Deutsche Bank Warns: Tether and Other Stablecoins To Face Risk of Failure

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In a recent research note, Deutsche Bank analysts have raised concerns about the stability of the growing stablecoin market, particularly targeting Tether (USDT) and others for lacking transparency, reserve backing, and robust operational controls. The report suggests that the majority of stablecoins are at risk of failure in the future or face a fate similar to that of TerraUSD (UST) stablecoin.

Stablecoin Market Under Scrutiny

Stablecoins, designed to maintain a steady value against traditional fiat currencies like the Dollar or Euro, play a crucial role in the crypto ecosystem. They offer a hedge against market volatility and facilitate trading without exposure to wild price swings.

However, a recent study from Deutsche Bank suggests that many stablecoins lack the necessary credibility and reserve backing required for sustained success in the market. Out of 334 currency pegs examined, only 14% have survived, with analysts predicting widespread instability despite Ripple’s optimistic $3 trillion market projection by 2028.

Meanwhile, the collapse of Terraform Labs’ TerraUSD (UST) and Luna, resulting in $40 billion in cryptocurrency losses, serves as a cautionary tale highlighting the risks associated with unstable stablecoin projects.

Tether Transparency Issues

Tether (USDT), the most dominant stablecoin with a market capitalization exceeding $100 billion, has come under scrutiny for over lack of transparency. Deutsche Bank analysts pointed to Tether’s history of misleading statements about its reserve holdings, resulting in regulatory fines. 

Recent reports have also linked Tether to a significant volume of criminal activity. Concerns were also raised about Tether’s influence in the crypto derivatives market, where its role could exacerbate market losses and leverage risks.

Tether’s Response

In response to the Deutsche Bank report, Tether dismissed the claims, citing a lack of concrete evidence to support the forecasted decline of stablecoins. Tether has taken steps to address regulatory concerns by issuing quarterly attestations of its reserves following settlements with regulatory authorities.

Marion Laboure, senior strategist at Deutsche Bank Research, emphasized the similarities between stablecoins and pegged currencies, underscoring the importance of adequate reserves and issuer credibility for their sustainability.

However, the Deutsche Bank report urges caution in the stablecoin market amid regulatory uncertainties and speculative pressures.