UST Wipes Out — is USDT Next?

Terra took a tumble recently wiping out $37 billion in value from the crypto markets through the collapse of LUNA and UST. Despite its shocking impact on token holders, the bigger issue is stablecoin regulation is now back in the crosshairs of policy makers who are likely to push for projects to be treated as deposit-taking institutions.

In particular, Tether’s USDT — with a market cap exceeding $70 billion — might be considered a systemically important asset as the quote currency for most of the important token trading pairs and for having more than ten times the trading volume of its nearest competitor. A run on it could cause liquidity shocks that reverberate to the capital markets and beyond. The stablecoin has long been rumored to be undercapitalized with a series of legal challenges over the years raising concerns about the value of its US dollar reserves. Last week, the New York Supreme Court rejected the company’s request to seal court records on Tether’s balance sheet position.

In the worst-case scenario, Tether’s unwinding would produce a severe stablecoin shortage in the market. Everyday transactions and trading activities could be impacted in unimaginable ways if USDT holders rushed to redeem for greenbacks. Eventually, USDC or BUSD should grow to fill that void. In the meantime, exchanges will scramble to list new pairs and markets like Vietnam where USDT sells for a handy premium might be in search for another stablecoin of choice.

If bitcoins were sold off at this time, there may not be enough stablecoins to support normal market price discovery functions. Possibly leading to a temporary and abrupt correction.

Disclaimer: Not financial advice

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First published 24th May 2022.

Source: https://www.facebook.com/robertvong/posts/10158423569056809