Arthur Hayes Warns of Tether Risk Amid Crypto Market Support

BitMEX co-founder Arthur Hayes warns that Tether is increasing its risk by shifting from cash-like instruments to Bitcoin and gold. This move comes as the Federal Reserve prepares for a rate-cut cycle. Hayes views this strategy as risky, fearing a sharp decline in these assets could weaken Tether's equity cushion.

Key Concerns

Tether disclosed $181 billion in total assets with $174 billion in liabilities, maintaining solvency on paper but not full liquidity.
A sudden drop in Bitcoin or gold prices could pressure Tether’s surplus, raising concerns about USDT's backing.
S&P Global rated Tether’s stability as "weak" due to increased allocations toward risk assets.

Tether argues against the rating framework, citing robust operations supported by significant settlement flows.

Financial Structure

$140 billion of Tether’s assets are in cash and equivalents; the rest, approximately $34 billion, is in Bitcoin, gold, secured loans, and other investments.
This setup resembles a fractional reserve system rather than a fully liquid vault, posing potential risks during redemption panics.

Counterarguments

Joseph, former Citi Research crypto lead, notes Tether’s separate equity balance sheet, including corporate investments and additional BTC reserves, strengthens its financial position.
Tether is highly profitable, with over $120 billion in interest-bearing Treasuries yielding around 4%, resulting in near $10 billion yearly profit.
Tether holds more conservative reserves compared to banks, which have a lender of last resort, unlike Tether.