Tether and other stablecoins are left with two options. The first is to hold a mix of cash and various (supposedly) liquid securities. Many stablecoins, however, do not report their reserves at all, and those that do, like Tether, do not provide any sort of external verification of their holdings. In 2017, Tether claimed that the owners of its coins had no contractual rights, legal rights, or guarantees to actually exchange them for dollars. A May 2021 company report showed that only about 3% of its reserves are backed by cash; around 50% is backed by promissory notes.
The report was the result of an agreement between the company and the New York attorney general, whose office was investigating whether Tether helped Bitfinex, owner south africa phone number list of the company that in turn owns Tether, to cover losses of 800 million dollars). Since the beginning of June, investors and regulators have been trying to find Tether's reserves, which appear to be in a number of banks in the Bahamas. The second option is to use an algorithm to manage the supply of the coin. Terra (not to be confused with Tether) is the most famous example of an “algorithmic stablecoin”. If too many people sold Terra at the same time, thus increasing its supply and pushing the price of a coin below $1, the algorithm was supposed to instantly exchange a Terra for the Luna floating cryptocurrency. This would reduce the circulating Terra, thus again raising the price. If the price of Terra was too high, the reverse trade would automatically be triggered.
The Terra collapse in May had both an immediate and a structural cause. The immediate cause was a bank run. Terra does not have its own reserves, but it does have rights to reserves held by an entity called Anchor, which is essentially trying to be a bank for cryptocurrencies. He held Terra deposits that he lent to others, and paid and received interest on Terra, claiming that his depositors would receive up to 20% per annum. On the afternoon of May 7, a small group of "various entities in good financial standing» working in part through the Celsius Network withdrew $500 million worth of various cryptocurrencies from Anchor, leaving it with about $35 million in reserves to cover $8.7 billion in deposits.