Cryptocurrency company Tether has been reducing the amount of commercial paper in its reserves.
Jakub Porzycki | Nurfoto | Getty Images
Tether, the world’s largest stablecoin, broke below $1 at one point on Thursday amid panic in the cryptocurrency market.
The token dropped to as low as 95 cents on some exchanges around 3:15 am ET. It must be pegged 1 to 1 to the US dollar. Tether was restarted shortly after 2:30 pm EST.
Tether’s initial decline came after terraUSD, another stablecoin, dropped below 30 cents on Wednesday, prompting fears of possible market contagion. TerraUSD, or USD, is different from tether in that it relies on code rather than funds held in a reserve to support its supposed peg to the dollar.
Vijay Ayyar, international head of cryptocurrency exchange Luno, said the tether move was likely “speculation-driven fear” resulting from the fallout from the UST crash.
“The environment is ripe for these news events to cause ripples in the markets, as we can see,” he told CNBC.
Nicholas Bonnet, a quant at cryptocurrency exchange Aplo, said that some traders were exploiting the drop in tether through arbitrage plays — essentially buying the token for less than $1 and then redeeming it for a dollar.
“Earlier this morning, the liquidity pools that allow you to trade tether for other things were almost empty,” he said.
“This may have created a short-term spiraling effect of panic by people seeing that tether was trading below the peg and not having a quick way out of the tether.”
Stablecoins are like the bank accounts of the cryptocurrency world, designed to serve as a good store of value that investors can turn to in times of market volatility. Tether and USDC, the two largest stablecoins, must be backed by a sufficient amount of money held in a reserve to ensure that depositors can get their dollars when they want to make a withdrawal.
But there have long been concerns about whether tether actually has enough assets to back up its $1 claim. Tether, the eponymous company, previously said that all of its tokens were backed 1-to-1 by dollars held in A reservation.
However, following a settlement with the New York Attorney General, it was revealed that Tether relied on a number of other assets, including commercial paper, a form of short-term, unsecured debt, to back its token. Tether has since reduced the amount of commercial paper in its reserves and says it plans to further reduce its holdings over time.
Earlier on Thursday, Tether CTO Paolo Ardoino insisted that tether holders would always receive $1 when redeeming their tokens.
About 300 million tether tokens were withdrawn in the last 24 hours “without a drop of sweat”, he tweeted.
Tether later released a statement saying it had returned to “business as usual amid an expected panic in the market”. The company said it was on track to process more than $2 billion in ransoms as of Thursday.
“Tether has maintained its stability through various black swan events and highly volatile market conditions,” the company said.
“Even in its darkest days, Tether has never failed to honor a ransom request from any of its verified customers. Tether will continue to do so, which has always been its practice.”
Bitcoin and other cryptocurrencies took another dip on Thursday as investors reacted to fears surrounding rising inflation and deteriorating economic prospects, as well as decoupling from the dollar peg.
—Tanaya Macheel of CNBC contributed reporting.