Tether's US Banking Ties Raise Concerns Over Stability

Tether's integration within the US financial system poses significant risks to the stablecoin. Its banking partners lack direct access to the Federal Reserve, making them susceptible to pressure from correspondent banks. Additionally, Tether's status as a fully reserved bank and its substantial holdings in Treasury bills can draw scrutiny from the Federal Reserve and US Treasury. These factors highlight Tether's vulnerability and could potentially lead to its exclusion from the financial system.

Tether's Tenuous Ties to the U.S. Financial System Pose Risks: Expert Analysis

Amidst ongoing concerns regarding the stability of Tether, the world's largest stablecoin, an industry expert has shed light on the company's vulnerabilities stemming from its integration within the broader U.S. financial system. Arthur Hayes, founder of cryptocurrency exchange BitMEX, has outlined the potential risks Tether faces due to its relationships with the Federal Reserve, the U.S. Treasury, and its banking partners.

Banking Partners: A Precarious Dependence

According to Hayes, Tether's banking partners, which include Britannia Bank & Trust, Cantor Fitzgerald, Capital Union, Ansbacher, and Deltec Bank and Trust, lack master accounts with the Federal Reserve. This reliance on correspondent banks creates a point of vulnerability, as these banks may not share the same level of comfort with serving crypto businesses like Tether.

Consequently, Hayes warns that correspondent banks could pressure Tether's banking partners to drop the company, effectively excluding it from the financial system. The absence of a direct relationship with the Federal Reserve further exacerbates this risk.

Federal Reserve: An Unwelcome Intermediary

Hayes also highlights the Federal Reserve's disapproval of fully reserved banks, such as Tether, which do not lend out their deposits. The central bank's payment of interest on banking reserves encourages fractional banks to lend more conservatively, thereby mitigating the risk of financial crises.

However, Tether's significant holdings in money-market funds and Treasury bills, which earn interest rates close to the federal funding rate, effectively arbitrages the Fed. Hayes suggests that the Federal Reserve is unlikely to provide assistance to Tether should its banking partners sever ties.

U.S. Treasury: A Delicate Balance

Hayes further notes the U.S. Treasury's unease with Tether's substantial holdings of Treasury bills, which rank it among the top 22 largest holders of U.S. debt. He warns that a sudden sell-off of these holdings could disrupt global bond markets.

While the Treasury is likely to intervene to ensure an orderly unwinding of Tether's positions in the event of banking disruptions, Hayes doubts that Treasury Secretary Janet Yellen would actively assist Tether in securing a new long-term banking partner.

Conclusion

The expert analysis elucidates the significant risks Tether faces due to its precarious relationships within the U.S. financial system. The company's dependence on banking partners without direct access to the Federal Reserve and its contentious relationship with the central bank create potential vulnerabilities that could threaten its stability. Additionally, the U.S. Treasury's concerns over Tether's Treasury bill holdings add to the uncertainty surrounding the stablecoin's long-term prospects.

It remains to be seen how Tether will navigate these challenges, which have implications not only for the company but also for the broader cryptocurrency market. As the industry continues to evolve, ongoing scrutiny and oversight of stablecoins and their integration into the financial system will be crucial to mitigate potential risks.