Welcome back everyone. I am Caspian Sea.
I'm joined as usual by my partner in crime, mr.
Bennett Tomlin. I know he's good.
No, I'm good going to keep moving on today.
We're doing an episode about our favorite topic.
Tether lately. Heather has well been making a
lot of noise with all this contagion going on with all of
these companies getting liquidated and going bankrupt.
Tether has Talking about how they're totally solvent they're
totally fine and we want to talk about a few things.
You want to talk about their loan to Celsius that they
supposedly over collateralized by roughly 30%.
We want to talk about some discrepancies that we've seen in
their transparency reports. They're at a stations and we
want to talk about a recent interview that the group did
that mr. Paulo Arduino.
Did on CNBC Tech check with Deirdre Bosa.
So we're going to link to that. You should watch the whole
interview. It's only 7 minutes or so eight
minutes, something like that. But we're going to talk about
these three things just to kind of review where tethers at, what
the risks remain to be and what we expect to see, I guess, kind
of nothing crazy, but a proper review.
So so let's get started with the the Celsius loan and liquidation
process. So Bennett can Ahead and get us
into that. Well, sure.
Let's start with the most basic parts.
Tether was the lead Equity investor in Celsius is series a
and so is a part owner of Celsius besides this, we knew
from the past and have talked about before on this show how
tether extended secured loans to various other crypto companies
including Celsius, the way these would work peers to be that
Celsius, Babel Finance, next So whoever would put up about say
1.3 billion dollars worth of bitcoin handed over to tether
and tether would then extend them a loan of about a billion
tethers at I think it was like a six percent interest rate or
something is what mission ski said, the loan from tether was
and then, yeah, that was the Lone.
What ended up happening is when Celsius was having all of these
liquidity issues, they were unable to post additional
collateral to tether and so tether to Tekt, the value of
their reserves which this loan was a part of supposedly was
able to liquidate the collateral above, the face value of the
loan and still return. Some of it to Celsius.
This liquidation B, tether may have been what ended up putting
some of Celsius has other loans in positions into danger.
I think it was during the contagion episode but it might
have been when Dirty Bubble media was on.
We talked about how tethered liquidating this loan to Celsius
and selling this one point three billion dollars.
Worth of bitcoin into the market.
May have been one of the things that was really pushing down the
price of Bitcoin during that period where Celsius shut off
withdrawals and ended up threatening their maker doubt
position. Because people remember during
that period Celsius spent a lot of that threat of having their
maker down loan liquidated and that was a wrapped Bitcoin
position. I know we've discussed it
before, but can you just go over?
What maker Dow is so that everybody is caught up here.
Sure make, or do is a stable coin?
That's basically based entirely around the idea of peace.
Kind of secured loans, that tether is giving people you over
collateralize, a position with cryptocurrency.
So in Celsius is case they were using wrapped Bitcoin here.
And so they put up about the same as what tether required
about 30% over and then you get extended a loan in die which is
a stable coin, effectively collateralized by these loans
and then you can use that as a stable coin often.
It's used to effectively lever up in the cryptocurrency
ecosystem, right? You take the crypto, you own,
you put it up as collateral so you can Keep your exposure to
that. You get this new stable coin.
In this case, basically the same whether it's tether or die, you
use that to purchase more crypto or to do other crypto trading
and things like that. And in doing so, effectively
increase your exposure as a whole, by increasing the
leverage in the system. So tether supposedly liquidated
their loan and Celsius got in trouble because of it.
Well, I think when most people consider loans, now there's the
obvious ones that probably everyone is familiar with is a
mortgage which are generally over collateralized.
So you'll put down however much the home is worth.
Let's say the home is worth a million dollars, you would put
down ten twenty percent, something like that.
And then the bank would extend the rest of the value of that
home to you, with the understanding being that, you're
going to make payments on that. For the remainder of the, it
could be 15 years, 30 years, who knows you're going to pay that
out. And if you don't, if you stop
paying their going to take your house from you, and so now they
have over collateralized that loan.
But normally Loans are not necessarily over collateralized.
If we're talking about business loans, if we're talking about
personal loans, if we're talking about a lot of different loans,
they're not actually over collateralized their
collateralized to some degree. Right?
When I think of most loans, either it's unsecured or the
individual genuinely does not have the capital necessary to
over collateralize alone. So, when you're talking to me
about all this over collateralization, the only
other example in my head, where over collateralization is the
norm. Which is like margin trading.
You know, leverage trading, options, trading, that kind of
thing. It's like, oh, this is these are
prime examples of when you need to be over collateralized
because the broker might need to call it in and take everything.
