Stablecoins shouldn't be the instruments that the public sells in a panic. They're supposed to be the opposite; the life vest that people grab on to. Competing stablecoins USD Coin and Binance USD performed as one would have expected, neither experienced a barrage of redemptions during these two episodes. Tether could do more to ensure the next time the crypto economy undergoes a shock, tether stays steady.
1) Tether needs to get rid of its corporate bonds, funds and "other investments."
A stablecoin's number one job is to be steady, and that demands holding safe assets like cash and Treasury bills. But Tether's balance sheet – including its commercial paper, corporate bonds and funds, secured loans and "other investments" – suggest it operates more like a hedge fund than a stablecoin.
Tether has been slowly addressing this problem. It spent much of 2022 replacing its massive $30 billion horde of commercial paper with Treasury bills, and now holds zero. It needs to sell all of its risky assets and move to a 100% safe-asset allocation. Next time a crisis hits, users will be less likely to unload their USDT.
2) Tether needs to cancel its 0.1% redemption/withdrawal fee.
The price of Tether tends to fluctuate randomly, unlike competitors – this instability hurts the company's reputation. Tether's 0.1% redemption fee is causing the issue. It may not sound like much, but the 0.1% fee leads to the price of USDT weaving randomly in a wide band around $1. That's because it adds to arbitrageurs' costs who are meant to trade to keep the token pegged. Remove the fee, remove the costs associated with arbitraging the token to a $1 peg.
3) Tether needs to open redemptions up to more people by removing its $100,000 floor.
Stablecoin issuers like Circle and Paxos allow people to withdraw or deposit any amount, while Tether's places a $100,000 limit on redemptions anywhere the token can be withdrawn for cash. This floor creates perverse trading patterns on exchanges like Binance and Kraken, which further exacerbate fears about Tether.
In short, Tether's $100,000 minimum pushes the majority of USDT users who want to sell en-masse on exchanges. If Tether removed its $100,000 minimum and allowed everyone to redeem at source – they could simply send their 100 USDT directly to the company and get $100. This would relieve price pressure on exchanges and bring an end to Tether's crazy on-exchange price movements.
4) Tether needs to be more transparent.
Lack of transparency is an old criticism of Tether, but it deserves to be re-enunciated. Tether falls short of the current standard for stablecoin transparency. This lack of transparency helps create a trust gap that leads to Tether selloffs during market panics.
– J.P. Koning, a CoinDesk columnist and author of the Moneyness blog
