The world’s biggest stablecoin has dropped below its $1 peg
Crypto firm Tether has been reducing the amount of commercial paper in its reserves.

Tether, World's largest stable coin has dropped below its $1 peg

Devinda Dissanayake

Tether, the world's largest stablecoin, Known as the crypto world's digital dollar, fell below its $1 peg on Thursday amid a crypto market panic.

At around 3:15 a.m. ET, the token dropped to as low as 95 cents on some exchanges. It is intended to be pegged 1:1 to the US dollar.

Tether's drop came after TerraUSD, another stablecoin, fell below 30 cents on Wednesday. It has raised concerns about market contagion.

The move by tether was likely "speculation-driven fear," according to Vijay Ayyar, head of international at crypto exchange Luna, as a result of the fallout from UST's plunge.

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

Stablecoins are the crypto equivalent of bank accounts, designed to provide investors with a safe haven of value during times of market volatility. Tether and USDC, the two most popular stablecoins, are intended to be backed by a sufficient amount of money held in reserve to ensure depositors can withdraw their dollars.

However, there have long been doubts about tether's ability to back up its intended $1 peg. Tether, the same-named company, previously stated that all of its tokens were backed 1-to-1 by dollars held in reserve.

However, following a settlement with the New York attorney general, it was revealed that Tether used a variety of other assets to back its token, including commercial paper, a type of short-term, unsecured debt. Tether has since reduced the amount of commercial paper in its reserves and says it will continue to do so in the future.

Tether Chief Technology Officer Paolo Ardoino insisted earlier Thursday that tether holders would always receive $1 when redeeming their tokens.

He tweeted that 300 million tether tokens were withdrawn in the last 24 hours "without breaking a sweat."

According to Nicholas Bonnet, a quant at crypto broker Aplo, some traders are taking advantage of the tether drop through arbitrage plays, which involve buying the token for less than $1 and then redeeming it for a dollar.

"Liquidity pools allowing you to swap tether for other things were almost empty this morning," he said.

"People seeing that tether was trading below the peg and having no quick way to exit tether may have created a spiral effect of short-term panic."

On Thursday, bitcoin and other cryptocurrencies fell further as investors reacted to concerns about rising inflation and a deteriorating economic outlook, as well as tether.