Caitlin Long, the founder of crypto bank Avanti Bank and a leading blockchain advocate, took to Twitter yesterday to explain the market sell-off, linking it to stablecoin issuer Tether.

Long reasoned that Tether, which revealed the assets that back its dollar-pegged currency for the first time last week, could have contributed to the brutal market drop, one that liquidated over $2.38 billion over the past day alone.

“Tether finally disclosed how it invests reserves & it was a big negative surprise (not previously knowable at this level of detail). This news probably contributed a lot to #crypto selloff since Wednesday,” she tweeted, adding:

“Why? Because now risk managers at #crypto hedge funds almost certainly will require haircuts on Tether, which means traders had to sell #crypto to reduce their total risk exposure.”

Tether issues

Tether has been mired in controversy for a large part of its history. The company issues and maintains the $53 billion USDT network, which theoretically holds an equivalent amount at a regulated, registered bank for each Tether coin (as the crypto maintains a 1:1 peg with the US dollar).

But some critics say holding that type of money in a bank is improbable. Tether, on its part, has rarely provided third-party audits of its holdings and has endured several court cases on the nature of its business.

Last week, however, it revealed its reserve holdings to the public for the first time, stating a bulk of its backed reserves were in cash, cash equivalents, or other short-term deposits with the remainder in secured loans, corporate bonds, and ‘other’ investments.

The firm said 65.39% of the backing arose from an unspecified ‘commercial paper,’ while the remaining came from fiduciary deposits (24.2%), cash (3.87%), reverse repo notes (3.6%), and Treasury bills (2.94%). A small percentage was backed by Bitcoin as well, it added.

Credit risk is why crypto funds are selling?

But despite the reveal, Long said the move meant Tether holders faced a probable credit risk. “Based on Tether’s new disclosure, both #Tether’s probability of default & loss severity in default just went up,” she tweeted.

She noted that Tether’s underlying funds were invested in ‘credit assets’ of questionable quality (not all assets are created equally), and could even include “short-term, lower-risk, liquid securities.”

Long noted Tether’s reserve portfolio resembled that of a credit hedge fund—or a traditional fund that invests or trades just credit-backed products. “Need LOTS more disclosure now. So many new questions,” she added.

“I can only guess how US regulators reacted to Tether’s announcement. Tread carefully, peeps. I’ve thought for a while that a #stablecoin crackdown is inevitable. Will this trigger it?” she said.

Don’t piss off the regulators

It’s not like Long’s tweet thread was a takedown of Tether. The Wall Street veteran, who is also an integral member of the Wyoming Blockchain Task Force, said she would continue to defend Tether as it was a “bridge” to the US dollar and is an integral part of the broader crypto market.

She, however, added, “But I can’t defend Tether’s choices on asset allocation & making no risk disclosure. What a missed opportunity! Not helpful to our industry.”

“Like it or not, one of the best things for the industry at present would be getting Stablecoins to be OK w/ US regulators (esp the Fed & the SEC),” she ended.

The post Wall Street veteran says these Tether risks are behind crypto market selloff appeared first on CryptoSlate.