While the collapse of TerraUSD rattled many investors this month, one crypto leader sees the fallout as exactly what the industry needed.
“It's an important moment for the crypto industry,” Paolo Ardino, chief technology officer of Tether (USDT), the most traded cryptocurrency, told Yahoo Finance between stints at the World Economic Forum and Coinmarketcap’s “The Capital” conference. “One that will definitely expedite regulations — and not just for stablecoins.”
Since the algorithmic stablecoin, TerraUSD, began to “de-peg” from its $1 mark on May 7, the global market capitalization for all crypto assets has dropped by more than 25%. It also put to test stablecoins backed by actual assets as investors rushed to liquidate their holdings, including Tether holders who withdrew $10 billion in 11 days, with the stablecoin’s price temporarily dropping below its $1 peg to as low as 95 cents.
“$7 billion was withdrawn and processed during 48 hours, and the average time for redemption was around one hour,” Ardoino said, noting Tether’s USDT is backed by $73 billion in assets it holds in custody. “This makes us one of the only stablecoins that have done something many cannot do and many doubted we could do.”
Ultimately, during periods of volatility, a stablecoin falling below its price peg isn’t as important as whether it can still redeem withdrawals from depositors, according to Messari analyst, Dustin Teander.
“I actually had very little concern when Tether dipped below its peg in early May,” he added.
And as John Kramer, head of crypto trading with GSR told Yahoo Finance, Tether is much more deeply ingrained within the crypto sector, meaning the industry’s biggest players don’t want to see it fail.
“Most of the major players in the crypto sector are incentivized to see confidence in USDT remain. Exchanges and trading firms that inherently carry a lot of tether risk are effectively the only ones who are able to redeem USDT [withdrawals],” Kramer added.
Still, the collapse of the Terra ecosystem this month has left its mark on the sector, accelerating the recent crypto sell-off and with a top U.S. bank regulator calling it both a “wake up call” and “opportunity to reset.”
According to data from the Block Research, between May 2021 and May 2022 the total supply of stablecoins circulating the crypto sector rose from $87 billion to $181 billion before dropping to $155 billion after Terra’s collapse.
With the majority of that growth coming from use of stablecoins to meet margin requirements in leveraged crypto trading, the implications for how stablecoins could pose a structural vulnerability not only to crypto but the financial sector writ large, has remained a forward-looking concern for financial regulators as noted in a May 9 financial stability report from the Federal Reserve.
“The stablecoin sector remained highly concentrated, with the three largest stablecoin issuers—Tether, USD Coin, and Binance USD—constituting more than 80 percent of the total market value,” the authors of the report stated.
Yet by weathering May’s tumultuous market, Ardoino told Yahoo Finance that Tether has proved its banking infrastructure and reserve assets portfolio is “stronger” than critics might think.
As Coindesk reported, during its $10 billion withdrawal period, a number of large crypto investors (whales) with wallets on the Ethereum network moved hundreds of millions of dollars from USDT to USDC.
By Ardoino’s count, of the total Tether withdrawals “around 3 billion” moved to the second largest stablecoin, USDC, while the rest, he said, may have “organically [exited] the crypto market.”
Though algorithmic stablecoins such as TerraUSD, pose more risk given how it maintained its peg, USDT has been dogged by critics and regulators for years who in the absence of transparency have repeatedly questioned how it backs its circulating coins with the reserve assets.
Notably, Tether previously claimed it backed its stablecoin one-to-one with dollars. After paying $18.5 million to the New York attorney general office and $41 million to the U.S. Commodities and Futures Commission (CFTC), the stablecoin began publishing quarterly audit in 2021, which revealed it used other assets including digital tokens (up to 6.02%) and commercial paper, a form of unsecured corporate debt with more risk than cash.
Published a week ago, the company’s March audit showed significant improvement. It reduced its commercial paper reliance by 17% from $24.4 billion to $20.1 billion.
But some crypto investors are still calling for more as Ardoino acknowledged, “There are a lot of voices saying we are not transparent enough and of course, everyone wants more information but this is a process, a process that we are following really thoroughly.”
Meanwhile, Tether's continues to spread further access to the crypto market across the world. In the last two days it has launched a version of USDT pegged to the Mexican peso and integrated with Polygon (MATIC).
Since its creation in 2014 as a payment and settlement solution for Bitcoin traders, USDT now serves as a safe haven for people around the world who are up against a devaluing local currency. The data is "scattered," Ardoino said, citing anecdotes of its use especially in Turkey, Argentina and Senegal.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.