[News Terms] 'Tether (USDT)' Criticized for Liquidity Issues

Issued Tether Limited in 2014, Representative of 'Stable Coin'
Linked to Fiat Currencies Including Dollar, Euro, and Yen

Cryptocurrency company 'Tether' logo / Photo by Wikipedia capture

[Asia Economy Reporter Lim Juhyung] The financial industry is paying close attention to 'USDT,' a type of cryptocurrency. The sudden expansion of its loan scale raises concerns about potential liquidity instability in the future. USDT, issued by Tether Limited, is a representative 'stablecoin' linked to a base currency in cryptocurrency, boasting the advantage of stable value fluctuations and has grown significantly in recent years.

The U.S. financial media outlet 'The Wall Street Journal (WSJ)' pointed out on the 1st (local time) the scale of USDT lending by Tether Limited, warning that "in a crisis situation, liquidity shortages could lead to risks." According to a recent financial report disclosed by Tether, as of September 30, Tether had loaned USDT worth $6.1 billion to customers, accounting for 9% of Tether's total assets.

Recently, due to monetary tightening in major countries such as the U.S. and the European Union, financial market instability has increased, causing several cryptocurrency companies to face liquidity crises. In this process, the value of stablecoins Terra and Luna plummeted by more than 99%, and cryptocurrency exchanges such as FTX and virtual asset exchange WEMIX went bankrupt, continuing the turmoil. WSJ pointed out that if Tether lends cryptocurrencies as collateral, it could emerge as a new 'weak link.' However, Tether responded by explaining, "Qualified customers are borrowing USDT through short-term loans."

Value Stabilization and Transparency Emphasized through Pegging to the Dollar

USDT is a cryptocurrency issued by Tether Limited, established in 2014. It is characterized by being 'pegged' 1:1 to the world's leading base currency, the U.S. dollar (USD), and the ticker USDT stands for U.S. Dollar Tether.

Cryptocurrencies linked to specific assets such as gold, crude oil, or fiat currencies are called stablecoins. Since USDT is pegged 1:1 to the dollar, it always maintains the value of one dollar. In particular, Tether holds a reserve of one dollar in its Hong Kong headquarters account for every USDT issued and discloses the reserve status on the official website's 'Transparency Page.' Based on this reliability and transparency, users can trade cryptocurrencies with stable value.

Tether's Transparency Page / Photo by Tether Official Website Capture

Tether transparently manages transaction ledger data through the Bitcoin blockchain and accurately tracks distribution routes using the open-source transfer protocol 'Omni' API. Additionally, Tether holds and manages fiat currencies that guarantee the value of USDT through its proprietary software, proves reserves, and operates web wallets between Tether and customers.

Tether's origin traces back to the 2012 idea in the cryptocurrency industry called 'Mastercoin.' The concept was to tokenize fiat currency using the cryptocurrency network 'Bitcoin blockchain' and build a transfer protocol enabling transactions in cryptocurrency. This idea materialized with the establishment of the 'Mastercoin Foundation,' and among the founding members, Brock Pierce, Craig Sellars, and Reeve Collins joined forces in 2014 to establish Tether in Hong Kong.

Because it was linked to fiat currency and had relatively strong reserves, Tether grew explosively. Tether launched cryptocurrencies pegged not only to the dollar but also to other fiat currencies such as the euro and yen. In the first half of 2018, Tether accounted for about 10% of total Bitcoin trading volume, but in the second half, it approached over 80%. This year, it achieved a market capitalization exceeding $65 billion, leading the stablecoin market.

Persistent 'Depegging' Risk... Responding by Strengthening Safe Asset Composition

Although USDT addresses the vulnerabilities of existing cryptocurrencies such as rapid value fluctuations and reserve issues, limitations remain. These include the risk of Tether's headquarters going bankrupt or funds being frozen or confiscated by other banks where accounts are established. Because of this, some customers demand more thorough information disclosure and external audits from Tether.

During the cryptocurrency 'Terra' price crash in May, other stablecoins including USDT also experienced depegging. The photo shows the price of Terra on May 13. / Photo by Online Community Capture

Especially this year, when major incidents occurred consecutively in the cryptocurrency market, Tether faced several crises. In May, when the Terra and Luna collapse occurred, USDT's price temporarily dropped to $0.96, causing a 'depegging' phenomenon. Customers holding USDT demanded conversion to dollars due to fears of market collapse, breaking the balance. If depegging had accelerated further, there was concern that USDT's value would plummet and affect Tether's collateral.

At that time, Tether's Chief Technology Officer (CTO) Paolo Ardoino reassured customers via his Twitter account, stating, "Customers' USDT-to-dollar conversions are proceeding smoothly," and made every effort to stabilize the system. After the incident, Tether reduced the proportion of risky assets such as commercial paper (CP) in its reserve composition and focused on safe assets like U.S. Treasury bonds. This was a measure to ensure sufficient liquidity even when financial markets are unstable. Following these measures, Tether restored its peg and, during last month's FTX bankruptcy, experienced a brief depegging but quickly recovered its value.