In-depth data: USDT issuance is almost controlled by the Chinese market
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Block beats BlockBeats (ID: BlockBeats)
,Author: @币军师Team Robbie, reprinted with authorization by Odaily.
This case originated at the end of April this year, when NYAG sued Bitfinex and Tether for a number of major violations. After the news was released, Tether had to admit that there were not enough US dollar reserves, and USDT no longer maintained a 1:1 anchor to the US dollar price. There has been a long-standing discussion in the market that Bitfinex and Tether have manipulated the price of Bitcoin through the issuance of USDT. This article analyzes the USDT issuance mechanism, transaction volume distribution, premium level and other market determinants in combination with historical events, and finds that USDT as a whole The close relationship between circulation and demand in the Chinese market, and expressed different views on the argument that the price of Bitcoin is manipulated by the issuance of USDT.
A more transparent and regulatory-compliant stablecoin is in the long-term best interests of the cryptocurrency industry, but in the short-term we need to pay attention to the possible volatility and impact of this hearing on a market that still relies heavily on USDT for liquidity .
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New York State Prosecutor's Prosecution Caused USDT Thunderstorm?
The hearing for Bitfinex and Tether will be held on July 29th (Tuesday, Beijing time). It mainly shows that Bitfinex and Tether do not trade with any New York participants, and the counterparties of the respondents—that is, the counterparties that actually trade with the respondents are all foreign entities; USDT redemption has never been a problem; Bitfinex has Every effort is made to exclude users in the United States and no promotion to users in the United States and New York is made; nor is the release of LEO directed to users in the United States.
At the end of April, New York State prosecutors brought Tether and its parent companies iFinex and Bitfinex to court, accusing them of multiple major violations, and further speculated that Tether was suspected of misappropriating USD 850 million in USDT reserves to help Bitfinex make up for the shortfall. Tether's general counsel admitted that about 26% of USDT has no legal currency reserve support, and Tether admitted that it no longer maintains 1:1 anchor assets (2).
Another major crisis of confidence in Tether occurred last year. Speculation about a major problem with Bitfinex and Tether — rumors of problems with customer withdrawals — intensified in early October, with customers and the public questioning the company's solvency. On October 12, the price of Bitcoin on the Bitfinex exchange began to show a premium, and at the same time, other trading pairs of USDT also began to show a premium. The market is beginning to express concern that USDT and Bitfinex are disconnecting from the global market.
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Above: The exchange rate of USDT/USD on Kraken Exchange - blue;
Bottom: Bitfinex/Bitstmap/Bittrex Bitcoin trading price and Coinbase price premium percentage - green/pink/light blue
In addition to NYAG speculating that Tether is suspected of misappropriating USDT reserves to help Bitfinex make up for the shortfall, market discussions and research on whether Bitcoin prices have been manipulated by the issuance of USDT have begun since the price of Bitcoin soared in 2017, and there have been several articles since then. The research report has caused extensive discussions in the market.
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Can additional issuance of USDT manipulate the market?
First of all, an anonymous report (tetherreport.com) in January 2018 used the Kolmokolov-Smilov test, and the result rejected the hypothesis that "there is no correlation between the additional issuance of USDT and the rise of Bitcoin", and believed that " The additional issuance of USDT should be responsible for 40% of the current round of Bitcoin rise” (4).
According to another Bloomberg report, Abrantez-Metz, another fake transaction identification expert, said regarding the USDT/USD traded data on the Kraken exchange: "It is very unusual that a large transaction does not cause a price change. I've seen too much data and I don't think these transactions are real."(5)
Although the various studies above tried to prove the correlation between the additional issuance of USDT and the rise of Bitcoin through different methods, they did not specifically study the issuance mechanism of USDT, or because of the opacity of Bitfinex and Tether, the issuance of USDT has always been questioned in a black box in progress.
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How is USDT "printed"?
Even though Tether insists that each new USDT is stored in cash in an offshore bank account, many people believe that USDT can be minted at will - or minted out of thin air before real dollars are sent to Tether's bank account.
For example, on the 14th of this month, due to human error, Tether minted USD 5 billion worth of USDT on Tron and then destroyed it. It is rumored that its original intention was to assist the Poloniex exchange to transfer USD 50 million USDT based on Omni to Tron. Technical error.
