World's biggest stablecoin Tether regains peg after crypto meltdown

The private company behind the coin that plays a critical role in the crypto ecosystem had no problem with redemptions. PHOTO: AFP

PORTLAND, Oregon (BLOOMBERG) - Amid worries that Tether, the world's biggest stablecoin, was losing its one-to-one peg to the United States dollar, its chief technology officer Paolo Ardoino stepped in to reassure investors.

Mr Ardoino emphasised that the private company behind the coin that plays a critical role in the crypto ecosystem had no problem with redemptions, including even a US$600 million (S$838 million) repayment in the last 24 hours.

"Actually, the peg was not broken," Mr Ardoino said in live audio conversation on Twitter on Thursday (May 12). "It would have been broken if Tether did not honour redemption at US$1."

Soon after the Twitter session ended, Tether - known as USDT - regained its peg, which briefly dropped to 94.55 cents earlier in the day, its lowest level since December 2020.

Crypto markets had a meltdown on Thursday partly on worries about the future of Tether, where traders park their funds in times of high volatility: About half of all Bitcoin is bought with Tether, according to CryptoCompare. A much smaller stablecoin, TerraUSD, known as UST, collapsed this week, and many traders worried that others may follow. Some new crypto users also may have confused UST with USDT.

Much of the Twitter discussion, attended by more than 1,500 people, focused on how Tether is different from TerraUSD. TerraUSD's peg was supposed to be maintained via algorithms and trading incentives, and partly relied on Bitcoin reserves. Tether, meanwhile, keeps more than half of its reserves in US Treasuries, Mr Ardoino said. So when many people want to redeem funds, Tether can sell the securities quickly and comply - something that TerraUSD could not do.

In the worst-case scenario, "Tether just shrinks", Mr Ardoino said.

Tether's reserves management is shrouded in mystery, and it settled with the New York Attorney-General for making false statements about its reserves.

Mr Ardoino said that TerraUSD's mistake was in growing too fast to ensure reimbursements could happen even if crypto prices fell. Its usefulness was also limited to yield farming - users invested it in decentralised finance to earn a yield of up to 20 per cent - and it was not used in payments or trading, he said. Tether, meanwhile, is used to buy everything from everyday essentials to homes.

Mr Adam Back, chief executive of blockchain technology firm Blockstream, blamed venture capitalists behind TerraUSD for causing the stablecoin's downfall by trying to increase the price of a related token, Luna.

"What they were looking to do is push up the value of the Luna tokens," Mr Back said. "They use some of Luna to juice some of the interest rates to 20 per cent, to incentivise more people to come in. It looks fun until the music stops."

The bottom line?

"This puts everybody on notice that you have to make safer, more robust things," Mr Back said. "It should impose rationality on the market."

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