Why the crypto sphere is watching the evolution of the stablecoin chain very closely

If the stablecoin tether (USDT) were to fall sharply, the cryptocurrency ecosystem would be shaken up.

Amid the collapse of the Terra blockchain stablecoin terra usd (UST), investors’ eyes are now on the largest stablecoin in history: tether (or USDT), which is currently worth $79 billion, according to the Coinmarketcap site.

On Thursday, the chain fell below its 1:1 peg with the dollar to trade at $0.97, sending holders into a cold sweat. It has since been restored, valued at $0.99 at the time of writing.

As a reminder, a stablecoin (or stable cryptocurrency) is a crypto asset (or digital asset) linked to a fiduciary currency such as the euro or the dollar. A stablecoin can also be backed by other assets (such as gold). This is called the underlying asset of the stablecoin.

When the price of the underlying asset goes up or down, the value of the stablecoin must match. The promise is to hold the parity permanently, e.g. 1 USDT = 1 dollar. This peg to a currency is also known as a “peg”. When there is a gap between the value of the underlying asset and that of the stablecoin, it is called a “de-peg” or “loss of parity”.

Like any so-called “classic” stablecoin (not to be confused with the so-called “algorithmic”), tether must guarantee that there are as many dollars in reserve as there are stable coins in circulation. So if a customer wants to sell their stablecoins for dollars, there is definitely enough money in this company’s coffers to make this conversion. It is therefore a parity based on the supply of “real” money available to the stablecoin issuer.

Lack of transparency on funds in reserve

The fall of the USDT is part of a general context of distrust in the stablecoin market, but not only. Tether has been criticized mainly for the lack of transparency regarding the reserve funds it has, while the stablecoin has a capitalization of $79 billion.

Notably, according to information communicated by tether in late December, the company owns approximately $35 billion in government bonds, $25 billion in “commercial paper” (mostly corporate short-term trade debt, editors’ note) and $4.16 billion in cash. The remaining $16 billion is invested in other financial products, such as cryptocurrencies or corporate bonds. The company ends up giving very few details.

For example, regarding “commercial paper” “we don’t know which companies they are and whether or not these companies will be able to repay their debt in the event of the collapse of Tether,” explains BFM Crypto Vincent Boy, Analyst at IG France.

A sharper decline in cryptocurrencies

But there’s another big problem: If everyone wanted to withdraw their US dollars into this stablecoin, would Tether have enough money to pay back this $79 billion in capitalization? Difficult to know.

“We could be in a scenario like the crisis of 1929, this would affect confidence in tether but also in cryptocurrencies, because tether in particular is widely used for trading,” the expert underlines.

Indeed, as a stable coin, one of its main features is to fight against the volatility of cryptocurrencies, tether is mainly used for trading cryptocurrencies. “If falling individuals and investors no longer have a way to protect themselves from volatility, it could lead to a sharper decline in cryptocurrencies. This is a matter of general confidence in the cryptocurrency market,” Vincent Boy estimates.

‘We shouldn’t go back years’

“Because the market is emerging, there are many risks, we must not undermine trust and we must not go back to years. Even if cryptocurrencies fall completely, there will always be a market because it is an online technology, the blockchain will remain , even if the bitcoin drops to 1 dollar,” said the latter.

In addition to individuals losing a lot of money, a sharp decline in cryptocurrencies would also put the balance sheets of many companies that have bet on bitcoin, such as Tesla or Microstrategy, at risk. “Companies with bitcoin in their coffers can be deeply in debt and unable to repay their debt,” warns Vincent Boy.

In a bleak environment in the stablecoin market, it seems that users are turning to other stablecoins such as Binance’s stablecoin, Binance USD, which has a market cap of $17 billion.

“To date, users have more confidence in Binance’s stablecoin, the largest trading platform in the world, which explains why Binance definitely has more capital to deal with attacks on its stablecoin and thus instill a certain confidence in its stablecoin,” Vincent said. Boy on.

As of today, the USDT is not at risk of falling as long as individuals and investors do not decide to withdraw their money en masse. But the slight drop following the terra-usd collapse casts doubt on the apparent stability of these assets, which erred within days. In this context, the US regulator, through the voice of current United States Treasury Secretary Janet Yellen, wants to move forward with its plan to regulate stablecoins and cryptocurrencies.

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