Tether has repeatedly called for a full review of its reserves.
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Investors withdrew more than $ 7 billion from Tether as it briefly gave up pegging to the dollar, raising new questions about the reserves underlying the world’s largest stablecoin.
According to CoinGecko, Tether’s turnover fell from about $ 83 billion a week ago to less than $ 76 billion on Tuesday.
The so-called stablecoin should always cost $ 1. But on Thursday, its price fell to 95 cents amid panic over the collapse of a rival token called terraUSD.
Most stablecoins are provided with fiat reserves, the idea is that they have enough collateral in case users decide to withdraw their funds. But a new variety of “algorithmic” stablecoins, such as terraUSD or UST, is trying to base its peg to the dollar on codes. This has been proven recently as investors have stumbled upon cryptocurrencies.
Earlier, Tether claimed that all his tokens were backed by dollars kept in the bank, 1 to 1. However, after settling with the Attorney General of New York, the company revealed that to support its token relies on a number of other assets – including commercial paper, form short-term unsecured debt issued by companies.
The situation again focused on the topic of reserves. When Tether last published a breakdown of reserves, the cash was about $ 4.2 billion in its assets. The vast majority – $ 34.5 billion – consisted of unidentified Treasury bonds with maturities of less than three months, while $ 24.2 billion was in commercial paper.
These “certifications,” produced by Tether each quarter, are signed by MHA Cayman, a Cayman-based company with only three employees, according to its LinkedIn profile.
Tether has repeatedly called for a full review of its reserves. In July 2021, the company told CNBC it would produce it within “months”. This is still not done.
Tether was not immediately available for comment when CNBC contacted the article.
Responding to a Twitter user urging Tether to conduct a full audit, Paola Ardoina, the company’s chief technology officer, insisted that his token was “fully supported” and bought back $ 7 billion in the last 48 hours.
“We can keep going if the market wants, we have all the liquidity to handle big repayments and pay all 1 to 1,” he said.
In a follow-up tweet, Ardoin said Tether was still working on the audit. “I hope regulators will push more audit firms to be more crypto-friendly,” he said.
The destabilization of tokens, which have the sole purpose of maintaining a stable price, has shaken regulators on both sides of the Atlantic. Last week, U.S. Treasury Secretary Janet Yellen warned of risks to financial stability if stablecoins would grow without regulatory restrictions, and urged lawmakers to approve sector regulation by the end of 2022.
In Europe, the head of the Bank of France Francois Villeroy de Gallou said that the turmoil in cryptocurrencies in recent times should be seen as an “awakening” for global regulators. Villeroy said cryptocurrencies could disrupt the financial system if not regulated, especially stablecoins, which he added were “somewhat wrong”.
Meanwhile, European Central Bank Executive Board member Fabio Panetta said that stablecoins such as Tether are “vulnerable to launch”, meaning “run away from banks” when customers flee en masse from a financial institution. The European Union plans to introduce stablecoins under strict supervision through new rules known as the regulation of cryptocurrency markets or abbreviated MiCA.
Francis Coppola, an independent economist, explained that cryptocurrencies – not retail investors – extract billions of dollars from Tether in wholesale transactions. To redeem the leashes on dollars at Tether, customers must make a minimum withdrawal of $ 100,000, according to the company’s website.
“Its clients are really exchanges,” Kopala said. “Then exchanges sell tokens to traders, amateurs and small investors.”
Tether is an important part of the crypto market, fostering billions of dollars in transactions every day. Investors often leave their money with a token in times of high cryptocurrency volatility.
Monsour Hussein, head of financial institution research at Fitch Ratings, said Tether would have “several difficulties” with selling his treasury holdings.
But the source of these possessions is unclear. In a recent interview with the Financial Times, Tether’s chief technology officer declined to give details of his treasury, saying the company “does not want to give away our secret sauce.”
Concerns around Tether seem to have boosted demand for competing tokens such as the USDC Circle and BUSD Binance, whose respective market prices have risen by about 8% and 4% over the past week, respectively. Experts say this is because these tokens are considered “more secure” than a leash.
Although Tether is not yet big enough to cause disruption in U.S. money markets, Tether could eventually reach such proportions if his ownership of the U.S. Treasury becomes “really scary,” said Carol Alexander, a professor of finance in Sussex. university.
“Suppose you go down, and instead of $ 80 billion we get $ 200 billion, and most of it is in liquid US government securities,” she said. “Then a breach in the leash would have a significant impact on US money markets and would simply subject the whole world to a recession.”