Disruption in Tether's Value Could Be Crypto Equivalent of 'Breaking the Buck': Former CFTC Chairman

Timothy Massad compared the hypothetical occurrence to the collapse in NAV of the Reserve Primary Fund in September 2008.

AccessTimeIconJun 1, 2021 at 12:34 p.m. UTC
Updated Sep 14, 2021 at 1:04 p.m. UTC

Disruption to the value of stablecoin tether could be cataclysmic for the wider crypto market, according to Former Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad.

In an opinion piece for Bloomberg published Monday, Massad compared the hypothetical occurrence of tether's value falling below $1 with the Reserve Primary Fund "breaking the buck" in September 2008, the day after Lehman Brothers filed for bankruptcy. The net asset value (NAV) of the $65 billion fund, which held Lehman commercial paper among its assets, fell below $1 a share, causing demand for withdrawals to escalate and prompting a run on money market funds in general.

In the crypto market, a stablecoin like tether – the value of which is pegged to the U.S. dollar – is the equivalent of a money market fund and investors should be concerned about the possibility of its value also falling below $1, according to Massad.

Potential Liquidity Shock

Tether recently disclosed that only around 10% of its assets were in cash, reverse repo notes and Treasury bills as of March 31. With the majority of tether's backing not being in the form of fiat currency, Massad said holders of USDT are "on notice that they may have trouble getting back $1 for each token."

The question then is whether Tether would be able to withstand a sudden wave of withdrawals and what its effect would be on the wider crypto ecosystem. A JPMorgan research note recently stated that a loss in confidence in tether "would likely generate a severe liquidity shock" to bitcoin markets, given that 50%-60% of all BTC trades are for USDT.

Massad also referred to CoinDesk's description of tether as "a key piece of the plumbing for the roughly $2 trillion global market," given that traders "use it to quickly transfer dollar value between exchanges to capture arbitrage opportunities when a bank wire is unavailable."

A liquidity decline would cause crypto prices to fall, squeezing those with leveraged positions.

Regulation of stablecoins must be strengthened, according to Massad. He referred to a bill introduced in Congress in December that would require stablecoin issuers to follow the same regulations and conform to the same standards as banks.

"Whether it moves forward is anyone's guess," Massad's piece concluded.


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