Tether Cedes Territory to Rival Stablecoins as Crypto Investors Diversify

A tumultuous spring in cryptocurrencies is remaking the pecking order among so-called stablecoins, which serve as a bridge between crypto and government-issued money. 

Tether is the best-known and most widely traded stablecoin—a breed of cryptocurrency that purports to offer a reliable conversion to and from dollars at a fixed price. After Tether fell from its $1 peg to 95 cents on May 12, investors redeemed $10 billion in the weeks that followed.

Other stablecoins added users over the same period. USD Coin, the largest stablecoin after tether, added more than $5 billion in market value, while Binance USD, now the third-largest stablecoin, added about $1.4 billion, according to data provider CoinGecko. 

Tether remains the largest stablecoin by far with a $72 billion market value. On Binance, a popular crypto exchange, many tokens and derivative contracts are still quoted and collateralized in tether. The current market value of USD Coin is about $54 billion while Binance USD has an $18 billion market capitalization. 

Deemed stablecoins for their supposed lack of volatility, these assets have become a larger part of the digital-asset ecosystem over the last two years. Stablecoins account for about $160 billion in market value, up from almost $11 billion in June 2020. 

But since the May collapse of terraUSD, formerly the third-largest stablecoin, investors and regulators have become more concerned about the risk of a 2008-style “bank run” on tether. In May, Treasury Secretary

Janet Yellen

reaffirmed the need for Congress to create a regulatory framework for stablecoins. 

On Binance, a popular crypto exchange, many tokens and derivative contracts are still quoted and collateralized in tether.



Photo:

Marco Bello/Getty Images

Changpeng Zhao,

Binance’s founder and CEO, whose exchange co-launched the stablecoin Binance USD, said he regards tether as a “high-risk stablecoin” given the lack of knowledge and information about its reserves. 

“It’s a black box to most people, including myself,” he said.

Tether is tied to the U.S. dollar by maintaining an equivalent amount of reserves that include commercial paper—or corporate short term loans—bank deposits, precious metals and government bonds. Tether hasn’t disclosed its reserve investments in detail, a decision that alarms some investors who contend the firm may be holding investments that it can’t quickly convert to cash. 

Regulators worry that if investors redeem tether en masse, the company would have to sell these traditional assets in order to give clients their money back, potentially setting off a fire sale that could destabilize financial markets. 

Tether reached a $18.5 million settlement in 2021 with the New York attorney general. The attorney general’s office said the companies made several public misrepresentations regarding the dollar reserves backing for tether.

WSJ’s Dion Rabouin explains why Wall Street has bet big on crypto and what that means for the new asset class and its future. Photo composite: Elizabeth Smelov

Circle Internet Financial Ltd, the company that issues USD Coin, said that in May investors flocked to USD Coin in a flight to safety.

“A lot of people got hurt in the Terra collapse,” said

Dante Disparte,

Circle’s chief strategy officer. “As a result, I think markets are rattled, and people are posing real questions of other types of crypto assets that may be stable in name only.”

Circle says it keeps its reserves solely in cash and cash equivalents. The firm said it would go public later this year through a merger with a special-purpose acquisition company.

Nic Carter, a partner at crypto-focused Castle Island Ventures, expects USD Coin to become the dominant stablecoin by market capitalization. Mr. Carter said his firm often funds its venture investments in USD Coin. 

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“Everyone in crypto is generally comfortable with USDC, we feel that there’s no real optics risks of using USDC,” he said. 

Since May 9, more than 130 large cryptocurrency holders increased their USD Coin balance by at least $1 million and decreased their tether balance by at least $1 million, according to data from analytics firm Coin Metrics. The shift has slowed since mid-May but continues.

In a blog post, Tether said its redemptions didn’t move directly into other stablecoins, but into the traditional finance system like banks. 

Paolo Ardoino,

chief technology officer at Tether Holdings Ltd., said the company should have done a “much better job” in addressing the concerns about its reserves, especially before 2021, when the firm reached the New York settlement. He said the firm is undergoing a full audit of its reserves. 

“We don’t have anything to hide,” Mr. Ardoino said. “People were saying Tether didn’t have the money all this time, yet we were the only group that was able to redeem $7 billion in 48 hours.”

Nate Maddrey, an analyst at Coin Metrics, said large investors, who range from exchanges to deep-pocketed traders, took advantage of Tether’s fall to 95 cents to redeem a large number of discounted tether for $1. Large investors with at least $100,000 in tether are able to redeem the coin for the full $1 in value, pocketing the difference.

Write to Vicky Ge Huang at vicky.huang@wsj.com

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