As investors are still struggling with the news of the UST collapse, another stable coin is having trouble maintaining its dollar peg.

Investors have withdrawn over $7 billion from tether (USDT) since it briefly dropped from its dollar peg, raising more questions about the reserves underpinning the world’s top stable coin.

USDT’s circulating supply dropped from about $83 billion a week ago to less than $76 billion on Tuesday, according to market data.

The stable coin is built in such a way that its value must always be worth $1. But last Thursday, the USDT price slumped as low as 95 cents amid the panic following the collapse of a rival token called terra USD.

Stable coins are usually backed by fiat reserves, the idea being that they have enough collateral in the event that users decide to withdraw their funds. However, there is a new era of “algorithmic” stable coins like terra USD, or UST, which prefer to base their dollar peg on code. That’s been put to the test lately most notably with the LUNA saga which left billions of reserves almost worth nothing last week.

Formerly, Tether claimed all its tokens were backed 1-to-1 by dollars held in the bank. Yet, after a settlement with the New York attorney general, the company disclosed that it relied on a range of other assets to support its token. These notably included commercial paper, a form of short-term, unsecured debt issued by companies.

The LUNA crisis has once again placed the subject of USDT’s reserves under the spotlight. Tether’s last revelation of its reserves consists of only $4.2 billion in cash assets. The majority (worth $34.5 billion) consisted of unidentified Treasury bills with a maturity of fewer than three months, while $24.2 billion of its holdings was held in commercial paper.

Tether has repeatedly faced calls for a full audit of its reserves but none has ever come through yet.

When urged by one Twitter user to release a full audit, Paolo Ardoino, the company’s chief technology officer, insisted its token was “fully backed” and had redeemed $7 billion in the past 48 hours.

He further stated, “We can keep going if the market wants, we have all the liquidity to handle big redemptions and pay all 1-to-1.”

Ardoino revealed that Tether is still working on an audit. “Hopefully regulators will push more auditing firms to be more crypto-friendly,” he added.

The destabilization of stable coins has attracted attention from government regulators worldwide. The U.S. Treasury Secretary Janet Yellen warned of the risks posed to financial stability if stable coins are left to grow without regulation. He urged legislators to approve the regulation of the crypto sector by the end of 2022.

Bank of France Governor Francois Villeroy de Galhau said the turmoil in crypto markets recently should be taken as a “wake-up call” for global regulators. He warned that cryptocurrencies could disrupt the financial system if left unregulated — particularly stable coins, which he added were “somewhat misnamed.”

Fabio Panetta, an Executive Board Member of the European Central Bank said stable coins like Tether are “vulnerable to runs,” referring to “bank runs” where clients flee a financial institution en masse. The European Union’s plans are to bring stable coins under strict regulatory oversight with new rules known as the Markets in Crypto-assets Regulation (MiCA).

Economist Frances Coppola believes that it’s crypto exchanges — not retail investors — that are pulling billions of dollars out of Tether in wholesale transactions.”

“Its customers really are the exchanges,” He said. “Then the exchanges sell tokens to traders, dabblers and small investors.”

Tether is a critical part of the crypto market, enabling billions of dollars worth of trades every day. Investors often covert their cryptos into USDT whenever the market is highly volatile.

Monsur Hussain, head of financial institutions research at Fitch Ratings, stated that Tether would have minimal difficulty in selling down its Treasury holdings. However, the source of those holdings is still unclear. Tether’s CTO refused to provide any details on its Treasury holdings, saying the company doesn’t want to give out its secret sauce.

Concerns surrounding Tether seem to have boosted demand for rival tokens, most notably USDC (by Circle) and Binance’s BUSD, whose respective market values have increased around 8% and 4% in the past week. Experts reasoned that’s because these tokens are deemed “safer” than Tether.

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