Why the crypto sphere is watching the evolution of the stablecoin tether very closely

If the stablecoin tether (USDT) were to fall sharply, the cryptocurrency ecosystem would be shaken.

Amid the collapse of the Terra blockchain stablecoin terra usd (UST), investors’ eyes are now on the biggest stablecoin in history: tether (or USDT), which is currently worth $79 billion. capitalization according to the Coinmarketcap site.

On Thursday, tether fell below its 1:1 peg with the dollar to trade at $0.97, sending its holders into a cold sweat. It has since rebounded, worth $0.99 at the time of writing.

As a reminder, a stablecoin (or stable cryptocurrency) is a crypto-asset (or digital asset) that is pegged to a fiduciary currency such as the euro or the dollar. A stablecoin can also be backed by other assets (such as gold). This is called the underlying of the stablecoin.

When the price of the underlying goes up or down, the value of the stablecoin must align with it. The promise is to permanently hold the parity, for example 1 USDT = 1 dollar. This peg to a currency is also called a “peg”. When there is a gap between the value of the underlying and that of the stablecoin, it is called a “de-peg” or “loss of parity”.

Like any so-called “classic” stablecoin (not to be confused with those called “algorithmic”), tether must guarantee to have as many dollars in reserve as there are stablecoins in circulation. So, if a customer wants to sell his stablecoins for dollars, there is sure to be enough money in the coffers of this company to make this conversion. It is therefore a parity based on the stock of “real” money available to the stablecoin issuer.

Lack of transparency on funds in reserve

The fall of the USDT is part of a general context of mistrust in the stablecoin market, but not only. Tether is particularly criticized for its lack of transparency vis-à-vis the reserve funds it has, while the stablecoin has a capitalization of 79 billion dollars.

According to information communicated by tether at the end of December, the company holds in particular around 35 billion in government bonds, 25 billion in “commercial paper” (generally short-term commercial debt of companies, editor’s note) and 4.16 billion in cash. The remaining $16 billion is invested in other financial products, such as cryptocurrencies or corporate bonds. The company ultimately gives very few details.

For example, with regard to “commercial paper”, “we do not know which companies they are, and whether or not these companies could repay their debt or not in the event of the collapse of Tether”, explains to BFM Crypto Vincent Boy, analyst at IG France.

A sharper fall in cryptocurrencies

But there is another big problem: if everyone wanted to withdraw their US dollars to this stablecoin, would tether have enough cash to repay this 79 billion dollars of capitalization? Hard to know.

“We could be in a scenario like in the 1929 crisis, this would tarnish confidence in tether but also in cryptocurrencies, because in particular tether is used a lot for trading”, underlines the expert.

Indeed, as a stablecoin, one of the main characteristics of which is to fight against the volatility of cryptocurrencies, tether is mainly used for trading cryptocurrencies. “If by falling individuals and investors no longer have a way to protect themselves from volatility, then this can lead to a sharper fall in cryptocurrencies. This is a question of general confidence in the cryptocurrency market”, estimates Vincent Boy.

“We must not go back years”

“As the market is nascent, there are a lot of risks, we must not damage confidence, and we must not go back to years. Even if cryptocurrencies fall completely, there will always be a market because it is an online technology, the blockchain will remain even if the bitcoin falls to 1 dollar”, thinks the latter.

In addition to causing individuals to lose a lot of money, a sharp drop in cryptocurrencies would also jeopardize the balance sheets of many companies that have bet on bitcoin, such as Tesla or Microstrategy. “Companies with bitcoin in their treasury could find themselves heavily indebted and no longer able to repay their debt”, warns Vincent Boy.

In a gloomy environment in the stablecoin market, it seems that users are turning to other stablecoins, like Binance’s stablecoin, Binance USD, which has a market capitalization of $17 billion.

“To date, users have more confidence in the stablecoin of Binance, which is the largest trading platform in the world, which explains why Binance certainly has more capital to settle attacks on its stablecoin and therefore to bring a certain confidence on his stablecoin”, indicates Vincent Boy.

As of today, USDT is unlikely to fall until individuals and investors decide to withdraw their funds massively. But its slight drop following the collapse of the terra usd calls into question the apparent stability of these assets, which showed faults in the space of a few days. In this context, the American regulator, through the voice of the current United States Treasury Secretary Janet Yellen, wishes to move forward with its plan to regulate stablecoins and cryptocurrencies.

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