Cryptocurrencies that are advertised as being relatively safe are called “stablecoins,” so called because they are pegged to a reserve asset like the U.S. dollar and are supposed to be backed by hard assets. But increasing it appears they are stable in name only, as questions grow about the safety of these digital coins within the highly risky world of cryptocurrencies.
Tether Holdings, the company behind the most popular stablecoin known as tether, recently revealed that it has been trying to generate increased profits by lending out more than $6 billion of its tether coins, nine percent of the company’s assets. Borrowers are supposed to repay their loans with tether coins. This leveraging of its stablecoin increases the risk that Tether Holdings may not have adequate hard assets to pay off tether holders in the event of a run on the stablecoin. Incorporated in the British Virgin Islands, Tether Holdings says its digital coins “are backed 100% by Tether’s reserves.” But the company does not publish a full accounting of those reserves.
Tether briefly lost its one-to-one peg against the dollar in mid-November amid worries over the collapse of cybercurrency exchange FTX. The stablecoin also dropped below the $1 mark in June when crypto lender Celsius Network failed and in May when another stablecoin, terraUSD, lost three-quarters of its value.
In the world of cryptocurrencies, which is riddled with seismic faults, it appears stablecoins are standing on shaky ground.