Why is Tether a Cryptocurrency Draped in Mystery?

Feb 1, 2019

One of the most actively traded and popular cryptocurrencies, Tether (or USDT), has been on every crypto investor’s mind, as it claims that each of its coins is backed by one US dollar. This is why it is traded in crypto markets as a substitute for the US currency. But crypto traders are worried, since in October, Tether’s price fell to $0.94, triggering an apparent sell-off of Tether tokens and speculation that investors had lost faith in the currency.

Tether’s popularity is also linked to Bitcoin and crypto exchange Bitfinex which was allegedly used to manipulate prices. It has been argued by traders that Tethers have been used to buy Bitcoin at specific moments when Bitcoin’s price had tumbled. For example, Bitfinex and Tether are investigated for potentially influencing Bitcoin’s all-time price high of $20,000 in December 2017. In November 19, 2017, Tether reported that a hacker had taken $31m, an event that caused the price of Bitcoin to fall to $7,818.

“Tether seems to be used both to stabilize and manipulate Bitcoin prices,” finance professor John Griffin and Amin Shams said. In their article, “Is Bitcoin Really Un-Tethered?,” they argue that indeed Tether has been used to manipulate the price of Bitcoin and other cryptocurrencies. They write that “purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. Less than 1% of hours with such heavy Tether transactions are associated with 50% of the meteoric rise in Bitcoin and 64% of other top cryptocurrencies.”

Lack of transparency sparks skepticism and doubt

The controversy and mystery surrounding Tether is further highlighted when one lands on their homepage and attempts to click on their “transparency update” for “proof of funds.” The link opens to nowhere, but a grey page that never loads. Despite being touted as “100% backed” with every tether being 1-to-1 backed by “traditional currency held in our reserves,” there is no substantial evidence to attest to their claims. A Bloomberg article showed that there were statements showing balances with Noble Bank and Deltec Bank, but there is no formal proof. Many are even questioning whether that amount of money held in reserve really exists.

According to Cryptoslate’s investigation, reports from the Central Bank of the Bahamas show that Tether Ltd. never deposited funds in the country, a fact that indicates the possibility of Tether holding their reserves somewhere else or nowhere at all. Investors are concerned about Tether’s stability, as the company has never undergone audits or revealed its banking relationships. Tether had broken its ties with banking partners in the past, but as Cryptoslate argues, it remains unclear whether they have done so due to KYC (know-your-customer) and anti-money laundering (AML) laws or whether it was the result of the company’s aforementioned controversies.

Additionally, things are further complicated as Tether has the same CEO as another controversial company, and one of the biggest cryptocurrency exchanges, Bitfinex. Bitfinex does not have a head office and is owned by a British Virgin Islands company. The cryptocurrency exchange found itself in the spotlight when it was being investigated by the US Justice Department for arguably manipulating the price of Bitcoin. According to the allegations, trading in Tether on Bitfinex had helped increase Bitcoin’s price.

According to a report from Bloomberg, on Dec. 6, last year, the US Commodity Futures Trading Commission (CFTC) sent subpoenas to Bitfinex and Tether, seeking proof that Tether is backed by a reserve of US dollars. But both firms avoided to comment. As it was reported, Bitfinex and Tether said in a statement: “We routinely receive legal process from law enforcement agents and regulators conducting investigations. It is our policy not to comment on any such requests.” In an email statement, Bitfinex Chief Executive Officer JL van der Velde said: “Tether issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex.”

Millions of worth of USDT removed from circulation

In October 2018, Bitfinex removed 630m USDT to an address called “Tether treasury,” in a series of transactions which drew commentators’ attention who wondered whether Tether was “getting out of the stablecoin business, buying back its own tokens at a profit.” Su Zhu and Hasu in “Tether is exiting, and nobody noticed,” are arguing exactly this. For them, now is the best time for Tether to slowly withdraw, as it will make everyone happy, both investors and traders. As they say: “Everyone sure got what they wanted out of Tether. Some people wanted to make money, some wanted new stablecoins and some just enjoyed the FUD and drama. Maybe it’s time to move on.”

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