USDT Depegging: A Result of Increased Scrutiny
Tether’s USDT, the largest stablecoin by market capitalization, recently experienced a significant deviation from its intended $1 price, raising concerns among investors and the crypto community. This depegging occurred following Tether’s announcement of a wallet-freezing policy in collaboration with law enforcement agencies, including the DOJ, FBI, and Secret Service. Major exchanges such as Binance, Coinbase, and Kraken witnessed USDT dipping as low as $0.985, indicating a departure from its dollar peg.
Stablecoins like USDT are designed to maintain parity with fiat currencies, specifically the dollar. Although occasional drifts from the peg can occur due to various factors, resulting in temporary devaluation, the recent depegging of USDT seems to be linked to diminishing confidence in Tether’s policies after a substantial asset freeze.
“Tether is grateful for the opportunity to address the concerns raised by U.S. lawmakers, and we are committed to continuing Tether’s close work with law enforcement in the U.S. and globally.” – Paolo Ardoino, Tether CEO
Tether’s collaboration with authorities to disrupt criminal activities involving USDT, as demonstrated by the freezing of crypto wallets holding over $435 million in USDT tokens, highlights the stablecoin issuer’s extensive involvement with law enforcement agencies.
However, Tether’s neutral stablecoin issuer status is now being questioned in the aftermath of the asset freeze. The magnitude of the frozen assets and Tether’s willingness to blacklist addresses has shocked many within the crypto community.
Tether’s Supply Expansion and Growing Concerns
In addition to the wallet freeze, Tether’s supply expansion in 2023 has further fueled concerns regarding the stability of USDT. In fact, according to data from Messari, USDT’s market cap has surpassed $90 billion, with a growth of over 70% this year alone. Tether has minted approximately $23 billion new USDT in 2023, nearly equaling the entire market cap of its rival stablecoin, USDC.
While Tether presents this growth as an indicator of robust demand, some investors perceive it as problematic. Critics speculate that Tether may mint USDT without proper backing to support Bitcoin prices in coordination with exchanges, while obstructing redemption into dollars. This potential scenario raises concerns that a collapse could occur if exchanges like Bitfinex or Binance were to fail.
“Tether is the CBDC. Truthers in shambles.” – Checkmate, Glassnode lead on-chain analyst
The combination of a supply explosion and compliance with regulatory authorities appears to be eroding confidence in Tether, leading to the depegging of USDT witnessed on various exchanges.
The broader concern is that the instability of USDT may have a cascading effect on the overall crypto market, which heavily relies on USDT liquidity. Since Bitcoin often trades at a premium on USDT markets, the volatility of USDT could potentially ripple outwards. As a result, faith in Tether’s policies seems to be tainted despite its dominance.
As doubts surrounding USDT’s future persist, rival stablecoins such as USDC may gain traction. Whether USDT can regain its dollar peg remains to be seen in the coming days.
