Tether, the company that runs the world’s largest stablecoin with a market capitalization of almost $120 billion, is exploring extending credit to commodities trading firms. That’s according to a Bloomberg report, citing sources. CEO Paolo Ardoino confirmed it’s exploring the sector but is in the early stages.
While the largest traders such as Trafigura and Mercuria have major lines of credits from banks, smaller traders sometimes struggle to fund commodities shipments. Those smaller firms are also riskier.
According to the Bloomberg report, Tether is also exploring the use of its stablecoin in trade payments. In July, a Chinese firm boasted using Tether to skirt sanctions for trade with Russia.
Allegations re collapse of several commodity trade firms
Although trade finance is considered low risk, there have been some massive frauds in the commodities sector. So much so that blockchain has been one of the tools explored to address fraud.
During 2020 a spate of alleged frauds were uncovered in Singapore, with some of the most experienced trade finance banks getting their fingers burned. Hence, the risk to a newcomer such as Tether is not insignificant.
Hin Leong Trading collapsed with $3.85 billion in debt. There were allegations of a forged a document for oil being used for a $56 million trade financing.
Agritrade imploded with $1.5 billion in debt. ING alleged that Agritrade used bills of lading to secure trade finance multiple times for the same goods. And allegedly, Commerzbank believes that shipments of coal it financed don’t actually exist.
HSBC alleged that smaller energy trader ZenRock issued duplicate commercial invoices to raise finance for the same oil cargo more than once.
As an aside, Cantor Fitzgerald provides custody for some of Tether’s Treasury holdings. Its sister firm, BGC Group, is also a major broker in the commodities sector. Hence, Tether’s interest is likely not a coincidence.
Tether’s risky bets
On the one hand, Tether currently says it has equity of around $12 billion in excess of the stablecoin. Provided it’s legal, what it does with its own assets is not really anyone’s business.
On the other hand, the stablecoin issuer has a history of using the stablecoin’s reserves for risky purposes – such as a loan to an insolvent sister firm and exposure to risky commercial paper. At least 15% of the current stablecoin reserves are somewhat risky, including $5 billion in Bitcoin. Some have likened Tether to a hedge fund where the limited partners (the stablecoin holders) get zero return. We previously compared it to a cat with nine lives. The more it survives risky bets, the more risk it is likely to take.
That risk taking is what has earned Tether the $12 billion in equity. The company’s profitability has attracted awe and appears to have silenced many skeptics.
So, are loans to commodity traders an appropriate use of stablecoin reserves?
Granting credit to commodity traders would also push the company further in to the “maturity transformation” space that banks occupy. Except, as an offshore and unregulated issuer, it doesn’t have the same oversight.
