Tether’s USDT, the leading stablecoin in terms of market capitalization, has deviated from its intended $1 price, experiencing a disconnect amidst increasing scrutiny following the company’s December 15 announcement of a wallet-freezing policy in collaboration with law enforcement agencies, including the DOJ, FBI, and Secret Service.
According to data from CoinMarketCap, USDT has dipped as low as $0.985 on major exchanges such as Binance, Coinbase, and Kraken, signaling a departure from its usual peg to the dollar.
Stablecoins, like USDT, are designed to maintain a one-to-one value ratio with fiat currencies, such as the dollar. However, various factors can lead to temporary deviations from the peg, resulting in devaluation. In the case of USDT, this recent depegging seems linked to a loss of confidence in Tether’s policies, particularly after the significant asset freeze.
USDT Depeg Caused by Cooperation with Authorities
On December 15, Tether sent a letter to Senator Cynthia M. Lummis and Congressman J. French Hill, detailing its action of freezing crypto wallets holding over $435 million in USDT tokens in response to requests from government agencies in 2023. This action highlighted the stablecoin issuer’s extensive collaboration with authorities to disrupt criminal activities involving USDT.
In the letter, Tether CEO Paolo Ardoino expressed gratitude for the opportunity to address concerns raised by U.S. lawmakers, affirming the company’s commitment to ongoing close cooperation with law enforcement both in the U.S. and globally. Ardoino stated, “Tether seeks to be a world-class partner to the U.S. as we continue to assist law enforcement and expand dollar hegemony globally.”
While Tether asserts its collaboration with agencies to combat illicit financial activities, its claim of being a neutral stablecoin issuer is now in doubt in the aftermath of the significant asset freeze.
The substantial value that was frozen and Tether’s readiness to blacklist addresses has left many within the crypto community surprised and questioning the stablecoin’s perceived neutrality.
In response to the news, Checkmate, the lead on-chain analyst at Glassnode, tweeted, “Tether is the CBDC. Truthers in shambles,” reflecting a sentiment of disbelief within the crypto community.
Charles Hoskinson, the founder of Cardano, also expressed his astonishment on the social media platform X by sharing a GIF that conveyed shock and disbelief.
Scrutiny of Tether’s Growth Also Intensifies
In addition to the wallet freeze, Tether’s significant supply expansion in 2023 has raised concerns within the crypto community. According to data from Messari, the market cap of USDT surpassed $90 billion, marking a growth of over 70% in the current year alone. Tether minted approximately $23 billion in new USDT in 2023, a figure nearly equivalent to the entire market cap of its rival stablecoin, USDC.
While Tether presents this expansion as indicative of strong demand, some investors view it with skepticism. Critics argue that Tether may be minting unbacked USDT to support Bitcoin prices in collaboration with exchanges, all while preventing redemption into dollars. This practice could potentially lead to a collapse if exchanges like Bitfinex or Binance were to fail.
The combination of the rapid increase in supply and Tether’s collaboration with authorities appears to be eroding confidence in the stablecoin, contributing to the observed depegging of USDT on exchanges.
The primary worry is that the instability of USDT could have a cascading effect on the broader crypto market, given its significant role in providing liquidity. Bitcoin, in particular, frequently trades at a premium on USDT markets, making the potential volatility of USDT a concern that might reverberate throughout the market.
In essence, despite its dominant position, faith in Tether’s policies seems to be wavering. This uncertainty opens the door for rival stablecoins like USDC to gain traction, particularly in the face of doubts about the future stability of USDT, especially if the depegging trend persists. The upcoming days will reveal whether USDT can successfully regain its dollar peg or if the challenges persist.