According to Will Harborne, the founder of Ethfinex: "When people see a large amount of USDT being minted, it means that a few wealthy customers have reserved these large USDTs a few days in advance, and then sold these USDTs on the market, while This is usually before Bitcoin starts to rise.”(8)
Except for a small number of Tether's so-called "corporate customers", Tether and its investors must purchase at least $100,000 directly from its website, and Tether needs to create a new batch of USDT to deal with the "rough, projected demand". The minting of these new USDTs requires key members of the company to sign with their public keys, and this takes time, so that's why investors' USDT demands are aggregated into large batches before being minted and issued. This also explains Professor John Griffin's question about why USDT is always minted in large quantities.
Harborne also revealed that Tether is basically just roughly estimating demand and pre-creating USDT on-chain: “Usually a customer doesn’t send $5 million without notifying Tether in advance. So, in the next few days, Tether can know it It will roughly take, say, $250 million. Once the USD reaches the Tether account via wire transfer, the actual USDT will be dispatched to the customer address.”
In addition, the issuance process of USDT actually consists of two steps: printing/minting (Authorized) and issuing/distributing (Issue). Printing money means sending a sum of USDT to the Tether Foundation address (Tether Treasury) on the chain at one time; The issue is that the foundation address transfers USDT to the buyer or exchange address. The part that has entered the foundation address but has not been transferred to the buyer's address is the unissued (Authorized but not issued) part, which has not actually circulated.
Since April this year, the market value of USDT has risen from US$2 billion to US$4 billion. At the same time, the price of Bitcoin has skyrocketed from US$4,000 to more than US$13,000. Whether the two events are really directly related has once again been debated by everyone. discuss. Since USDT is mainly used in markets where it is not possible to buy and sell cryptocurrencies directly through fiat currency, the Asian market - especially the Chinese market is decisive for USDT.
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According to the China Special Research Report data released by DIAR in June, most of the newly distributed USDT flowed to Chinese exchanges. (6) Among them, in the second quarter of 2019, the proportion of this figure rose to 62%. At the same time, the demand for USDT on US exchanges dropped from nearly 40% in the fourth quarter of 2017 to less than 5%; as of the second quarter , In 2019, the USDT transaction volume of Chinese exchanges exceeded 10 billion US dollars, and only 450 million US dollars of USDT were traded in the United States.
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Figure 2: Regional distribution of USDT transferred to various exchanges on the chain % - DIAR; China/Rest of the world/United States (black/grey/red) - DIAR
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In addition, according to Morgan Stanley's report in July (7), USDT's share of Bitcoin trading volume began to soar in the second half of 2017, and accounted for about 80% of the global Bitcoin trading volume earlier this year, and then gradually declined to about 60%. %.
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Figure 4: % of Bitcoin trading volume for different currencies/assets
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Morgan Stanley 2019/7/16 Research Report Update: Libra, Bitcoin and Cryptos
Due to the huge influence of the Chinese market on USDT, we can further analyze whether the issuance of USDT is arbitrarily decided by Tether or by market supply and demand by analyzing the supply and demand of the Chinese market and the premium level of USDT’s RMB transaction price in the domestic OTC over-the-counter trading market decided. Or whether we can find market demand to support Tether's behavior during the stage of Tether's large-scale issuance of USDT.
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Is the issuance of USDT decided by Tether company at will, or by the market supply and demand relationship?
Comparing before and after "94", in the four months from May 2017 to the end of August, the market value of USDT rose from 60 million US dollars to about 300 million US dollars; and from September to the end of January 2018, the market value of USDT rose from 400 million US dollars It soared to 2.2 billion US dollars, and the newly issued USDT was more than five times the total market value before "94" (see Figure 5). Therefore, the huge demand for USDT in the Chinese market is the most important factor for the rapid rise of USDT market value during this period.
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Gray shaded area: USDT market value stable stage; Green shaded area: USDT rapid issuance stage in April;
Orange shaded area: NYAG sued Tether - USDT issuance is suspended; blue shaded area: USDT is in the rapid issuance stage again
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Orange shaded area: NYAG sued Tether - USDT issuance is suspended; blue shaded area: USDT is in the rapid issuance stage again
The rapid issuance of USDT in 2019 began in April, and USDT was issued about 800 million U.S. dollars in April. According to Figure 3, after entering 2019, China is undoubtedly the region with the largest proportion of USDT transactions. From Figure 6, we can see that before that, that is, from the second half of February to the beginning of April - the gray shaded area, the USDT of domestic RMB OTC transactions has been in a positive premium state, and the premium level has also risen from 1% to around 3%. The long-term premium of USDT in China can be used as evidence of the growth of USDT demand. This may be due to the fact that the several waves of Bitcoin's rise after bottoming out at $3,500 have caused a large number of demand for bottom-hunting to enter the market.
