Tether: The Bahamian Data

Following the first dig into Tether several people directed me to this medium post.  As there are significant errors in that analysis the plan was to ignore it.  Having been asked a few times now it's worth diving in with clarifications.  Doubly so as this gives us a new data point to watch published in next few weeks.

Read that post first, particularly the parts about The Bahamas.  Then continue.

The Bahamas does publish aggregate banking system statistics (which are also referenced earlier on this blog).  But its' important to check the right numbers.  First we need to identify how Deltec is regulated and then chase down the correct reports.

There is a list of regulated institutions -- the ones that roll up into the aggregates -- here.  Deltec is regulated as a "Authorised Agent" in the "Bank & Trust Companies" category and it is both "Public" and "Resident."  Those are specific terms defined in the document as:

Authorised Agent:

An authorised agent is a trust company authorised by the Central Bank to deal in Bahamian and foreign currency securities and to receive securities into deposits (i.e. to act as custodians) in accordance with the terms of Exchange Control Regulations Act and Exchange Control Notices issued by the Central Bank.

Resident:

A resident status allows a bank and/or trust company to deal only in Bahamian Dollars, but operations in foreign currencies require Exchange Control authorisation. This does not apply to an Authorised Agent or Authorised Dealer which is a designated Resident.

Public License:

A public bank and/or trust company is one which is permitted to carry on banking and/or trust business with members of the public.

The Bahamian Dollar is restricted and that's what the "Exchange Control" stuff is about.  A useful clarification is given here:

Trust companies with resident status are allowed to deal in foreign securities on behalf of nonresident customers.  A bank which is designated as 'Nonresident' permits a bank and/or trust company to operate freely in foreign currencies, however, Exchange Control approval is necessary to operate a Bahamian dollar account to pay local expenses.

So the Bahamian reporting regime is aware of, and tries to monitor, both local and foreign currency activities within the banking system across a range of licenses.

And, unsurprisingly, they publish data on a regular schedule.  The Quarterly Statistical Digest gives us lots of data.  The linked medium post references the "Domestic Banks: Summary of Foreign Liabilities" page in that report.  A lot of discussion -- including a podcast linked earlier on this blog -- asserts that is the wrong category.  It is not 100% clear from the definitions given above and time spent reading the central bank's website what the right answer is.  So let's just look at the entire banking system:

Note the comment at the bottom: The data represents Resident and Non-resident Banks &/or Trust Companies.  The entire banking system's balance sheet as of end-2020 is $173B.  That number is pretty stable, and the composition is pretty stable.  Any USD backing USDT held by Tether at Deltec will show up on both sides of the aggregate balance sheet.

Liability Side

First let's look at the liability side.  Tether isn't resident*, it isn't an SFI in The Bahamas and it isn't a bank.  But it might be a "financial institution."  So their USD deposit holdings appear either under "customer deposits" as "non-resident" or perhaps in the "head office or branches outside The Bahamas" column under "due to financial institutions."  

In calendar 2020 there was about $15B of Tether issuance.  It is certainly possible that sits inside one of those columns.  One went from $57.8B to $41B while the other started at $43.2B and ended at $49.8B.  The end-2020 issuance was $20.9B.  Wherever it sits, the $20.9B of cash behind Tether at end-2020 would up a lot of one of those entries.  If it's under deposits there were some pretty substantial outflows by other customers!

This gives us something to watch when the 2021Q1 report comes out.  With an end-Q1 total issuance of $40.7B something should go up by $20B.  Given the overall stability of these numbers that should be visible.

Asset Side

Now the asset side.  Here we should find Deltec's USD holding, in their Citi UK account or elsewhere.  This is a problem.  Let's take each possible column in turn:

• "Notes & Coins" is both too small and it's pretty unlikely the USD are in physical cash. Though it would be hilarious.
• "Balance with the Central Bank" and "The Bahamas Government" can't be it*
• It's not from a Multilateral Development Bank
• It's not in local currency "Loans & Advances"*
• "SFIs in The Bahamas" aren't holding it*
• "Head Office or Branches Outside The Bahamas" cannot be it as Deltec doesn't have such branches*.  Recall their account at Citi UK is in the name of the Bahamas entity.

This leaves 4 possibilities:

• "Other Governments" could hold some UST if that is part of the reserve.
• "Other Investments" could maybe be it.
• "Loans & Advances" in "Foreign Currency" could be part of it.
• "Other Banks Outside The Bahamas" could be part of it, but it's quite small.

Those columns are remarkably stable for several years.  It is possible the $20B as of end-2020 is hiding in there somewhere -- but the total across all 4 possibilities is only $64.8B.  An incremental $20B in Q1 will be very visible.

This is a key point: while that medium post is incorrect about the Bahamian reporting there is useful data nearby and it gets published soon.  An incremental $20B must be visible in these reports.

What If It's Partially Backed?

The total amount of Tether is now so large relative to these aggregate banking system reports that it doesn't really matter if they are only 80% backed.  80% of $40B will show up in the reports.  We can't tell precisely what is going on.  But we can establish if there is a reasonable quantum of backing or not.

At $40B end-Q1 any substantial fraction held as USD at Deltec will be visible in the regulatory reports.

Getting Real

There is a reason the "Head Office or Branches..." column is the largest: The Bahamas is expecting banks like Citi to open branches in Nassau and deal a lot with their own other branches around the world.  This column kind of doesn't matter to the local authorities.  The banking system ex these inter-company assets and liabilities is on the order of $100B in total.

These 4 possible places to find the money are small, stable, and long-used integral parts of an offshore banking center.  At $50B Tether would represent something like 1/3  to 1/2 of the "real" banking system.  It could be effectively all of the locally-held foreign government securities.  Or maybe the "Other Investments" across the banking system are dominated by shares in cryptocurrency businesses.  Those are all problems. 

(*) Possible Errors In Assumptions

This analysis makes a few assumptions that could be wrong.  Quick comments about them are included here to avoid mucking up the narrative.

"Tether isn't resident in The Bahamas" could be incorrect.  Similarly some assets could be held in local currency.  But these seem exceedingly unlikely as the total amount of money in those categories is small and stable.  And everyone who lives and works in The Bahamas needs those balances to live so they aren't getting transferred to another banking center.

"SFI aren't holding it" is roughly the assumption that Deltec, within The Bahamas, is holding it's own USD.  It's a bit ridiculous to take wires via Citi UK only to then move that money to an account at RBC  or Citi in The Bahamas!  If Tether's reserve is a cash or securities account at JP Morgan Trust Co (Bahamas) Ltd you'd have thought somebody would have mentioned that by now.  Anyway the internal numbers are too small as, again, the main use of an offshore financial center brnach is transactions with your own head office in an onshore money center.

"Deltec doesn't have other branches" is based on the assumption that, if Deltec had other branches, there would be evidence on the internet somewhere.  Recall their UK account is in the name of the Bahamian entity and nobody has mentioned a "Deltec Zurich" or anything like that.  There is an asset management operation in the US but if this money is sitting in a custody account in NY under their asset management arm you'd think somebody would have mentioned that to the NY Attorney General.