The stablecoin Tether (USDT) falls below $ 1 peg

Cryptocurrency firm Tether has reduced the amount of commercial paper in its reserves.

Jakub Porzycki | Nurphoto | Getty Images

bindthe largest stablecoin in the world broke below its $ 1 peg on Thursday amid panic in the cryptocurrency market.

The token dropped to a low of 98 cents around 3:30 am ET, according to data from CoinGecko. It is meant to be anchored one by one at American dollar.

Tether’s decline came after terraUSD, a different stablecoin, dropped below 30 cents Wednesday

Vijay Ayyar, head of the international cryptocurrency exchange Luno, said the move was likely “speculation-driven fear” stemming from the fallout from the UST crash.

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

Stablecoins are a bit like the bank accounts of the cryptocurrency world, designed to serve as a solid store of value that investors can turn to in times of market volatility. Tether and USDC, the two largest stablecoins, should be backed by a sufficient amount of money held in a reserve to ensure depositors can receive their dollars when they want to make a withdrawal.

But there have long been doubts that tether actually has enough resources to back up the expected $ 1 peg. Tether, the company of the same name, had previously claimed that all of its tokens were guaranteed one-to-one by dollars held in a reserve.

However, after a settlement With the New York Attorney General, it was revealed that Tether was relying on a number of other assets, including commercial paper, a form of short-term unsecured debt, to back its token. Tether has since reduced the amount of commercial paper in its reserves and says it plans to lower its holdings further over time.

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

About 300 million tokens have been withdrawn in the past 24 hours “without breaking a sweat,” he tweeted.

Bitcoin and other cryptocurrencies took another dip on Thursday as investors reacted to fears of rising inflation and deteriorating economic outlook, as well as decoupling the bond from the dollar.