Why tether the world’s third-largest cryptocurrency worries economists. Tether isn’t the only stablecoin out there, but it’s the most popular.
Last month, Boston Fed President Eric Rosengren gave the alarm about lashing, calling it a potential risk to financial stability. Meanwhile, some investors believe that a loss of confidence in tether could be the “ black swan ” of the cryptocurrency, an unpredictable event that would severely affect the market.
The issues surrounding tether have significant implications for the nascent world of cryptocurrencies. And economists are increasingly concerned that this could also impact markets beyond digital currencies. Here’s what you need to know:
What is tether?
You’ve probably heard a thing or two about bitcoin. But what about tether?
Like bitcoin, tether is a cryptocurrency. In fact, it is the third largest digital currency in the world by market value. But it’s very different from bitcoin and other virtual currencies.
Tether is known as stablecoin. These are digital currencies that are tied to real-world assets – the US dollar, for example – to maintain a stable value, unlike most cryptocurrencies, which are known to be volatile. Bitcoin, for example, peaked at nearly $65,000 in April and has since dropped nearly half in value.
Tether is designed to be pegged to the dollar. While other cryptocurrencies tend to fluctuate in value, the price of tether is usually the equivalent of $1. That’s not always the case, however, and fluctuations in value have frightened investors in the past.
Cryptocurrency traders often use tether to buy cryptocurrencies, as an alternative to the dollar. This essentially gives them a way to look to a more stable asset during times of high volatility in the cryptomarket.
However, cryptocurrency is unregulated and many banks shy away from doing business with digital currency exchanges due to the level of risk involved. That’s where stablecoins tend to come in.
Why is it controversial?
Some investors and economists are concerned that the tether issuer does not have enough dollar reserves to justify its dollar peg.
In May, Tether broke its stablecoin reserves. The company revealed that only a fraction of its holdings – 2.9%, to be exact – was in cash, while the vast majority was in commercial paper, a form of short-term unsecured debt.
This would place Tether among the top ten holders of commercial paper in the world, according to JPMorgan. Tether has been compared to traditional money market funds – but without any regulation.
With over $60 billion in tokens in circulation, Tether has more deposits than many US banks.
There have long been concerns about whether tether is being used to manipulate bitcoin prices, with one study claiming the token was used to support bitcoin during major price drops in its monstrous 2017 rally.
Earlier this year, the New York Attorney General’s office reached an agreement with Tether and Bitfinex, an affiliated digital currency exchange.
The top state security official accused the companies of moving hundreds of millions of dollars to cover losses of $850 million.
Tether and Bitfinex agreed to pay $18.5 million in the deal and were barred from operating in New York State, but the companies did not admit any wrongdoing.
Analysts at JPMorgan have previously warned that a sudden loss of confidence in tether could result in a “severe liquidity shock to the broader cryptocurrency market”.
But there are also concerns that a sudden increase in tether withdrawals could lead to possible market contagion, affecting assets beyond the cryptocurrency.
In June, Rosengren mentioned tether and other stablecoins as one of several potential risks to financial stability.
“These stablecoins are becoming more popular,”
He said during a presentation.
“A future crisis could easily be triggered as they become a more important sector of the financial market, unless we start to regulate them and ensure that there is actually much more stable stability for what is being marketed to the general public. as a stablecoin”, Rosengren added.
Last week, Fitch Ratings warned that a sudden mass redemption of tether tokens could destabilize short-term credit markets.
“Less risk is presented by currencies that are fully backed by safe, highly liquid assets, although officials may still be concerned if the footprint is potentially global or systemic,” the US credit rating agency said.
“Considering that stablecoins that use fractional reserves or adopt high risk asset allocation may face greater execution risk.”
Tether isn’t the only stablecoin out there, but it’s by far the biggest and most popular. Others include USD Coin and USD Binance.