Examining Tether’s Secret Loan Portfolio
The first public look inside Tether’s loan business
Summary: We recently obtained information about Tether’s secured loans operations from a source familiar with the matter. This source identified Ethereum addresses used to process both loan interest and principal payments. We validate this claim using data from the Celsius Network bankruptcy. We then identify previous and current addresses that appear to be loan customers of Tether, including several well-known crypto entities. Finally, we estimate the total loan amounts represented by this dataset, demonstrating that we can account for 100% (or more) of Tether’s reported secured loans in 2021, and around 20-30% of their reported secured loan book as of their most recent attestation (assuming we can trust their numbers).
Tether, the $89 billion stablecoin that acts as the lifeblood of the crypto-conomy, has long faced questions about the assets backing their tokens. A stablecoin should remain “stable,” pegged to whatever real-world currency unit it represents on the blockchain. The second largest stablecoin, USDC, is issued by a New York-based company called Circle Financial. They regularly publish a detailed accounting for the assets backing their tokens. According to their reports, USDC is backed by short-dated U.S. Treasury bonds and cash held in bank accounts. Simple, right?
In contrast, Tether’s reserves are somewhat more… exotic. Of course, to discuss Tether’s reserves one must first play devil’s advocate and assume that Tether’s claims regarding their reserve portfolio are accurate. After all, Tether has been caught lying about their reserves in the past. Analysts have demonstrated that the supposed performance of their reported portfolios stretch the limits of credulity. And importantly, the procedures underlying the third-party validation of their reserves by accounting firm BDO are quite limited and rely on management’s assertions. (These reports are colloquially referred to as an “attestation,” although this is a misnomer.)
Assuming Tether has found the error of their ways and is now being honest with us about the reserves backing their tokens, one finds that the Tether portfolio managers have a decidedly more risky approach than their main competitor Circle. Per previous attestations and document releases, Tether tokens have been backed by Chinese commercial paper, Bitcoins, precious metals, “other investments,” and secured loans to “non-affiliated entities.”
The last category, secured loans, has been of interest for investigators and journalists. Tether has never publicized who they lend to or the terms of the loans. That veil was pierced once about two years ago, when the bumbling Celsius Network CEO Alex Mashinsky let slip that Celsius had borrowed around $1 billion from Tether using Bitcoin as collateral:
“If you give them enough collateral, liquid collateral, bitcoin, ethereum and so on . . . they will mint tether against it,” [Mashinsky] said…“New USDT is issued for such loans,” he added, and later destroyed when the loan is closed “so it does not permanently increase USDT in circulation”.
However, until now there has been minimal public information available about Tether’s loan book.
Insightful analysis and commentary on the dirtiest bubbles of the 21st century.
Identifying Tether’s On-Chain Loan Activity
Recently, we established contact with a source familiar with Tether’s process for issuing and collecting secured loans. This individual described the terms of the loans and provided a list of three blockchain addresses used by Tether to issue and redeem loan principal and to collect interest payments from their borrowers. According to this individual, Tether uses their main treasury addresses on Tron and Ethereum to issue and redeem loan principal. A third address (we will refer to it as the “Tether Interest Address”), not annotated by any available blockchain analytics platform (we checked Etherscan, Arkham, and Nansen) was reported to receive interest payments on the loans. We observed that the Tether Interest Address receives transfers from multiple addresses and that these transfers cluster around the first of each month. Once a large balance builds up, the funds are then transferred to a second address (Bitfinex deposit) and then immediately transferred again to the Bitfinex exchange hot wallet.
Absent confirmation from a second source, we decided to examine the available data to see if there was a way to support these assertions. We realized that there was an excellent data source available. After its collapse and subsequent Chapter 11 filing, Celsius Network’s relationship with Tether was examined in some detail. On their collapse, Celsius owed around $900 million to Tether; this was paid when Tether reportedly liquidated Celsius’ Bitcoin collateral. The Celsius bankruptcy examiner’s report also provides a few other values for the balance of Celsius’ Tether loans in 2021.
Fortunately, due to our prior work examining Celsius Network’s cryptocurrency movements we had established a robust map of their Ethereum addresses. To test whether Celsius received loan disbursements and made repayments to Tether’s treasury address, we filtered the Tether treasury’s transaction history for probable Celsius addresses. We then obtained a running total of the estimated balance of Celsius’ loans using this dataset:
This dataset tracks closely with the data provided by the bankruptcy examiner’s report. For example, we obtain a value of $890 million as the final Celsius loan balance; this is within a few million dollars of the amount reported by the examiner.
We conclude with high confidence that Celsius’ loans from Tether were disbursed and repaid via the Tether Treasury address.
