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Tether is the third largest cryptocurrency in the world by market capitalization, which has alarmed some economists, including a U.S. Federal Reserve official.
Boston Fed Chairman Eric Rosengren sounded the alarm on Tether last month, calling it a potential risk to financial stability.
The problems with Tether have major implications for the emerging world of cryptocurrencies. Economists are increasingly concerned about its impact on the markets unlike other cryptocurrencies, so what is the cause of this concern?
What is Tether?
Like Bitcoin, Tether is a cryptocurrency, and it ranks third in terms of market capitalization behind Bitcoin and Ethereum, but it is very different from Bitcoin and other virtual currencies.
Tether is known as stablecoin, which is tied to a real world asset, and in the case of Tether, it is pegged to the dollar, and unlike most cryptocurrencies known to be volatile, Tether does not suffer not the same violent movements.
Tether is designed to be pegged to the dollar. While the value of other cryptocurrencies fluctuates often, the price of Tether is usually equivalent to a dollar. But that’s not always the case, and fluctuations in the value of the cryptocurrency have alarmed investors in the past.
Cryptocurrency traders often use Tether to buy cryptocurrency, as an alternative to dollars. Essentially, this provides them with a way to seek safety in a more stable asset during times of extreme volatility in the cryptocurrency market.
However, cryptocurrencies are not regulated and many banks avoid dealing with cryptocurrencies due to the level of risk involved. This is where stable coins tend to appear.
Why is this controversy?
Some investors and economists are concerned that Tether’s issuer does not have enough dollar reserves to justify pegging to the dollar.
In May, Tether divested its stablecoin reserves. The company revealed that only a small portion of its holdings, equal to 2.9%, to be exact, was in cash, while the vast majority was in commercial paper, a form of unsecured short-term debt.
That would put Tether in the list of the 10 largest commercial paper holders in the world, according to JPMorgan. Tether has also been compared to traditional money market funds, but without any regulations, according to “CNBC” and reviewed by “Al Arabiya.net”.
With over $ 60 billion in “tokens” in circulation, Tether has more deposits than many US banks.
It has long been questioned whether Tether is being used to manipulate Bitcoin prices, with a study claiming that the cryptocurrency was used to prop up Bitcoin during large price drops in the brutal rally of 2017.
Earlier this year, the New York attorney general’s office struck a deal with Tether and Bitfinex, an affiliate cryptocurrency exchange.
The state’s top law enforcement official accused the two companies of embezzling hundreds of millions of dollars to cover $ 850 million in losses. Tether and Bitfinex agreed to pay $ 18.5 million as part of the settlement and have been banned from operating in New York state, although the two companies have not admitted any wrongdoing.
market infection
In turn, JPMorgan analysts have previously warned that a sudden loss of confidence in Tether could trigger a “severe liquidity shock in the broader cryptocurrency market.”
Last week, Fitch warned that a massive and sudden rally in Tether tokens could destabilize credit markets in the short term.
“There is less risk posed by cryptocurrencies that are fully backed by safe and highly liquid assets, although authorities may still be concerned if the footprint is global or systemic,” the rating agency said. American.
Tether isn’t the only stablecoin, but it is by far the largest and most popular. Other currencies include the USD Coin and Binance USD.
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