by Viktor A 

July 3, 2021

Since the launch of bitcoin’s first altcoin, the controversial USDT has been the subject of much debate. Since its inception, under the leadership of its creator, a group of former Bitcoin core developers butted heads with the project’s supporters. However, many commentators have subsequently expressed concerns that the initiative is a ploy orchestrated by the cryptocurrency’s largest exchanges to regain control of Bitcoin’s price from Chinese miners and exchanges.

In a recent blog post by Bitfinex, the exchange stated that “Bitfinex will provide USDT as a payment method for Tether (USDT) issuance, which will occur on a continuous basis.”

Since the failure of the New York Agreement, the U.S. dollar has been fluctuating in an unsteady fashion. This has resulted in a market in which exchanges can accept deposits in Bitcoin, but then also choose to settle the same Bitcoin for dollars at a later time. This is a known problem that has been addressed with the use of the U.S. dollar’s commercial paper (CP) tether. These are named because they are backed by U.S. dollar assets, but are also considered to have a risk profile similar to that of a commercial paper instrument.

The market for stable currencies is growing exponentially. Last week, Eric Rosengren, president of the Federal Reserve Bank of Boston, issued a warning.

There are many reasons to believe that stablecoins – at least many stablecoins – are not really very stable, he said in a speech at the Official Monetary Institutions Forum, expressing concern that a future [financial] crisis could easily be provoked as they become a more important sector of the financial market unless we start regulating them.

Moreover, in the accompanying slideshow, the bank’s CEO mentioned Tether (USDT), the dominant issuer of stablecoins, noting that its basket of reserve assets looks very much like a high-risk blue chip fund – the kind that has struggled in the last two recessions.

Did Rosengren act correctly in designating bonds for his reserve assets, including commercial paper, corporate bonds, secured loans and precious metals? Could the parabolic growth of stablenecoins really destabilize the short-term lending markets, and would the stablenecoins industry be better served by stricter provisions and testing?

Moreover, Tether remains the dominant player in the global stackable coin market. What happens if Tether goes bankrupt – could that cause the entire cryptocurrency market to collapse? As you can see from the chart below, which was used in Rosengren’s presentation, the market capitalization of Stabelcoins relative to money market funds under management is now over 20%.

word image 525

Francine McKenna, an associate professor at American University’s Kogod School of Business, understands Rosengren’s concerns. She told Cointelegraph that these new stablecoin funds are, in a sense, intrusions into traditional short-term credit markets, and that the chairman of the Boston Fed and his colleagues may realize that suddenly we don’t have our fingers on all the levers.

Are stablecoins the engine of the cryptocurrency market?

Stable currencies currently influence short-term loan prices, but these instruments could exit the market just as quickly. In mid-June, for example, Iron Finance’s protocol execution caused the price of stablecoin IRON and its native token TITAN to spiral by nearly 100%, particularly affecting investor Mark Cuban.

Rohan Gray, an associate professor at Willamette University School of Law, told Cointelegraph that if Tether collapses, it could have fatal consequences for cryptocurrency trading:

Tether remains one of the most traded asset pairs for almost all other cryptocurrencies, providing the sector with a huge amount of liquidity. So yes, the collapse of Tether will have a big impact on the rest of the ecosystem.

Circle and some other Stabelcoins have started to take over market share from Tether. So it’s entirely possible that there will be another Stabelcoin, but even without Tether, the rest of the crypto industry still relies on a Stabelcoin base, he added.

In February, Tether and its subsidiary Bitfinex agreed to pay $18.5 million to the State of New York for misrepresenting the level of USDT’s fiat currency collateral.

Tether’s claims that its virtual currency was always fully backed by USDT were false, New York Attorney General Letitia James said in announcing the settlement, which also requires Tether and Bitfinex to file mandatory quarterly reports on USDT reserves – the first of which was filed as part of the Rosengren settlement.

However, the USDT report in March did not reassure everyone. Of particular note is the fact that commercial paper accounts for half (49.6%) of the assets. The fact that Tether owns so many stocks and corporate bonds is a big deal, Gray told Cointelegraph, adding: No one knows what it is, and it completely contradicts their longstanding claims that they have only invested in cash or cash-like assets.

The cash equivalent has to be something particularly liquid, with no uncertainty in the market, McKenna told Cointelegraph : Commercial papers are not universally applicable. There are all kinds of commercial papers. She said we are not living in the days when people said General Electric’s commercial paper was as good as gold. Today: You need to see who the transmitter is.

USDT has been a big question mark since its inception, Sidharth Sogani, founder and CEO of research firm Crebaco, told Cointelegraph. If Tether invests in assets that are not denominated in U.S. dollars, what happens if those assets – such as precious metals or corporate bonds – fall in value? Will the USDT lose its value? Also: How will the revenue be distributed? Tether users are expected to hold bonds and commodities that produce stable coins. The interest earned is therefore the users’ right, Mr Sogani said.

However, not everyone is against the idea of linking the Tether token to a basket of commercial paper. In my opinion, there is nothing wrong with a stablecoin – USDT or not – being backed by or trading in paper, as opposed to being backed 100% by a specific fiat currency, Sean Stein Smith, associate professor of economics and business administration at Lehman College, told Cointelegraph.

However, Stein Smith acknowledged that complications could arise – for example, a raid on Stablecoin could destabilize a certain portion of the commercial paper market. Conversely, a rise in the commercial paper market could disrupt the redemption of a particular stablecoin.

