May 13, 2022 - Economy & Business

The run on Tether recalls the 2008 money market scare

Illustration of a person standing on a downward trend line, looking down.

Illustration: Shoshana Gordon/Axios

It's not a bank run — but it's still a run. What happened to Tether (USDT) on Wednesday night is very similar to what happened to the Reserve Fund in 2008 — an event that worried regulators so much they stepped in with an emergency bailout of all money-market funds.

Why it matters: If a $64 billion money-market fund posed a systemic risk in 2008, it stands to reason that an $81 billion stablecoin poses a systemic risk in 2022.

The big picture: Stablecoins like Tether are a bit like money market mutual funds, in that, in principle, they both represent fractional ownership of a pool of safe assets.

  • If there are 64 billion Tethers, and Tether owns $64 billion in Treasury bonds and other money-like instruments, then Tether can credibly promise to pay $1 in cash to anybody redeeming one token — just like money-market mutual funds promised to pay $1 in cash to anybody redeeming one share.
  • The catch: If a lot of people all try to redeem at the same time, then Tether (or the mutual fund) has to dump a lot of assets in a very short timeframe. Depending on the liquidity of the market in those assets, that might cause their price to fall significantly below its par value — or there might be no bid for them at all.
  • Regulators worry that having safe paper trade at well below par would undermine confidence in the financial system.

Between the lines: In the case of Tether, there are two further problems.

  1. If the USDT selling happens in the middle of the U.S. night, then there aren't any open markets where Tether can sell its assets to raise cash. But crypto markets, by their nature, are open 24/7. That disconnect can cause prices to fall sharply when U.S. markets are closed.
  2. No one's entirely sure what Tether owns, where it's held or whether it even covers the total amount of USDT in circulation. If there aren't enough assets to go round, then there's a strong incentive to get out first, at par, before the money runs out. In that sense, a run on Tether might resemble a traditional bank run.

The bottom line: Tether is largely unregulated. But if it's forced to sell tens of billions of dollars' worth of securities in a short amount of time, that could send massive repercussions through global money markets.

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