BusinessTether investors flee after Terra USD stablecoin reckoning

Tether investors flee after Terra USD stablecoin reckoning

After Terra USD’s downfall last week bared the flaws in the mechanisms meant to buffer stablecoin volatility, investors have been 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 fallout. In the past week, investors withdrew over $7 billion from the cryptocurrency amid jitters in the market, bringing its total value in circulation down 9% from $83 billion to $76 billion.

While Tether and Terra USD are both pegged to the price of the U.S. dollar, the mechanisms they use to stabilize that price differ. Terra’s collapse stemmed from the failure of a system of algorithms meant to control the token’s price by manipulating its supply, as a so-called “algorithmic stablecoin” of which investors are now wary.

But what’s likely causing investors to flee Tether is the fact that its mechanisms are still unclear—which has been the subject of controversy in recent years.

Its stablecoins are said to be backed by reserves of fiat currency collateral, which would make it among the stable-est of stablecoins, alongside the likes of USD Coin, which is backed in a 1-to-1 ratio by dollars stored in a bank. Similarly, Tether once claimed to be backed solely by a 1-to1 ratio of dollar bills.

However, a string of litigation starting in 2019—including a probe for financial mismanagement by the New York Attorney General—has revealed that to be untrue: In April 2019, Tether’s lawyer stated each coin was backed by 74 cents in cash or cash equivalents. Then in May 2021, Tether published a report showing that just 2.9% was backed by cash, while the rest was in a range of assets including 49.6% commercial paper—a short-term, unsecured debt issued by companies, which offers investors very little recourse in the event of a default.

Critics have also pointed out the apparent lack of auditing of Tether’s self-published reports—especially as the composition of its reserves has supposedly shifted to include more solid assets. In August 2021, it published a second report showing the cash backing had grown to 10.2%, and that a large slice 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 amid last week’s crisis—which saw the price of Tether briefly fall as low as 95 cents on Thursday, prompting fears of another bank run—Tether’s chief technology officer, Paolo Ardoino, insisted in a Twitter Spaces chat that the majority of its reserves are now in Treasury bills, while it has cut its exposure to commercial paper.

But the question lingers: If every investor were to run from Tether at once, would Tether be able to pay them all out? On Twitter today, Ardoino said the $7 billion has been redeemed “in the blink of an eye . . . We can keep going if the market wants, we have all the liquidity to handle big redemptions and pay all 1-to-1.”

However, the investors who lost $50 billion from Terra USD’s demise would likely tell you not to trust, or bet money on, words alone.

Original Source Link


Please enter your comment!
Please enter your name here

Latest News

Alibaba founder Jack Ma back in China after months abroad

Alibaba founder Jack Ma has been seen in public in China after the first time in several months....

‘sell the news’ moment nears after crypto-leading 20% weekly gain

XRP (XRP) price is currently outperforming all other major cryptocurrencies as of March 27, rising over 20% in the...

Banking turmoil eases but threat of wide and lasting impact remains

This article is an on-site version of our Disrupted Times newsletter. Sign up here to get the newsletter...

Plastics Are Devastating the Guts of Seabirds

This might be why her team got contrasting results in their analysis: The more individual microplastics in the gut,...

Setting The Pace For 2023 HCD Conference

It’s hard to believe that in 2023, we’re still experiencing “firsts” within the context of returning to pre-pandemic...

James Comer Crashes And Burns As Jake Tapper Blows Holes In His Alvin Bragg Attack

Rep. James Comer (R-KY) tried to defend his attempted obstruction of Alvin Bragg’s investigation, but CNN’s Jake Tapper...

Must Read

Joe Biden Honors Julia Louis-Dreyfus & More At National Medals Of Arts – Hollywood Life

View gallery It’s never too late to be honored...

It’s Never Been Easier to Make an Adventure Game

In the early years of personal computers, the...
- Advertisement -

You might also likeRELATED
Recommended to you