Could Tether be the catalyst for a cryptographic apocalypse?

The cryptocurrency market has shown that it is not immune to broader economic issues. Large cap coins, including Bitcoin and Ethereum, have been on a downward trend for the past few weeks. But the broader economy and inflationary pressure are far from the only factor influencing cryptocurrencies right now. The collapse of stablecoin Terra (UST) last week sent market panic waveswith some commentators wondering if the collapse was a ‘Lehman Brothers’ moment for the cryptocurrency.

But UST is just one of many stablecoins. By far the biggest is Tether, or USDT. It currently ranks third in terms of total market cap, behind Bitcoin and Ethereum. The total market cap of USDT has dropped from about $83 billion on May 11 to less than $75 billion in May, according to Coingecko. This drop is due to a series of redemptions, which were redeemed for the full value of one US dollar.

Tether Operations Limited, the company behind USDT, sought to reassure investors worried about the possibility of another untying and bank run, which is what happened to UST the week before. The company stated on its blog that “Since May 11, Tether has successfully processed $7 billion in USDT redemptions to verified individuals. Every redemption request that was submitted was redeemed in full.”

Tether has faced criticism due to a lack of transparency about exactly what its reserves are and how much they are actually worth. Recent Tether bailouts have served as a stress test. Despite some fluctuations during peak trading last week, the 1:1 dollar peg remains intact.

It is important to note that USDT and UST are fundamentally different from each other. UST relied on algorithms to maintain its peg by tying it with another token called Luna. During the crash, Luna’s value went from over $80 to virtually nothing, meaning that UST’s $1 peg could not be maintained. USDT, on the other hand, is reportedly backed by fiat and other asset reserves.

While Tether retains its value for the time being, doubts about its level of transparency remain. Last year, the company paid an $18.5 million fine to the New York attorney general’s office to end a lengthy investigation. Office of NY Attorney General Letitia James once said “Bitfinex and Tether recklessly and illegally covered up huge financial losses to keep their scheme running and protect its results,” before adding that “Tether’s claims that its virtual currency was fully backed by US dollars at all times was a lie”.

This is not the kind of thing you want to read if you are trading USDT.

For now, Tether appears to be able to weather these fluctuations and maintain its $1 rate, but if Tether collapses, the cryptocurrency will face an apocalypse the likes of which it has never seen. As always, trade carefully and be aware of the risks!

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