Investors have pulled out $9 billion from USDT, causing a drop in the circulating supply of the stablecoin. This is according to data available at Coinmarketcap seen by Cryptoinfowatch on May 19. It shows a 7-day drop to $74 billion from $83 billion.
This has has heightened concerns that the most capitalized stablecoin might be in for more troubles down the line. The stability of the stablecoin, Tether has been a subject of controversy, especially in recent times. With a pending case at the New York Supreme court and the depeg of another stablecoin, Terra USD, investors are asking if Tether is reliable.
Efficiency of The Market Maker
Tether is currently trading at $0.9986, a 0.1% drop from one dollar. This is nothing unusual since it is acceptable in trading circles that a stablecoin fluctuates with very low margins. It becomes an issue when a cryptocurrency that is expected to be a stabilizer in a volatile market loses its stability. When a stablecoin starts losing up to 3 cents or more, investors should be concerned as in the case of Terra’s UST.
Speaking on the stability of stablecoins, the Ethereum co-founder, Vitalik Buterin said that a stablecoin cannot be considered good just because its value stays close to $1. He emphasized the need for an efficient market maker backing the coin to ensure market stability.
Why people are concerned with Tether is that it is the biggest stablecoin in the coin market. If USDT drops well below the USD, it’ll create an unprecedented panic in the market as users would have to exit their positions using other stablecoins such as USDC and BUSD. The reality is that no one knows the capacity of these blockchins to withstand a swamping of a panicked market.
CFTC Fine On Tether
Tether, the company behind USDT claims that the stablecoin is fully backed by US dollar reserve. This has been a subject of controversy that came to a head with the CFTC fine on the company. According to the regulator, the $41 million fine on Tether LTD. last October was:
“for making untrue or misleading statements and omissions of material fact in connection with the U.S. dollar tether token (USDT) stablecoin. The order requires Tether to pay a civil monetary penalty of $41 million and to cease and desist from any further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.”
A Disclosure Suit in New York Supreme Court
The New York Supreme Court is presently looking at petition filed by Tether to prevent the public from having access to the details of its reserve. The suit filed by the Tether LTD against the New York Attorney General’s Office hopes to stop the office from revealing the details of the company’s reserve to CoinDesk, a blockchain publication affiliated to a rival company.
IFINEX, the parent company of Tether LTD and other subsidiaries, wants the court to stop the office of the New York Attorney General’s Office to desist from its demand for public disclosure of the composition of the assets that the company holds to back its $78.4 billion stablecoins.
According to the court document, the Office of the New York Attorney General was joined in the suit by Coindesk in the demand for disclosure by IFINEX and its subsidiaries. The petition filed on September 2 wished to stop the disclosure, which contradicts the Freedom of Information Law.
The document states that a Verified answer was filed by the Office of the Attorney General and Kathryn Sheingold on November 6, 2021. Tether is protesting the disclosure of its reserves backing its stablecoin, USDT over the past few years.
CoinDesk, a party to the suit is owned by Digital Currency Group, the same company that is behind Circle (USDC), the next stablecoin competing with Tether’s stablecoin (USDT). Tether demanded that the court stops the NYAG from providing details of its reserve to CoinDesk. The apprehension over the state of health of USDT has benefited USDC, the rival stablecoin which has remained relatively stable at its $1 peg.
Is The Future of USDT Stable?
Tether bleeding another $1.5 billion and $9 billion over the past week. The fraud of unaudited reserves will be readily apparent. Commercial paper? A lie. Treasuries? So far beyond Madoff. Who believes this nonsense? Massive Ponzi. If you are still in you get what you deserve. pic.twitter.com/aYdXgYinqr
— Christopher Bloomstran (@ChrisBloomstran) May 18, 2022
Even if the Supreme court gives the NYAG the nod to reveal Tether holdings, the company may not face much challenge unless the market starters losing confidence in USDT as a stablecoin. If that happens, USDT could become another destabilized coin. This is especially so if the stablecoin doesn’t have enough USD its its reserve backing it.
In their reaction to the market apprehension, the Tether team, through a release said that Tether is still a reliable stablecoin. They said that since 2015, that the company has never failed a redemption test, despite a few shortfalls that investors have experienced in exchanges such as Binance.
“When this occurs, it doesn’t mean USD₮ is no longer backed by 1-to-1 with reserves, or that USD₮ peg is lost, or that Tether redemptions are being processed at less than $1 per USD₮. It simply shows that selling pressure on exchanges has exceeded the limited liquidity on that exchange” the update states.
In a recent comment on May 17, Paolo Ardoino, the chief technology officer (CTO) of Tether said that the asset is fully backed by the USD. He added that the company redeemed $7 billion of the asset in the past 48 hours.