Some companies have started using cryptocurrency to make payments to China, specifically the stablecoin Tether, which is pegged to the U.S. dollar, reports Bloomberg.
You can't just announce that you have a new currency that is pegged to a currency. You can peg one currency to another, but only by expending resources to keep the values together, regardless of other relative demand for each.
Even if you have a lot of resources, it's not always possible to maintain a peg.
Tether (USDT), the largest stablecoin by market capitalization, may be "constrained" in its ability to maintain its peg to the U.S. dollar, S&P Global Ratings said Tuesday, citing concerns about its reserve transparency and risk appetite, among other issues.1
The ratings agency gave an asset assessment score of 4 out of 5, with a 1 being the best possible score.
"Our asset assessment of 4 (constrained) reflects a lack of information on entities that are custodians, counterparties, or bank account providers of USDT's reserves," says the report.
So, What's Bothering S&P Global About Tether?
Now, Tether discloses details about its reserves every quarter and the ratings agency analyzed the latest data where it found some concerns.
First, the S&P assessment points out that much of Tether's reserves are held in "low-risk assets" like short-term U.S. treasuries. Even in those cases, Tether does not offer information about "custodians, counterparties, or bank account providers of the assets."
Tether's reserves also include double-digit and opaque exposure to riskier assets.
"The riskier assets making up 15% of the collateralization ratio comprise corporate bonds, precious metals, bitcoin, secured loans, and other investments," the report adds. "Given the type of assets and limited transparency on their composition, such as their denomination and the borrowers of the secured loans, there is potential exposure to credit, market, currency, and interest risks that cannot be quantified."
The report also points to the lack of a regulatory framework, limitations on primary redeemability, and lack of asset segregation as other shortcomings of the stablecoin.
This is not the first time Tether's reserves have received attention. In 2021, Tether was a subject of enforcement actions by the Commodity Futures Trading Commission (CFTC) and New York Attorney General for improper information about the reserves backing the stablecoin.23
That sounds like it doesn't. Like, someone might be willing to sell you this at a fixed rate, but if those backing reserves become exhausted, there's no guarantee that you don't wind up in a situation where you can't get dollars back.