Are new stablecoins stealing Tethers crown?

Tether holds the crown as the most prolific and widely traded stablecoin. It is pegged to the value of the US dollar with a one-to-one ratio. However, a range of alternative dollar pegged stablecoins with different implementations and strategies have been issued recently and they often trade at a premium to Tether. As these stablecoins make their way onto the high volume exchanges these new regulated currencies are threatening Tethers crown.

Gemini, Paxos and Circle have all recently launched their own asset-backed stablecoins. These tokens are backed by physical assets stored in company controlled bank accounts. Early indications are that traders seem to prefer these to Tether.

All of the above-mentioned companies have received regulatory authorization to operate in New York from the New York Department of Financial Services which is considered by many to be one of the strictest regulatory authorities in the United States.

The mentioned firms have achieved different levels of regulatory authorization. Gemini and Paxos have both received NYDFS charters and Circle has managed to obtain the coveted “BitLicense”. The market appears to have taken into account the regulated status of these coins and it is reflected in the premium that buyers are paying to hold these coins.

At the time of writing Tether is the tenth largest cryptocurrency by market capitalization with a market cap of $2.0.6 billion. With a daily trading volume of $17 billion US dollars, it is currently the second most liquid cryptocurrency behind bitcoin.

The issuers of the new stable coins have publicly touted that their tokens are regulated financial instruments. Tether, however, has reportedly received a subpoena from US regulators in relation to the secret nature of where they are keeping their dollar reserves.

It was reported but not proven that Tether is or has been holding its reserves in NBI, a Panamanian based non-fractional lending bank. However, recent changes to Tethers terms of reserves have brought into question the nature of their reserves with they are currently holding with their updated terms not stating the reserves are held in fiat:

Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”

When a dollar is not worth a dollar

As new stablecoins entered the market late last year they began start to achieve respectable levels of liquidity on crypto exchanges it seems that their regulatory approval and lack of controversy caused them to trade at a premium to Tether.

On the 15th of October, the USD-backed stablecoin Tether (USDT) fell below $0.90 on Bitfinex as concerns over its reserves forced traders to buy Bitcoin and other digital assets. At the time of writing, Tether is now trading at approximately $1.

Imploding or winding down?

Some people have claimed that Tethers recent bad press was a result of “weaponized FUD” and others have speculated that the companies lack of transparency regarding its dollar backing could suggest it is insolvent. Cryptoslate has reported that Tether has removed almost half of the USDT in circulation and burned them. Is this a sign that the company is imploding? Or could it just be that they are winding down?

One theory put forward by an independent researcher called Hasu suggests that Tether might be selling off assets in preparation of winding down. On his Medium blog he suggests that this may be the best outcome for all involved.

He suggests that Tethers recent issues are something that its competitors can use to their advantage. Tether had almost completely cornered the market when it came to a dollar pegged cryptocurrency and was in such a strong position it seemed that it would have required either insolvency for it to lose its crown or governments would need to regulate it out of existence.

Hasu speculated that Tether is slowly exiting the market and that the massive transfers of USDT are a result of the company buying up coins at a discount and then destroying or retiring them. He postulates that they are then crediting themselves the value of the coin. This practice is also employed by Wall Street, who buy back stocks when they believe them to be trading under their true market price.

Tether could potentially make many millions by removing the discounted USDT from circulation and realizing their full fiat value.

Hasu states:

“Even if we assume that $200M was withdrawn by non-Tether traders, that would mean Tether still managed to buy back $600M worth of tokens. With a 3–5% discount, this buyback made them between $18M and $30M.”

In his article, he discusses the attention surrounding Tether and its subsequent price decline. He suggests that it has provided the “external shock” required to dethrone Tether. If Tether is exiting it will clear the path for the plethora of new stablecoins that have hit the market.

At the time of writing 2.06 billion USDT remain in circulation. If this amount continues to drop it will add credence to Hasu’s theory. If Tethers creators are not slowly exiting the market then the last few weeks should act as a wakeup call to them. If they are going to survive and compete with regulated stablecoins then Tether is going to have to become much more transparent and potentially open itself up to be audited and prove that it is not insolvent. Only time will tell.

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