Tether has economists including an official at the Federal Reserve worried

July 9, 2021

Tether, the third-biggest cryptocurency in the world by market value and it is got some economists, including an official at the Federal Reserve, worried, according to CNBC.

Last month, Boston Fed President Eric Rosengren raised the alarm about tether, calling it a financial stability risk. Some investors believe that loss of confidence in tether could be crypto’s “black swan” an unpredictable event that would severely impact the market.

Like bitcoin, tether is a cryptocurrency. In fact, it’s the world’s third-biggest digital coin by market value. But it’s very different from bitcoin and other virtual currencies. Tether is a stable coin and are tired to digital assets that are tied to real-world assets most popularly the U.S. dollar to maintain stable value, hence the term stable coin.”

Tether was designed to be pegged to the dollar. While other cryptocurrencies often fluctuate in value, tether’s price is usually equivalent to $1. This isn’t always the case though, and wobbles in the value of tether have spooked investors in the past.

Crypto traders often use tether to buy cryptocurrencies, as an alternative to the greenback. This essentially provides them with a way to seek safety in a more stable asset during times of sharp volatility in the crypto market.

However, crypto isn’t regulated, and many banks avoid doing business with digital currency exchanges due to the level of risk involved. That’s where stablecoins tend to come in.

Some investors and economists are worried tether’s issuer doesn’t have enough dollar reserves to justify its dollar peg.

In May, Tether broke down the reserves for its stablecoin. The firm revealed that only a fraction of its holdings — 2.9%, to be exact — were in cash, while the vast majority was in commercial paper, a form of unsecured, short-term debt.

That would place Tether in the top 10 biggest holders of commercial paper in the world, according to JPMorgan. Tether has been compared to traditional money-market funds — but without any regulation.

With more than $60 billion worth of tokens in circulation, Tether has more deposits than that of many U.S. banks.

There have long been concerns about whether tether is being used to manipulate bitcoin prices, with one study claiming the token was used to prop up bitcoin during key price declines in its monster 2017 rally.

Earlier this year, the New York attorney general’s office reached a settlement with Tether and Bitfinex, an affiliated digital currency exchange.

The state’s top law enforcement official had accused the firms of moving hundreds of millions of dollars to cover up $850 million of losses.

Tether and Bitfinex agreed to pay $18.5 million in the settlement and were barred from operating in New York state, however the companies didn’t admit to any wrongdoing.

Analysts at JPMorgan have previously warned that a sudden loss of confidence in tether could result in a “severe liquidity shock to the broader cryptocurrency market.”

But there are also concerns that a sudden increase of tether withdrawals could lead to a potential market contagion, affecting assets beyond crypto.

In June, Rosengren mentioned tether and other stablecoins as one of several potential risks to financial stability.

Copyright © CNBC 2021

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