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BY Risen Jayaseelan - October 16, 2018

Miscellaneous 0

Tether’s crisis means better transparency required for new stable coins

Tether trades below its US dollar peg value
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The crisis facing supposed stable coin tether sheds light on the challenges facing stable coins. It will also place higher standards on the newer stable coins coming into the space.

To recap, tether is floundering below its US$1 peg, a sell down which reportedly began amid it facing deteriorating banking support.

Tether had already faced criticism before considering it could not show conclusive proof of its US dollar holdings.

However, that did not stop users from loading into tether, as it had become one of the most actively traded cryptocurrencies.

Tether is widely used as a substitute for fiat when trading in exchanges, especially those such as Binance that do not accept fiat deposits.

China, which has imposed numerous cryptocurrency bans including those on exchanges, has emerged as one of the biggest tether markets, insiders say.

So what now?

Miko Matsumura, a renowned blockchain speaker and investor, reckons that the tether episode is a serious one, and means that stable coins have to proof their worth.

The next stable coin seeking to peg to the US dollar needs to have a proven 100% reserve ratio he says.

“I think tether losing their peg will provide an opportunity for a more transparent and audited US dollar backed stablecoin with a 100% reserve ratio,” he tells CryptoNewsAsia.

Such a move though would be an expensive endeavor, hence require only a well funded and experienced group to embark on that.  

Adds Matsumura, “Since there’s not much of a business model for that, the provider needs to have another way of making money such as payment services or exchange fees”.

The other problem is banking. Recall that Noble bank, one of the early banks associated with safeguarding tether’s supposed US dollar haul, had turned out to be insolvent, which in turn led to Tether’s current predicament.

Ranjeet Sodhi, the CEO of Vault, reckons that small banks, which are under less regulations, are more susceptible to failures. And because it is primarily small banks that service the cryptocurrency market, the problem is compounded.

He revealed this in a well written op-ed just published today.

But did tether ever have those US dollars in its bank account all the time?

This will continue to remain one of cryptoland’s biggest mysteries.  

Sodhi had this to say, “The biggest issue I see is that while they “claim” that one can redeem tether (or at least could), I have not come across any successful redemption reports or seen that on that chain. This lack of transparency could drive the tether price down during a run on the bank/tether (like what we are seeing now).”

Mati Greenspan of eToro though has a different view. He says that a stable coin needn’t have that equivalent amount of US dollars or any other purported assets in its coffers.

On whether tether had all those US dollars all the time in its accounts, Greenspan says, “It’s impossible to know for sure but it would be extremely difficult to hold an exact reserve of one to one with all the constant buying and selling across various exchanges. Truthfully, they shouldn’t really need to hold exact reserves though. What keeps a peg in place is perception more than anything.”

Considering the current fallout from tether, it is left to be seen if users will accept that or insist on proof of exact reserves being in place.

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