And so it sounds to me like you're suggesting, that's what
this over collateralization is all about.
It's all about Levering up, Levering up.
Yes. So I think you made a couple of
points of them and then dissect a little bit like a revolving
line of credit extended to a business is not Necessarily
collateralized, but in many cases will be by, for example,
partial ownership, some amount of equity in that business
itself and we're saying over collateralized.
But we really shouldn't be and we talked about this back.
When Francis Coppola was on back at like episode 20, the bank of
international settlements, basically says that,
cryptocurrency is too volatile to be used as loan collateral
because you can't be confident that you're going to be able to
liquidate it, right. And like we've seen with a whole
bunch of these loan platforms that were exposed.
Three hours capital, and all these other ones, that many of
them, despite the loan initially appearing, adequately
collateralized. When they went to liquidate,
there was not adequate liquidity for that loan to actually be
adequately collateralized that even appears to be what's going
on with the coin Flex, Roger ver dispute, right?
That when they finally liquidated the collateral, in
his Futures account, they ended up with a deficit because they'd
extended too much to him, effectively.
And so, we're saying over collateralized, put these are
not really over collateralized there.
Aged, hopefully, the bank of international settlements would
say no, but we'll say they are for this.
And the issue with crypto collateralized loans, like we
kind of talked about. In our contagion issue is what
you're leading into now is that it is generally used as a way of
Levering up. It's trying to maintain
exposure, to your crypto asset, and still get an asset.
You can use to continue to trade interact and increase your
exposure to the crypto ecosystem.
And I think the other example that we do commonly, see that
looks kind of similar to this. Borrowing against your stocks,
right? Like we've seen a lot of Elon
Musk, for example, put up a bunch of Tesla stock as
collateral have a bank, extend him alone.
And then that is kind of vaguely similar to what we see a lot of
these cryptocurrency places doing on that note.
I'm going to go ahead and jump into the actual so tether
released a statement on July 8 and and I'm not going to read
the whole thing but I am going to read a part of it will link
to it. In case you want to feel the
full Wrath of tether, and there's a couple weird.
Things in this statement to me. But first the tether loan that
was taken out by Celsius wasn't over collateralized Loan
denominated in Bitcoin, at 130 plus percent and the decision to
liquidate the collateral to cover.
The loan was a part of the original terms of the agreement
between the two entities and reconfirmed in writing before
the start of the liquidation event.
This process was carried out in a way to minimize as much
possible any as much possible, any impact on the markets and in
fact, Once the loan was covered, tether return to the remaining
part to Celsius as per its agreement.
Okay, if I have taken out a short position or a margin loan
to buy stock and the bank margin calls, me, they take it, they
don't send anything back. They take my collateral that
loan is done and I've been liquidated, never will The
Brokerage send me anything back. Help me understand why they're
sending Capital back after. They've liquidated, a company.
I mean, presumably because it's part of the written agreement,
they have with Celsius. Is that after the liquidation?
Since presumably, like their maximum loan-to-value ratio is
at a point, well above one to one, they probably included in
the agreement that when the liquidation is completed tether
will send the remainder to Celsius.
I don't think that Parts particularly unbelievable here
but there's a more troubling aspect to this loan that I think
we need to touch on here. And this kind of goes back to
tether was one of the lead investors in Celsius tether.
Owns a portion of Casillas Celsius used customer deposits
these Bitcoin to get this loan extended in tether.
And when the time came tether, sold customer deposits from a
company, they own a part of into the market and just liquidated
them protecting tethers reserves.
But selling the customer deposits of a company that
tether partially owns. That is a Morally challenging
position to be in and I think that's a detail that hasn't
gotten as much attention yet in this story.
Is that like the fact that tether extended the loan in the
first place and was willing to basically take these customer
deposits from Celsius and do this and give them this loan
that they knew could be liquidated itself has problems,
but then that they actually did liquidate it and sell these
customer Bitcoins that had been extended to them by Celsius,
feels real, bad morally. Yeah, that's pretty ambiguous
but I would say, from a business perspective, I am like, okay,
well obviously they're going to do that before you move on from
this, I do have a couple of other thoughts on this loan
before this episode comes out another episode.
We recorded just a couple days ago will be out in which we
discuss a lawsuit filed by Jason Stone against Celsius in it.
He alleges the original loan from together to Celsius was
effectively a bailout for Celsius because they had ended
up in solvent by not appropriately accounting for
user funds and using user funds to This is not the only time
together has been accused of doing this.
In December of twenty twenty. Decrypt ran an article
discussing a whistleblower allegation about Babel Finance,
another crypto lending platform at the time that was really
popular in China. This platform had supposedly
taken customer deposits had, begun trying to lever up using
them to trade and payout higher yields, when they ended up in a
position within adequate liquidity, tether stepped, in
bailed them out. And kept them going.
