Tether's Liquidation will Sentence the Death of USDT Tokens

After Bitcoin and Terra LUNA, Tether investors are scared due to the liquidation

The Crypto bloodbath is not going to stop as early as you thought. Because looking at the condition of all cryptocurrencies, surely, things are not going to settle anytime soon. From terra Luna’s dramatic crash to Bitcoin falling below US18K, is there anything crypto investors haven’t seen? Well yes, everyone’s favorite stablecoin Tether is at risk. Embattled cryptocurrency hedge fund Three Arrows Capital has transferred tens of millions of dollars worth of Tether (USDT) and USD Coin (USDC) stablecoins to cryptocurrency exchange KuCoin, according to data provided by blockchain security company PeckShield. The recent transfers come just days after 3AC filed for Chapter 15 bankruptcy protection. The failed hedge fund was recently reprimanded by the Monetary Authority of Singapore (MAS), the country’s financial regulator for providing misleading information about the company’s assets. 3AC was also accused of failing to notify the MAS of changes in shareholding positions.

Last month, Investors pulled out about US$1.6 billion in 48 hours from Tether’s dollar-pegged USDT stablecoin, reducing its circulating supply to US$70.8 billion, the lowest since October 2021, according to the price tracker CoinGecko. Tether’s USDT has a different financial structure from the Terra blockchain’s UST “algorithmic stablecoin,” which collapsed last month. But USDT has long suffered from investor doubts about the assets backing it, and whether redemptions would be honored in a full-blown crisis.

Tether issued an official statement in June 2022, to deny reports alleging that Tether’s commercial paper portfolio is 85% backed by Chinese or Asian commercial papers and is being traded at a 30% discount.

The stablecoin firm called such allegations “completely false,” reiterating that more than 47% of total USDT reserves are now the “United States Treasuries.” In its latest assurance opinion issued in May, Tether reported that commercial paper makes up less than 25% of USDT’s backing, amounting to around US$21 billion as of March 31.

Tether operates differently from TerraUSD, or UST, which was designed to use a complex mix of code, trader incentives, and swaps with its sister token Luna to maintain its peg. Tether, on the other hand, says it backs its token with dollar-equivalent assets, though questions about the quality of its stockpile persist. Its decline highlights the overall risk-off mood that’s sweeping through crypto markets, analysts said.

Stablecoins are kind of like the bank accounts of the crypto world, designed to serve as a sound store of value investors can turn to in times of market volatility. Tether and USDC, the two biggest stablecoins, are meant to be backed by a sufficient amount of money held in a reserve to ensure depositors can receive their dollars when they want to make a withdrawal.


What Makes Tether Unique?

USDT’s unique feature is the fact that its value is guaranteed by Tether to remain pegged to the U.S. dollar. According to Tether, whenever it issues new USDT tokens, it allocates the same amount of USD to its reserves, thus ensuring that USDT is fully backed by cash and cash equivalents.

The famously high volatility of the crypto markets means that cryptocurrencies can rise or fall by 10-20% within a single day, making them unreliable as a store of value. USDT, on the other hand, is protected from these fluctuations.

This property makes USDT a haven for crypto investors: during periods of high volatility, they can park their portfolios in Tether without having to completely cash out into USD. In addition, USDT provides a simple way to transact a U.S. dollar equivalent between regions, countries, and even continents via blockchain — without having to rely on a slow and expensive intermediary, like a bank or a financial service provider.