The $1.3tn cryptocurrency industry was on Thursday hit by one of its toughest challenges when stablecoin Tether — a critical cog in the market — failed to maintain its link with the US dollar.
Tether tumbled as low as 95.11 cents in European trading, far below the $1 peg that it seeks to maintain as it faced an intense bout of selling pressure. Its price later recovered, but the rare slip-up, days after the failure of smaller rival TerraUSD, sent bitcoin — the world’s biggest digital asset — sinking to its lowest level since late 2020.
Ratings group Fitch said the troubles at Tether and TerraUSD “highlight the fragile nature of private stablecoins, and will accelerate calls for regulation”.
In congressional testimony on Thursday, Janet Yellen, the US treasury secretary, said the collapse of TerraUSD showed the dangers of stablecoins, which the Biden administration and US regulators have grown increasingly concerned about.
“I wouldn’t characterise it at this scale as a real threat to financial stability, but they’re growing very rapidly and they present the same kind of risks that we have known for centuries in connection with bank runs,” Yellen told lawmakers.
Stablecoins, which are supposed to track real-world currencies, play a central role in the stability of the broader crypto market by providing traders with a safe place to park their cash between making bets on volatile digital coins.
Tether, the biggest operator in this $180bn stablecoin space, plays a crucial role in facilitating trading across the crypto market and also provides a link with the mainstream financial system.
Tether aims to maintain a peg to the dollar by keeping up a store of reserves of traditional assets. There are 80bn Tether tokens in circulation, meaning it should hold $80bn in assets — a sum that compares with the biggest hedge funds in the world. But details around how those reserves are managed are scant, and not subject to audits under internationally recognised accounting standards.
Paolo Ardoino, Tether’s chief technology officer, on Thursday vowed to defend the token’s dollar peg and said the company had bought “a ton” of US government debt, which it is willing to offload in that effort. But in an interview with the Financial Times, he declined to give details about its $40bn hoard of US government bonds because he did not “want to give our secret sauce”.
“Our counterparties are not public. We are not a public company,” he said. “So we keep that information [to] ourselves, but we are working with many big institutions in the traditional financial space.”
Last year, the US Commodity Futures Trading Commission fined Tether $41mn, claiming the company made “untrue or misleading” statements about its reserves.
Ardoino also said the stablecoin issuer is working on obtaining an audit, but said the big accounting firms “are quite scared for reputational risk in touching crypto at this moment”. Tether has had $2bn in redemption requests in the past day, an unusually high number, Ardoino added.
He said the group had recently been shifting away from holdings of commercial paper, a type of short-term corporate debt typically sold by highly rated companies, to Treasury bills. Treasury bills now account for around half of the group’s $80bn in reserves, he added.
Chris Taylor, a partner at proprietary trading firm GSA, said he is “a little more concerned about [the Tether debacle’s effect on] the ecosystem in general, but for now it seems to be stabilising”. Maintaining the redemption process would be key to restoring confidence in the digital coin, he added.
Ardoino said it was consistently possible to redeem Tether for $1 in cash by requesting a wire transfer that would be processed by its banking partners in the Bahamas.
Additional reporting by Philip Stafford