SAN FRANCISCO (NYTIMES) - Cryptocurrency prices are plummeting. A so-called stablecoin lost all its value in a matter of days. A newfangled crypto bank halted withdrawals, and investors have been plunged into financial ruin.

Now the crypto industry is grappling with an even grimmer prospect: The worst may be yet to come.

Concern is mounting over another potential vulnerability in the crypto market: Tether, a company whose namesake currency is a lynchpin of crypto trading worldwide.

Long one of the most scrutinised companies in the industry, Tether is facing heightened pressure from regulators, investors, economists and growing legions of sceptics, who argue it could be another domino to fall in an even bigger crash.

"Tether is really the lifeblood of the crypto ecosystem," said Professor Hilary Allen, a finance expert at American University. "If it imploded, then the entire facade falls down."

Tether is the dominant issuer of stablecoins, a type of cryptocurrency pegged to a stable asset such as the United States dollar. Unlike traditional cryptocurrencies such as Bitcoin and Ether, whose monetary value can fluctuate widely, stablecoins are typically designed to maintain a constant price of US$1 and are backed by large reserves of funds or financial engineering. This consistency allows crypto traders to conduct safe, predictable transactions without relying on banks or other financial gatekeepers.

But many of these coins are stable in name only. Last month, when cryptocurrencies melted down, the crash was triggered partly by the failure of TerraUSD, a stablecoin with a US$1 peg that was algorithmically linked to a sister cryptocurrency called Luna. When the price of Luna plummeted, TerraUSD also fell, creating a "death spiral" that shook the broader market.

By contrast, Tether claims its stablecoins are backed by cash and other traditional assets, making its reserves essential to the health of the crypto market. In theory, anyone who wants to exchange Tether coins for US dollars can do so quickly and easily.

But the company's financial statements show that a significant portion of its reserves is tied up in unsecured corporate debt known as commercial paper. Such financial instruments are riskier and harder to quickly convert into cash, especially during financial turmoil. In 2021, New York's attorney-general fined Tether US$18.5 million (S$25.8 million) and said the company had lied about its reserves, calling it "a stablecoin without stability".

Critics say Tether essentially acts as a loosely regulated bank. Traders hand over millions of dollars and, in return, receive millions of stablecoins, which they use to bet on more volatile cryptocurrencies such as Bitcoin or Dogecoin. Tether currently has 70 billion coins in circulation, making it more than three times the size of TerraUSD before the crash.

In a worst-case scenario, critics say, a downturn could spark the crypto equivalent of a bank run. Traders might all rush to exchange their Tether coins for dollars, only to discover that Tether could not fulfill those orders. Investors would lose billions of dollars, forcing them to sell their other crypto holdings, causing a potentially devastating panic that might spill into non-crypto markets.

Tether got a taste of that scenario last month. As cryptocurrencies plummeted, a flood of investors asked to exchange their Tether coins for dollars, forcing the company to pay out about an eighth of its reserves, or US$10 billion, over the course of 1½ weeks. On cryptocurrency exchanges, Tether briefly wavered from its US$1 peg.

Ultimately, the company said, it met the demand. Tether went on a victory lap, proclaiming it had weathered the crisis "flawlessly".

The crash was "the best story that could have happened to Tether", Mr Paolo Ardoino, the company's chief technology officer, said in an interview. "We are not fooling around, and we take risk management extremely seriously."

Then on Sunday (June 12), crypto bank Celsius Network announced it was halting withdrawals, causing digital currency prices to crash again. Tether had invested in Celsius in 2020 and lent it about US$1 billion in Tether coins, according to Bloomberg News. The company said this week that it currently had "zero exposure" to Celsius apart from a small investment. Still, as the market reeled, investors pulled out about US$1.6 billion from Tether.

More sceptics are speaking up. Last month, a top US banking official called for new rules governing Tether and its competitors, saying the TerraUSD crash highlighted the risks of loosely regulated stablecoins. Some traders are now putting their funds into alternative stablecoins, amid fears that the next crash could test whether Tether has adequate reserves.

"They had enough collateral to weather this run, but that does not mean they have enough to weather the next run," said Rutgers University economics professor Bruce Mizrach, who studies cryptocurrencies.

Even by crypto's often surreal standards, Tether has a peculiar history. The company was founded in 2014 by cryptocurrency evangelist Brock Pierce, who, as a child actor, starred in the Mighty Ducks movies. He and partner Reeve Collins later handed control of the firm to former plastic surgeon Giancarlo Devasini, who has stored some of Tether's assets in a bank in the Bahamas run by one of the creators of the Inspector Gadget cartoon.

At times, Tether has insisted that its stablecoins were fully backed by US dollars. But last year, New York Attorney-General Letitia James called those claims "a lie". A few years earlier, a cryptocurrency exchange affiliated with Tether had lost US$850 million in a business deal gone sour. To cover the losses, the exchange, Bitfinex, took loans from Tether's reserves, leaving the stablecoin partly unbacked, according to Ms James' investigation.

A Tether spokesman said the issue with the company's reserves boiled down to a "communications misstep".

Concerns about Tether have spread to Washington. When Treasury Secretary Janet Yellen testified before Congress last month, she noted Tether's wavering from its US$1 peg and called for greater regulation of stablecoins.

The growth of stablecoins presents "the same kind of risks that we have known for centuries in connection with bank runs", she said.

Mr Ardoino said Tether was eager to work with regulators to devise a global framework governing disclosures that stablecoin issuers must make about their reserves. But Tether has resisted more aggressive proposals, which would subject it to regulatory requirements such as those of traditional banks.

"Everyone is freaking out - like, 'I lost my life savings'," said Mr Collins, who founded Tether with Mr Pierce and now runs a crypto venture called BLOCKv. "That is a tragedy, but it is just as much of a tragedy when someone says 'I went to a casino and lost my life savings'. But that does not mean let's regulate casinos out of existence."