Tether again Breaks the Buck
Tether (USDT), the most popular stablecoin by volume, has again “broken the buck” amid concerns that the company behind it, Tether Limited, does not actually possess the funds required to back each coin.
As a stablecoin, the market value of Tether is supposed to be pegged to $1.00 US; most of the time, the price has fluctuated between $0.99 and $1.01. To be sure, the term peg is more aspirational than strict; Tether was subject to market trading. There was always a built-in vulnerability to the peg, just as there was of gold to the dollar under the Bretton Woods monetary arrangements. We know how that ended.
In late April 2017 the price Tether fell as low as $0.91 before rebounding to $1.05; at this writing, the price stands at $0.96. In order to be a legitimate stablecoin, Tether would have to be backed by $1.00 for each of its coins trading in the market.
The drop comes amid a rising crescendo of distrust. Over the weekend a Bloomberg article rehashed concerns which have been voiced for over a year that Tether does not actually have the required funds in reserve to actually back its coins. Added factors, such as the company’s continuing unwillingness or inability to permit an independent audit substantiating the sufficiency of its reserves – and the appearance of a meticulously phrased, if inconclusive, unofficial audit on the website – have weighed on the price of the USDT coin.
Complicating the issue is that both Tether Limited and the crypto exchange upon which the majority of Tether trades take place, Bitfinex, are run by many of the same individuals.
Stablecoins exist because they are more easily transferable from one exchange to another by avoiding the conventional banking system altogether. In other words, they perform the same functions of clearing that central banks provide, except with a crypto-based medium created specifically for that function.
They have also, in recent years, been used in a secondary role to speculate on banking regulations: as banking rules have tightened, the price of Tether and other stablecoins have risen slightly, and when rules relax, the price of stablecoins frequently drops slightly.
Because of its pivotal role in Bitcoin trading – estimated at 80% in during summer 2018 – Tether has become a de facto “central bank” in the cryptocurrency markets, an irony which is sure not to be missed if it turns out that the company does not have one dollar backing each of its stablecoins; e.g., that it has essentially been engaging in a crude form of fractional reserve banking.
Alternative stablecoins TrueUSD, BitCNY, and Dai were all trading up 2 to 4% Monday morning.
The idea of stablecoins as an alternative clearing system to banks is a good one. But under ideal conditions, they would come to exist due to pure market demand rather than as a reflection of the regulatory climate that has limited access that crypto exchanges have been granted to conventional banking services.
Short-term (which could mean 5 to 10 years) these coins will come and go; long-term, they could provide a path forward for clearing systems in a cryptofied world.
Peter C. Earle
Peter C. Earle, Ph.D, is a Senior Research Fellow who joined AIER in 2018. He holds a Ph.D in Economics from l’Universite d’Angers, an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.
Prior to joining AIER, Dr. Earle spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area as well as engaging in extensive consulting within the cryptocurrency and gaming sectors. His research focuses on financial markets, monetary policy, macroeconomic forecasting, and problems in economic measurement. He has been quoted by the Wall Street Journal, the Financial Times, Barron’s, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications.
