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By cryptocurrency standards, the past seven days have been a wild ride. The price of bitcoin fell 30% on Wednesday to $ 30,000 – less than half of the peak reached last month – after China announced a new crackdown and Elon Musk announced that Tesla would not accept bitcoin as payment.

Traders sold almost all of the major coins, turning trading into a sea of ​​red. A quick rebound later in the week was not enough to recoup the losses. By Sunday, bitcoin had returned to $ 32,000.

Worryingly, major cryptocurrency exchanges were unable to cope with the sell-off, due to technical failures that temporarily prevented customers from trading.

To critics, these issues give a taste of more serious issues that could arise from a deeper downturn; issues that would have ramifications far beyond cryptoland.

Frances Coppola, a financial economist who has written extensively on cryptocurrencies, believes exchanges might struggle to keep up with the demand for withdrawals if enough people rush to the door and wish to trade their crypto for cash. traditional silver or fiat.

“It would look a lot like a traditional bank run,” Coppola says.

“If the exchanges did not have enough fiat currency to meet withdrawal requests, they would either have to get it faster through a fire sale of assets or refuse to allow people to draw fiat currencies.”

In practice, that would mean shutting down their apps, which, Coppola points out, could sound like a customer like technical failure.

At the heart of the potential problems in the $ 2 trillion market are stablecoins; a vital component of the crypto world that acts as a bridge to the traditional financial system.

Stable coins are so called because they are pegged to the value of a real world asset, usually a currency like the dollar.

They alleviate the biggest problem facing cryptocurrencies: huge volatility. It can be nerve-racking to go to bed while leaving your savings in an asset like bitcoin that fell 10% at lunchtime and then rose almost as much by the time you sit down for dinner.

Having a coin pegged to the dollar, pound, or euro, which in turn are backed by central banks, means people can “cash out” the crypto market when it becomes too volatile.

The availability of stablecoins has been a key factor in the recent bull run that saw the price of bitcoin soar 700% between September and April. But critics argue that the stability they claim to offer is a dangerous illusion.

Why? Importantly, when someone trades their volatile cryptocurrency for a stable coin like Tether (by far the most widely used), they are still part of the crypto ecosystem. They did not withdraw real funds from a bank account.

A digital analogue of a dollar is not a dollar. Tether dollars (“USDT”) cannot be used in many places outside of a crypto exchange. Its dollars are not backed by the US Federal Reserve but by an opaque company registered in Hong Kong with a bank account in the Bahamas that has been less than transparent about its financial position. Tether, the company behind the motto of the same name, has been contacted for comment.

Tether derives its value in large part from the promise that it can be traded for real dollars at a 1: 1 exchange rate. This promise has looked increasingly fragile. JPMorgan is among those who have warned that a crash in Tether’s value could sink the entire bitcoin market.

“Market home trades as a USD equivalent,” Coppola says. “But exchanges do not guarantee that people will always be able to exchange their ties for US dollars and, more importantly, withdraw those dollars from the exchange,”

“And there’s also no guarantee from Tether that people will be able to trade their ties for US dollars.”

Tether had claimed that for every digital dollar he created, he kept a real one in reserve in the bank.

Then in 2019, he admitted it wasn’t true. He only had enough to cover 74% of his coins and not all of that was held in cash at the bank. Some had been loaned. Tether has refused repeated calls to verify its reservations so no one can verify its claims, but the net is closing in.

In February, Tether agreed to pay $ 18.5 million as part of a settlement with the New York attorney general after a 22-month investigation that concluded, “Tether’s claims that he was still supported by dollars were a lie. ”

Tether has been ordered to file quarterly disclosures showing the assets it holds in reserve. The first of those disclosures was released last week as a one-page document with two pie charts and no explanation. The company said only 3.9% of the reserves it holds are in cash, with the rest of its money being loaned to unknown entities with unknown creditworthiness.

For anyone old enough to remember the global financial crisis, some of these points – an institution with dangerously low capital; risky debt …

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This notice was published: 2021-05-24 15:54:17