Tether (USDT) redemptions fuel fears about stablecoin’s backing

Investors have withdrawn more than $7 billion from tether since it briefly dropped from its dollar peg, raising fresh questions about the reserves underpinning the world’s largest stablecoin.

Tether’s circulating supply has slipped from about $83 billion a week ago to less than $76 billion on Tuesday, according to data from CoinGecko.

The so-called stablecoin is meant to always be worth $1. But on Thursday, its price slipped as low as 95 cents amid panic over the collapse of a rival token called terraUSD.

Most stablecoins are backed by fiat reserves, the idea being that they have enough collateral in case users decide to withdraw their funds. But a new breed of “algorithmic” stablecoins like terraUSD, or UST, attempt to base their dollar peg on code. That’s been put to the test lately as investors have soured on cryptocurrencies.

Previously, Tether claimed all its tokens were backed 1-to-1 by dollars stored in a bank. However, after a settlement with the New York attorney general, the company revealed it relied on a range of other assets — including commercial paper, a form of short-term, unsecured debt issued by companies — to support its token.

The situation has once again placed the subject of the reserves behind tether under the spotlight. When Tether last disclosed its reserve breakdown, cash made up around $4.2 billion of its assets. The vast majority — $34.5 billion — consisted of unidentified Treasury bills with a maturity of less than three months, while $24.2 billion of its holdings was in commercial paper.

These “attestations” produced by Tether each quarter are signed off by MHA Cayman, a Cayman Islands-based firm which has only three employees, according to its LinkedIn profile.

Tether has faced repeated calls for a full audit of its reserves. In July 2021, the company told CNBC it would produce one in a matter of “months.” It has still not done so.

Tether was not immediately available for comment when contacted by CNBC for this article.

The destabilization of tokens which have the sole purpose of maintaining a stable price has rattled regulators on either side of the Atlantic. Last week, U.S. Treasury Secretary Janet Yellen warned of the risks posed to financial stability if stablecoins are left to grow unfettered by regulation, and urged lawmakers to approve regulation of the sector by the end of 2022.

In Europe, Bank of France Governor Francois Villeroy de Galhau said the turmoil in crypto markets recently should be taken as a “wake-up call” for global regulators. Cryptocurrencies could disrupt the financial system if left unregulated, Villeroy said — particularly stablecoins, which he added were “somewhat misnamed.”

Meanwhile, European Central Bank Executive Board Member Fabio Panetta said stablecoins like tether are “vulnerable to runs,” referring to “bank runs” where clients flee a financial institution en masse. The…