And I think this kind of points to something we've discussed for
years at this point, which is that tether is not just a dollar
Peg. Token together is not just its
market cap. Tether is like this integral and
in jewess part of the crypto industry that gets in and is
connected to so many other pieces.
So we're talking about all this kind of in sexual stuff.
All of this weird backing secured loan.
And Paolo went on with Deirdre, and she asked a lot of these
questions directly to him. Let's start talking about some
of the main points that stuck out the most to us.
Where do we want to start? I would be nervous going on.
CNBC right? Like people, get nervous going
on major Network TV. Let's, let's not read too much
into his tone and focus more on like his words.
Let's start at one specific place.
I got a starting point is a year ago when stew and Paulo went on
Stu said Wendy asked for the timeline that the audit would be
coming in months. If not years, when Paula was
recently on, he was asked follow-up questions about that
audit. He said that they currently had
a big 12 auditor performing the audit, which is not a term that
everyone knows this. There are four big auditing
firms. It is called the Big Four.
It used to be the big five used to be the big 8.
There have been different Moments in time where there were
more of these Auditors than now. But right now, it's four of
them. It's Ernst & Young, it's KPMG.
It's Deloitte and pricewaterhousecoopers.
So those are your big for big 12 is not a fucking thing.
It's not a real fucking thing. It's totally made up.
And, and, and I'm mentioning this.
And I'm so glad Deirdre called this out because he's been
repeating it all over the place. He's saying we've got a big
problem. Twelve auditor.
We've got a top 12 auditor there isn't such a thing, there's no
such thing, stop, listen saying that.
I'm sure there is some list that this auditor was ranked number
12 on. And that's what, who fucking
cares. I don't know where the list is,
but it probably exists. So yeah, thanks said, they hired
a big 12 auditor which first of all.
Let's pause for a second. Even among the big four
Auditors, there is a wide range of quality and diligence among
their franchises, right? Like the u.s. domicile, Ones
which still have quite a few ethical and other problems.
This is it. They're so impressed Aces so
important because she asked if they reached out to the big four
and his response wasn't. Yes.
We did. His response was yes in certain
jurisdictions. Yeah.
And so even across the like different jurisdictions, you'll
see a wide variance in the diligence and quality of the
audit, the China hustle, which we've talked about before, kind
of gets into how the big Force. Franchises were auditing numbers
that were completely untethered. From reality Paolo, says that
they discussed with the big four, but did not like ever
engage with the big for the big four.
Our not auditing together in any jurisdiction.
They're scared, they're scared of auditing cryptocurrencies.
That's that was the claim. They're scared of auditing
cryptocurrency. Companies not not they're scared
of auditing tether. In particular which is a
probably a lot closer to the truth.
They're scared of auditing cryptocurrencies in general,
which again, Deirdre paused on and said.
Sorry, what did you say? They're scared.
And he was like, yeah, it's queer like, was about okay.
That many Auditors were afraid of the reputation risk of
working for tether, and especially of signing off on
their current books. But, like, that's another
important thing to remember is they're saying top 12, which is
already not a thing wrong with eight below, what people
actually consider the top. And depending on what
jurisdiction, that top 12 is operating in their He'll be a
massive variation, even for that own, right.
How did her among their different franchises?
Right? Like if for example, there
London office is generally considered pretty passable
there, for example. Cayman Islands office might not
have that same reputation. Hypothetically just saying not
that I'm suggesting that. But they have a top 12 auditor,
but they can't tell us who it is.
Because if they tell us cast and I are going to call them in,
annoy the auditor and then, the auditor will stop working for
tether which, by the way, I want to make this clear and I don't
know, maybe been at you have a different, you may Be of a
different experience. I never have called any of
tethers Auditors. Never in my life, I've never
planned. I've never been to imagine other
journalists have, like, as part of writing articles, back, when
Friedman was supposedly, auditing them.
I imagine journalists have called the auditor to ask.
Are you performing an audit? And I imagine that's a normal
thing. That Auditors have to deal with
is journalists or other people calling and asking about a
company. It seemed like a pretty normal
part of the job. Imagine most auditing.
You're not going to tell people a bunch of details over the
phone. The most will probably do if
it's already public. Knowledge is go.
Yes we can't. Confirm so-and-so is one of our
clients but we don't discuss ongoing engagements beyond that,
right? It's not like the Auditors are
going to suddenly start going over the phone to a journalist.
Oh yes, we're auditing them. They have this match of this
security. This much of this security.
