According to user reports circulating on social media on January 10th, cryptocurrency exchange Crypto.com plans to withdraw Tether (USDT) from circulation in Canada, starting on January 31st. The exchange has told its customers that if they do not withdraw or convert their USDT assets within the deadline, their Tether will be automatically converted to USD currency (USDC). You may incur recovery fees if USDT deposits are made from external wallets after this suspension period, and recovery of funds may not be possible in some cases, it warns customers.
Not all cryptocurrencies are volatile. In fact, some of them are specifically designed to keep a fixed price: stablecoins. In an industry where coins and tokens can crash overnight, there is massive demand for coins that combine the benefits of blockchain with the ability to track more stable value.
crypto dot com to remove USDT pic.twitter.com/3KD0gJlMkE
— chortly (@charlesstrussel) January 10, 2023
In August, Crypto.com announced that the Ontario Securities Commission had accepted the company’s pre-registration undertaking for its Canadian operations. As part of regulatory requirements, cryptocurrency exchanges operating in the Canadian province of Ontario are prohibited from listing digital assets banned by the Ontario Securities Commission (OSC), which includes USDT. Similarly, Coinsquare, a cryptocurrency exchange regulated by the Investment Industry Regulatory Organization of Canada (IIROC), does not currently list USDT among its assets available for trading.
Tether is a cryptocurrency, of the stablecoin type, issued by the company Tether Limited. Tether tokens are assets that move across the blockchain as easily as other digital currencies, but are linked to real-world currencies on a 1-to-1 basis.
Focus on stable currency
A stablecoin is a cryptocurrency pegged to another asset, such as fiat currencies or precious metals. Stablecoins are designed to maintain a relatively stable price so that users can avoid the risks of volatility common in crypto markets. There are three types of stablecoins:
- backed by fiat currencies;
- backed by cryptocurrencies;
- and algorithms.
Fiat-backed stablecoins, such as BUSD, are pegged to traditional fiat currencies. They maintain this connection by holding reserves of fiat currency that can be exchanged for stable currency. Cryptocurrency-backed stablecoins (like DAI) over-collateralize their tokens to account for cryptocurrency price volatility, and algorithmic stablecoins control supply without the need for reserves.
Because of their practical use and large market capitalization, regulators have begun to pay more attention to stablecoins. Some governments even create their own to maintain control of the currency.
Stable coins support fiat currency
A fiat-backed stablecoin holds fiat currency, such as the US dollar or the British pound, in reserve. For example, all Tether tokens are linked 1-to-1 to a corresponding fiat currency (eg 1 USD₮ = 1 USD) and are backed 100% by Tether reserves. Users can then convert fiat currencies to fiat currencies and vice versa at a fixed rate. If the token price deviates from the fiat base currency, arbitrageurs will quickly return the price to the fixed rate.
Another stablecoin BUSD trades above one dollar for example. Arbitrageurs convert US dollars into BUSD and sell them at a higher price in the market. This increases the BUSD’s supply to sell and brings the price back to one dollar. If BUSD trades below one dollar, arbitrageurs buy it and convert it to USD. This increases the demand for BUSD and pushes its price up to one dollar.
Cryptocurrency-backed stablecoins work similarly to fiat-backed stablecoins. But instead of using dollars or another currency as a reserve, cryptocurrencies are used as collateral. Since the cryptocurrency market is highly volatile, cryptocurrency-backed stablecoins typically over-collateralize reserves to protect against price fluctuations.
Cryptocurrency-backed stablecoins use smart contracts to manage slash and burn. This makes the process more reliable as users can independently verify contracts. However, some stablecoins are run by decentralized autonomous organizations (DAOs), where the community can vote on changes to the project. In this case, you will have to get involved or simply trust the DAO to make the best decisions.
Let `s Take An Example. To create $100 from a fixed USD DAI, you will need to secure $150 of cryptocurrency with 1.5x collateral. Once you have your DAI, you can use it however you like. You can transfer it, invest with it or just keep it. If you want your deposit back, you will have to repay 100 DAI. However, if your collateral falls below a certain collateral or loan-to-value ratio, it will be liquidated.
When the stablecoin is below $1, incentives are created for holders to surrender their stablecoin in exchange for collateral. When the stablecoin is above $1, users are incentivized to create the token, which increases its supply and lowers the price. DAI is one example, but all stablecoins rely on a mix of game theory and on-chain algorithms to drive price stability.
Algorithmic stablecoins take a different approach by removing the need for reserves. Instead, algorithms and smart contracts manage the supply of stock tokens. This model is much rarer than stablecoins backed by cryptocurrencies or fiat currencies and more difficult to manage.
Essentially, an algorithmic stablecoin system will reduce the supply of tokens if the price falls below the fiat currency it tracks. This can be done through block placement, burning or purchases. If the price exceeds the value of the fiat currency, new tokens come into circulation to reduce the value of the stable currency.
Tether tokens are called stablecoins because they offer price stability since they are tied to fiat currency. Thus they offer traders, traders and funds a low-volatility solution to exit their market positions.
All Tether tokens are linked 1-to-1 to a corresponding fiat currency (eg 1 USD₮ = 1 USD) and are backed 100% by Tether reserves. As a company, Tether Limited publishes a current reserve asset register. Historically, the company claimed that each currency was backed by a US dollar, but as of March 14, 2019, it changed its support to include loans to related companies.
Crypto.com, the cryptocurrency platform, announced on October 15 last year that it had signed a pre-registration agreement with the Ontario Securities Commission (OSC) in Canada.
This signature, recognized by the OSC and all Canadian jurisdictions through a joint initiative of the Canadian Securities Administrators (CSA), makes Crypto.com the first global cryptocurrency platform currently operating in compliance with this regulatory commitment in Canada .
Under the terms of the agreement, Crypto.com agrees to work with the OSC to provide a suite of products and services in full compliance with Canadian regulations. This commitment is based on the existing regulation of Crypto.com in Canada under the Financial Transactions and Reports Analysis Center of Canada (FINTRAC).
In making its decision, the OSC never explained its reasons for banning Tether. However, a document made public on February 17, 2021 shows that the only US dollars held by Tether, ostensibly as collateral for the approximately 442 million tethers in circulation, are approximately $61 million deposited at the Bank of Montreal. Meanwhile, experts have repeatedly questioned the authenticity of Tether’s backups and audits.
Currently, all potential cryptocurrency exchanges must register with IROC if they want to do business in Canada. Exchanges such as Binance, Bybit and Huobi have faced problems with the OSC in the past regarding their regulatory status. In response to this development, a Tether spokesperson commented:
Canadian securities regulators and their member securities commissions began issuing guidance in 2021 regarding requirements for regulated exchanges on the issue of support for stable currencies, at the time particularly linked to the USDt. The topic has just resurfaced following the need for Crypto.com to comply with Canadian regulatory requirements.
The spokesperson further explained that while Canada is not a primary market for Tether, the company will ensure that its products can be used across borders. That being said, we can see Canada moving more aggressively in crypto regulation than most other countries. We believe in encouraging a more fair, open and forward-looking approach to financial access.
What is your opinion on this topic?