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Tether’s USDT, the preeminent stablecoin in terms of market capitalization, has seen a notable departure from its $1 parity following the company’s recent declaration of freezing wallets in coordination with law enforcement agencies, including the DOJ, FBI, and Secret Service.

Data from CoinMarketCap indicates that USDT experienced a dip to $0.985 on prominent exchanges like Binance, Coinbase, and Kraken. This deviation from the dollar peg is a significant concern for a stablecoin designed to mirror the value of fiat currencies like the U.S. dollar. Temporary fluctuations in the peg can occur due to various reasons, with the current depeg seemingly linked to diminishing confidence in Tether’s recent actions.

USDT’s Departure from Peg Linked to Law Enforcement Collaboration

Tether disclosed in a December 15 letter to Senator Cynthia M. Lummis and Congressman J. French Hill that it had complied with requests from government agencies to freeze wallets containing over $435 million in USDT tokens throughout 2023. This level of cooperation has raised questions about Tether’s operational independence.

“Tether is grateful for the opportunity to address the concerns raised by U.S. lawmakers, and we are committed to continuing Tether’s close work with law enforcement in the U.S. and globally,” said Tether CEO Paolo Ardoino. “Tether seeks to be a world class partner to the U.S. as we continue to assist law enforcement and expand dollar hegemony globally.”

Despite Tether’s emphasis on collaborating to combat illegal financial dealings, its role as a neutral stablecoin issuer is now under scrutiny following the substantial wallet freeze.

The news of the freeze has led to widespread surprise and skepticism within the cryptocurrency community. Glassnode’s lead on-chain analyst Checkmate reacted with a tweet, “Tether is the CBDC. Truthers in shambles,” while Cardano founder Charles Hoskinson expressed his astonishment on social media platform X.

Growing Concerns Over Tether’s Expansion

The rapid increase in Tether’s supply in 2023, which saw its market cap exceed $90 billion, growing by over 70%, has also intensified scrutiny. The issuer minted approximately $23 billion in new USDT this year, a figure nearly matching the total market cap of its competitor USDC.

While Tether presents this surge as evidence of strong demand, critics are wary, with some suspecting the minting of unbacked USDT to artificially boost Bitcoin prices and avert dollar redemptions, potentially leading to a market crash if exchanges like Bitfinex or Binance falter.

The combination of aggressive supply growth and compliance with governmental authorities appears to be undermining confidence in Tether, as evidenced by the recent depegging on exchanges.

The primary concern now is the potential ripple effect of USDT’s instability on the wider cryptocurrency market, which heavily depends on USDT for liquidity. This situation may lead to rival stablecoins like USDC gaining traction, particularly if USDT’s pegging issues persist.

In conclusion, Tether’s dominance is being challenged amidst growing doubts over its future, and the forthcoming days will be crucial in determining whether USDT can reestablish its peg to the dollar.