After the demise of Terra USD last week revealed flaws in the mechanisms intended to buffer the volatility of stable coins, investors are unsurprisingly squirrelly on other pegged cryptocurrencies.
Now Tether – the world’s largest stablecoin by market capitalization and the third largest token overall – is feeling the consequences. In the past week, investors withdrew more than $7 billion from the cryptocurrency amid market jitters, dropping its total value in circulation by 9% from $83 billion to $76 billion.
While Tether and Terra USD are both pegged to the US dollar price, the mechanisms they use to stabilize that price are different. Terra’s collapse stemmed from the failure of a system of algorithms designed to control the price of the token by manipulating its supply, acting as a so-called “algorithmic stable coin” that investors are now wary of.
But what’s likely why investors are fleeing Tether is the fact that its mechanisms are still unclear — which has been the subject of controversy in recent years.
The stablecoins are said to be backed by reserves of fiat currency collateral, which would make it one of the most stable of all stablecoins, alongside USD Coin, which is backed in a 1-to-1 ratio by dollars that are stored in a bank. Likewise, Tether once claimed to be backed only by a 1-to-1 ratio of dollar bills.
However, a series of lawsuits that began in 2019, including an investigation into financial mismanagement by the New York Attorney General, have shown this to be untrue: In April 2019, Tether’s attorney stated that each coin was backed by 74 cents in cash or cash equivalents. In May 2021, Tether released a report showing that only 2.9% was backed by cash, with the rest in a range of assets, including 49.6% commercial paper – a short-term, unsecured debt issued by corporations, which investors have very little interest in. offers redress in case of default.
Critics have also pointed to the apparent lack of scrutiny of Tether’s self-published reports, especially as the composition of its reserves has ostensibly shifted to include more solid assets. In August 2021, it released a second report showing that cashback had grown to 10.2%, and much of the pie chart was now in Treasury bills – a short-term debt obligation fulfilled by the federal government, which had grown from 2 .2% to 24.7%.
And during last week’s crisis — with Tether’s price briefly falling to 95 cents on Thursday, sparking fears of another bank run — Tether’s chief technology officer, Paolo Ardoino, insisted in a Twitter Spaces chat that it Most of its reserves are now in Treasury bills, while it has reduced its exposure to commercial paper.
But the question lingers: If every investor walked away from Tether at once, would Tether be able to cash them all out? Today on Twitter, Ardoino said the $7 billion was paid off “in the blink of an eye.” † † We can go ahead if the market wants us to, we have all the liquidity to handle large redemptions and pay everything 1-to-1.”
We exchanged 7B in 48 hours, without the blink of an eye. How many institutions can do the same?
We can go ahead if the market wants us to, we have all the liquidity to handle large redemptions and pay everything 1-to-1.
Yes, Tether is fully supported.
— Paolo Ardoino (@paoloardoino) May 17, 2022
However, the investors who lost $50 billion to the demise of Terra USD would probably tell you not to bet trust – or money – on words alone.
This post Tether Investors Flee After Terra USD Stablecoin Calculation was original published at “https://www.fastcompany.com/90753109/tether-investors-stablecoin-crisis-crypto?partner=rss&utm_source=rss&utm_medium=feed&utm_campaign=rss+fastcompany&utm_content=rss”