How stable are stablecoins in the FTX crypto market contagion?

If early November’s FTX collapse was crypto’s “Lehman moment” — as more than a few pundits have suggested — will the FTX contagion now spread to stablecoins? After all, Tether (USDT), the market leader, briefly lost its United States dollar peg on Nov. 10. In normal times, this might have raised alarm bells.

But, these aren’t normal times.

In fact, in the days following FTX’s Nov. 11 bankruptcy filing, stablecoin “dominance,” i.e., the sector’s share of overall cryptocurrency market capitalization, increased to 18%, an all-time high. Bitcoin (BTC), Ether (ETH), and most altcoins appeared to be feeling the pain from crypto-exchange FTX’s implosion, but not stablecoins.

But, what awaits stablecoins in the longer term? Will they really emerge from the FTX fiasco unscathed, or is the sector due for a shake-out? Are stablecoins (still) too opaque, undercollateralized and unregulated for investors and regulators, as many insist?

The collapse of the Bahamas-based crypto-exchange FTX hit the crypto world like a tropical storm, and so it bears asking once again: How stable are stablecoins?

Is the contagion spreading?

“The cracks in the crypto eco-system are increasing, and it would not be surprising to see a significant de-pegging event” in the future, Arvin Abraham, a United Kingdom-based partner at law firm McDermott Will and Emery, told Cointelegraph. Particularly at risk are those stablecoins that use other cryptocurrencies for their asset reserves, rather than fiat currencies like the euro or U.S. dollar, he said.

“There is some evidence that FTX contagion did spread to stablecoins,” Ryan Clements, assistant professor at the University of Calgary Faculty of Law, told Cointelegraph, citing the brief USDT de-pegging event. “This shows how interconnected the crypto market is to it.”

On Nov. 10, Tether fell to $0.97 on Bitstamp and several other exchanges and to $0.93 for a few moments on Kraken. Tron’s USDD stablecoin also wobbled. Stablecoins are never supposed to fall below $1.00.

For its part, Tether blamed the depegging on crypto-exchange illiquidity. Relatively few crypto trading platforms are well capitalized, and sometimes “there is more demand for liquidity than exists on that exchange’s order books and has nothing to do with Tether’s ability to hold its peg nor the value or makeup of its reserves,” said the company.

“Tether is completely unexposed to Alameda Research or FTX,” the firm added in its Nov. 9 blog…