Deutsche Bank's Analysis Sparks Debate over Tether's Stability and Operations
[TL; DR]
Tether USDT should improve its transparency to enhance its viability.
Deutsche Bank and JPMorgan agree that Tether USDT faces operational risks that threaten its future viability.
The EU will implement the MICA regulations during mid-year which will affect stablecoins in the region.
Introduction
The Deutsche Bank, released on 7 May, has generated much debate in the crypto sector as it predicts failures of several leading stablecoins including Tether USDT. Importantly, the report covers the performances of different currency pegs since 1800. Despite such speculations some analysts contend that if national governments institute suitable regulation most stablecoins will be able to maintain their pegs.
The greatest risks the stablecoins face are related to crypto legislation and reserve compliance. This article covers Deutsche Bank’s Tether USDT analysis and the future of stablecoins.
Deutsche Bank Research’s analysis on Tether’s USDT
The Deutsche Bank Research report that explores 334 currency pegs since 1800 has highlighted the risks that stablecoins face. However, it delved much more on operational risks which Tether may encounter.
The research concluded that out of the 334 currency pegs that Deutsche investigated only 14% of them are still on the market, showing the vulnerability of stablecoins. The prominent threats to the existing stablecoins include depegging as a result of speculative tendencies. Lack of operational transparency on the part of the stablecoin issuers exacerbates their risks.
First, in its report Deutsche Bank has questioned Tether USDT’s stability and the transparency of Tether practices pertaining to its USD denominated reserves. As per a recent Cointelegraph publication, the analysts at the bank also question Tether USDT’s solvency.
Nevertheless, due to Tether market dominance it may not be possible to notice the threats that it is facing until a “peso moment” that will likely affect crypto market volatility. According to the Deutsche Bank report the peso moment may have an impact on the entire crypto market.
To illustrate its point, the report cited the example of the collapse of TerraUSD (TUSD) which wiped over $40 billion from the crypto market within a few days. As you remember, the Terra USD collapse resulted in the implosion of several crypto projects that had links with it. In this regard, Deutsche Bank stated: “While some may survive, most will likely fail, particularly due to the lack of transparency in stablecoin operations and vulnerability to speculative sentiment.”
Read also: Will the Terra Luna Project Ever Recover?
One point Deutsche Bank has put across to the entire crypto market is that there is a need for stablecoin transparency. For example, all cryptocurrency pegged currencies should keep amble reserves which are audited and publicized to avoid panic among its users if there are signs of depegging.
As part of its research Deutsche Bank carried out a consumer survey in various countries including Spain, Italy, France, Germany, the United Kingdom and the United States. Out of the 3,350 participants only 18% showed confidence in the viability and sustainability of stablecoins. On the contrary, 42% believed that stablecoins may decline as a result of various crypto ecosystem risks.
Tether USDT Analysis: JPMorgan’s Concern
The Deutsche Bank Tether stablecoin market analysis seems to resonate with JPMorgan’s scepticism of USDT’s long term viability. In February JPMorgan produced another report that positions Tether market dominance as a threat to the crypto market as it limits competition and innovation. As a result of its dominance if it faces strong operational problems that may have a domino effect on the entire crypto market.
Brad Garlinghouse, Ripple CEO, also raised concern about Tether USDT’s viability. However, his concern is different from that of JPMorgan and Deutsche Bank. Garlinghouse’s fear is that stablecoin regulations in the United States and the EU may adversely affect the performance of Tether USDT. In fact, the Ripple CEO strongly believes that the U.S government is targeting Tether USDT in a way that may destabilize its smooth operations.
Past Tether Regulatory Issues and Fines
Garlinghouse’s fears may sound realistic if we consider previous Tether regulatory issues. As a fact, in 2021 the U.S Commodity Futures Trading Commission imposed a $41 million fine on Tether. During the same year Tether made an USD $18.5 million settlement with the New York Attorney General. Both penalties emanated from the allegations that Tether had made misleading claims about its reserves. Basically, the U.S authorities had strong doubts about Tether’s stablecoin compliance in terms of reserves. It seems obvious that at that time Tether failed the proof of burden test.
Going forward, what is important is that Tether keeps enough reserves for its USDT stablecoin. More importantly, it should be transparent in this regard and be able to prove to the authorities the sufficiency of its reserves at any time. It may also be essential for Tether to invite external auditors. Currently, it seems that Tether is relying on its attestation. For example, its Q4, 2023 attestation shows that it generated $2.85 billion in profit. It produced the following as part of the attestation.
2023 Tether Reserves – Tether
Whereas this seems impressive an external audit report may do much good and improve its public image as it increases transparency and accountability. A full audit is more comprehensible as it indicates the firm’s risks, compliance and the currently unknown data.
Important to know: Commodities vs. securities: Key differences
Tether’s Response
In the wake of the above allegations and industry concerns Tether has played down on the fears the cited parties have raised. It dismissed the Deutsche Bank report for lack of validity since it contains no evidence nor clarity. On the other hand, the stablecoin giant said that it has mechanisms to maintain the stability of the stablecoin.
It also stated that it is irrelevant for Deutsche Bank to compare USDT, a fiat-backed stablecoin, to TerraUSD, an algorithmic stablecoin. In comments shared with Cointelegraph, a Tether representative said, “Moreover, its comparison to Terra, an algorithmic stablecoin, is misleading and irrelevant to the discussion on reserve-backed coins.” The reason is that Terra USD collapse was not directly linked to the absence of reserves.
It continued, “Questioning the credibility of any financial institution, especially one with Deutsche Bank’s track record, seems ironic. Deutsche Bank’s history of fines and penalties raises doubts about its own standing to critique others in the industry.”
USDT’s Role and Market Cap Growth in the Crypto Market
Based on the current stablecoin market analysis Tether USDT is playing a critical role in the entire cryptocurrency market. Basically, USDT enables traders to maintain the value of their crypto holdings. For example, during a period of market volatility many investors prefer to convert their crypto assets to Tether USDT. It is also important to note that the USDT stability is evident since it has never experienced instances of sharp depegging.
Tether, with a market capitalization of over $100 billion, has a stablecoin market share of over 69%. In most cases, the USDT trading volumes are greater than those of Bitcoin, the number one cryptocurrency. The main reason for this is that USDT is paired against many crypto assets. Similarly, many people and institutions also use Tether USDT as a medium of exchange and for international remittances. Additionally, the stablecoin provides much needed liquidity to the cryptocurrency market and enhances the popularity of digital assets.
Upcoming Stablecoin Regulations in the US and the EU’s MiCA
Several countries intend to introduce crypto laws that will govern different classes of cryptocurrencies including stablecoins. For example, the EU will soon implement the Markets in Crypto-Assets Regulation (MiCA) by mid-year. On the other hand, the United States is working on its stablecoin regulation, the Clarity for Payment stablecoins Act. These crypto legislations have several similarities. For example, both require the issuers to get licenses before issuing stablecoins. The stablecoin providers should also segregate customer funds as well as maintaining sufficient reserves.
Conclusion
A recent Deutsche Bank Research has indicated that stablecoins face viability challenges, especially if they lack transparency. It also pointed out that stablecoins like USDT may encounter operational risk due to speculative tendencies of cryptocurrencies. In recent months, JPMorgan identified the USDT dominance as a threat to the banking system. The crypto legislation which the United States and the EU may implement soon are likely to create additional risks to stablecoins.
