Amidst great fanfare Tether released a breakdown of its reserves on Friday, revealing that amongst its $45bn in reserves (it has since added a further $10bn since the report date on additional Tether issuances) they only had $2.1bn in identifiable cash reserves. Notionally the remaining reserves are spread across highly quality sounding ‘assets’ like ‘Commercial Paper’ or ‘Reverse Repo Notes’…. which are obviously a recent development, as having worked in the Treasury space of large commercial banks for many years while I’ve heard of Repos and Reverse Repo’s, I’ve never actually heard of a ‘Reverse Repo Note’:
While some people might be comforted by these two pie charts, and in an open and transparent company it might provide a little assurance, I can’t help remembering that even this paltry amount of information was only forth coming as a result of the settlement with the NY Attorney General’s investigation. If it were not for the NY AG’s action Tether’s website would still be saying they were one for one backed with USD dollars. Consequently while it remains to be seen whether the NY AG will be satisfied with the break down of Tether’s supposed reserves, I for one remain skeptical.
Here is my breakdown of Tether’s reserves:
Or in keeping with the pie chart theme:
So while I will begrudgingly give Tether the benefit of the doubt that they do actually have $2.1bn in cash, against their considerable Tether liabilities, it is still considerably larger than the actual cash position of most other crypto exchanges – recently floated Coinbase for instance only has $1.1bn in cash. Personally I doubt that there is more than $10bn in real liquidity across all the crypto exchanges against the $2 Trillion ‘market cap’ of the entire crypto complex.
Now if real USD liquidity is $10bn, all that is required to crash the entire crypto complex would be for half of one percent, 0.5%, of the “$2 Trillion” market Capitalization seeking to exit the system. What could possibly cause someone to think of ‘have fun staying poor’ by removing some of their crypto wealth from the crypto complex? Well paying real world obligations like tax on their capital gains would be a start. BTC alone is up 1567% since March last year, so I’m suspecting that there are probably some sizeable realised capital gains out there that have tax obligations falling due on them.
The IRS (and most other national tax agencies) is far more prepared for this boom – they have honed their investigative techniques considerably since the last boom in 2017 and they are no empowered by Global Financial Regulations, CRS and FACTA, to ensure tax compliance:
Court Greenlights IRS Access to Kraken’s Customer Data After gaining access to Circle users’ data.https://decrypt.co/70022/court-greenlights-irs-access-to-krakens-customer-data
The IRS is now looking for Kraken customers who have failed to comply with internal revenue laws.
For those not up to speed on Global Taxation reform, both FACTA (the US) and CRS (the rest of the world) basically require any Financial Institution that has funds belonging to a non-resident, to report the details of that resident and the nature of the funds being held, to their local tax authority like the IRS or ATO, who will then compile that information and exchange it with the tax authority who the non-resident claims to be administered by. If you are an Australian citizen with a US bank account, the IRS will report your bank account and details to the ATO, who are then able to check whether you have been declaring all your income. While the rules and regulations associated with these two pieces of regulation have gradually been being applied since around 2016, the big bang, in terms of them being universally applied and reported commenced in 2020.
No Govt wants the blood on its hand for killing a $2Trillion dollar market by enforcing the sort of Regulation that would kill the crypto industry stone dead. They will prosecute obvious maleficence and laundering, and demand that tax obligations are paid, but all they have to do is wait until the remaining real liquidity evaporates, like so much dry ice, after which the market will implode.
The point is, regulations won’t destroy this bubble, the law of large numbers and ratios to real liquidity will. Regulation will come way after, TrollyMcTrollface’s chart shows the time sequence for how regulations will be applied and their impact on the crypto market better than any other:
As I have repeatedly mentioned, the entire $2trillion crypto space is a series of liquidity constrained markets, where participants are increasingly encouraged to stake (HODL) crypto in dubious financial ‘businesses’ via DeFi and Yield Farming, which further reduces available liquidity, all of which is further inflated by at least $55bn of fake liquidity in UST alone. All of this $2trillion dollar market is IMHO floating on barely $10bn of genuine liquidity, and which has a slow leak of $55m dollars a day in the form of mining costs that HAVE to be paid in hard currency.
Not that it will actually require the $10bn to be totally gone before it collapses. Once the real liquidity starts to drain market making exchanges own hard currency reserves, they will essentially stop making a market in order to prevent their own cash reserves from being drained. Otherwise they would otherwise be forced to continue to buy BTC and sell hard USD cash until they have no cash left and are effectively insolvent.
When real liquidity inflows/outflows swing materially negative the entire crypto market will implode in a matter of days.