Contagion from the stablecoin collapse that started on Monday with Terra is now affecting the largest dollar token, Tether, hitting the broader cryptocurrency markets.
At 07.00 UTC on Thursday 12 May Tether tokens traded on the Kraken exchange as low as $0.92, eight percent below its target of $1 per token.
The Tether drop led to sharp selling across the cryptocurrrency complex.
At 06.00 UTC on Thursday bitcoin was trading at $26,883, down 15 percent in the last 24 hours. Ethereum was trading at $1,809, down 24 percent in 24 hours.
Tether, which is the dominant reference asset for trading in bitcoin and other cryptocurrencies, plays a vital role across crypto exchanges and lending platforms.
At face value, Tether says it has $83bn in tokens outstanding. However, its reserves have never been fully disclosed and the stablecoin’s operators have been shown in the past to have lied about its asset backing.
This week’s stablecoin turmoil has attracted the attention of central bankers, who have little oversight of the market for cryptocurrency-based dollar tokens.
Speaking yesterday, Federal Reserve Bank of St. Louis President James said that the noticeable volatility in the stablecoin market does not seem systemic, but can be validating to those who perceive it as risky.
Others see a more significant potential weakness in Tether.
“Bitcoin is down ~60% from its peak yet Tether’s claimed assets only go up”
Nate Anderson, founder of Hindenberg Research, a hedge fund specialising in short-selling, yesterday cast doubt on the accuracy of Tether’s accounting.
“Bitcoin is down ~60% from its peak yet Tether’s claimed assets only go up,” Anderson tweeted late on Wednesday.
“When this comes tumbling down it will weigh on crypto for a decade,” he said.
In October, Hindenberg Research offered a ‘Tether Bounty Program’ of up to $1m for details on Tether’s backing.
“Since the claims that garnered it ‘stablecoin’ status were made, Tether subsequently revealed that its coin was backed only by a small percentage of traditional currency, and that much of its backing consists of holdings in commercial paper issued by unnamed counterparties,” Hindenberg said at the time.
Tether’s chief technology officer, Paolo Ardoino, said at 06.30 UTC on Thursday that the stablecoin was meeting its obligations and redeeming tokens for those who wanted to do so.
“>300M redeemed in last 24h without a sweat drop,” he said.
On its website, Tether grants limited rights of redemption to token holders, reserving the option to redeem tokens for other securities or assets, rather than dollar cash.
There are signs that other stablecoin operators are seeking to distance themselves from Tether
“The right to have Tether Tokens redeemed or issued is a contractual right personal to you,” Tether says.
“Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves,” it goes on.
There are signs that other stablecoin operators are seeking to distance themselves from Tether.
Late on Wednesday, Binance’s chief executive, Changpeng Zhao, tweeted a link to a blog about the exchange’s dollar stablecoin, BSD, which has $17bn in assets.
In the blog Binance said that its stablecoin kept 96 percent of its reserves in cash and cash equivalents, with the other 4 percent in US Treasury Bills.
In its last attestation, as at the end of December 2021, Tether said it had $24bn of its $79bn assets in commercial paper and certificates of deposit, without naming the issuers of this commercial debt.
Tether also said it had $5bn of its assets in other digital tokens at the same date, without disclosing the nature of these reserves.
In October, the CEO of cryptocurrency lending platform Celsius, Alex Mashinsky, told reporters at Bloomberg that Celsius was borrowing stablecoins from Tether, paying 5 to 6 percent a year for collateralised loans.
Celsius was then taking the tokens it had received and lending them out at even higher rates in the hedge fund market or to other cryptocurrency counterparties, Mashinsky said.
Yesterday, amidst rumours that Celsius had been hit hard by Terra’s collapse, Mashinsky tweeted that “all funds are safe” and “we continue to be open for business as usual”.
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