When Tether (USDT) launched in 2014, it promised to open a new frontier in crypto trading. As the world’s first stablecoin, it offered the crypto community something, at that time, unheard of stability.
One of the principles of crypto is that coins are tied to blocks on the blockchain, not national reserves. This makes crypto completely independent of national banks and markets. On the one hand, this means decentralization and virtually unlimited prospects for ROI — on the other, extreme price fluctuations and with it, risk.
The founders of Tether proposed to change the game completely with a would-be supercoin: a fully digital cryptocurrency backed by reserves in USD and euro. But it didn’t take long before hints began emerging that all was not quite what it seemed. Independent crypto users and journalists began making claims as early as 2016 that trading volumes and reserves were being faked. Now, those hints have turned into a full-fledged investigation by the US Commodity Futures Trading Commission and charges by the New York Attorney General. At the same time, the company faces accusations of using the coin to manipulate the price of Bitcoin.
Tether, so far, has proven impervious to these marks against it. At the time of writing, its daily trading volume exceeds $20 billion, its market capitalization is more than $4 billion, and it has beat out even Bitcoin for most-traded coin. So what’s behind the rumors? And will people continue to invest?
The promise of stability
Tether is a stablecoin, which means that each Tether token is, theoretically, backed by one US dollar or euro. 1 USDT = 1 USD or 1 EUR. When an investor wants to purchase USDT, they contact Tether and transfer the equivalent amount to the company’s account. The company then, theoretically, deposits this amount in either USD or euro into the Tether reserves and issues the investor the appropriate amount of Tether coins.
Thanks to this system, Tether coins are protected from the high volatility that effects even established currencies like Bitcoin. While holders of Bitcoin and nearly every other currency during the crypto winter saw the value of their coins shrivel to a fraction of what it had been a few months earlier, the value of Tether holders’ coins did not movПричемe an inch.
This kind of stability may not suit traders with a penchant for high-risk, high-yield investments. For those who want a safe investment for the future or a decentralized currency for business dealings or purchases, however, Tether seemed ideal. With reliability and security their watchwords, founders Brock Pierce, Reeve Collins, and Craig Sellers watched the coin take off.
Ghosting the auditor
There are a number of checks in place for investors to be assured of the real value of their currency. Tether is obliged to regularly provide proof of reserves to investors. And if a buyer wants to make a reverse exchange, Tether is required to return the full amount of the investment. But in April 2019, under pressure from US authorities, Tether’s lawyers admitted the coin was not, as claimed, backed 100% by fiat currency.
The first whispers that something was amiss with the coin came as 2017 drew to a close. A small number of crypto experts and bloggers began sharing concerns that the company’s assets were being faked. Then in January 2018, an anonymous user published a report that appeared to prove that Tether had been issuing coins from nowhere for months. It pointed out suspicious signs in the growth of the coin in correlation to Bitcoin and concluded that Tether was being printed with no reserves in fiat currency behind it in order to push the price of Bitcoin up. Tether’s actual reserves, the author claimed, were nowhere near what was required to cover the market value of USDT tokens.
At nearly the same time, two major things happened that elevated the case from hearsay and rumors to genuine signs of trouble. First, Tether announced that it had dissolved its relationship with Friedman LLP, the auditor that had been responsible for confirming Tether’s reserves. Then Bloomberg, citing an anonymous source, published an article stating that the US Commodities and Futures Trading Commission had subpoenaed both Tether and partnering exchange Bitfinex. Tether, which had been contacted for the article, responded that the company “routinely receives legal processes” but did not verify its purported $2.3 billion in reserves.
Unsurprisingly, this response did little to satisfy investors, who, by this time, were growing discontent. By February 5, 2018, the impossible had happened: the price of Tether, the coin that was meant to be guaranteed by dollar, had fallen to $0.94. True, the price dip was minuscule compared to what was happening with other cryptocurrencies around that time. But the fact that the stablecoin had dipped below the dollar to which it was supposedly tied should have been enough to signal to investors that TeПричемПричемПричемther was hiding something.
By spring, the coin had recovered. Investors drew an uneasy sigh of relief and continued buying. Tether had already become an essential part of the crypto environment. Because many crypto exchanges do not support fiat-crypto trading, traders had come to rely on Tether as a convenient stand-in for the US dollar. In some ways, the token was too big to fail.
