 percent in secured loans, from 8.7 percent to 6.5 percent within the overall reserves. Meanwhile, the highest percentage of assets, over $53 billion, was allocated to US treasury bills, representing more than 64 percent of the overall reserves. Gold and Bitcoin contributed about 4 percent and 1.8 percent of the total reserves, respectively.

The company also claimed to have high liquidity, backed by a significant portion (85 percent) of investments held in cash, cash equivalents, and other short-term deposits. The cash and cash equivalents included money market funds, overnight repo, cash and bank deposits, and term repo.

Citing the losses incurred by its competitors during the banking crisis, Tether announced that it had reduced its bank deposits from $5.3 billion to $481 million in Q1 to mitigate counterparty risk.

As mentioned earlier, the banking crisis was triggered by the collapse of three major US banks: Silvergate Bank, Signature Bank, and Silicon Valley Bank (SVB). As a result, the second-largest stablecoin, USDC, lost its pet to the dollar and fell below 90 cents after it was revealed that its issuer, Circle, had about a $3.3 billion exposure in SVB. Consequently, USDC faced a deposit run, although it eventually recovered from a brief de-peg.

In light of these events, Tether emphasized that its deposits were diversified across multiple banks, rather than concentrated in a single institution. Tether also compared its Q1 profits to those of Blackrock, a leading investment provider established for over 30 years, stating that despite being only a decade old, it generated profits over $300 million higher than Blackrock. Additionally, Tether claimed to have made higher Q1 profits than prominent industry heavyweights such as Paypal, Netflix, Starbuck, CashApp, and others in the S&P 500.

John Reed Stark, the former head of the SEC Internet Enforcement Office, pointed out that Tether had agreed to commission a full audit within "months, not years" in 2021, which has yet to occur. He also criticized the use of attestations, stating that they are ‘meaningless’ and not considered audits. Stark claimed that Tether previously published attestations completed by a random 5-person Cayman Islands firm.

With that in mind, it is still unclear whether Tether’s attestation reports would help avoid the wrath of US regulators, or whether or not the same would put questions about its reserves to bed. However, what is known is that USDT continues to solidify its position as the largest stablecoin in the market, especially during times of macro uncertainties.