Could Tether's USDT Collapse Trigger the Greatest Crypto Crash Ever?

Amid heightened concerns and escalating speculation, it's imperative to assess the security of your investments in the face of this looming menace.

Tether (USDT), the largest stablecoin by market capitalization, has faced increasing scrutiny over the years. Critics have raised concerns about the transparency and backing of USDT, pointing to issues like insufficient reserves and the lack of proper audits. These concerns have led some to speculate about the possibility of a USDT collapse and its potential impact on the crypto market. In this article, we will delve into the allegations against USDT, the reasons behind its recent strategic decisions, and whether a collapse is possible in the future. We will also explore the potential consequences of a USDT collapse and provide tips on how to protect your portfolio from these risks.

The Chaotic Journey of USDT in the Crypto Market

Tether (USDT), originally known as Realcoin, was launched in 2014 by Brock Pierce, Reeve Collins, and Craig Sellars under the company Tether Limited. It was quickly rebranded and introduced as a stablecoin pegged to the US dollar, with each USDT token claimed to be backed 1:1 by reserves. However, Tether's journey has been fraught with challenges. From the beginning, it operated opaquely, leading to early concerns. Between 2017 and 2018, Tether's market supply surged from approximately $10 million to $2.8 billion, sparking debates over the authenticity of its reserves and its transparency. In 2018, Tether's price briefly dropped to $0.88, inciting fears regarding its stability and reserve backing. Consequently, its market dominance declined from nearly 94% at the start of the year to about 74% by the end of 2018.

Despite these issues, Tether surpassed Bitcoin (BTC) in trading volume in 2019, cementing its vital role in the crypto ecosystem and drawing intense regulatory scrutiny. In 2021, the New York Attorney General sued Tether and its sister company, Bitfinex, revealing that Tether had loaned $850 million from its reserves to cover Bitfinex's losses. This lawsuit, which settled without an admission of wrongdoing, did little to silence the critics. In 2023, The Wall Street Journal reported that Tether Holdings had used fake invoices and contracts to circumvent banking regulations, further damaging its credibility. Over the years, the company has also faced allegations of market manipulation and links to illicit activities like money laundering and sanctions evasion.

Although Tether has increased its holdings of US Treasury Bills and made attempts to enhance transparency by publishing reserve breakdowns and undergoing attestations, these actions have not completely dispelled doubts, as critics still question the transparency of Tether's reserves, which previously consisted largely of commercial paper. Meanwhile, Tether reported a record $4.52 billion profit in Q1 2024, with assets of $86.4 billion against liabilities of $83.2 billion. Tether now claims that 90% of its reserves are in cash and cash equivalents, mainly US Treasury Bills. With a current market cap surpassing $112 billion, Tether undeniably dominates the stablecoin market. Yet, this dominance comes with the risk that any potential collapse could largely impact the entire crypto market.

Rising Concerns for Tether

Amid changing regulatory landscapes, Tether, despite being the most widely used stablecoin, is facing growing concerns, especially in the European Union (EU). In March 2024, crypto exchange OKX announced that it would cease support for USDT trading pairs for users in the European Union and European Economic Area (EEA). OKX stated that this move was to focus on euro-denominated liquidity. While USDT will still be available for deposit, withdrawal, and over-the-counter (OTC) trading, it will no longer be directly tradeable against crypto assets other than USDC and the euro. This decision aligns with the EU's new regulatory framework, known as the Markets in Crypto-Assets (MiCA) regulation, which is set to come into full force by the end of 2024. MiCA requires stablecoin issuers to be regulated as electronic money institutions, a classification that many stablecoins currently offered in Europe do not meet.

Meanwhile, on June 18, cryptocurrency exchange Uphold notified its European users that it would delist six popular stablecoins, including USDT, starting July 1. Uphold cited compliance with MiCA as the reason for this change. Users were instructed to convert their holdings into other cryptocurrencies before the deadline, after which the exchange would automatically convert the stablecoins into USDC. Other major exchanges, such as Binance and Kraken, have also begun reviewing their stablecoin policies to comply with the new regulations. For instance, Binance has categorized its stablecoins into "regulated" and "unauthorized" under MiCA but has yet to finalize which stablecoins will continue to be supported.

Could USDT Collapse?

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