USDT Slips Below $1 Peg Due to Tether’s Freezing of Crypto Wallets
Stablecoin issuer Tether’s USDT tokens recently depegged from the U.S. dollar and dropped below their $1 peg on major crypto exchanges.
The depegging comes after Tether announced on December 15 that it was freezing crypto wallet addresses holding over $435 million in USDT tokens in collaboration with U.S. law enforcement agencies investigating illicit financial activity.
As a stablecoin, USDT is designed to maintain a 1:1 parity with the U.S. dollar. However, the coin dipped to as low as $0.985 on exchanges like Binance, Coinbase and Kraken, indicating a loss of trust in Tether’s policies.
Factors Behind the Depegging
Several factors contributed to USDT devaluing below its $1 peg:
- Declining faith in Tether’s ability to maintain its peg after freezing a substantial amount of assets on law enforcement requests.
- Tether has frozen crypto wallet addresses holding over $435 million in USDT this year alone on requests from government agencies investigating unlawful activities.
- Questions about Tether’s neutrality as a stablecoin issuer due to its proactive stance in cooperating with law enforcement.
Prominent crypto figures like Charles Hoskinson of Cardano expressed disbelief at Tether’s actions on Twitter.
Concerns Over USDT Supply Expansion and Backing
Tether’s market capitalization expanded rapidly in 2023, surpassing $90 billion with $23 billion newly minted USDT this year alone, raising concerns that:
- Tether may be minting unbacked USDT and coordinating with exchanges to inflate Bitcoin prices, which could lead to a collapse if certain exchanges fail.
- Overall confidence in Tether’s stability and backing is waning, potentially affecting the broader crypto market that relies on USDT liquidity.
USDT’s instability risks affecting Bitcoin’s trading premium on USDT markets and volatility may impact the wider crypto ecosystem.
Rival stablecoins like USD Coin (USDC) may benefit if doubts about USDT’s stability and depeg persist.
Future Uncertain for Tether
The future remains unclear as to whether USDT can regain its dollar peg and restore market confidence amid the ongoing crisis.