Tether and the Elite Athlete: Navigating the Risks and Opportunities of a Controversial Stablecoin

KEY POINTS

• Tether's lack of transparency and regulatory oversight raises significant concerns about its financial stability and potential role in illicit activities.

• Despite its profitability and market dominance, Tether faces growing scrutiny from regulators and consumer watchdogs due to its opaque reserve practices and involvement in a parallel economy.

• Elite athletes considering Tether as an investment should be wary of its associated risks, including potential regulatory crackdowns, reputational damage, and ethical implications.

In the fast-paced world of sports, elite athletes frequently look for opportunities to diversify and grow their wealth. Recently, many have turned their attention to cryptocurrencies, and among these digital assets, stablecoins like Tether (USDT) have emerged as a popular option. However, Tether's reputation is mired in controversy, raising questions about its safety and the implications for athletes who might choose to invest in it. This article delves into the multifaceted debate surrounding Tether and explores what elite athletes need to know before venturing into this volatile market.

Tether's Rise and Its Shadowy Underbelly

Tether, known as a stablecoin due to its 1:1 peg with the U.S. dollar, has become a linchpin in the cryptocurrency ecosystem. Offering the stability of fiat currency with the flexibility of digital assets, it’s used widely for trading, remittances, and as a hedge against market volatility. With assets under management reaching an all-time high of $120 billion, Tether reported a staggering $1.3 billion in operating profit in the second quarter of 2024. Last year it generated $6.2 billion in profit, outearning BlackRock, the world’s largest asset manager, by $700 million.

Despite its growing influence, Tether has been criticized for its lack of transparency and regulatory oversight. According to a report by a consumer protection group, Consumers' Research, Tether's lack of a full audit from a reputable accounting firm raises concerns about its dollar reserves backing USDT. The watchdog described Tether as a "disaster for consumers waiting to happen," drawing parallels to the collapses of FTX and Celsius. Justin Bons, founder of Cyber Capital, echoed this sentiment, labeling Tether as a scam greater than FTX and Bernie Madoff due to its absence of independent audits to prove its reserves.

How Tether works

Tether’s entry into the crypto mainstream came during the market’s 2020-2021 bull run, as traders used tether to buy and sell out of risky bets. Its market capitalization exploded from $4 billion to almost $80 billion.

The company behind tether, Tether Holdings, issues the virtual coins to a select group of direct customers, mostly trading firms, who wire real-world dollars in exchange. Tether uses those dollars to purchase assets, mostly U.S. Treasurys, that back the coin’s value. Once in the wider market, tether can be traded for other tokens or traditional currencies through exchanges and local brokerages. In Iran, for example, a crypto exchange called TetherLand allows Iranians to swap rials into tether.

Tether vets the identities of its direct customers, but much of its vast secondary market goes unpoliced. The tokens can be pinged near-instantaneously along chains of digital wallets to obfuscate the source. A United Nations report this January said tether was “a preferred choice” for Southeast Asian money launderers.

Legal Recognition and Regulatory Gaps

While Tether's operations have largely escaped regulatory scrutiny, there have been recent legal developments. In a landmark case, an English high court recognized Tether as property, classifying its stablecoin USDT under English law. This ruling came as part of a fraud case and marked the first instance of a cryptocurrency being classified as property at full trial in the UK. However, this recognition doesn't necessarily translate to regulatory approval or guarantee the stability and legitimacy of Tether's backing.

The Wall Street Journal reported that Tether operates in a parallel economy beyond the reach of U.S. law enforcement, with its use widespread in areas under U.S. sanctions like Iran, Venezuela, and Russia. While this is largely true, it is also somewhat misleading, as Tether itself is subject to U.S. law: most of its assets are held inside the US banking system and all of the US dollars it uses to create digital dollars are moved between regulated US banks.

The U.S. Treasury has also voiced concerns, calling for a regulatory framework to ensure offshore stablecoin providers like Tether don’t operate under a different set of rules. Despite this, the U.S. government has not taken decisive action against Tether, possibly due to the lack of a formal stance on digital dollars and stablecoins.

Tether's Financial Performance and Market Dominance

Tether has reported impressive profitability, even outpacing financial giants like BlackRock. Since Q4 2022, Tether has accumulated $12.72 billion in net profit, surpassing BlackRock's $9.83 billion. However, these numbers are inflated by including mark-to-market gains from Bitcoin and gold holdings, not just earnings from U.S. Treasuries. With about 68% of its reserves in short-dated U.S. Treasuries, with reverse repurchase agreements, money market funds, secured loans and bitcoin as the next largest categories, Tether enjoys substantial returns, but the lack of a full audit of its reserves and the reliance on unrealized gains make its financial stability questionable. In January, however, Howard Lutnick, CEO of Cantor Fitzgerald, which manages Tether's US securities portfolio, said during a Bloomberg interview that "from what we've seen [...] they have the money they say they have.“

What This Means for Elite Athletes

For elite athletes with substantial earnings, the appeal of stablecoins like Tether is understandable. They offer a semblance of stability in the volatile crypto market and can be used for quick, cross-border transactions. However, the concerns raised about Tether's transparency, regulatory status, and its role in facilitating transactions in the financial underworld present significant risks.

1. Transparency and Security

Tether's lack of a full audit means there is no verified guarantee that every USDT is backed by a dollar or equivalent asset. This exposes investors to the risk of losing their capital if Tether cannot honor its 1:1 peg. For athletes, whose earnings and sponsorships often depend on their personal brand, being associated with a potentially unstable or fraudulent asset could have reputational consequences.

2. Regulatory Risks

The regulatory environment for stablecoins is still evolving. While Tether has managed to operate without major regulatory intervention so far, the U.S. Treasury and other global regulators are paying closer attention to its activities. A sudden crackdown or imposition of regulations could lead to a significant negative impact on USDT and affect those holding large amounts.

3. Financial and Ethical Considerations

Tether's involvement in facilitating transactions for sanctioned entities, as reported by the Wall Street Journal, raises ethical questions. Athletes need to consider whether they want to be linked to a currency that might be enabling illicit activities, such as money laundering and evading international sanctions.

4. Liquidity and Accessibility

For athletes looking for quick access to cash and international transactions, Tether's liquidity is an advantage. However, this ease of use should be weighed against the potential legal and financial implications of holding a controversial asset.

Bottom Line: Weighing the Risks and Rewards

The allure of Tether and other stablecoins is strong for elite athletes seeking to diversify their portfolios and gain access to the benefits of the crypto market. However, the lack of transparency, regulatory concerns, and potential ethical implications present a minefield that requires careful navigation. Athletes considering an investment in Tether should conduct thorough due diligence, consult financial advisors, and be prepared for the potential risks associated with this digital asset.

Tether may offer the promise of stability and high returns, but it operates in a space fraught with uncertainty and legal ambiguity. For those in the sports world, where reputation and trust are paramount, understanding the full scope of these risks is crucial before making any financial commitment.

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I really appreciate you reading my note today.

Peace,

Irg

Irg’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. This work may feature assets and entities in which the author has invested.

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