Stablecoin crypto : Should we be afraid of USDT?

Tether’s stablecoin is counted among the most popular cryptocurrencies on the market. However, this asset backed by the US dollar is experiencing difficult days. Like several of its counterparts, the USDT, as it is commonly known, had a particularly difficult year in 2023. A study by analysts at Moody’s signals that during that year, the asset repeatedly experienced “depeg.” That is to say that on numerous occasions, the crypto lost its dollar peg, the very essence of its stability compared to conventional cryptos. In this context, knowing that depeg situations reached new heights in 2023, isn’t it more prudent to be wary of USDT? This article will attempt to answer this important question for investors.

First and foremost, what exactly is a stablecoin?

To understand what is meant by “stablecoin,” a term widely used in the crypto industry, we must go back to the etymological sense of the word. The word “stablecoin” stems from two words in the English language namely “stable”, meaning steady or constant, and “coin,” which refers to a crypto.

Thus, a stablecoin is a type of cryptocurrency designed to maintain a stable value relative to an underlying asset. This underlying asset can be a national currency such as the dollar or euro, commodities, or even other cryptos. It is this unique characteristic that differentiates stablecoin from cryptos as we understand them. The latter are intrinsically known for their particular volatility.

In fact, the main goal of a stablecoin is to mitigate the inherent volatility of traditional cryptos such as Bitcoin (BTC) or Ethereum (ETH). Several methods are used to achieve this. Among them are traditional currency reserves, algorithmic control mechanisms, or smart contract guarantees. This allows users to enjoy the benefits of blockchain technology without suffering the drastic price fluctuations that other cryptos usually experience. While there is an abundance of offerings to this end, some stablecoins have established themselves as behemoths of the sector. This is the case with BUSD issued by Binance, USDC backed by Circle, or USDT supported by Tether.

In particular, the latter is known for its use as an alternative to traditional currencies on crypto exchanges. The asset has built its popularity on the ease it offers in terms of transactions and fast transfers at low cost. However, USDT has raised regulatory concerns and criticism regarding its transparency, particularly regarding the reserve of US dollars held by Tether Limited, the issuer of USDT. And this is not its only problem.

Successive depegs of USDT and other threats associated with the asset

With a market capitalization of over 95 billion dollars, USDT stands as a dominant stablecoin in the crypto market. A hegemony that nevertheless hides structural weaknesses that compromise the stability of the asset. This stability has been repeatedly called into question in recent years due to successive depegs. A situation that raises concerns about its reliability and safety.

To recall, a depeg occurs when the price of a stablecoin deviates from its usual anchor, often the US dollar, typically set at 1 dollar. In the case of USDT, this means that its price has regularly fallen below the 1 dollar parity. For example, in May 2022, USDT experienced a significant depeg marked by a fall in its price to 0.95 dollars.

This drop had been attributed to a combination of factors. Increased volatility in financial markets, speculative attacks, and liquidity issues that hindered traders’ ability to perform transactions were mentioned. But such incidents have since been repeated. Indeed, since the May 2022 depeg, USDT has seen several other minor depegs. For instance, on January 20, 2024, its price briefly fell to 0.99 dollars.

It is true that when markets are turbulent, asset prices, including stablecoins, can fluctuate sharply, leading to temporary or prolonged depegs. However, the persistence of these incidents underscores the serious challenges USDT faces in terms of stability and investor confidence.

In fact, besides depegs, USDT faces other threats that could compromise its long-term viability. Among them, concerns regarding the composition of Tether’s reserves, the entity issuing USDT, are persistent. On several occasions, the crypto firm has been accused of not having sufficient reserves to fully support the value of the USDT in circulation. All this leads some analysts to say that USDT is not safe from a particularly problematic situation if the repetition of depegs is not controlled.

Because USDT depegs are not without consequences. They could lead to a widespread loss of confidence in stablecoins, making their use in commercial and financial transactions difficult. Depegs could contribute to increasing the volatility of the crypto market by further complicating the prediction of price movements essential for informed decision-making. Not to mention, in the worst-case scenario, the triggering of a generalized financial crisis, undermining confidence in the entire financial system.

The damning UN report on USDT

If we are asking whether we should be wary of USDT, the United Nations (UN) has something to do with it. Indeed, the international institution published, on Monday, January 15, a damning document on the asset. According to the UN, this stablecoin is the ultimate panacea for fraudsters to commit their dirty deeds. In the organization’s report, USDT is presented as the favored means for money laundering activities, especially in Southeast Asia, efficiently obscuring the sources of substantial ill-gotten funds. Assuming that the UN report on USDT is factually true, it casts some discredit on this crypto. This is why the UN calls for limiting its fraudulent use through concerted efforts in international judicial cooperation. But also, improvements in the tracking of suspicious operations and information exchange. In this matter, the MiCA regulation is ahead as it includes provisions governing the use of stablecoins. But while waiting for the effectiveness of these measures adopted last year, the existence of USDT could be understood as a project of an atypical stablecoin.

Towards replacing USDT with the emergence of a regulated stablecoin?

Soon, the stablecoin market could experience a major evolution. The company Figure Technologies Inc. is gearing up to revolutionize the world of cryptos by launching the first regulated stablecoin. The startup wants to provide the stability and security so lacking for investors operating in a volatile ecosystem. The goal is to offer a credible alternative to traditional stablecoins like USDT, proposing a return guaranteed by high-quality assets. The project does not lack boldness. If it obtains the necessary approvals, Figure’s stablecoin would mark a turning point. It would introduce a new class of digital asset combining the stability and efficiency inherent in crypto. This could compromise the existence of classic stablecoins like USDT, which could then be condemned to reinvent themselves to stay relevant.

In any case, the regulation of stablecoins is a persistently raised issue. There are indeed many stakes in this. Among these, the risk of issuer bankruptcy, risks to financial stability, and lack of transparency. At the same time, stablecoin regulation emerges as a means to protect users while helping to prevent unfair practices and fraud. If USDT and its counterparts do not evolve in this direction, the fear of this stablecoin could be a serious warning that every investor should take into consideration.

Conclusion

Faced with the recurring depegs and regulatory concerns surrounding USDT, investors are legitimately wondering if they should fear this stablecoin. Its tumultuous history raises concerns about its stability and reliability, especially because of the repeated losses of its dollar peg and the accusations of a lack of transparency regarding the reserves of Tether Limited. Indeed, the depegs and threats hanging over USDT could lead to a widespread loss of confidence in stablecoins and increase the volatility of the crypto market. As efforts are being made to regulate stablecoins and as new regulated alternatives emerge, it is crucial to consider the risks associated with USDT. Investors must explore safer and more transparent options to maintain the viability of their crypto investments.