As cryptocurrency prices plummeted, attention has been drawn to a potential vulnerability: Tether’s dependence on the stablecoin Tether.
SAN FRANCISCO — The prices of cryptocurrency is falling. In a matter of days, a stablecoin had lost all its value. The withdrawals were stopped by a new crypto bank. Investors have been plunged into financial ruin.
Now The crypto industry is facing a grimmer prospect: The worst could be yet to come.
Tether, the company whose nameake currency is a keystone of crypto trading around the world, is becoming a concern. Tether, long one of the most closely watched companies in the sector, is now under increasing pressure from regulators as well as investors and economists.
Hilary Allen, an American University finance expert, said that “Tether is really what sustains the crypto ecosystem.” “If it collapses, the whole facade will fall down.”
Tether is the main issuer of stablecoins. This type of cryptocurrency is pegged to a stable asset such as the U.S. dollars. Stablecoins, unlike traditional cryptocurrencies like Bitcoin and Ether, which can fluctuate in value, are designed to have a constant price of $1. They are also backed by large amounts of funds or other financial engineering. This consistency allows crypto traders and investors to make predictable, safe transactions without having to rely on banks or financial gatekeepers.
Many of these coins are only stable in name. The crash of cryptocurrencies last month was partly caused by the collapse of TerraUSD, which was a stablecoin that had a $1 peg and was algorithmically linked with Luna, a sister cryptocurrency. TerraUSD fell with the fall in Luna’s price, triggering a “death spiral”, which shook the wider market.
Tether, however, claims that its stablecoins can be backed by cash and traditional assets. This is essential for the health of the crypto markets. Anyone can exchange Tethers for U.S. Dollars in theory.
However, the company’s financial statements reveal that a large portion of its reserves is tied up in commercial paper (unsecured corporate debt). These financial instruments can be more risky and take longer to convert into cash, particularly during financial turmoil. Tether was fined $18.5 million by New York’s Attorney General in 2021. claimed that the company had lied to about its reserves and called it “a stablecoin with no stability”.
Tether is essentially a loosely regulated banking institution, according to critics. In return for millions of stablecoins, traders can bet on volatile cryptocurrencies like Bitcoin and Dogecoin. They also hand over millions of dollars. Tether currently has 70 million coins in circulation. This is more than three times larger than TerraUSD prior to the crash.
Critics warn that a downturn could lead to a crypto-bank run in the worst case. Tether might not be able to fulfill orders, so traders may rush to exchange Tethers for dollars. Investors could lose billions of dollars and have to sell other crypto holdings. This might cause a panic that could spill over into non-crypto markets.
Tether was able to experience this scenario last month. As cryptocurrency prices plummeted, investors began to ask for dollars to convert their Tethers. The company was forced to pay out approximately an eighth of its reserves , or $10 billion , in less than a week . Tether’s $1 peg briefly slipped on cryptocurrency exchanges.
The company claimed that it had met the demand. Tether took a victory lap, declaring it had survived the crisis “flawlessly”.
Paolo Ardoino said that the crash was “the greatest story that could have happened” to Tether in an interview. We don’t play around with risk management and we aren’t fooling around.
On Sunday, the cryptocurrency bank Celsius Network announced that it would stop withdrawing digital currencies. This caused prices to crash once again. According to Bloomberg News, Tether had invested into Celsius in 2020 and borrowed it approximately $1 billion to Tethers. The company stated this week that it had “zero exposure” in Celsius aside from a small investment. Despite the market’s woes, investors repaid $1.6 billion in Tether.
There are more skeptics speaking out. A top U.S. banking official called last month to request new rules for Tether and its rivals. He said that the TerraUSD crash had highlighted the dangers of unregulated stablecoins. Fears that Tether’s next crash will test its reserves, some traders are now investing their funds in alternative stablecoins.
Bruce Mizrach, Rutgers University economics professor and cryptocurrency expert, said that they had sufficient collateral to weather this run.
Tether’s history is unusual even by crypto’s sometimes-surreal standards. The company was founded by Brock Pierce in 2014. He is a cryptocurrency evangelist and actor who, as a child, appeared in the “Mighty Ducks”. Reeve Collins and he later gave control to Giancarlo devasini, a former plastic surgeon who had stored some Tether assets in a Bahamas bank owned by one of the creators the “Inspector Gadget”.
Tether has seen a rapid growth. It issued approximately 50 billion stablecoins last year, more than tripling global supply. In an interview, Mr. Ardoino stated that “if we have to redeem until the last cent,” he said.
About 50 people work for the company in Europe, Asia, and Latin America. JL van de Velde, the chief executive of the company, is a Dutch businessman. His LinkedIn profile indicates that he is based out of Hong Kong. The company declined to confirm this. He and Mr. Devasini (chief operating officer) rarely speak out. Tether’s public face, Mr. Ardoino describes his colleagues as “normal people” who are amazed at the company’s growth.
Mr. Ardoino stated that they didn’t initially think it would be so successful. They weren’t ready to be public people. It’s not bad.
Tether has maintained that its stablecoins are fully backed by U.S. dollar at times. however, claimed that these claims were “a lie” by Letitia James, New York’s attorney general.
Tether was involved in a business deal that had resulted in the loss of $850 million by a cryptocurrency exchange. Bitfinex took loans from Tether’s reserves to cover its losses. This left the stablecoin unbacked according to Ms. James’s investigation.
Tether paid $18.5 million in penalties to the New York Attorney General and did not admit any wrongdoing. Tether spokeswoman, claiming that the problem with the company’s reserve funds was due to “communications mistakes.”
The Commodity Futures Trading Commission discovered last October that Tether had sufficient reserves in its accounts for only 25% of the 26-month period between 2016 and 2018. The company was fined $41 million.
Tether has made periodic statements about the composition of its reserves since the New York settlement. Tether’s announcements have not stopped skepticism.
Tether disclosed last month that around a quarter of its reserves (or $20 billion) consisted of commercial papers, a decrease of $4 billion over February. It also increased its exposure to money markets funds to $7 billion, up from $3 billion. Tether also disclosed that $5 billion of its reserve were held in “other investments,” which includes digital currencies. Critics argued the report was basically a wash. The project still lacks the stability many investors are looking for.
(The Tether spokeswoman stated that the company’s portfolio of commercial-paper would “gradually decline to zero without incurring any losses.”
Tether is still the most widely used stablecoin. Tethers have decreased by more than 7 percent in the past month. The circulation of USDC has increased around 4 percent. This stablecoin is said to be fully backed cash as well as U.S Treasurys.
Sam Kazemian, who manages Frax, another stablecoin, said, “I can’t claim I’m as confident with Tether as USDC.”
Washington has been awash with concerns about Tether. Janet Yellen, Treasury Secretary, testified before Congress last month. She noted Tether’s drift from its $1 peg and demanded greater regulation for stablecoins.
She said that the growth of stablecoins poses “the same type of risks as we have known for centuries about bank runs.”
Tether said that it was open to working with regulators in order to create a global framework for disclosures stablecoin issuers need to make about their reserves. Tether has not complied with more aggressive proposals that would have made it subject to regulatory requirements, similar to those for traditional banks.
“Everyone’s panicking — like, I lost my entire life savings’,” said Mr. Collins. He co-founded Tether with Mr. Pierce, and is now the founder of a crypto venture called BLOCKv. It’s tragic, but it’s equally devastating when someone claims, “I went to a Casino and lost my life savings.” But let’s not forget about the possibility of regulation.