The market is showing signs of concern about the health of the asset-backed token Tether (USDT), with the U.S. Securities and Exchange Commission (SEC) seemingly committed to burning the earth and salting the fields of the cryptocurrency industry. Last week, the token dropped from its U.S. dollar face value to $0.0996, raising questions about whether its dollar-denominated tokens are fully backed by assets, including U.S. Treasury bonds, held by Tether’s parent company.
The worst-case scenario would be that Tether’s assets on hand don’t match the face value of outstanding Tether tokens, currently just over $83 billion. This has led some traders to take a short position in the token that would pay out if Tether lost its one-dollar peg. Metrics such as the Tether borrowing interest rate on the Compound decentralized lending platform have spiked in recent days, indicating increasing interest in shorting Tether.
However, shorting Tether is both technically complex and financially risky. The overall level of short interest is also hard to gauge considering how widely integrated USDT is in the crypto economy and in crypto trading pairs. Additionally, Tether the company may be at regulatory risk, but it seems to be thriving operationally, with $1.48 billion in profits in the first quarter of 2023.
Austin Campbell, a stablecoin veteran and founder of Zero Knowledge Consulting, explains that the easiest way to short Tether is to do it on-chain – borrow Tether, then sell it. But there are a variety of obstacles to the trade, some unique to Tether, such as the relatively few trading venues outside of decentralized finance (DeFi) that make shorting Tether straightforward, particularly for U.S. firms.
Ultimately, shorting Tether is a risky bet, with limited upside and significant risks. It’s uncertain when or if an SEC action against the Tether corporation, which would likely catalyze a significant depegging, might happen – if at all.