January 27, 2022

Why Is Tether, The ‘number 3’ Cryptocurrency, Sparking Uneasiness Among Economists?

Tether, the world’s third-largest cryptocurrency by market value, is a matter of concern to some economists. And one of them is nothing less than a director of the United States Federal Reserve.

That cryptocurrency belongs to the so-called ‘stablecoines‘or stable currencies, a class linked to assets that enjoy some stability, such as fiat money or commodities, thereby minimize their volatility in the highly volatile cryptocurrency market.

Thus the tether is vpegged to the dollar American. Its value at this time is exactly one dollar and in the last 24 hours it only suffered fluctuations of less than 0.06%, according to consists on the Coinmarketcap.com site logs.

Tether ranks third in that ranking, with a capitalization of over $ 62.34 billion.

Notable actor

Investors frequently use tether as an alternative to the dollar to buy and sell cryptocurrencies, and see it as a safe asset in times of high market volatility.

The link with the dollar makes it more attractive to banks, who seek to avoid high levels of risk inherent in the crypto market.

However, some economists believe that the issuer of the tether, of the same name, lacks reserves enough in dollars to support your stablecoin, points out CNBC.

Last May, the company Tether revealed that only 2.9% of its reserves is held in cash, while 50% is represented by commercial papers, a form of short-term unsecured debt.

This puts the company in the ‘top’ 10 forks of commercial papers in the world, according to JP Morgan. It has been compared to traditional money market funds, but in this case the not regulated.

With tokens in circulation valued at more than $ 60 billion, Tether has larger deposits than many US banks.

Destabilizing risks

Several JP Morgan analysts have warned that a sudden loss of confidence in tether could lead to a “severe and broad impact on crypto market liquidityThere are also concerns that a drastic increase in withdrawals in that currency could even ‘rub off’ on other assets. beyond the crypto market.

Last June, Eric Rosengren, president of the Federal Reserve Bank of Boston, called tether and other stablecoins one of the threats potentials to the financial stability.

This is the only major cryptocurrency that did not collapse after China's restrictions.

“A future crisis could easily be triggered as these become a more important sector of the financial market, unless we start to regulate them and make sure that there really is a much greater stability in what is marketed to the general public as a stable currency, “stressed Rosengren.

The risk rating agency Fitch Ratings alerted last week that a sudden massive swap of tethers could destabilize the short-term credit markets.

“Currencies that are fully backed by safe and highly liquid assets present less risk, although authorities may still be concerned about whether the impact is potentially global or systemic. On the other hand, stablecoins that use fractional reserves or adopt a riskier asset allocation may face a greater risk of escape“the agency said.

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Why Is Tether, The ‘number 3’ Cryptocurrency, Sparking Uneasiness Among Economists?