Tether “Monopoly” Won’t Save Stablecoins From Collapse: Deutsche Bank
Deutsche Bank says Tether, the dominant stablecoin, is particularly vulnerable due to its history of transparency issues. | Credit: Jakub Porzycki/NurPhoto via Getty Images
Key Takeaways
- Deutsche Bank analysts predict most stablecoins will fail based on historical analysis of currency pegs.
- Stablecoins lack the credibility, reserves, and controlled environment needed for long-term success, the analysts say.
- Tether, the dominant stablecoin, is particularly vulnerable due to its history of transparency issues.
Most stablecoins will fail. That’s the verdict of Deutsche Bank analysts, based on a study of 334 currency pegs over the last 224 years.
Despite its market dominance and significant trading volume, Tether is not immune to historical challenges and collapses similar to other currency pegs.
Most Stablecoins Will Fail Based on Historical Analysis
Deutsche Bank Research analysts reviewed 334 currency pegs dating back to 1800. As a result, they discovered that only 14% have persisted over time. From this historical analysis, they predict a grim future for most stablecoins. They suggest that while a few may endure, the majority are expected to fail.
Stablecoins strive to maintain parity with fiat currencies like the dollar. In doing so, they a vital role in cryptocurrency trading by offering a stable alternative during the market’s inherent volatility. For instance, Tether’s USDT token, which has a market value exceeding $100 billion, surpasses even Bitcoin in daily trading volume.
The collapse of Terraform Lab’s TerraUSD and its companion token Luna, which wiped about $40 billion from the crypto market, shows potential pitfalls. These tokens were interdependent for value stability, highlighting the vulnerabilities inherent in such designs, called algorithmic stablecoins.
Deutsche Bank analysts said that historically, the few pegged currencies that have remained stable managed this due to three key factors. These were
- Credibility.
- Substantial reserves.
- Operation within tightly controlled systems.
These attributes, the analysts claim, are often missing in many stablecoins today. Tether particular concerns the researchers. USDT holds what the paper calls a near-monopoly in the stablecoin market, a position fraught with speculation and a lack of transparency.
Therefore, despite its market dominance and significant trading volume, Tether is not immune to the historical challenges and collapses similar to other currency pegs.
Grim Future for Stablecoins, Tether Disputes Findings
Further compounding these worries are historical issues with Tether. Perhaps most notable are its misleading claims about reserve holdings. As a result, the US Commodity Futures Trading Commission (CFTC), fined Tether $41 million. The research team also pointed out the significant role Tether plays in the crypto derivatives market, where its centrality could potentially amplify losses and make the fallout from leveraged trades worse.
Tether has been issuing quarterly attestations of its reserves since it reached settlements with the CFTC and New York state.
The researchers said: “The 30% de-peg rate among some stablecoins is therefore hardly surprising, and many more defunct stablecoins are hard to account for.”
In response to the report, Tether criticized its findings, saying:
“The report ‘lacks clarity and substantial evidence, relying on vague assertions rather than rigorous analysis.’ While it attempts to forecast the decline of stablecoins, it fails to provide concrete data to support its claims.”
Challenges Similar to Historical Currency Pegs
The researchers explained their focus on currency pegs, noting their significant parallels despite being implemented for different purposes—a government for a country’s economy versus a private company for profit operating globally.
Marion Laboure, senior strategist at Deutsche Bank Research and one of the report’s authors explained :
“We chose to compare stablecoins to peg currencies because historically their similarities make them a close proxy as both are pegged currencies. Both require ample reserves and credibility from issuers, are exposed to speculative forces, and the majority of both stablecoins and historical currency pegs track the USD.”
According to the researchers’ database, 49% of fixed currencies failed, with those that failed or were discontinued having a median lifespan of between eight to 10 years. Laboure highlighted that there were valuable lessons for those monitoring stablecoins from the currencies that kept their pegs.
She concluded:
“Macroeconomic factors are key to determining a peg’s sustainability. Issues around governance and speculative forces could also indicate when there’s a possibility of de-pegging.”
