Tether is the third largest cryptocurrency in the world by market value. And this worries some economists, including a US Federal Reserve official.
Boston Fed Chairman Eric Rosengren sounded the peg alarm last month, citing it as a potential risk to financial stability. At the same time, some investors believe that the loss of confidence in Tether may be the reason “black Swan“Crypto is an unpredictable event that will have a huge impact on the market.
The problems with Tether have serious implications for the cryptocurrency world. And economists are increasingly concerned that this could affect markets beyond digital currencies as well.
What is a leash?
Like Bitcoin, tether is a cryptocurrency. In fact, it is the third digital currency in the world by market value. But it is very different from bitcoins and other virtual currencies.
Tether is what is called a stablecoin. These are digital currencies that are tied to real world assets like the US dollar to maintain a stable value, unlike most cryptocurrencies, which are known to be volatile. Bitcoin, for example, hit an all-time high of nearly $ 65,000 in April and has since lost nearly half of its value.
Tether was designed to be pegged to the dollar. While the value of other cryptocurrencies often fluctuates, the peg price is usually the equivalent of $ 1. However, this is not always the case, and fluctuations in peg cost scared investors in the past.
Crypto traders often use tether to buy cryptocurrency as an alternative to the dollar. In essence, it gives them the opportunity to look for security in more stable assets during periods of high volatility in the cryptocurrency market.
However, cryptocurrency is not regulated and many banks shy away from doing digital currency exchange business due to the high level of risk. This is where stablecoins come in.
Why is this a contradiction?
Some investors and economists fear that the Tether issuer does not have enough dollar reserves to justify a dollar peg.
In May, Tether released its stablecoin reserves. The company showed that only a fraction of its assets – 2.9% to be precise – are cash, while the vast majority are commercial paper, a form of unsecured short-term debt.
According to JPMorgan, Tether will be among the ten largest holders of commercial paper in the world. Tether has been compared to traditional money market funds, but without any regulation.
With more than $ 60 billion worth of tokens in circulation, Tether has more deposits than many US banks.
It has long been questioned whether tether is being used to manipulate bitcoin prices, with one study claiming the token was used to support bitcoin during key price drops during its monstrous rally in 2017.
Earlier this year, the New York Attorney General’s Office struck a deal with Tether and Bitfinex, an affiliated digital currency exchange.
A top state law enforcement official has accused the companies of transferring hundreds of millions of dollars to cover damages of $ 850 million.
Tether and Bitfinex agreed to pay $ 18.5 million as part of a settlement and were barred from working in New York State, but the companies pleaded not guilty.
JPMorgan analysts have previously warned that a sudden loss of confidence in Tether could lead to “a severe liquidity shock in the larger cryptocurrency market.“
But there are also concerns that a sudden increase in peg bounces could lead to potential market contamination outside of cryptocurrency.
In June, Rosengren mentioned tether and other stablecoins as one of the many potential risks to financial stability.
“These stablecoins are becoming more and more popular.“, – he said during the presentation.
“A future crisis could easily be triggered as they will become a larger part of the financial market unless we start regulating them and make sure that there is actually much more stability in what the general public is trading in, such as stablecoin.“, – added Rosengren.
Fitch Ratings warned last week that a massive and sudden buyback of Tether tokens could destabilize short-term lending markets.
“Coins that are fully backed by safe and highly liquid assets pose less risk, although the authorities may still be concerned about whether the impact is potentially global or systemic.“The American rating agency reported.
“Whereas stablecoins using fractional reserves or applying riskier asset allocations may face greater exercise risk.“
Tether is not the only stablecoin, but it is by far the largest and most popular.