Crypto: Should we be afraid of the USDT stablecoin?

The Tether stablecoin is counted among the most popular cryptos on the market. But this asset backed by the US dollar is facing difficult days. Like many of its counterparts, USDT, as it is commonly known, had a particularly difficult 2023. A study by Moody’s analysts indicates that during this year, the asset has many times “depeg”. That is to say, on many occasions, crypto has lost its anchor to the dollar, the very essence of its stability compared to conventional cryptos. In this context, knowing that depeg situations have reached peaks in 2023, is it not more prudent to be wary of USDT? This article will attempt to answer this important question for investors.

First of all, what exactly is a stablecoin?

To understand what we mean by “stablecoin”, a term very used in the crypto industry, we must return to the etymological meaning of the word. The word “stablecoin” derives from two words in the English language namely ” stable “meaning stable or constant, and ” corner “, which refers to a crypto.

So, a stablecoin is a type of crypto designed to maintain a stable value relative to an underlying asset. The latter could be a national currency such as the dollar or the euro or commodities or even other cryptos. It is basically this unique characteristic that differentiates the stablecoin from cryptos as we understand it. The latter being intrinsically known for their particular volatility.

In fact, the main purpose of a stablecoin is to mitigate the volatility inherent in traditional cryptos such as bitcoin (BTC) or Ether (ETH). There are several methods to achieve this. Among these, traditional currency reserves, algorithmic control mechanisms or smart contract guarantees. This allows users to enjoy the benefits of blockchain technology without experiencing the drastic price fluctuations that other cryptos usually experience. If the offer for this purpose is plentiful, certain stablecoins have established themselves as behemoths in the sector. This is the case of BUSD issued by Binance, USDC carried by Circle, or even USDT supported by Tether.

Concerning the latter in particular, you should know that it is renowned for its use as an alternative to traditional currencies on crypto exchanges. The asset has built its popularity on the ease it offers in fast, low-cost transactions and fund transfers. However, USDT has attracted regulatory concerns and criticism over its transparency. Particularly with regard to the reserve of US dollars held by Tether Limited, the issuer of USDT. And that’s not his only problem.

Successive USDT depegs and other threats associated with the asset

With a market capitalization of over $95 billion, USDT has established itself as a dominant stablecoin in the crypto market. A hegemony which nevertheless hides structural weaknesses compromising the stability of the asset. The latter has been repeatedly called into question in recent years due to successive depegs. A situation raising concerns about its reliability and security.

As a reminder, a depeg occurs when the price of a stablecoin moves away from its usual anchor, often the US dollar, generally set at 1 dollar. As for USDT, this means that its price has steadily fallen below the $1 parity. Thus, in May 2022, USDT suffered a significant depeg marked by the fall in its price to $0.95.

This decline had been attributed to a combination of factors. Increased volatility in financial markets, speculative attacks and liquidity problems hampering the ability of traders to transact were cited. But such incidents were repeated later. Indeed, since the May 2022 depeg, USDT has experienced several other minor depegs. For example, on January 20, 2024, its price briefly fell to $0.99.

It is true that when markets are choppy, the prices of assets, including stablecoins, can fluctuate sharply, leading to temporary or prolonged depegs. However, the persistence of these incidents highlights the serious challenges facing USDT in terms of stability and investor confidence.

Indeed, in addition to depegs, USDT faces other threats that could compromise its long-term viability. Among these, concerns about the composition of the reserves of Tether, the entity issuing USDT, are coming back with insistence. The crypto firm has repeatedly been accused of not having sufficient reserves to fully support the value of USDT in circulation. All this leads some analysts to say that USDT is not immune to a particularly problematic situation if the repetition of depegs is not controlled.

Because USDT depegs are not without consequences. They could lead to a widespread loss of trust in stablecoins making it difficult to use them in commercial and financial transactions. Depegs could contribute to increased volatility in the crypto market by further complicating the prediction of price movements vital for informed decision-making. Not to mention, in the worst-case scenario, the triggering of a generalized financial crisis, undermining confidence in the entire financial system.

The damning UN report on USDT

If we ask ourselves the question of whether we should be wary of USDT, the United Nations (UN) has something to do with it. Indeed, the international institution published, Monday January 15, a damning document on the asset. According to the UN, this stablecoin would be the ultimate panacea for fraudsters to carry out their dirty work. In the organization’s report, USDT is presented as the preferred means of money laundering activities, particularly in Southeast Asia. This, by effectively blurring the sources of large sums of ill-gotten money. Assuming that the UN report on USDT is factually true, it somewhat discredits this crypto. This is why the UN is calling for limiting its fraudulent use through concerted efforts in international judicial cooperation. But also to improve the traceability of suspicious operations and the exchange of information. In this area, the MiCA regulation is a step ahead since it provides provisions governing the use of stablecoins. But while waiting for the effectiveness of these measures adopted last year, the existence of USDT could be understood by an atypical stablecoin project.

Towards the replacement of USDT with the emergence of a regulated stablecoin?

Soon, the stablecoin market could experience a major evolution. Figure Technologies Inc. is preparing to revolutionize the world of cryptos by launching the first regulated stablecoin. The startup wants to offer the stability and security that investors operating in a volatile ecosystem lack. The aim is to provide a credible alternative to traditional stablecoins like USDT, by offering a return guaranteed by high quality assets. The project does not lack panache. If it gets the necessary approvals, Figure’s stablecoin would mark a turning point. It would introduce a new digital asset class combining the stability and efficiency specific to crypto. Enough to compromise the existence of classic stablecoins like USDT which could then be condemned to reinvent themselves to remain relevant.

In any case, the regulation of stablecoins is a persistent question. There are indeed many issues at stake in this. Among these, the risk of bankruptcy of the issuer, risks for financial stability without forgetting the lack of transparency. At the same time, regulation of stablecoins is needed as the way to protect users while helping to prevent unfair practices and fraud. Unless USDT and its peers move in this direction, the fear of this stablecoin could be a very serious warning that any investor should heed.

Conclusion

Faced with recurring depegs and regulatory concerns surrounding USDT, investors are legitimately wondering whether they should fear this stablecoin. Its tumultuous history raises concerns about its stability and reliability. Particularly because of the repeated losses of its dollar anchor, as well as accusations of lack of transparency regarding Tether Limited’s reserves. Indeed, depegs and threats to USDT could lead to a widespread loss of confidence in stablecoins and increase the volatility of the crypto market. As efforts are made to regulate stablecoins and new regulated alternatives emerge, it is crucial to consider the risks associated with USDT. Investors must explore more secure and transparent options to maintain the viability of their crypto investments.

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