Untethered from reality

Anyone who has traded on a major crypto assets exchange is likely familiar with Tether (USDT). Tether provides a convenient way for traders to hedge their portfolios using the stability of fiat currency without using a bank or dealing with any actual fiat. According to their website:

Tether converts cash into digital currency, to anchor or tether the value to the price of national currencies like the US dollar, the Euro, and the Yen.

Tether guarantees every USDT token to be backed by fiat currency:

Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD.

This is highly misleading in several ways.

For one, USDT isn’t actually tethered to anything. Although Tether gives the impression that USDT tokens are pegged to the dollar with a fixed exchange rate, they actually float on an open market. The price has in fact seen substantial volatility:

Although the price fluctuates, it tends to oscillate around 1 USD. But as far as I can tell, the only thing driving the value of USDT is the trust that it can be redeemed for dollars at some point — trust that many believe is unwarranted.

Their terms of service certainly don’t inspire much trust:

Once you have Tethers, you can trade them, keep them, or use them to pay persons that will accept your Tethers. However, Tethers are not money and are not monetary instruments. They are also not stored value or currency.

Say what?! Oh, and:

There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money. There is no guarantee against losses when you buy, trade, sell, or redeem Tethers.

Yeah. The text goes on to indemnify Tether against any legal responsibility related to losses from a drop in value of the token and a host of other legal scenarios that appear more and more likely by the day.

In spite of this, USDT remains a very popular option among crypto assets traders. And with a market cap approaching $700M, there’s certainly no shortage of them floating around out there. Are we really to believe they have that much money sitting in the bank?

Speaking of the bank, Tether and its sister crypto exchange Bitfinex have been having banking issues lately, having had their accounts closed. In fact, surprisingly little is known about where these juggernauts stash their fiat currency. Tether’s transparency page has been down for the past few days.

Even if Tether does turn out to be legitimate, they will likely be sued into oblivion given they are basically operating a fractional reserve banking system without any sort of approval or license, though nobody is even really sure what jurisdiction they’re in!

After the latest hack, in which over $30 million in USDT was pilfered from the company, suspicion of Tether is growing more and more intense. Markets have reacted relatively calmly to the news, but it is only a matter of time before another hack, a lawsuit, or some other adverse event spurs a bank run on Tether and the whole thing comes crashing down.

Anyway, there’s a whole lot more I could say how sketchy these people are, but you get the idea. As tempting as it is to be able to hedge with fiat without involving the bank, USDT is not the answer.

So how can you work around this?

I use GDAX, which is affiliated with Coinbase, for my USD trades. For EUR, I use Kraken. Obviously, working with these exchanges also involves a certain amount of trust, but they are much more transparent and based in strong jurisdictions. There is much more clarity on the status of their accounts, and I find it to be an acceptable level of risk given the benefits of hedging with fiat.