After entering April, the USDT premium level of domestic OTC transactions rose again with the rise in the price of Bitcoin, showing the great demand for USDT in the Chinese market. At the same time, the so-called "kimchi premium" has also appeared in the bitcoin price in South Korea, that is, the price of bitcoin traded in Korean won in South Korea is higher than the price of US dollar exchanges such as Coinbase, and South Korea is also one of the regions where USDT is widely used. Therefore, behind the large USDT issuance in April, we can see the support from the strong demand in East Asia.
After that, USDT continued to be issued again with the rapid rise of Bitcoin prices from May to July, because the bull-run optimism in the bull market made funds continue to flow into the cryptocurrency market, and the trading volume increased. The same phenomenon can also be observed in exchanges such as Coinbase where the U.S. dollar can be directly circulated——Figure 7, that is, the large inflow of funds and the continuous expansion of transaction volume promote the further rise of currency prices.
In addition, we observed that due to the trade war, the exchange rate of the RMB against the US dollar depreciated sharply in early May, and the outflow effect of the RMB may also cause some funds to enter the cryptocurrency field.
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Let's zoom in and observe Tether's newly issued 100 million USDT on July 2. In this operation, Tether Treasure distributed the newly minted 100 million USDT to the key nodes of market liquidity in the following two days through a series of large transfers. Bitfinex, Binance, Huobi, Okex and other exchanges are the main transfer objects, and the newly minted USDT enters the market in this way. The previous additional issuance of USDT was 150 million (9) on June 22.
The price of Bitcoin rose sharply from $11,000 to over $13,000 on the 22nd, and quickly pulled back above $10,000 on July 1; as can be seen in Figure 8, the end of June happened to be the time when the USDT RMB OTC transaction price was shown in the figure The range with the highest premium level in the segment, the overall premium is above 2%. Since there is no direct RMB trading channel, a large amount of new RMB will be exchanged for USDT to buy Bitcoin when the price of Bitcoin rises rapidly, and a large number of Bitcoin will be sold for USDT and then USDT during the rapid market correction. avoid risk. Therefore, during the period of high volatility, the market has a great demand for USDT. Therefore, the additional issuance of USDT on July 2 also has relatively sufficient market demand behind it.
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Figure 8: From June 15th to July 27th, USDT RMB OTC transaction price premium level & Bitcoin price (blue/orange) - Chainext.io
From the above analysis, it can be seen that USDT’s additional issuance is almost supported by strong market demand, but the overall issuance mechanism of USDT is very lack of transparency. On the one hand, Tether provides effective liquidity through USDT for cryptocurrency investors who have no direct access to currency. On the other hand, Tether cannot publish buyers' remittance bills or regular audit reports due to regulatory issues.
But the lack of transparency is not the same as fraud or market manipulation. Through the above research, I personally prefer that the issuance of USDT is determined by the market—especially the demand of the Chinese market, and the herd effect of the market amplifies the market in a certain market. The demand for USDT in a certain period of time has also caused a large number of additional issuances of USDT in a short period of time.
In contrast, some of Tether's competitors (USDK, TrueUSD, USDC, Paxos, and GUSD, etc.) issue audit reports through audit companies every month. Such a mechanism is obviously more transparent and reliable than USDT.
Situation and market analysis before and after the July 29 hearing:
Compared with the situation before the first hearing, although the current premium of the USDT RMB OTC transaction price has fallen, it still remains in a positive premium (the end of Figure 8). The market seems to have reasonably expected this hearing after the violent reaction in April. In the evidence meeting on July 22, Bitfinex also submitted materials to refute the allegations made by the New York Attorney General's Office (NYAG).
But it is clear that the market does not have the conditions to attract a large amount of new funds into the pull-up before the risk event. In addition, we need to pay attention to the premium level of USDT against the US dollar and RMB in the near future. Once there is a rapid decline, the last situation may occur - the market is swayed by risk aversion, and investors sell USDT, causing the price of Bitcoin to soar.
Finally, it’s worth noting that the scope of the hearing is limited to the extent to which Bitfinex and Tether allegedly defrauded New York residents, which is likely to be much smaller than its overall scope. In the long run, transparency and regulatory compliance are the dual conditions that stablecoins need to have, and it is also in the long-term best interest of the cryptocurrency industry.
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