Digital investors have withdrawn savings into the ‘stablecoin’ worth $7.6bn (£6.2bn) since the cryptocurrency crisis began last week, suggesting that the company paid almost twice its total cash holdings to frightened depositors.
Stablecoins are meant to have a fixed value corresponding to a real-world asset, in most cases $1 per token. However, faith in the concept was shaken last Tuesday when another big player, terra, broke its dollar peg. This fueled a broader sell-off in the crypto sector, which relies on stablecoins for much of its financial engineering.
Tether, the third-largest cryptocurrency by “market cap,” suffered a short-lived slump on Thursday when its value surged from $1 to 95¢ as savers feared it would follow fellow stablecoin terra and crash. collapses. However, the token, which is controlled by a private company with close ties to crypto exchange Bitfinex, has since largely restored its dollar peg by honoring a promise to allow savers to always withdraw $1 for every tether they surrender. to the society.
The company only allows direct withdrawals of at least $100,000 for each request and charges a 0.1% fee on redemptions. Anyone with less tether than that minimum can only turn their money into dollars by finding someone to buy it from them – a disparity that has fueled the temporary collapse in value.
Despite the difficulties, according to public blockchain data, $7.6 billion worth of tether has been reallocated in this way since Thursday. That’s almost double the money Tether had in its reserves at the end of last year, according to accounts posted on its website.
Most of the rest of its reserves are held in “cash-like” assets, the majority of which are $35 billion in US government debt and $25 billion in corporate bonds. However, the company declined to share further details of the investments, with its chief technology officer, Paolo Ardoino, telling the Financial Times: “We don’t want to give away our secret sauce.”
There have long been fears about Tether’s ability to honor all redemptions. The company once said it backed its currency with “US dollars”, a claim the New York attorney general said in 2021 “was a lie”. Now he simply claims that his currency is “100% backed by Tether reserves”.
In contrast, terra was backed by a complex algorithm that required the value of a sister cryptocurrency, luna, to constantly increase in order to maintain the peg to the dollar. When the crash hit last week, the system went into a “death spiral”, automatically printing more luna, which drove the price down even further, until luna lost 99.9995% of its value in days and terra languishes at $0.11.
The charismatic founder of the Terra project, Do Kwon, has said that he wants to revive the currency. In a proposal posted to the project’s bulletin board on Friday, he suggested wiping all luna ownership and redistributing 1 billion new tokens, with most going to those who hold the stablecoin or held luna before the crash of the week. last.
“It’s a difficult balance – and no easy answers to redistribute value within the network,” Kwon wrote. “But the value has to be distributed to allow the ecosystem to survive, and in its current state that won’t be the case.”
Kwon also faces questions about how the vast sums of bitcoins his project had raised to support the earth were spent. According to a distribution shared by the organizationhe sold over 80,000 bitcoins, worth over $2.4 billion, to anonymous parties in exchange for terra worth $1 – at a time when the public price for the currency was less than 75¢.
The jitters around stablecoins combined with a general slump in tech stocks and the broader US slowdown to trigger a broader crisis of confidence in the crypto sector. Bitcoin and Ethereum, the two largest cryptocurrencies, are down more than 10% in the past seven days, with Ethereum dropping 17% to below $2,000. Smaller currencies were, as always, more volatile, with dogecoin dropping 26% over the week.
Even some of the most vocal proponents of digital currencies are now questioning the sector’s promises. The founder of the FTX crypto exchange, Sam Bankman-Fried, said in an interview with the Financial Times that bitcoin has no future as a payment network due to inherent inefficiencies in its blockchain, the public digital ledger that records its transactions. Instead, he argued, it could only function as a long-term store of value similar to gold.