There’s a lot going on in the crypto world right now, and I’m not going to try to comment on all of it. One thing that I’ve seen talked about, though, is that “tether is off its peg”, and that’s what I wanted to talk about.

There have always been worries about Tether’s assets, with a fairly constant stream of people saying that there will be a tether run any day now. But something that might end up being more important is also much more prosaic.

About a month ago tether (USDT) lost its $1.00USD peg in a pretty serious way, but has since come back up and has been hovering around $0.999USD. I personally, as well as the rest of the market I believe, learned during this incident that Tether (the company) charges a 10bps redemption fee when turning tethers into dollars, and it seems like no coincidence that tether now trades at parity minus this fee.

The actual peg

This is a nice bit of marketing by Tether to say that tethers are pegged “1:1” to dollars, with an asterisk of a 10bps redemption fee. This is how the market treated them until a month ago.

I think a better interpretation is that tethers are pegged to 99.9 cents, with a 10bps creation fee. I think this is how the market treats them now. In some ways this is more charitable, because under this interpretation Tether has been more-or-less correctly trading at its peg during a tumultuous time.

10bps redemption doesn’t seem so bad, since you imagine that people who want to redeem probably want to do so pretty badly. But a 10bps creation fee seems a lot harder to sell: why would anyone pay 10bps to create tethers when they can be bought in other ways for a lower fee? Is onramping your dollars via Tether (the company) so attractive that you will pay 10bps for it?

What happens now

I wonder if this could spell issues for tether in a way that the concerns about their assets has not. In particular I am guessing that we will continue to see tether redemptions since some market participants want to do that, but we won’t see any tether creations unless tether trades *above its peg*. You can imagine a stablecoin trading above its peg in the past, but now that there are competing stablecoins I think it’s far less likely.

So I think that tether will continue to see outflows, not necessarily because of a “run” on tether, but just because they charge this fee on inflows which will tend to make inflows and outflows unbalanced.

They got away with this fee for a while, and I suppose props to them, but now that the stablecoin market is competitive I would expect this fee to get competed away (unlikely in my view), or for Tether to continue to lose market share (more likely I believe).