Despite The Banking Crisis, Tether Emerges As An Unlikely Winner‍

The market capitalization of the stablecoin has increased by 10% this year

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Tether, the largest stablecoin, has increased its lead due to turmoil in the dollar-backed cryptocurrency world.

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In the first half of this year, the market cap of tether has increased by 10% to $73 billion, while the market cap of its chief rival, USD Coin, has decreased by more than 11% to $39 billion, according to CoinMarketCap data. It is estimated that Binance USD has fallen by almost half to just over $8 billion in just a few days.

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Now that Circle Internet Financial's USD Coin has broken out of its peg and New York regulators have closed down new U.S. issuances of Binance USD, the world's third-largest stablecoin, traders are relying more than ever on Tether.

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After USD Coin's fixed price of $1 fell sharply below the fixed value of the cryptocurrency over the weekend, crypto investors fled to tether. There were more than $3 billion in reserves on hand at Circle, an amount that was significantly higher than the guarantee provided by the Federal Deposit Insurance Corp., which backed the coin that was deposited in the Silicon Valley Bank that collapsed.

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The demand for Tether on Coinbase, Binance, and other centralized exchanges was so strong on Monday as traders rushed to exchange USD Coins for tether, that Kaiko, the provider of digital assets data and information services, stated the stablecoin continued to trade slightly above its $1 peg on Coinbase, Binance, and other centralized exchanges.

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A sharp reversal of market conditions from last year, when the collapse of algorithmic stablecoin TerraUSD spooked investors, resulting in them redeeming billions of tether and switching to USD Coin, was marked by the shift away from USD Coin, which is marketed as a stablecoin with the highest transparency and regulation.

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Kevin March, the co-founder of Floating Point Group, an institutional trading desk, said that the firm converted single-digit millions of USD Coin into Tether over the past few days in order to hedge against the uncertainty surrounding Circle.

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“Most of our customers did the same, putting a lot of pressure on the USDC-USDT trading pair,” Mr. March said, referring to USD Coin and tether by their trading symbols.

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Tether is arguably the most popular and widely traded stablecoin - a type of cryptocurrency that converts from one currency to another at a fixed rate based on a fixed dollar price. Even though the coin has been around for a long time, it has faced controversy regarding the lack of transparency in the way it operates and the lack of information regarding how it invests the reserves that back the coin. 

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The New York attorney general's office settled a complaint with Tether in 2021 after it claimed that the company misrepresented the dollar reserves backed by its stablecoin in 2017. Trade Algo has reported that at the end of last year, when the companies behind tether were struggling to maintain their access to the global banking system, some of their backers turned to shadowy intermediaries, falsified documents, and shell companies to regain access to the system. 

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Tether, on the other hand, might be at an advantage at the moment due to its lack of transparency.

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“I think this is a validation of what we know about money and things that attempt to be money which is that when you provide too much information, you are susceptible to runs,” said Steven Kelly, a researcher at Yale University’s program on financial stability at the university.

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“Circle knew it had exposure to SVB, we discovered what it was and then there was a run on it. It seems safer for this reason alone since we do not really know as much as we could about Tethers," said Mr. Kelly.

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The chief technology officer of Tether, Paolo Ardoino, said on Twitter that the stablecoin issuing company does not have any exposure to Silicon Valley Bank or the crypto-friendly Signature Bank, according to Ardoino. As another blow to the digital-asset industry, federal regulators shut down Signature Bank on Sunday, one of the last major banks to service crypto companies in the country. 

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Despite the recent failure of Silicon Valley Bank, USD Coin traded just shy of its $1 peg on Monday, regaining much of its weekend losses, after U.S. regulators stepped in to guarantee all deposits at the bank.

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After Circle pledged Saturday to cover any shortfall with company resources, including outside funding if necessary, some traders have restored their faith in USD Coin.

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Floating Point Group customers were buying USD Coin dips early Sunday morning on the belief that Circle would quickly recover the assets from SVB, according to Mr. March.

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In the meantime, USD Coin's market capitalization has decreased by more than $4 billion since last Thursday, according to CoinMarketCap data.