Crypto Long & Short: What’s Going on With Tether?

This week, the crypto market shrugged off unfavorable reports about one of its most significant service providers. The US Department of Justice is becoming more interested in the crypto sector and is investigating the creators of the stable coin Tether (USDT) for misleading banks about the nature of their business.

That isn’t exactly breaking news, and the market reacted as expected. The most interesting aspect of the whole story is that Tether’s growth has been flat since the end of May. For a cryptocurrency that tripled in value between January 1 and May 31, the two-month slump is astounding.

Tether has long been beset by accusations that real dollars do not back it. Instead, its issuers are artificially inflating the price of cryptocurrencies with tether units created out of thin air. However, traders either don’t believe it or don’t care: Tether has generally maintained its peg to the dollar, despite its financials being suspect.

Trading cryptocurrency necessitates a certain level of risk tolerance. Nobody, I suppose, walks to the Bellagio’s cashier’s window and demands to view the casino’s audited balance sheets.

Nonetheless, the issue of Tether’s solvency is of systemic significance. In crypto markets, Tether and other stablecoins serve as money-market funds. Tether is used chiefly on offshore exchanges like Binance. The disparity between these offshore markets and a casino is that they determine the price of this cryptocurrency.

Tether might be part of a market-crash scenario in which a rapid influx of discounted Tether drives down the price of bitcoin (BTC, -2.1 percent) and other tradable crypto assets. Tether is distinct from stable coins such as USDC, which are regulated more directly by US regulators, and it extends beyond the distinctions between money-market funds.As a result, USDC has continued to expand despite its slowing and ultimately stagnating growth.

As Tether’s $64.3 billion supply illustrates, this isn’t due to some flight from Tether to the relative safety of a more controlled stable coin. Instead, the inflow of new investors who can’t or won’t deal in Tether or trade on offshore exchanges is more plausible. Professionals and institutions, in particular, who have fiduciary duty for investor funds, fall under this category.

This highlights the distinction between Tether and USDC. The former is regulated by US authorities, while the other is not (aside from a settlement with the New York attorney general’s office). As a result, they are two different currencies used by multiple people in various locations.

It wouldn’t be wise to believe that a crisis of confidence among Tether’s offshore dealers would spread to other stable coins Tether, in this light, may not be as systemically vital as Lehman Brothers’ money-market fund. The risk of a tether crash, on the other hand, is a systemic one that every known investment in crypto assets faces.

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