When enough speculators attack the currency, or capital outflows are just too great to handle, keeping the peg becomes unsustainable and it cracks. Despite this the people behind one controversial altcoin, Tether, are trying to achieve just that.
Keeping a smaller currency constantly pegged to a larger national one, to a regional one or even to a global reserve currency, is a difficult task which many central banks around the world have failed to do in the past in times of crisis.
Now the entire Tether idea is coming under intense scrutiny by voices in the cryptocurrency community in online forums and social media where people are raising their concerns. The most recent spark for this maelstrom is an apparent unintentional admission by the Tether PR team that the USTD is backed by other cryptocurrencies and not the USD.
This means that in case of a crisis analogous to a traditional ‘run on the banks’ Tether might not be able to back up all its USTD with hard fiat cash.
In addition to Tether, the Bitfinex exchange has received much of the flak arising from this issue. It was recently revealed that Bitfinex’s Giancarlo Devasini and Philip Potter established Tether in the British Virgin Islands in 2014. The exchange was already facing harsh scrutiny over its relationship to the altcoin and its failure to adequately answer for a $30 million hacking of the Tether Treasury Wallet.
What Can Be the Repercussions?
Usually when a peg is no longer sustained despite previous promises it can have detrimental short-term effects on traders, exporters, importers, brokers or anyone else which relayed on a fixed exchange rate. Such was the case when George Soros “broke” the Bank of England in 1992, when the Swiss National Bank dropped the cap on the franc in 2015 and many other instances along the years.
In the unfortunate case of a Tether unpegging, the first to suffer the consequences will probably be cryptocurrency exchanges that use it as a proxy for fiat trading – unless they are already working on contingency plans unbeknownst to the public that is.
In the longer term it could likely lead to financial regulators clamping down harder against cryptocurrency altogether, as many already fear. The bad press that will come out of it can also shake the confidence of bitcoin investors, many of them new to the field as they were attracted to the recent rally which took BTC from $1,000 to $10,000 this year, leading to a crash.