Why Tether (USDT) is Slipping from its $1 Peg

Following the news of the liquidity crunch at FTX, Tether (USDT) has slipped from its $1 peg and currently trading below the $0.98 price level. The drop comes amidst reports that  USDT may be exposed to risks due to their past engagements with FTX, FTT and Alameda, which most reports have pointed out is the second largest issuer of Tether.

The liquidity crunch and fear of exposure has also seen leading crypto exchange crypto.com notifying its customers via email a few hours ago that they had paused deposits and withdrawals for USDT and USDC on their Solana network with immediate effect. The decision by Crypto.com added confusion and chaos to an already tense crypto market that follows the ongoing FTX’s Struggle. 

Why is Tether De-pegging?

Despite Tether coming out and assuring most of its users that the USDT was not exposed to the risk and current financial problems of Alameda and FTX, members of the cryptocurrency community continue to ask for transparency from the three institutions. With Alameda research being the second-largest issuer of Tether and Tether being the largest stablecoin by market capitalization, a permanent de-pegging of the crypto would spell doom in the industry. 

Responding to crypto community members’ concerns, Tether’s Chief Technology Officer Paolo Ardoino confirmed reports that Alameda had redeemed a large quantity of USDT in the past. However, he insisted that exposure from the current FTX and Alameda meltdown to Tether was null. He also added that despite huge withdrawals, Tether had no credit exposure; therefore, it was unlikely to be impacted.

However, these assurances have not calmed the markets or prevented the USDT from continuing to fall. Part of the reason for the current slip in the Tether peg has been due to recent stablecoin problems, including the fall of UST, which resulted in investors losing over $50 billion.

The fear of a possible contagion risk from liquidity issues at embattled crypto exchange FTX may also be causing massive USDT withdrawals, resulting in platforms such as Crypto.com temporarily stopping people from getting USDT out of the platform in fear of losing their assets. It is also possible that Alameda is currently withdrawing large amounts of USDT as it tries to balance its books and avoid liquidation, and causing the de-pegging.

USDT Daily Chart