What Has Spooked Investors About Tether (USDT)?

USDT depeg

Two days after Terra USD depegged from the dollar, there are indications that USDT is losing its stability. On May 12, the stablecoin deviated from its $1 peg by 3%. At 9.24 am, USDT dropped to $0.9508. Its market capitalization is also down by 1.66%, while its trading volume has spiked by 52%.

This raw data gives insight into the fact that many investors are moving away from USDT. This is the reason why the stablecoin is showing signs of depeg from $1. What could be responsible for the low demand for USDT, considering that it has been the most capitalized stablecoin in the market?

What is obvious from this data is that investors are moving funds away from USDT. The benefiting stablecoins are USDC, the second most capitalized stablecoin and BUSD, the stablecoin from Binance, the largest cryptocurrency exchange.

At the time of filing this report, both stablecoins have maintained their peg to $1. USDC is steady at $1 while BUSD is trading at $1.1. This is an indication that the demand for the latter is so high at the moment because of investor confidence in Binance, the company behind the stablecoin.

Absence of A Transparent Audit

Anyone who has been in the coin market for a number of years may be aware of some of the controversies surrounding USDT. Pegged to the dollar, USDT is the number one stablecoin owned by Tether Holdings LTD.

One of the issues around the stablecoin is that despite the claims of Tether Holdings LTD that it is backed by the dollar, there is actually no evidence that it is. A market analyst, Stefan Urquelle made a comment concerning USDT and top competing stablecoins. According to him, this is why investors may be moving away from Tether:

“USDT has never been audited. $BUSD is owned by the largest crypto exchange in the world and has been audited. Blackrock (owners of the United States) own the $USDC stablecoin. It has been audited. These are obvious picks over anything that has no major backing/successful audits”

USDT and Bitfinex Connection

On October 15, 2021, the Commodities Futures Trading Commission (CFTC) ordered Bitfinex and Tether Holdings to pay fines of $42.5 million. This was the penalty for “making untrue or misleading statements and omissions of material fact in connection with the U.S. dollar tether token (USDT) stablecoin.”

The penalty against Tether Holdings Limited, Tether Limited, Tether Operations Limited, and Tether International Limited, proved beyond doubt that USDT has never fully been backed by the US dollar, despite years of misinformation by Tether LTD. Tether paid a monetary penalty, civil in scope of $41 million.

A separate fine was issued to Bitfinex, the exchange that is closely linked to Tether, but never fully reveal its relationship with the stablecoin maker. In fact, available information shores that the two companies share the same shareholders.  The issue has always been that entities backing USDT minted the stablecoin arbitrarily without recourse to ensuring that equivalent volume of USD backed their cryptocurrency.

Bitfinex was fined $1.5 million for violations that bordered on “illegal, off-exchange retail commodity transactions in digital assets with U.S persons”. This is not the first time Bitfinex has been sanctioned by CFTC. A 2016 penalty fined the company $75,000 “for offering illegal off-exchanged financed commodity transactions”

According to the CFTC, the essence of the sanctions was the need to uphold honesty and transparency in the evolving market for digital assets. Tether, which launched its stablecoin, USDT in 2014, misrepresented that it was fully backed by the USD. A CFTC document shows that from June 1, 2016 to February 25, 2019, there were insufficient funds in the company reserves.

“Tether falsely represented that it would undergo routine, professional audits to demonstrate that it maintained “100% reserves at all times” even though Tether reserves were not audited” the document continues.

Tether’s Response To USDT Instability

Tether Holdings LTD seems to be taking remedial action to make sure that its stablecoin doesn’t depeg for $1 like UST did. In a May 12 update, the company said that it will take some actions to enhance the stability of USDT. The release said:

“In a few minutes Tether will coordinate with a 3rd party to perform a chain swap, converting from Tron TRC20 to Ethereum ERC20, for 1B USDt and from Tron TRC20 to Avalanche, for 20M USDt.”

The company maintained that the process will not affect the supply of USDT.

Worse Case Scenario

USDT is the most widespread stablecoin, so a depeg will have a remarkable impact on the coin market. The scenario that most investors will face in case of a depeg from the dollar will be their inability to convert their USDT to fiat (USD, EUR, etc) since it is not sufficiently backed by the dollar. The alternative stablecoins such as USDC and BUSD may not be able to withstand the demand of investors wishing to exit or hedge with these stablecoins.

On May 10, Binance temporarily suspended withdrawal of UST on the Terra network. This was after the Terra network depegged from the dollar.

A cryptocurrency trader, Hassan Bin Muzzamil summarized the situation at the moment, when he said:

“Zoom out…[on the chart] whenever there has been a massive sell off…USDT lost its peg… then USDT also recovered in bull momentum.. Saying all the above, I have moved my money into USDC to be safe.. You never know. Something crazy can happen in this crazy world of crypto”

Author: Jinka Kamma

Jinka Kamma is passionate about the prospects of blockchain and the freedom cryptocurrencies afford people across borders. He holds small amounts of bitcoin and tether.