Tether breaks $ 1 peg as pressure mounts on world’s biggest stablecoin

Tether has vowed to maintain its peg against the dollar “at all costs” after a tumble in the price of the world’s most important stablecoin heaped fresh pressure on the cryptocurrency market.

The $ 80bn token, which is designed to match the value of $ 1 through a reserve of traditional assets, fell as low as 95.11 cents on Thursday, according to a CryptoCompare index that tracks trading on the world’s top digital asset exchanges.

Paolo Ardoino, Tether’s chief technology officer, said on a Twitter chat on Thursday that the group was prepared to “maintain the US dollar peg at all costs”. He said Tether holds “a ton” of US government bonds and was prepared to sell them to defend the token.

Stablecoins claim to provide crypto traders with a safe place to park their cash between making bets on volatile cryptocurrencies. Tether, by far the world’s biggest stablecoin, plays a crucial role in facilitating trading across the crypto market and also provides a link with the traditional financial system.

The fall in the price of Tether to almost 5 per cent below its $ 1 peg ricocheted across the digital asset market. Bitcoin, the most actively traded cryptocurrency, fell almost 7 per cent to $ 26,250, the lowest level since December 2020.

Tether says it held almost $ 35bn in short-term Treasuries, known as bills, at the end of last year. However, the group’s reserve figures have not been audited under generally accepted accounting principles.

Line chart of $ per token showing Tether sinks below $ 1 peg

Cryptocurrencies are generally priced in comparison to the value of stablecoins as opposed to traditional currencies because of the quick settlement times required in the digital asset market. Tether, as the market leader, plays an outsize role in the market and is often regarded as a market benchmark. When the price of Tether fluctuates it also leaves the broader crypto market more vulnerable to volatility.

What is a stablecoin?

Tokens pegged to other assets, usually the world’s biggest and most stable currencies. They act as crypto-native dollars and a bridge between crypto and traditional financial worlds. They also allow traders to more easily convert traditional currencies into cryptocurrencies for trading.

The coins can be lent as collateral for trading, or to generate high yields in the form of interest. They are supposed to have a fixed price and be backed by reserves at all times, allowing users to redeem them. However, critics have questioned where some stablecoins keep their reserves and whether the assets can be quickly recovered and redeemed.

Read more on the FT Crypto glossary

“The crypto market has been in turmoil this week, and chaos continues to spread,” said Sam Kopelman, UK manager at crypto exchange Luno. “Stablecoins, traditionally a place of refuge for traders during trying times, are feeling the heat, and it’s having a major impact on the rest of the market.”

Tether’s decline comes after TerraUSD, a much smaller stablecoin, became completely unmoored from its peg against the dollar earlier this week. Tether, unlike TerraUSD, claims to be backed by a basket of dollar-based assets. However, its backers have declined to provide granular details of its holdings.

Tether was hit with a $ 41mn fine from the US Commodity Futures Trading Commission last year over allegations that it made misleading statements from at least June 2016 to February 2019 about having sufficient dollar reserves to back each of its stablecoins in circulation.

Regulators have cited stablecoins, which are largely unregulated in most markets, as a risk to financial stability. The Federal Reserve said earlier this week that three stablecoins, Tether, USDCoin and Binance USD, make up 80 per cent of the $ 180bn market.

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