Updated: Oct 19, 2021
This is from the FT on Saturday 16 Oct: "The CFTC order found that Tether relied on unregulated and third-party entities to hold funds, including reserves. The regulator’s order also found that Tether transferred reserves to Bitfinex, including when the exchange was experiencing what its chief financial officer described as a liquidity crisis."
Back in 2018, when USDT cap was less than $3 billion, Tether's "reserves" were loans to Bittrex -- and other crypto exchanges -- with little (or only non-fiat) collateral.
Today, we have $69 billion USDT cap of which up to 50% of the reserves are loans -- collateralised by crypto as confirmed by the FT article on 19 Oct. I believe that many of these loans are to Binance and other crypto exchanges that have unwittingly been operating as toxic playgrounds for shark prop traders. Read on to find out why.....
A number of questions arise: First, why does Binance need these USDT loans? Binance brokerage takes fiat currency from retail investors in return for USDT, in order that retail can trade on the Binance exchanges. In fact, Binance has grown so quickly, precisely because retail traders (little fish) attract bigger and bigger fish. The big fish want to avoid trading with each other (that is what we call "toxic flow") but there are plenty of little fish on Binance -- and other exchanges like Bybit, OKEx and Huobi, but Binance is by far the biggest.
So, with all this fiat on--boarding through its brokerage services, Binance custody services should be holding a lot in fiat reserves, yes? Actually no, read on...., your fiat currency (dear retail investor) goes to prop up the losses made by the Binance clearing house.
Binance has an "insurance fund" which takes over liquidated positions. When volatility arrives, the fund trades in the open market to close out all the liquidated positions it has assumed, using a high-frequency algo of course. But Binance's algo is no match for those developed by shark prop traders such as Alameda, Cumberland, Jump etc.
Sharks like Alameda and Cumberland can use Binance as their playground. Not just Binance, most of the other exchanges too -- except perhaps not FTX, because it is owned by a shark, and sharks don't poison their own ground.
The exchange's insurance fund (sometimes called a guarantee fund) is forced to assume liquidated positions that must be traded against the sharks. But at least it is on their home playground, albeit one that has been made rather toxic by the sharks. No wonder, therefore, that Binance likely pulled their own plug on May 19. Simple logic tells us that when the lights went out on this crazy Binance carousel, the insurance fund instantly stopped bleeding.
The sharks target a playground exchange and do a high-frequency 'pump-and-dump' of prices on it, thus creating volatility. Once the retail investors are wiped out by this volatility, the Binance clearing house insurance fund is left facing the sharks on the Binance playground. Of course, not just Binance -- all these exchanges insurance/guarantee funds have been losing heavily -- their algos are helpless compared with those used by the sharks.
So, when the sharks stir up the volatility, Binance (and other exchanges) experience a liquidity crisis. Then Tether comes in with another loan of USDT -- to keep on the lights of this toxic crypto carousel. But the exchanges have nothing like the fiat reserves that they should have as collateral for these USDT loans. Your precious fiat currency deposit with Binance brokerage (dear retail crypto investor) didn't stay with Binance custody for long. It was long ago eaten by the sharks .
I think the shark prop traders are the real culprits, although at this point, now the story is clear, neither Binance nor Tether has any excuse to allow the toxic crypto carousel to keep on turning.