The fall in Tether’s price has heightened tensions in the nervous markets of cryptocurrencies, highlighting the central role of stablecoin behind the daily trading of digital assets such as bitcoin.
Although supposed to be one-on-one with the US dollar, Tether traded up 95.11 cents on Thursday before regaining some of its composure when it turned to social media to calm markets.
Tether’s seizure has heightened additional pressure on the cryptocurrency market, which has been shaken by the collapse of the value of TerraUSD, a much smaller stable coin.
Here’s a guide to why Tether plays such an important role in the crypto market and what can happen if it doesn’t work.
What is stablecoin and why does Tether matter?
Stablecoins are a type of cryptocurrency linked to other assets to reduce their volatility and play a crucial mediating role between hard currencies such as the US dollar and the euro and digital tokens such as bitcoin and ether. Using ordinary dollars to buy cryptocurrency can be difficult for traders, as settlement is slow and the price of currencies such as bitcoin can change significantly.
Instead, traders typically use traditional currencies to buy stablecoins, which are accepted on dozens of crypto exchanges. This allows retailers to buy and sell volatile digital assets faster.
Tether has issued more than $ 80 billion in circulation, making it the largest stable coin in the digital market and a major source of liquidity for the crypto economy.
Central to its operations is the company’s promise that the theater is pegged to the US on a one-to-one basis and that it is fully backed by its reserves of assets such as US government bonds, short-term corporate debt and relatively small cash.
Why is it so popular?
Tether’s market position, with 50% market share, is still slightly ahead of second-place USD Coin, which has 30% according to crypto data site CoinGecko.
It is the oldest stablecoin on the market and continues to dominate the use of stablecoins, especially in markets outside the United States. USD Coin, which launches in 2018, is positioned as a more friendly option for the United States.
Circle, which co-manages USD Coin with Coinbase, is also increasingly focusing on promoting its use for purposes other than cryptocurrency transfers.
Tether, like other stable coins, is also used on “yield platforms” that give digital tokens at a higher rate than they offer to customers.
Tether has also found some offline use outside the United States as an alternative to dollars, where access to the real thing is more limited. In December, the opposition government of Myanmar’s national unity announced that it had recognized Tether as its official currency.
Why is Tether controversial?
Critics often question Tether’s credentials as saying that his tokens are fully backed by assets.
The New York Attorney’s Office and the regulator of US derivatives, the Commodity Futures Trading Commission, have collectively fined the company nearly $ 60 million for allegedly falsely claiming that its tokens are fully backed by dollars by 2019. Tether settled both cases without acknowledge or deny responsibility.
Following the agreement with New York officials, Tether began publishing financial data showing a breakdown of its reserves. As of December, almost a quarter are still in commercial paper, a form of short-term debt. Tether does not disclose the identity or origin of the issuers of the commercial papers, except that some of its holdings are international.
What will happen if Tether loses its relationship to the dollar for an extended period of time?
Although stablecoins are sold as stable, in practice they fluctuate constantly. A July report by JPMorgan found that the four largest stablecoins had spent between 30-40% of the previous three months, trading below face value.
However, these fluctuations are usually relatively small. If Tether loses its one-on-one relationship with the US dollar by a large margin over a long period of time, it could have a destabilizing effect on the crypto market.
Crypto traders who hold large reserves in Tether would find that owning them costs less, which could force them to sell other tokens and cause them to rush to demand dollars in exchange for their depreciated Tether coins.
As people rush to buy their bonds for dollars, Stablecoin supporters will have to sell the traditional assets they claim to own to pay. The flow of sales can disrupt key traditional markets, such as those for short-term corporate debt or government bonds.
Central bankers around the world are wary that the impact of the collapse of the stablecoin could spread to traditional financial markets. Earlier this week, US Treasury Secretary Janet Yellen warned that the falling value of Terra illustrates that stablecoins are “a fast-growing product and have rapidly growing risks.”
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