Yes, here's the audit. It's right in front of me.
There is claiming that the reason they can't tell us who's
doing the audit is because the auditor will no longer do it.
If people Know who's doing it. Which is like this is bitfenix
and tethers banking all over again.
Where I can't tell you where we bank, because if we tell you
where we Bank, the bank accounts will get shut down right.
And I didn't I didn't let you get to the last part of this,
which is funny to me that after saying, you know, they're
getting audited. They're definitely, they're
ready. They're all lined up and it's
ready to get done. Now, this this audit from a big
Club auditor, what's the? Which means they must know who
the auditor is, right? Like if they're describing them
as Big 12, they must exist in be top 12 on a Somewhere.
So they it has to like exist as an engagement or they're just
flat out lying. Right so okay fine.
They've engaged with this auditor but a year ago they said
it was a few months away. And this time when asked, if
this would be a few months away years, Paulo said, I don't know.
I just don't, I don't know what to say about this.
It's the blind leading, the blind over their tether.
I don't know how you go on National Television.
Television International television and you're not
prepared to answer pretty simple questions like that, you know,
well and like what keeps your token Tethered to the dollar and
and and that's so we'll move on from the interview because I
think we touched on kind of the most is there.
Another part that you think particularly sticks out to you
before we move on? No, not particularly.
The one part that I do want to draw attention to is that
Deirdre ask Paolo if their asset management was handled by an
external. Firm that manage their reserves
for them and Paolo said, no, it was entirely internal.
So that means our friends Silvio di Stefano who's named tether is
suing to keep a secret must be managing an incredible team of
traders who pull off miraculous stunts on a daily basis.
And this gets us into finally the last part of our update
which is that. Now again you can listen to all
of our old episodes about tether.
I think we've done four or five at this point.
Ain't So quite a few episodes about them specifically and
there's a couple hours worth of listening there but lately we've
noticed in their transparency there at a stations that were
forced upon them. By the way.
These aren't they're not doing this willingly, they don't like
doing it. It was they are forced to
quarterly do at a stations that they have to show to the public.
Don't get confused. Don't let them pretend they're
doing this to be the kings of unrivaled transparency.
They're doing it because the New York attorney, Instead, if you
don't do this, you're fucking toast Bros.
So they decided to, you know, play by the rules at least in
that sense. But what we've noticed is that
their assets and we're not the only ones who have noticed this.
Patrick Mackenzie who you can follow at patio PA TI o 11, 11
on Twitter Patrick Mackenzie has repeatedly pointed out that
their assets over liabilities are essentially like less than
1% if you're a stable coin, if your assets Over liabilities dip
below like one. If you if you get below a dollar
of assets over liabilities, if you go to zero or negative one
that makes you insolvent. The interesting part here is
that tether has gone from a market cap of roughly 80 billion
to sixty six billion tether has apparently sold all of their
commercial paper for some reason.
I mean it was all great. Apologies, they've sold a bunch
of their commercial paper, which they shouldn't even be doing
because it was such perfect. Beautiful commercial paper and
it was hardly even a risk. They said, but to get critics
like us to shut up. Apparently, just because of
people like us, they're going to move away from this.
This really beautiful commercial paper.
That's giving them this great yield and they're going to move
it all into us. Treasuries.
So they're selling off all of this essentially riskier asset
class with higher yield and selling it into a lower,
yielding less risky asset class. Meanwhile, their market cap is
dropping precipitously. Also let's not forget they have
equity in Celsius which is now pretty much gone belly-up.
I think we can all agree. It's seems like it's going to go
bankrupt here, so they have equity and companies going.
Bust, they've lent out to 3ac, they've lent out to Celsius.
They've lent out to X y&z company.
That's probably dead in the water already and yet, and yet,
this this DeStefano guy has managed to keep their assets
over liabilities, almost exactly.
The same throughout all of this. It's unreal, it's unbelievable.
It is amazing, amazing. It is literally unbelievable.
You're right. And there's a few different
things here. There should be a cost for them
rolling these assets, right? The commercial paper, they've
rolled over which we can see because the duration and the
attestation suggest that they are still purchasing new
commercial paper, they're rolling some portion of it and
not just taking the cash and moving it into treasuries.
So there's a cost associated with that.
There's also the changing in rates environment that has been
occurring. Like, underneath the Bonds
commercial paper in treasuries, they own as rates have gone up
the face value of the things they own we would expect would
go down and their long-term Position will improve as they
roll into the new higher-yielding stuff because
their overall yield will go up, but the stuff they're holding as
the rates go. Its face value goes down in
there in potentially more challenging position to roll it.
