Stablecoin Tether (USDT) drops below $1

Crypto firm Tether has reduced the amount of commercial paper in its reserves.

Jakub Porzycki | Nurphoto | Getty Images

Tether, the world’s largest stablecoin, fell below its $1 peg on Thursday amid panic in the crypto market.

The token fell to 95 cents on some exchanges around 3:15 a.m. ET. It is supposed to be pegged 1 to 1 to the US dollar.

Tether’s drop came after terraUSD, a different stablecoin, fell below 30 cents on Wednesday. It raised fears of possible market contagion.

Vijay Ayyar, head of international at crypto exchange Luno, said the move to tether was likely a “speculatively-driven scare” stemming from the fallout from the fall of the UST.

“The environment is ripe for such news events to cause ripples in the markets, as we can see,” he told CNBC.

Stablecoins are a lot like the bank accounts of the crypto world, designed to serve as a store of value that investors can turn to during times of market volatility. Tether and USDC, the two largest stablecoins, are supposed to be backed by a sufficient amount of silver held in reserve to ensure that depositors can receive their dollars when they want to withdraw.

But there has long been concern about whether Tether actually has enough assets to back its projected $1 peg. Tether, the company of the same name, previously said that all of its tokens were backed 1-to-1 by dollars held in a reserve.

However, after a settlement with the New York Attorney General, it was revealed that Tether relied on a range of other assets, including commercial paper, a form of unsecured short-term debt, to back its token. Tether has since reduced the amount of commercial paper in its reserves and says it plans to reduce its holdings further over time.

Earlier Thursday, Tether CTO Paolo Ardoino insisted that tether holders would still receive $1 when exchanging their tokens.

About 300 million tether tokens have been withdrawn in the past 24 hours “without a sweat,” he tweeted.

Nicholas Bonnet, a quant at crypto broker Aplo, said some traders exploit the tether drop through arbitrage games – essentially buying the token for less than $1 and then buying it back for a dollar.

“Early this morning, the liquidity pools allowing you to trade bonds for other things were nearly empty,” he said.

“It could have created a short-term panic spiral effect in people seeing the tether was trading below the ankle and having no quick way out of the tether.”

Bitcoin and other cryptocurrencies plunged further on Thursday as investors reacted to fears about rising inflation and deteriorating economic prospects, as well as the uncoupling of the link to its dollar peg.

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