Tether, or $USDT, is reportedly the third biggest cryptocurrency in the whole world based on market value, and it has some economists, even including a particular official from the United States Federal Reserve worried.
Why is this "stablecoin" something that might be "alarming?"
Is Tether a Potential Financial Stability Risk?
According to an article by CoinDesk, Eric Rosengren, Boston Fed, raised the alarm regarding tether and even called it a potential financial stability risk. Some investors even have a full loss of confidence in tether as it could actually be crypto's "black swan," or an unpredictable event that would have a severe impact on markets beyond the whole digital currency.
The real question is, what is Tether?
A story by CNBC states that Tether, or $USDT, is known as what the cryptoverse calls a "stablecoin." These are certain digital currencies that are directly tied to real-world assets, like how Tether is directly tied to the US dollar, for example, in order to maintain a stable value.
What is Tether?
This makes the coin different from other cryptocurrencies as it is not too volatile. Bitcoin, on the other hand, rose to its all-time high back in April and has ever since been fluctuating at about half its value.
Tether was originally designed to be directly pegged to the dollar. While other cryptocurrencies would sometimes fluctuate in value, Tether is able to maintain its price at $1. This, however, isn't always the case and the slight wobbles in value have even spooked investors in the past.
What is Tether for?
Crypto traders usually use tether in order to buy cryptocurrencies. It is an alternative to the greenback. This would provide crypto traders a way to directly seek safety in a much more stable asset during times of extremely sharp volatility within the crypto market.
Crypto, however, isn't really regulated and there are a lot of banks that still avoid doing business with digital currency exchanges due to the high levels of risk that is involved. This is where stablecoins come into the picture.
Is Tether Risky?
There are some investors and economists that remain worried that Tether's own issuer won't have enough dollar reserves in order to justify its own dollar peg. Back in May, Tether even broke down the reserves for its own stablecoin.
The firm even revealed that only a 2.9% fraction of its holdings were in cash while the vast majority actually existed in commercial paper which, according to CNBC, is a form of unsecured, short-term debt. This would place Tether in a position included in the top 10 biggest holders of commercial paper in the whole world, as per JPMorgan.
Tether has already been compared to certain traditional money-market funds in the past, but still without any regulation. With over $60 billion worth of tokens in its circulation, Tether reportedly has more reserves compared to a number of US banks, Bloomberg noted.
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Written by Urian B.