Tether: The least transparent or customer-centric Stablecoin

Stablecoins

Blockchain technology and cryptocurrency set the stage for massive disruption in banking and finance by providing an efficient and improved payments system which is said to be secure, transparent and fast with decentralization being the forefront – the absence of middlemen or regulatory authorities in the network.

However, Bitcoin and other cryptocurrencies are digital currencies with their values being based on, mostly, speculation. This means that although Bitcoin and most other cryptocurrencies are created for more secure transactions, their values highly fluctuate on a daily basis. You could amass a fortune overnight only to lose it weeks later. This is a cause for concern among hodlers as it makes cryptocurrencies like Bitcoin and other altcoins unreliable, especially as a mode of payment.

In the last couple of years, stablecoins have been increasingly gaining attention in the crypto-sphere because of their relatively fixed values as a result of being pegged to assets such as the U.S. dollar and gold.

Stablecoins are cryptocurrencies that are collateralized to the value of an underlying asset. This means that the digital coin has many of the benefits of being a cryptocurrency, like transparency, security, privacy along with having the relative stability of fiat money.

Stablecoins have been the subject of many a debate, with one side arguing that the extreme volatility of Bitcoin and some other cryptocurrencies make them extremely unreliable, especially for merchants and businesses. On the other hand, you have the argument that stablecoins are the modern reinvention of the banknote. Further, stablecoins like Tether don’t really solve for currency risk as much as they solve for liquidity.

Tether (USDT)

Tether or USDT is a cryptocurrency – a stablecoin to be more specific – whose value is pegged to the U.S. dollar, where one USDT equals one U.S. dollar in value. The circulation of USDT is equal to the reserves of USD that the Tether organization has in its bank account.

The Mastercoin protocol’s white paper (later renamed to Omni Foundation) was published in January 2012 by J. R. Willet and formed the technological foundation for Tether. One of the founders of Mastercoin, Brock Pierce, would go on to become one of the co-founders of Tether along with Craig Sellars, who served as the CTO at Mastercoin.

Tether first started out as “RealCoin” and was first announced in July 2014 by co-founders Brock Pierce, Reeve Collins and Craig Sellars in Santa Monica. The first coins were issued in October 2014 on the Bitcoin blockchain, using the Omni-layer protocol. In November 2014, an announcement was made by Reeve Collins that the project was being renamed to Tether.

Tether was created because a lot of exchanges were having issues dealing with U.S. dollars. Dealing with U.S. dollars comes with a plethora of bottlenecks like compliance issues, legal issues, KYC and anti-money laundering policies. For that reason, exchanges keep their customer deposits in the U.S. dollar Tether and price their coins in USDT.

The main use case of Tether is that it is mainly used by cryptocurrency exchanges because of being pegged to the U.S. dollar, as these exchanges don’t want to deal with fiat money or actual U.S. dollars due to the regulatory issues related to the United States’ jurisdiction.

The idea behind using Tether is that the users on those cryptocurrency exchanges who trade and pair with USDT, and want to exit the crypto-market, don’t have to transfer their cryptocurrency out of these exchanges. Instead, they can exchange their cryptocurrency for USDT and hopefully redeem their cryptocurrency for the appropriate amount in USD in the future.

According to the Tether website, the platform “currently holds 100% of actual fiat currency and it is in their reserve account.” When people deposit fiat money into their accounts, the company will issue out the Tethers and the currency can always be redeemed for USD in the future.

Issues of Transparency

The real issues with Tether start from the platform’s claim of being absolutely transparent with unaudited details of them having over 2 billion dollars worth of USD in their accounts (along with 14 million dollars worth of EUR). What they want to say is that they have the specified amount of money and that users can redeem their USDT for USD in the future.

A lot of investors and participants in the crypto-sphere have voiced their concerns over the use of Tether, and rightfully so. What if Tether is not holding all that money their reserve account?

In terms of legality, Tether is not a legal tender currency or a financial instrument. The ownership of Tether has no contractual rights, other legal claims, or guarantees against losses. Tether Limited is not a bank and is not required to (and does not) hold its reserves at the Federal Reserve. Tether tokens are not a legal tender currency and are not covered by deposit insurance.

If a user violates any of the terms and conditions stated on their website, they can refuse to issue USD to that user even if he or she has deposited any USDT onto their platform. Tether Limited can basically reserve the right to prevent users from redeeming their Tether tokens, according to their exceptionally worded terms of service on their website.