And so like there's several of these factors that contribute to
and like the bond market has gotten hammered Because of the
rising rates and bond ETFs back, part of tether, you mentioned
Celsius Equity, infinite Fleet Equity from Samson Mi little
game. You mentioned the loans to
Celsius. We don't actually know if they'd
blown 23 AC we just know 3 AC was getting a bunch of tethers
issued to them. We do know that they had in the
past at least issued loans to babble Finance which is another
lending platform that shut off withdrawals.
And we have not heard that tether liquidated that loan and
so like you're right, there's a bunch of things in here.
Here that seemed like we would expect their value to sometimes
change yet tether who says the update the transparency page
every single day shows basically the exact same shareholder
Capital cushion. This isn't the only problem with
tethers transparency Page. By the way, we've been pointing
out for years and one of our auditor friends also pointed
this out for years. That the number of quarantine
tethers described on the tether transparency, page does not
match the number on the Block. I've added up the ones on the
Omni blockchain before and it is millions more than they list on
their transparency page, which gets at something we discussed
back when we talked about the tether.
Cftc settlement, right? Which revealed that tethers,
record-keeping was inadequate, they were not keeping good track
of their reserves. They were not keeping careful.
Track of the tethers issued and redeemed against those reserves.
And so tether has a long history of inadequate bookkeeping.
Of suspicious numbers on these statements.
And I think that kind of takes us back to why they've had so
much trouble finding an auditor and like, they had hired an
auditor who supposedly had agreed to do a full Financial
audit way back in 2017, right? They had announced to the world,
the name of the auditor, then when they separated from the
auditor their excuse was, not that people were calling this
auditor and annoying them, their excuse, was this auditor wanted
to do excruciating. Lee detailed procedures.
And because of that, we weren't going to go forward with it.
That's how an audit works by the way.
Yeah, that's how a fucking audit Works, guys.
I don't know what to tell you. When you get audited, they go
through your financials and like, excruciating lie.
Especially if you're, you know, you're a bank with a dollar
derivative essentially. Like, if that's your, if that is
your company. Yeah, expect a rough audit to
see what you're doing with your dollar derivative?
Yeah, and we'll just double down in that last year when they went
and Deirdre show. Promise, the audit stew ended up
tweeting out something that was very strange, which said the
audit would be coming soon that the 2018 fiscal year audit would
be coming first and that there would be no pineapple pizza,
their statements, which is a really weird statement for
several reasons. One, the first auditor they
engaged was for the 2017 Financial year, not 20 18,
during 2018. They were engaging in a series
of conflicted. Actions with B FedEx, involving
hundreds of millions of dollars, moving between the two companies
without documentation or contracts and like why in 2021
where they promising that the first thing they were going to
provide was the audit for 2018 and then finally, why was that
promised a year ago? And now they're going on TV and
saying there's no timeline and they can't even tell us who the
auditor is. What happened to whoever was
supposedly doing the 2018 audit a year ago?
Why is that a question that they can't answer why 2018 I'm going
mad. Yeah, well, for all this
posturing that they consistently do, this is not new to us.
We've been following the space long enough.
That we've seen them do this a million times before, but I do
want to say this that I think they have the same cocky,
bullshit attitude as suzu at 3. AC Kyle Davies, at 3, AC Alex
machine ski at Celsius. These people are broke now.
Now and no one knows where they are.
No one knows what's going on with them.
Nobody's heard from these people in weeks, because as cocky and
annoying as they were, they lost it all real fast.
And that cocky attitude has gone, they're gone.
And who knows? Maybe tether is being cocky
because they're totally up to Snuff and they are going to
prove us so wrong, with all these beautiful audits from a
big 12 auditor, I don't think so.
I just don't believe them anymore.
They have lied to us about 10 times too many times for me to
take a single word, they say as honest, they've, they have if
nothing else proven that they won't be honest.
Unless a government agency forces them to be slightly
transparent, they're not going to tell you the truth.
Don't believe their lies as my boy, in Memento would say, so I
think that's, I wanted to do an update simply because they're
posturing a lot lately. They're they're doing press
releases. They're going on TV, they're
doing the same old song and dance but it works sometimes.
And I just want to make sure people are holding the same
space of skepticism that they were holding before they started
their song and dance. Again, Heather is a corporation
full of liars and is a corporation that itself.
Lies simple. I mean if corporations are
people than there, you go. I guess we should take down our
tether donation page. We've been accepting this
donations and tether for truant either a theory.
I'm debtors Alana Heather on on bitcoin cash.
We only do those ones though, we don't do it on any of the other
chains. Instead of donating, I guess you
can hit the like or subscribe button and thanks for joining
us.