Tither (USDT) redemption sparks fears about the backing of stablecoins

Tether has received repeated calls for a full audit of his reserves.

Justin Talis | AFP via Getty Images

Investors withdrew more than $ 7 billion from Tether as it briefly dropped off its dollar peg, raising new questions about reserves based on the world’s largest stablecoin.

According to CoinGecko, Tether’s circulation supply fell to about $ 76 billion on Tuesday from about $ 83 billion a week ago.

The so-called stablecoin always means 1. But on Thursday, its price plunged as much as 95 cents amid fears of the fall of a rival token called Terra USD.

Supported by the most stable coin Fiat Reserve, the idea is that users have enough collateral to make the decision to withdraw their funds. But “algorithmic” stablecoins are like a new breed TerraUSD, Or UST, has tried to base their dollar peg on the code. This has recently been tested because investors are concerned about cryptocurrencies.

Earlier, Tether claimed that all his tokens were backed up one by one by dollars stored in a bank. However, following a settlement with the New York Attorney General, the company revealed that it relied on a range of other assets – including commercial paper, to support the tokens of short-term, unsecured loans issued by companies.

The situation has once again placed the subject matter behind the teaser under the spotlight. When Teether last announced his reserve breakdown, cash made about সম্প 4.2 billion in his assets. The vast majority – $ 34.5 billion – consists of unknown Treasury bills, with holdings of $ 24.2 billion on commercial paper.

Each quarter, these “certifications” produced by Tether are signed by MHA Cayman, a Cayman Islands-based firm with only three employees according to its LinkedIn profile.

Tether has received repeated calls for a full audit of his reserves. In July 2021, the company told CNBC that it would produce one within “months”. It hasn’t been done yet.

Tether was not immediately available for comment when contacted by CNBC for this article.

The volatility of tokens whose sole purpose is to maintain a stable value has disturbed regulators on both sides of the Atlantic. Last week, U.S. Treasury Secretary Janet Yellen warned of financial stability risks if stable coins continue to rise steadily, and called on lawmakers to approve control of the sector by the end of 2022.

In Europe, Bank of France Governor Franোয়াois Villarre de Galhau said the recent volatility in the crypto market should be taken as a “wake-up call” for regulators worldwide. Leaving uncontrolled cryptocurrencies could disrupt the financial system, Villeroy says – especially Stablecoin, which he added is “somewhat a misnomer”.

Meanwhile, Fabio Panetta, a member of the European Central Bank’s executive board, said stablecoins, such as Tether’s, were “weak for the run”, referring to “bank runs” where clients largely flee a financial institution. The European Union plans to bring Stablecoin under strict regulatory supervision with the new rules known as the Crypto-Asset Regulation, or MiCA for short.

Francis Coppola, an independent economist, explains that it is crypto exchanges – not retail investors – that are pulling billions of dollars from Tether in wholesale transactions. To redeem tethers for dollars at Tether, clients must withdraw a minimum of $ 100,000, according to the company’s website.

“Its customers really exchange,” Coppola said. “The exchanges then sell tokens to traders, doubles and small investors.”

Tether is an important part of the crypto market, offering billions of dollars worth of trading every day. Investors often deposit their cash with tokens during times of high volatility in cryptocurrencies.

Mansour Hussein, head of research at Fitch Ratings, a financial institution, said there would be “some difficulty” in selling Teether’s treasury holdings.

Nonetheless, concerns surrounding Tether seem to have boosted demand for rival tokens, such as USDC and Binance’s BUSD in the Circle, whose respective market prices rose nearly 8% and 4% last week, respectively. Experts say these tokens are considered “safer” than teasers.

Carol Alexander, a professor of finance at the University of Sussex, says that while not yet large enough to disrupt the U.S. money market, Teether could eventually reach a point where ownership of U.S. treasuries becomes “really terrible.”

“Suppose you go down the line and instead of 80 80 billion, we get 200 200 billion, and most of it is liquid US government securities,” he said. “Then a crash in the teaser would have a significant impact on the US money market and push the whole world into recession.”

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