Since the world's biggest stable coin lost its peg against the US dollar last week, traders have been yanked $7 billion from Tether, which has intensified concerns about the assets that underpin the global criptocurrency market.
Since May 12th, the market value of ether has fallen by 9 per cent to $76 bn as token has been removed from circulation to meet redemption requests, according to the data fromCryptoCompare. The decline came after Tether traded at 95 cents last Thursday, well below the $1 level it seeks to maintain after the failure of a smaller rival.
Observers inside and outside the market have warned that deeper or more lasting volatility in stable coins, designed to keep a one-to-one peg with the dollar, could drag down the value of thousands of speculative assets that have attracted buyers around the world.
There is no guarantee that stablecoins can be redeemed at any time - just last week the world s biggest stable coin temporarily lost its peg to the dollar, Fabio Panetta, an executive board member at the European Central Bank, said in a speech on Monday.
Panetta said that stable coin holders could not claim deposit insurance to recover losses, and operators were not able to access bank standing facilities, leaving the token vulnerable to runs. He pointed out last week's collapse in TerraUSD, once a top-five stable coin, as an example of this risk.
It is an illusion to believe that private instruments can act as money when they can't be converted into public money at all times, the ECB official said.
Using mainstream currencies, such as the dollar or sterling, can be clunky. Digital asset enthusiasts often use stable coins that are native to the technology of cryptanalym and designed to keep a one-to-one link with the dollar.
The biggest rival of Circle s USD Coin, Circle s USD Coin, has drawn a 5 per cent increase in funds during the same period, as Tether has faced outflows.
There is very strong outflow from some stable coin, but there is an inflow into other stable coin. All of that is suggesting that it is time for stable coins to become stable, said Tobias Adrian, director of the IMF's monetary and capital markets department.
Big stable coins are fairly regulated, and many are not regulated at all. Central banks are keeping a close eye on developments in the space in case it affects household wealth by depressing crypto prices or sparks other financial stability risks, particularly for tokens such as Tether that are backed with financial asset reserves.
In a March 2022 report, the Bank of England said stablecoins could play an increasingly important role in payments, public confidence in money and payments could be undermined if a systemic stable coin is used for payments fails to meet its obligations. Tether s operators said the token is backed by a basket of dollar-based assets equal to the size of the token outstanding, but it has not released granular details of these reserves. In an interview with the Financial Times last week, Tether executive Paolo Ardoino said that revealing details about the group's reserve management would give away the company's secret sauce. The company wouldn't comment on its outflows on Monday. Tether said it always has a liquid portfolio of assets to manage redemptions even in a bank-run scenario and engages in constant risk-management and stress-test scenarios in a blog post.