Improvement of the test?

Will the regular audit of Tether’s reserves by the Big Four accounting firm improve the company’s reserves? A regular audit would definitely help, Stein Smith said, both to build confidence in USDT’s support and to create cryptocurrency-specific standards that can be adopted by other stablecoin issuers in the future.

But others are not so sure. For example, USD Coin (USDC), the second largest stablecoin, receives monthly confirmation from Grant Thornton LLP that it has sufficient USDC reserves. This approach is often cited as the best, but it also has serious limitations, McKenna said. All that really happens, McKenna says, is a monthly check of the issuer’s bank balance. Two minutes after the accountant looks at the bank statement, the Stabelcoin issuer can just transfer the money somewhere else.

So what’s the answer? McKenna says these are trust accounts, which are segregated client funds that brokers and dealers must have. In any case, there are many ways to immobilize money so it can’t be touched.

Another stumbling block for people is the fact that, according to Tether itself, only 2.9% of USDT assets are in cash, leading some to say that Tether acts like a bank – but without strict banking rules.

If you look at the composition of its reserves – a small portion of which is cash in bank accounts – it’s clear that Tether is operating like a bank, but without the usual disclosure, Martin Walker, director of banking and finance at the Center for Evidence-Based Management, told the Financial Times.

Meanwhile, all the hype about the reserves probably isn’t helping to attract new users. According to CoinMarketCap, USDT’s market capitalization has barely changed in the past month. In the case of stablecoins, market capitalization is a good indicator of overall supply, as the value of each coin is very close to $1.00. Meanwhile, USD Coin and Binance USD (BUSD), Tether’s closest competitors, have significantly increased their market value during this period, by 10% and 12% respectively since the beginning of June.

Cointelegraph invited Tether/Bitfinex to comment on the idea that it appears to be losing ground to its competitors, but received no response.

What if the USDT collapses?

There is no sign of an imminent collapse of USDT, but given Tether’s continued dominance in the market, such an event is often a topic of conversation – as is speculation. Sogani told Cointelegraph:

BTC/cryptocurrency pairs will be supported, but there will still be carnage. I think the market will lose 10-15% – USDT’s outstanding shares are now $64 billion – of its market capitalization, and a sudden correction to 35% could occur if USDT collapses, as it would cause a panic.

Stein Smith, meanwhile, does not believe that Stabelcoins in general, or USDT in particular, pose a greater threat to financial stability or the crypto-ecosystem. If stablecoins are a global systemic risk, why are so many central banks experimenting and introducing digital currencies that are basically government-issued stablecoins, he said, adding:

If Tether collapses, it will certainly cause some volatility and headlines announcing the end of cryptocurrencies, but it won’t bring down the entire industry.

Is the STABILITY Act necessary?

In other countries, at least if some initiatives prove successful, regulation of Stabelcoins could be introduced. It is important that the issuance of stablecoin linked to a fiat currency is regulated, Sogani said, otherwise it amounts to creating value out of thin air to buy more and more cryptocurrencies, especially bitcoin. Since stable components are usually centralized, strict regulation is necessary due to the lack of transparency.

The Stabelcoin market is also fragmented globally, as different organizations have their own Stabelcoins and many Stabelcoins are available on different chains. For example, USDT is available as an ERC-20 token on Ethereum, a TRC-20 token on Tron, a BEP-20 token on Binance’s blockchain, and can also be used through Omni Layer on Bitcoin (BTC), making it difficult to verify.

Stubblecoin is essentially an unregulated free bank that issues deposits. But free banking has never worked in the past, even when the government asked for support, Gary Gorton, a professor of finance at Yale University, recently explained: Stable currencies should be strongly supported because they can now operate without any supervision.

The industry could benefit from tighter regulation, Gray, of Willamette University, told Cointelegraph. Gray helped draft the STABLE (Stable Coin Tethering and Enforcement of Banking Licenses) Act, which was introduced in the US House of Representatives in December 2020. The STABLE Act requires, among other things, that U.S. issuers of stable coins obtain a bank charter and prior approval from the Federal Reserve, the Federal Deposit Insurance Corporation, and the appropriate banking authority in their jurisdiction.

In general, stable currencies have grown rapidly in recent times, attracting increasing attention from financial regulators. Tether is at the top of the stablecoin pyramid, but it remains to be seen whether all stablecoins in fiat currency are truly linked, McKenna said. If I need money to pay a debt or taxes, will I get a dollar for a dollar?

Indeed, when money market funds were hit by the 2008 financial crisis – that is, when their net asset values fell below $1 – it was because these funds were investing in derivatives, commercial paper, and other contingent and illiquid assets. McKenna concluded: Yes, the Fed and its presidents have huge reasons to be concerned.The unauthorized tethering service offered by Bitfinex has once again been suspended. While the move was expected by many, the markets took it as a negative sign for the company’s exchange business, which has been operating in the red for several months. USDT, the stablecoin created by Tether and backed by US dollars, saw its price tank following the announcement.. Read more about tether case and let us know what you think.

Related Tags:

tether commercial papertether pricetether audittether lawsuittether crypto price predictiontether reserves,People also search for,Privacy settings,How Search works,tether commercial paper,what will happen to tether,tether and bitcoin connection,tether price,tether case,what happens if tether collapses,tether audit,tether lawsuit

About the author 

Viktor A

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Subscribe now to get the latest updates!