Next, we proceeded to examine the transaction list from the identified Tether Interest Address. Again, we filtered for known Celsius Network addresses. We then examined whether the amount of the monthly payments was correlated with the loan balance. We determined that there was an 89% correlation between the monthly payments and the loan balances over time.
Next, we used Alex Mashinsky’s stated “5-6%” interest rate to estimate the principal amount that would correspond to the interest payments. Despite the rough nature of this estimate, these values again match closely with data from the Celsius examiner:
We conclude with high confidence that Celsius made interest payments to Tether via this address.
Who else does Tether lend to?
After confirming that Celsius used the identified addresses as described, we examined the other entities that have interacted with the Tether Interest Address. We discovered that several addresses are associated with known entities according to blockchain analytics platforms Nexo, Arkham, and/or Etherscan. Among these were the crypto lenders Babel Finance (insolvent) and Nexo and crypto trading firms Three Arrows Capital (insolvent) and Amber Group. We also identified addresses associated with the Bitfinex, OkEX, BTCTurk, and Binance cryptocurrency exchanges.
We searched the Tether Treasury address to see if the same entities showed up. Indeed, we discovered that the identifiable entities that made monthly transfers to the Tether Interest Address also sent and received funds from the Treasury. We also observed this pattern for several addresses that are presently unidentified. This pattern matches the behavior of Celsius Network, suggesting that these parties borrowed from Tether via a secured loan mechanism.
As of December 1st, there appear to be seven borrowers making monthly interest payments, based on the similarity of the payment amounts over the past few months. The largest payments are transferred from the Bitfinex hotwallet. (Note: this doesn’t mean that Bitfinex or OKX are Tether borrowers, only that someone used these exchanges to make the transfers to the interest payment address).
How have Tether’s secured loans changed?
We used the total interest payment dataset to estimate the principal amount represented over time:
Finally, we wanted to examine whether this dataset agreed with Tether’s reported secured loan balances. Using average interest rates of 6% and 8%, we estimated the loan balances represented by this dataset and compared them to Tether’s official numbers. Notably, our estimates are quite close to Tether’s reported numbers for 2021. (It is interesting that our estimates at times exceed Tether’s reported loan balances. We wouldn’t draw too strong of a conclusion yet; just note that if their average interest rate in mid-2021 was 6% or lower there might be a problem here!)
However, starting in June 2022 the numbers diverge significantly. While the balance represented by our dataset declines to around $1.2-1.5 billion, Tether’s secured loan balance rose and remained relatively stable from that point forward, hovering between $5 to $6.2 billion.
As we shared at the beginning of the article, we were informed that Tether’s Tron treasury address is used to issue and redeem loans on that blockchain. However, we have much less insight into the addresses on that chain and were unable to obtain a Tron interest payment address to use as a filter for possible borrowers. It is quite possible that Tether has issued a significant amount of loans using that blockchain.
Conclusion: How Tether issues billions of “dollars” that aren’t dollars at all
Based on the current dataset, we can estimate that Tether issued many billions of USDT backed by crypto collateral. The impact is far larger than one might assume just from looking at the loan balances. For example, Tether lent Celsius Network just over $4 billion in total. Our data indicates that other parties like Amber and 3AC similarly received billions in loans, which round-tripped their way through the crypto-conomy without ever touching the real financial system or ever being backed by real money….
Many questions remain unanswered:
What percentage of Tether’s “redemptions” are actually loan repayments?
What is the impact of cycling billions of crypto-backed USDT through the crypto markets?
And, why did Tether’s reported secured loans massively diverge from this data starting in May/June 2022, around the same time as Terra, Celsius Network, and Three Arrows Capital collapsed?
We note that these revelations, while quite interesting and useful, do not provide any substantive evidence either to confirm or contradict Tether’s claims regarding their secured loans. However, this information does provide a first look inside Tether’s loan business and will give our friends in journalism and analytics another piece of the Tether reserves puzzle.
Coda: What about the Bitcoin?
As an aside, we wanted to note something we observed while writing this article. On Tether’s attestation reports, they list a “Bitcoin” category as part of their reserves:
Checking the footnote for “Bitcoins,” we find:
The “Bitcoins” category comprises Bitcoins held on-chain in wallets controlled by the Group.
The language “controlled by the group” is interesting, because Tether by definition controls any addresses holding Bitcoin collateral for their secured loans. We know from Mr. Mashinsky that Tether over-collateralizes their secured loans. Is it possible that Tether is including these “extra” Bitcoin in their reserves?
Celsius Network. FTX. Signature Bank. Binance. Who’s next?