As Tether approaches $100 billion in circulation this week, the rapid rise of the world's largest stablecoin has highlighted concerns about potential risks to broader financial markets.
The dollar-pegged digital token is designed to maintain a constant value. Tether says it achieves this by holding dollar-denominated reserves for each token it creates.
Crypto traders say the tokens are essential for quickly transferring funds in crypto without using the regulated banking system.
“Tether plays a central role in our day-to-day operations and primarily serves as a mechanism for quickly transferring funds between trading venues,” said Michael Hall, founding partner of London-based crypto asset manager Nickel Digital.
However, regulators have long had concerns that growing stablecoin reserves expose the broader financial system to greater risks as they act as a bridge between the crypto universe and mainstream financial markets.
James Butterfill, head of research at asset manager CoinShares, said Tether's dominance increases systemic risk in the crypto space.
“If Tether fails for some unlikely reason, it would result in a dramatic drop in trading volume,” he said.
US regulators have warned banks that stablecoin reserves could be subject to rapid outflow, for example if holders rush to convert such tokens back into traditional currency.
A spokesperson for Tether said its “products provide real value by enabling billions of unbanked people around the world to access the global financial system when this was not possible before.”
The spokesperson also said that Tether is “proactively working with law enforcement and regulatory agencies around the world to stop the illegal use of stablecoin technology and has frozen hundreds of millions of USDT related to illegal activities.”
CEO Paolo Ardoino said in a statement in January that Tether was committed to “transparency, stability and responsible financial management.”
Crypto markets have mostly recovered from the declines that caused prices to collapse in 2022. Bitcoin rose more than 20% last week and hit an all-time high on Tuesday, driven by excitement over inflows into U.S. spot Bitcoin ETFs.
Tether is also growing quickly. Last year, around $29 billion in value was created, it said in a statement on Tuesday.
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The crypto lobby has previously stated that asset-backed stablecoins do not pose a systemic risk.
But with Tether now holding nearly $100 billion worth of reserves at traditional banking institutions, Rajeev Bamra, head of DeFi and digital assets strategy at Moody's Investors Service, said: “Anything that goes wrong with Tether will ultimately reflect on this.” banking institutions.” “.
“I think the concentration risk with Tether is huge,” Bamra added, citing Tether’s dominance in the crypto world.
S&P Global Ratings last year gave Tether a stablecoin stability rating of 4, the second-worst on a scale of 1 to 5, citing a lack of information about custodians, counterparties or bank account providers of its reserves.
Tether agreed to quarterly reserve reporting for 2021 as part of a settlement with the New York Attorney General's Office.
At the end of 2023, according to the latest report, Tether's reserves included $63 billion worth of US Treasury securities, $3.5 billion worth of precious metals, $2.8 billion worth of Bitcoin, “other investments ” worth $3.8 billion and “secured loans” worth $4.8 billion.
Paul Brody, global head of blockchain at Ernst & Young, said that a reserve report is not a complete audit of financial statements.
Although various jurisdictions are developing stablecoin laws, Tether is not currently subject to specific oversight by any relevant body or rules about how or where it can invest its reserves, Rebecca Mun, an analyst at S&P Global Ratings, said in an interview late last month.
Tether Holdings Ltd, which is registered in Hong Kong and owned by a company registered in the British Virgin Islands, says on its website that it is “completely transparent” but does not disclose where its reserves are held.
Hall said Nickel is using Tether “carefully,” balancing convenience with the downside risk of losing its dollar peg.
Crypto traders who rely on Tether say they gain confidence because it has previously maintained its peg and processed billions of dollars worth of redemptions during times of crypto market turmoil, such as in 2022 has.
“While no asset is without risk, especially in the volatile crypto market, Tether’s track record positions it as a comparatively lower-risk option within the digital asset spectrum,” Hall said.
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