Tether, the largest “stablecoin” and a foundational part of the cryptocurrency ecosystem, is at risk of a bank run after breaking its peg to the dollar amid the sector’s worst crash in years.
The cryptocurrency traded at less than $0.98 (82p) for the first time in two years on Thursday morning, prompting its chief technology officer, Paolo Ardoino, to tweet reassurances to investors that it was still capable of honouring withdrawals at par.
Like all stablecoins, tether is intended to only ever trade at a fixed value relative to a conventional currency: one tether token is always supposed to be $1.
However, on Monday another prominent stablecoin, terra, broke its peg to the dollar and has slumped since, now trading at barely half its supposed stable value. That event appears to have precipitated a wider crash, with even the blue-chip cryptocurrencies plummeting over the past week.
Bitcoin and ethereum are both down 30% in the past seven days, with smaller cryptocurrencies such as ripple, solana and dogecoin falling more than 40%. Binance, one of the largest US cryptocurrency exchanges, suspended deposits and withdrawals on Thursday from 11.30am for what it said was scheduled maintenance.
Another big player in the sector that is suffering is the crypto exchange Coinbase, with its stock trading down 60% over the last five days. It has been hit with the general slump in the tech sector, blowback from the crypto collapse and problems of its own.
In its earnings report, the company reported a loss of $1.98 a share, compared with an expected profit of 17¢, and said its monthly transacting users had fallen 2.2m over the last quarter, and expected them to fall further. The company also prompted panic among its users with a legally mandated disclosure that, if it goes bankrupt, customer deposits are not protected in the same way bank deposits are.
The cryptocurrency jitters come amid a wider downturn in the US economy, with tech stocks sliding and US inflation at 8.3%. However, unlike previous downturns, where crypto has largely tracked wider weaknesses and recoveries, the near-total collapse of terra – valued at $30bn last week and now trading at less than $300m – has fuelled real panic that the sector may face existential problems.
There are particular concerns about tether because of its foundational role in the financial engineering of much of the sector and the fact it holds reserves in other cryptocurrencies, leading to fears of contagion if it collapses.
Unlike terra – which maintains its value via a complex algorithm linked to the value of another cryptocurrency that has since collapsed – tether pledges that all its tokens “are backed 100%” by its reserves, which were $80bn in its last report in December and also include loans, precious metals, and investments in other crypto sector companies. Tether also pledges to exchange its tokens for US dollars directly, but only to any customer large enough to do so, with a minimum of $100,000 at a time while paying a 0.1% fee.
In theory, tether should never trade below $1 as a result: any time it does, there is guaranteed profit from commercial arbitrageurs willing to buy the token at a discount and return it to tether for the full value.
However, since terra’s collapse there has been such a rush of selling across the entire sector that the market value of tether fell as low as 95¢ before recovering. Public records show at least one large redemption removed almost $350m from the reserves.
As redemptions increase, the company could be forced to call in its loans to other crypto companies, in turn causing them to suffer financially. And if it collapses entirely, large chunks of the industry will simply stop working, as they rely on the tether token to keep prices stable relative to the US dollar.
In a statement, tether said it was “business as usual amid some expected market panic” and that it had processed $2bn of withdrawals. That represents about half of the company’s cash on hand.
Ardoino said: “Tether is gratified that the market continues to show its trust and confidence in tether: the first, largest, and most transparent, innovative, and liquid stablecoin. We are a quickly evolving industry and as an industry we will learn from these events together.”