Tether, which operates the world’s largest stablecoin with a market capitalization of about $120 billion, is considering extending credit to commodity trading companies. Bloomberg reported this, citing people familiar with the matter. CEO Paolo Ardoino admitted that the company is looking into this area but is in the early stages.
While the biggest traders, such as Trafigura and Mercuria, have major credit facilities from banks, smaller traders can sometimes struggle to fund shipments of goods. These small businesses are also at higher risk.
According to a report from Bloomberg, Tether is also considering the use of stablecoins for trade payments. In July, Chinese companies boasted that they were using Tether to circumvent sanctions on trade with Russia.
Suspicions of re-bankruptcy of multiple commodity trading companies
Although trade finance is considered low-risk, some large-scale frauds have occurred in the commodity sector. Blockchain is therefore one of the tools being considered to combat fraud.
In 2020, a spate of fraud allegations burned some of Singapore’s most experienced trade finance banks. Therefore, the risks to new entrants like Tether are not small.
Hinleong Trading went bankrupt with $3.85 billion in debt. There were allegations that forged oil documents were used to finance $56 million in trade financing.
AgriTrade collapsed with $1.5 billion in debt. ING alleged that AgriTrade used bills of lading multiple times to secure trade finance for the same products. And Commerzbank reportedly believes the coal shipments it financed do not actually exist.
HSBC alleged that ZenRock, a small energy trader, issued duplicate commercial invoices multiple times to finance the same oil cargo.
As a side note, Cantor Fitzgerald provides custody of a portion of Tether’s Treasury holdings. Its sister company BGC Group is also a leading broker in the commodities sector. Therefore, the interest in Tether is likely not a coincidence.
Tether’s risky bet
Meanwhile, Tether says it currently has about $12 billion in capital, more than stablecoins. It doesn’t really matter to anyone what they do with their assets, as long as it’s legal.
On the other hand, stablecoin issuers have a history of using stablecoin reserves for risky purposes, such as loans to bankrupt sister companies or exposure to risky commercial paper. At least 15% of current stablecoin reserves include $5 billion in Bitcoin, which comes with some risk. Some liken Tether to a hedge fund where the limited partners (stablecoin holders) have zero profits. Previously, I compared this to a cat with nine lives. The more you survive risky bets, the more risks you are likely to take.
By taking these risks, Tether earned $12 billion in equity. The company’s profitability has inspired awe and appears to have silenced many skeptics.
So, is lending to commodity traders an appropriate use of stablecoin reserves?
Giving credit to commodity traders would also push the company further into the realm of “maturity transformation” occupied by banks. However, as an offshore, unregulated issuer, there is no similar oversight.