The Bitfinex Conundrum

According to leaked Paradise Papers; in 2014, an offshore law firm helped the operators of cryptocurrency exchange, Bitfinex (one of the largest Bitcoin exchanges in the world) – Phil Potter and Giancarlo Devasini – incorporate Tether in the British Virgin Islands. A lot of critics and users in online communities allege that Bitfinex and Tether Limited are one single entity.

Tether is said to be pegged to USD and it enjoyed relative amounts of stability up until April 2017, when Tether hit its biggest FUD (Fear, Uncertainty, Doubt) wave. Tether experienced an 8% drop in value to 92 cents in relation to USD. The reason for this can be attributed to the fact that Bitfinex had its accounts frozen. This happened because Tether had been processing USD transactions through Taiwanese banks, which then sent the money through Wells Fargo to allow for the funds to be moved out of Taiwan. Tether, along with Bitfinex slapped a lawsuit on Wells Fargo, but the case was withdrawn a week later.

The drop in Tether’s value created a lot of uncertainty as to whether the accounts having USD held by Tether were closed and if that money could be withdrawn. As a result, a lot of people ended up selling their Tether for really cheap. When the values of cryptocurrencies started dropping, a lot of people wanted to use Tether, thereby sending its value up. Fear, uncertainty, and doubt (month-on-month) in regards to Tether have always been related to the solvency of Tether and its terms of service.

Tether & Friedman LLP

Many people in the crypto community wonder whether Tether truly maintains adequate reserves to redeem all the Tether tokens in existence. Following rising concerns among members of the crypto community, accounting and advisory services firm, Friedman LLP, was scheduled to conduct an audit of Tether Limited. In January 2018, it was announced that Tether had ended its relationship with Friedman LLP. Doubts were raised by members of the online community that Friedman had even dropped Bitfinex from its list of clients on its website.

With no oversight or regulation of the company, Tether Limited can essentially issue or mint coins as per its convenience. This is very similar to a centralized bank where they could just print money as and when the need arises. There is no actual transparency or audit issued to the creation of USDT. There has been no audit issued or record of what goes on within Tether Limited, right from its inception, and that is the biggest problem with the digital currency.

Tether and Bitcoin’s Price Rise

According to a document published in June 2018 by John M. Griffin, titled, “Is Bitcoin really Un-Tethered?”, the value of Bitcoin surged in 2017 through the use of Tether. In the document, findings showed that 87 hours of trading Tether might have been responsible for a 50% rise in the price of Bitcoin. The paper says that Bitfinex pushed (increased the supply of) Tether immediately after a slump in its price. Pushing of Tether is mainly present in two instances; after periods of negative returns, and periods following the issue of more tokens.

In March 2019, Tether Limited issued 300 million new tokens in one day. Co-incidentally (or not), this had a massive impact on the value of Bitcoin. Whenever there has been a pump in the minting of USDT, the price of Bitcoin has also surged.

In April 2019, New York’s Attorney General, Letitia James, stated that Bitfinex used Tether to cover up losses of about 850 million USD of client and corporate funds. Until recently, Tether claimed that its tokens were 100% backed by cash reserves, with each token being pegged at 1:1 ratio to the U.S. dollar. Recently, in 2019, Tether made changes (added) to its original statement to include loans being made to its affiliated companies. NYAG, Letitia James, alleged that “Bitfinex treated Tether’s cash reserves as its own corporate slush fund” and that it was “hiding its massive undisclosed losses and inability to handle customer withdrawals.”

This caused Bitcoin’s price to drop momentarily before surging back up again, as a result of people pulling their funds out of Tether and investing it in Bitcoin. Tether’s value dropped to 90 cents the same day.

Conclusion

As a stablecoin, Tether’s value must always be consistent at 1 USD per coin and should never cross or fall below that specified amount. There’s a fear that Tether will crash at some point, and be removed from the market altogether. This can be attributed to the lack of transparency and the frequency of FUD created by Tether. Furthermore, the cryptocurrency space is only poised for more regulation in the future, and Tether will have to be audited at some point.

Tether has been the subject of a lot of controversies right from its origins and affiliations with Bitfinex, to its constant issues related to a lack of transparency and unaudited accounts. Furthermore, fluctuating prices don’t paint a very pretty picture for something that positions itself as a stablecoin, the key word being ‘STABLE’.

What does the future hold for Tether? Only time will tell.

Want to share your thoughts on this?