Barclays Warns Even Fully Collateralized Stablecoins May Be Prone to Downwards Spiral

There’s a wide variety of horses in the world of stablecoins, and more than one type might be prone to sudden runs.

While much attention has been focused on algorithmic stablecoins in the wake of Terra’s spectacular collapse last week, fully collateralized coins like Tether might not prove to be much of a different animal.

That’s the warning from Joe Abate, strategist at Barclays Plc, who says that while questions have been swirling over the assets backing the Tether stablecoin, the token might still be prone to a sudden dearth of liquidity and subsequent price spiral even assuming it’s fully collateralized.

Part of the risk stems from Tether’s less-talked about bulwarks against sudden outflows. While the coin is supposed to hold financial assets like cash reserves and bonds to back up its one-to-one peg with the US dollar, it also controls redemptions of the cryptocurrency with things like fees and minimum size requirements for direct redemptions into fiat.

If you want to convert your USDT into dollars with Tether directly, you’ll need to set up an account, exchange at least $100,000 worth of tokens and pay a fee of 0.1% of the withdrawal amount.

Of course, if you can’t meet those requirements or want to convert to fiat more quickly, you can also exchange your USDT in the secondary market. But there you might not get the best price.

Jitters over the safety of stablecoins in recent days have sent USDT dipping below its ostensible one-for-one peg to the US dollar to trade at just 95 cents on May 12. Still, some investors were clearly willing to take a 5% haircut on the value of their stablecoin in exchange for getting out early.