Tether Falls Against Dollar as Crypto Selloff Deepens

© Jakub Porzycki via Reuters Connect

By Geoffrey Smith 

Investing.com -- The world's biggest stablecoin fell below its notional peg of 1:1 against the dollar on Thursday as the global selloff in cryptocurrencies deepened. 

By 2:55 AM ET (0655 GMT), Tether was trading at 97.25 cents, over 2.5% below its peg. 

There was no immediately obvious explanation as to why investors would be prepared to sell their Tethers at a discount. However, the crypto space has been shocked in the last couple of days by the collapse of TerraUSD, the world's third-largest stablecoin, and the LUNA token that is connected to it. 

In contrast to TerraUSD, Tether owner and issuer, the Bitfinex crypto exchange, has always argued that Tether is completely backed by dollar reserves. TerraUSD's value, by contrast, is ultimately backed by a reserve composed largely of Bitcoin, which has slumped to a 17-month low this week.

Tether is most widely used as a vehicle for parking funds as crypto enthusiasts switch their holdings between various digital currencies. It has a market capitalization of over $80 billion and is by far the largest of the world's stablecoins, despite losing market share to USD Coin and, in recent months, TerraUSD.

Global financial regulators have expressed concern in the past that stablecoins, which are an essential part of the global cryptocurrency universe, may not be able to honor their promises of constant asset value. A May 2021 report issued by Bitfinex showed that only 2.9% of Tether was actually backed by cash, while nearly half its reserve was backed by commercial paper.

That report came three months after Tether settled a dispute with the New York Attorney General's office over the composition of its reserves. New York Attorney General Letitia James said at the time, "Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie."