Tether investors cash out to the tune of $10 billion as crypto crashes and stablecoin confidence falters after UST collapse

From a high of just over $83 billion in market capitalization on May 11, Tether, the largest stablecoin by market capitalization, dropped to around $73 billion in market cap as of Monday, according to CoinMarketCap.

The jump in investors cashing out does not mean that Tether is collapsing. But it does point to how the UST fiasco was a reputational hit for the entire category of so-called stablecoins.

The demise of Terra two weeks ago shocked the crypto world and led to billions in losses for investors. UST was meant to be tied to the U.S. dollar, but after it lost its peg, it triggered a broad selloff that sent the algorithmic stablecoin and Luna, its sister cryptocurrency, down to almost nothing.

In the aftermath, Tether also briefly lost its peg to the U.S. dollar, dropping to 95 cents on May 12, but quickly regained it. 

However, Tether is a different kind of stablecoin. It differs from an algorithmic stablecoin like UST because its tokens are supposedly backed by reserves of non-crypto assets, like bonds and cash.

Some people have previously cast doubt about what kinds of assets Tether holds to back up the number of tokens they have issued, and whether it is enough to justify its peg to the dollar. In October, Tether said it would pay $41 million to settle allegations by the Commodity Futures Trading Commission that Tether did hold $1 in reserve for every token it issued, as it had claimed previously. 

Last week, Tether released its quarterly assurance by independent accountants MHA Cayman that showed it reduced the amount of commercial paper it holds, a riskier type of asset issued by corporations, and increased the number of U.S. treasury bills it holds by 13%.

“Tether has maintained its stability through multiple black swan events and highly volatile market conditions and, even in its darkest days, Tether has never once failed to honor a redemption request from any of its verified customers,” Tether’s Chief Technology Officer Paolo Ardoino said in a press release on May 19 announcing changes to Tether’s reserves. 

A spokesperson for Tether said in a statement to Fortune that the company did not struggle to process the $10 billion in redemptions.

“Since May 11th Tether has successfully processed $10 billion in USDT redemptions – a feat it was able to do effortlessly, and which was nowhere near its capacity. The redemption request was honored in full to all verified customers and the USDT peg was respected 1-1 with USD. The size and success of such redemptions amidst unprecedented market volatility show the strength of Tether’s reserves, and the ability of Tether to process additional redemptions supports its position as the most resilient and solid stablecoin in the industry.”

Not all stablecoins are seeing major cash outs from investors. Other popular stablecoins backed by non-crypto assets have seen a boost in interest from investors. USD Coin, which also holds reserves to back its tokens, saw an increase of about $4.9 billion poured into the coin since May 11. The Binance USD stablecoin (BUSD) also saw its market cap increase about $1.2 billion, according to CoinMarketCap.

In light of the TerraUSD collapse U.S. regulators have also been increasingly scrutinizing stablecoins. Around the time UST was just starting to collapse on May 10, Treasury Secretary Janet Yellen said it would be “highly appropriate” for stablecoin regulation to be put in place before the end of the year. 
Abroad, the U.K. is already moving forward with regulation that would regulate stablecoins used as a “means of payment” and bring some of them into compliance with existing regulations. 

Update, May 24, 2022: This article has been updated with a comment from Tether.