PORTLAND – Tether’s stablecoin is on the verge of recovering all of its market value lost in the wake of the collapse of algorithmic rival TerraUSD less than a year ago.
The stablecoin operator had assets totalling around US$81.4 billion (S$108.6 billion) backing its USDT token as at April 21, according to data tracker CoinMarketCap. The amount reached a peak of about US$83 billion last May, when the unravelling of Terra prompted investors to dump cryptocurrencies across the board.
Tether’s assets had dropped almost 20 per cent in the second quarter of last year.
The recovery is a testament to the dominant role that Tether plays in crypto as a means for conducting transactions and storing value. USDT, the world’s most traded crypto asset, aims to maintain a one-to-one redemption with the US dollar by relying on a reserve of cash and cash-equivalents.
It briefly dropped below US$1 when TerraUSD imploded, and again in November when the FTX exchange failed. The quality of assets used by Tether for that reserve have been called into question in the past, and regulators globally have turned the spotlight onto stablecoin issuers.
Tether has benefited this year from banking turmoil that has weighed on rivals such as Circle’s USD Coin (USDC), as well as the rally that has sent market bellwether Bitcoin up about 70 per cent.
The amount of Tether in circulation typically rises during rallies and flattens or modestly declines in bear markets, according to Mr Alex Thorn, head of research at Galaxy Digital.
Large investors, often referred to as whales, have also been exiting profitable trades and parking proceeds in Tether, said Mr Henry Elder, head of decentralised finance at Wave Digital Assets.
Meanwhile, the evolving United States regulatory environment is seen pushing more traders offshore. Tether is based in the British Virgin Islands. Circle, which has seen about a 30 per cent decline in USDC assets this year, is run from Boston.
“We are seeing a wholesale shift from USDC to other, less US-centric stablecoins,” Mr Elder said. “This will continue to play out as long as the US remains irrationally hostile to crypto in general and stablecoins in particular.”
A House of Representatives hearing last week that was focused on stablecoins indicated a deep rift between Republican and Democratic lawmakers. This likely bodes poorly for legislation.
At the same time, the US Securities and Exchange Commission (SEC) and state regulators have ramped up enforcement actions. Paxos Trust stopped issuing its Binance-branded BUSD stablecoin after a pushback by the New York authorities and the SEC.
BUSD’s market cap has been down around 60 per cent since the beginning of the year, according to CoinMarketCap. The SEC also declared UST, the stablecoin whose de-pegging triggered the failure of the Terra-Luna ecosystem, an unregistered security.
“Tether had been a huge benefactor of the enforcement approach in the US, as it not only appears to be isolated from the SEC, but also has not suffered any major incidents as of late, inspiring confidence among investors,” said Mr Conor Ryder, a research analyst at Kaiko.
Tether has also appeared to have profited from the recent wave of financial institutions turning away from crypto clients. This left stablecoins like Tether as one of the few viable alternative options for getting into crypto.
This is ironic as Tether is, in many ways, still viewed by many market observers as a black box. Its reserves have not been independently audited.
Several years ago, it reached a settlement with the New York authorities for commingling funds and lying about the reserves; the company did not admit to any wrongdoing.
“It is inexplicable to me that people are pouring into USDT,” said Dr Campbell Harvey, a finance professor at Duke University. “It is very opaque.”
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