Bloomberg: $4 billion hedge fund Fir Tree is shorting USDT

Fir Tree Capital Management, a $4 billion hedge fund, is shorting Tether’s stablecoin USDT as the cryptocurrency’s most valuable stablecoin faces scrutiny from regulators.

According to Bloomberg, according to the company’s clients, Fir Tree has established an “asymmetric trading” way to short USDT. In other words, the risk is minimized, but the possibility of profit is still high.

The hedge fund is also reportedly betting that its decision could be profitable within 12 months. The firm’s concerns center around Tether’s $24 billion in high-yield commercial paper, which it also believes is tied to Chinese real estate developers.

China's real estate sector has been facing a debt crisis, led by China Evergrande Group, which missed a debt repayment deadline in December 2021, when its debt exceeded $300 billion.

While Tether has said it does not hold any commercial paper tied to Evergrande, Bloomberg reported that Fir Tree expects some of the commercial paper held by Tether to depreciate.

Investors reportedly said this could lead to a significant drop in the reserves held by Tether.

Fir Tree has been considering shorting USDT since July last year and has conducted research including hiring third-party experts. At the same time, if enough customers are interested, Fir Tree is also considering setting up a separate fund to short USDT.

Tether’s reserves

Tether’s latest quarterly collateral opinion, released last month, showed a 21% drop in commercial paper holdings in the last fiscal quarter.

Last May, Tether disclosed its reserve details for the first time since its launch in 2014. As of March 31, 2021, Tether's reserves consisted of nearly 76% cash and cash equivalents, other short-term deposits and commercial paper. The rest was secured loans, bonds and other investments, including digital currencies such as Bitcoin (only Bitcoin). Specifically, commercial paper makes up the majority of its cash and cash equivalents, accounting for 65%. Trust deposits accounted for 24%, reverse repo bills accounted for 3.60%, Treasury bills accounted for about 3%, and actual cash accounted for only 3.87%.

Despite previous claims that Tether was 100% cash-backed, the company’s reserve breakdown at the time showed that less than 3% of Tether’s reserves were actually held in cash.

In August 2021, another forensic report found that Tether had $62.7 million in total backing. A total of $30.8 million of that was in commercial paper.

Last October, the U.S. Commodity Futures Trading Commission (CFTC) required cryptocurrency trading platforms Bitfinex and Tether to pay a total of $42.5 million in fines.

The CFTC issued an order and simultaneously filed and settled lawsuits against Tether Holdings Limited, Tether Limited, Tether Operations Limited, and Tether International Limited, alleging that they made untrue or misleading statements and omissions of material facts in relation to the USD stablecoin USDT. The order requires Tether to pay a $41 million civil penalty and cease further violations of the Commodity Exchange Act (CEA) and CFTC regulations. In addition, Bitfinex was fined $1.5 million for conducting illegal transactions while operating the platform and for violating the Commission's previous regulations.