The world’s largest stablecoin Tether regains dollar peg after a stumble

Tether (USDT), the world’s largest stablecoin, regained its peg to the US dollar on Friday after more than $3 billion worth of tokens left the system in a single day. On May 12, the stablecoin sunk as low as 95 cents and struggled to climb back to its intended dollar peg, as the recent collapse of another stablecoin – TerraUSD (UST) – had shaken crypto investors’ confidence in Tether.

By Friday, Tether was trading firmly at $1 again, soothing investors’ fears about a possible crypto market contagion from the collapse of embattled stablecoin project Terra.

TerraUSD (UST) is different to Tether in that it relies on a complex mix of code and a sister token called LUNA to stabilize its price. It was also partly collateralized by billions of dollars’ worth of Bitcoin.

On the other hand, Tether is supposed to be backed by cash, short-term debt obligations corresponding to an equivalent amount of dollars deposited by its users. Those assets are held in a reserve managed by a company of the same name.

It’s essentially like a bank account for crypto investors, who often turn to Tether in times of heightened market volatility. Much Bitcoin trading is done in Tether.

According to FT, ratings group Fitch said the troubles at Tether and TerraUSD “highlight the fragile nature of private stablecoins, and will accelerate calls for regulation.”

Janet Yellen, the US treasury secretary, said in congressional testimony that the collapse of TerraUSD showed the dangers of stablecoins, which the Biden administration and US regulators have grown increasingly concerned about.

“I wouldn’t characterize 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.

Tether is the largest stablecoin by market cap, and, along with USD Coin and Binance USD, they account for almost 87% of the total $169.5 billion stablecoin market, according to CoinMarketCap. Tether now has a circulating supply of around $79.5 billion, down from $82.9 billion 24 hours earlier, suggesting the company behind it processed over $3 billion in redemptions in just one day.

Mati Greenspan, CEO of Quantum Economics, said the Terra debacle had “shaken” the crypto market’s confidence in other stablecoins, like Tether.

“The DeFi market certainly has a lot riding on the precept that stablecoins can remain stable, so if things start to unravel it could be potentially catastrophic for the industry,” he said.

Amidst worries, Paolo Ardoino, Tether’s CTO, stepped in to reassure investors, Bloomberg reported. He emphasized that the private company behind the coin that plays a critical role in the crypto ecosystem had no problem with redemptions, including even a $600-million repayment in the last 24 hours.

“Actually, the peg was not broken,” Ardoino said on Twitter Spaces Thursday. “It would have been broken if Tether didn’t honor redemption at $1.”

“We had pretty much $3 billion in redemptions, and they were liquidated pretty quickly through our banking channels,” he added

Last year, the US Commodity Futures Trading Commission fined Tether $41million, claiming the company made “untrue or misleading” statements about its reserves.

Tether’s CTO 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.

Ardoino also reassured that 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.