Tether (USDT) under scrutiny: possible crisis for stablecoin

Tether stablecoin (USDT) in 2022 has seen two failures: the collapse of Terra/ Luna USD in May and the failure of FTX in November. In both cases, Tether stablecoin was affected by the collapse of the platforms, falling by $18 billion (21%) between May/June and by an additional $4 billion (4%) in November.  

This year’s severe crises have made the concept of stablecoins fade a lot; in fact, they should not be sold in user panic, but rather the opposite; Stablecoins such as Tether, USD Coin, and Binance USD should act as investors’ life jackets. 

The year 2022 marked the end of many companies and the suffering of the most important stablecoin, put it in a position of analysis, is it worth continuing to trade Tether (USDT)?

Coinbase attacks Tether, encourages users to switch to USD Coin

US-based exchange Coinbase recently posted an appeal to its customers on its website, where it expressly asks them to convert their Tether (USDT) stablecoins to USD Coin, which is a stablecoin issued by Circle and co-founded by Coinbase in 2018. 

“Now more than ever, stability and confidence are of utmost importance to clients. Stablecoins backed by fiat (cryptocurrencies pegged to reserve assets such as the U.S. dollar) offer clients stability and confidence during periods of volatility. 

However, events in recent weeks have tested some stablecoins and we have seen a flight to safety. We believe USD Coin (USDC) is a reliable and reputable stablecoin, so we are making the transition easier: starting today we are waiving fees for global retail clients to convert USDT to USDC.”

According to Coinbase, it all starts with the collapse of FTX, which made Tether less reliable and less transparent. In contrast, USDC is a much safer and more reliable alternative, so Coinbase has also eliminated fees for converting from Tether (USDT) to USD Coin. 

USD Coin is not only a stablecoin but also an ERC-20 token, which means it is a cryptocurrency built as a smart contract on the Ethereum network. For those who do not know, a smart contract is a software program that runs on the blockchain and functions as a real “contract.” This effectively performs certain actions upon the occurrence of certain encoded conditions. The maximum supply of USD Coin is indeterminate.

The steps Tether (USDT) needs to take to become stable again

Nevertheless, Tether (USDT) remains the stablecoin with the most market capitalization; it also recently announced that it demonstrated reserve resilience in its latest attestation, highlighting Tether’s extremely liquid reserves:

“Tether’s reserves are extremely liquid with the majority of its investments, making up 82 percent of total assets, held in Cash & Cash equivalent and other short-term deposits. It also showed a massive reduction in commercial securities with exposure representing only 0.07 percent of reserves as of the date of the report.

Tether reduced its exposure to commercial paper by more than $24 billion without loss during 2022, fulfilling both its promise and commitment to the community to do so.”

What is putting the stablecoin in crisis, however, are other factors not only relating to reserve losses, but to become a major currency again and regain full customer confidence.

1. Tether (USDT) does not work like a hedge fund and has to clean up corporate bonds, funds and investments 

Consistency is one of the main factors for a stablecoin, so its value should not be determined by investments made. USDT’s balance sheets are often affected by its various investments, this suggests that Tether has less interest in its use as a stablecoin and more interest in looking like an investment fund or venture capital firm. 

To end this pattern, Tether needs to sell all its risky assets and switch to a 100% safe asset allocation. The next time a crisis occurs, users will be less likely to dump their Tether tokens.

1. There is a need for more transparency in Tether (USDT)

One problem that plagues not only stablecoins, but many other companies and businesses, transparency. Tether for example, has been much criticized over the years for its lack of transparency, so in order to break the barriers that are being created around stablecoin, Tether needs to be given the right transparency. 

The current transparency index comes courtesy of the New York Department of Financial Services (NYDFS), which in July 2022 issued formal guidance for NYDFS-approved stablecoin issuers, including updates to the quantity and quality of information that issuers must provide to the public.

To excel in the industry, however, Tether must increase its transparency to its audience and regain their trust. In such gray times, transparency is the winning weapon, without a doubt.

1. Eliminate the 0.1% redemption/withdrawal fee

Tether’s withdrawal and deposit fee is always set at 0.1%, regardless of the amount of money entered or withdrawn. All other stablecoin issuers do not charge such fees, and Tether is the only one in the industry that does.

The price is just too high, and users are beginning to feel the effects. To ensure true stablecoin stability, it is necessary to get rid of the fee, or at least reduce it. 

In conclusion, what might seem like strong criticisms of Tether are also suggestions for improving the stability of the coin, which seems to have seen better times in the last period. The collapse of LUNA and FTX platforms, have been detrimental to Tether USDT. Even though it seems that other stablecoins are taking over, Tether (USDT) remains first in capitalization and is poised to weather the downturn.