Tether, the largest stablecoin by market capitalization, has paid out more than $10 billion in withdrawals since the start of the latest crypto crash in early May. Despite the aggressive cash-out, USDT has largely maintained its peg, barely slipping from its intended target of $1.
Why Tether Experienced Massive Withdrawals
The collapse of Terra’s algorithmic stablecoin UST sent shockwaves through the entire crypto market. Panicked investors started pouring money even out of blue-chip cryptocurrencies, further contributing to the crash. Amid this fiasco, Tether was also hit by a wave of withdrawals.
That was not entirely unexpected since the controversy around stablecoins, particularly around USDT, has been worrying. Tether, which used to claim that all of its tokens are backed one-to-one by US dollars retained in cash reserves, has recently disclosed that a very small portion of its assets was backed by cash reserves.
In a 2019 filing, general counsel at Tether Stuart Hoegner revealed that about 74% of USDT tokens were backed by “cash and cash equivalents”, with the remaining in a “less liquid form.” In the report, Hoegner acknowledged that Tether tokens are not backed 100 percent by cash or liquid assets.
A more detailed breakdown of Tether’s reserves by Paolo Ardoino, chief technical officer at Tether, in March 2021 showed that only 2.9% of USDT tokens were backed by cash reserves. At the time, analysts voiced concern that Tether could collapse in the event of a run.
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Over $10 Billion Withdrawn From Tether During Market Crash
During the early days of the UST crash, fears that contagion might be spreading in the crypto market started to grow. This led to investors redeeming USDT tokens for fiat currency or exchanging them for more transparent stablecoins like USDC and BUSD at an unprecedented rate.
Subsequently, Tether briefly distanced from its $1 peg, dropping to as low as $0.980 on some exchanges. Some started speculating that a Tether’s peg failure would be “cataclysmic” for the markets. “You thought 20 Billion vanishing into thin air was bad? Try 80 billion,” one Twitter user said. “The scary part is that everyone knows that Tether is a timebomb Ponzi just waiting to collapse.”
Contagion is spreading in the crypto markets.
If #Tether falls it will be cataclysmic. pic.twitter.com/HWSYz3dGZL
— Moonstreet
(@Moonstreet91) May 11, 2022
Nevertheless, despite the recent withdrawals, USDT has managed to largely maintain its peg. The company has carried out more than $10 billion in redemption, which is equivalent to about one-eighth of its entire reserves.
The recent massive withdrawals have led to Tether publishing new reserves report, probably in a bid to calm depeg fears. As per the report, currently, over 55% of total USDT reserves are in US Treasuries while commercial paper makes up less than 29% of USDT’s backing
The company stressed that US treasuries now make up a much larger percentage of Tether’s reserves, and pledged to further reduce commercial paper as part of its reserves and instead increase its holding of US Treasuries. The report said:
“USDT is, quite simply, fully backed by collateral. It has maintained its peg because every USDT is redeemable for dollars via Tether, and as such any time the price goes below $1 investors can earn a profit by buying USDT for a discount and redeeming it with Tether.”
As of now, Tether is trading at $0.9991, barely below its $1 peg, according to CoinMarketCap. The stablecoin currently has a circulating supply of around $73.3 billion, down from a record $84.2 billion on May 11.
Do you think the recent market crash was Tether’s toughest exam? Let us know in the comments below.
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