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Tether’s USDT, the leading stablecoin in terms of market capitalization, has strayed from its intended $1 valuation amidst heightened scrutiny following the company’s announcement on December 15 regarding a policy to freeze wallets in collaboration with law enforcement agencies, including the DOJ, FBI, and Secret Service.
According to data from CoinMarketCap, USDT experienced declines, reaching as low as $0.985 at times on major exchanges like Binance, Coinbase, and Kraken, signaling a departure from its peg to the US dollar.
Stablecoins such as USDT are created to uphold a 1:1 value ratio with fiat currencies like the dollar. While several factors can lead to brief deviations from this peg, they may lead to devaluation. In the case of USDT, the recent detachment from its peg seems linked to a loss of confidence in Tether’s policies, particularly following the significant asset freeze.
The detachment of USDT from its peg is a consequence of collaboration with authorities.
On December 15, Tether communicated to Senator Cynthia M. Lummis and Congressman J. French Hill that it had taken action to freeze cryptocurrency wallets containing over $435 million in USDT tokens in response to requests from government agencies in 2023. This underscored 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 and reiterated the commitment to closely work with law enforcement 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 maintained its collaboration with agencies to combat illicit financial activities, the company’s neutral stance as a stablecoin issuer has come into question in the aftermath of the asset freeze.
The substantial value that was frozen and Tether’s readiness to blacklist addresses has left many in the crypto community astonished. Checkmate, the lead on-chain analyst at Glassnode, tweeted, “Tether is the CBDC. Truthers in shambles,” reflecting the surprise within the community. Cardano founder Charles Hoskinson also expressed his astonishment on the social media platform X by sharing a GIF depicting shock and disbelief.
The examination of Tether’s expansion is also on the rise.
In addition to the wallet freeze, there is growing apprehension about Tether’s supply expansion in 2023. According to data from Messari, the market cap of USDT surpassed $90 billion, registering a climb of over 70% this year alone. Tether generated approximately $23 billion in new USDT in 2023, nearly matching the entire market cap of its rival stablecoin, USDC.
While Tether presents this surge as indicative of robust demand, some investors view it with concern. Critics argue that Tether might be creating unbacked USDT to support Bitcoin prices in collaboration with exchanges, while preventing the conversion into dollars, potentially leading to a collapse if exchanges like Bitfinex or Binance encounter difficulties.
The simultaneous increase in supply and compliance with authorities appears to be diminishing confidence in Tether, contributing to the observed depegging of USDT on exchanges.
The primary worry is that the instability of USDT could extend to the broader crypto market, heavily reliant on USDT liquidity. Given that Bitcoin often trades at a premium on USDT markets, any volatility in USDT may have ripple effects outward.
In summary, despite its dominance, skepticism is growing regarding Tether’s policies. Rival stablecoins such as USDC might gain traction amid uncertainties about the future of USDT, especially if the depegging trend persists. The upcoming days will reveal whether USDT can reestablish its peg to the dollar.