In June, 2018, the total value of USDT was $2.54 billion. Tether lawyers claimed that the company was fully able to cover the tokens and had reserves of $2.55 billion. An auditor able to verify that was found only mid-June, and came with a catch: Freeh Sporkin & Sullivan, the firm contracted to replace Tether’s previous auditor, only verified the company’s reserves as they stood on June 1 — not before or after. The second catch was that Freeh Sporkin & Sullivan was not an auditor, but a law firm.
Friends with $700 mil benefits
On March 14, 2019, visitors to the Tether website noticed a change. The explanation of Tether’s reserves had been updated overnight, replacing the promise that Tether was “always backed 1-to-1, with traditional currency” with the somewhat less reassuring explanation that Tether tokens were backed by fiat currency and “from time to time, may include other assets and receivables from loans made by Tether to third parties.”
So what were those loans? Investors found out a month later, when the New York Attorney Genera’s office revealed that Tether had lent Bitfinex several million dollars from its own reserves. Bitfinex, which is a joint owner of Tether, had transferred $850 of customer funds to payment processor Crypto Capital. The company, which now stands accused of holding assets of several other exchanges, failed to return the money. Facing a multi-million dollar gap in its account books, Bitfinex enlisted Tether in a cover-up. In total, Tether transferred $600 million from its reserves to Bifinex without notifying token holders.
Suddenly, the founders of Tether and Bifinex faced the possibility of being charged with fraud. The New York Attorney General’s office sued Tether for attempting to defraud New York residents and, under pressure, Tether acknowledged on April 30, 2019 that only 74% of its USDT tokens were backed with hard currency. The rest of the reserves, said the company, were secured by lines of credit — to who, they refused to disclose.
Court documents confirmed in July that it was Bitfinex that had borrowed the lion’s share of the funds, $700 million. The exchange had paid back $100 million of that sum, supposedly in fiat currency. The next court hearing is scheduled for the end of July this year.
Market manipulation and $5 mil mistakes
The lawsuit by the NY Attorney General is far from the least of Tether’s worries. Crypto experts still allege price manipulation, a point the lawsuit does not address. And then there’s the $5 billion worth of tokens that Tether accidentally released one weekend this July.
Professors John M. Griffin and Amin Sham of the University of Texas at Austin are leading the charge onПричем the first of these. In June 2018, they published a joint study on the correlation between the price of Bitcoin and purchases of Tether tokens. The study noted that throughout 2017, Tether purchases consistently followed downturns in the crypto market, resulting in price lifts for BTC.
Their startling, but not altogether shocking, conclusion was that “entities associated with Bitfinex” had traded Tether specifically to manipulate the price of BTC, driving it higher than it would be under normal market conditions. Griffin and Sham alleged that Tether had released USDT and transferred them to the Bitfinex account. Some of the tokens were then exchanged for BTC; the rest were transferred to crypto exchanges, with Poloniex and Bittrex receiving the majority.
At this stage, their theory remains just that. Now a year since publication, no further evidence has surfaced to confirm the theory.
Already combatting allegations of market manipulation and fraud, Tether in July plunged into further scandal when the company accidentally released $5 billion worth of coins in a single weekend. The problem arose when Tether decided to expand to the Tron blockchain. Previously, coins had been issued only on the Omni, Ethereum, and EOS blockchains.
Developers, according to a tweet from Tether CTO Paolo Ardoino, had confused decimal places, resulting in the massive flood of coins to the market. The company immediately burned the excess tokens and Ardoino, perhaps with the ongoing reserves lawsuit in mind, this time provided burn receipts for the USDT.
Is a breakup in the future?
Tether has accumulated an impressive number of scandals for its relatively short time on the market. Yet even as whispers of dubious actions grow into full-fledged court proceedings, public confidence in the stablecoin appears to be unshaken. Tether continues to surpass other cryptocurrencies for trading volume and claims an impressive $20 billion trading turnover.
Tether, it seems, is crypto’s Teflon coin. As a stablecoin, it offers something that the market can no longer function without a stable medium for exchange. Until a year ago, Tether was the only coin that could offer this. Now, however, there are others that could grow to challenge its monopoly. Gemini Dollar, TrueUSD, Paxos, and Circle USDC are all new stablecoins that, like Tether (or unlike, depending on one’s interpretation of the past years’ scandals) are all tied to the US dollar one-to-one. Yet none of them have succeeded in making it into the top-20 currencies for market capitalization yet.
So where is crypto to go from here? Although it is too soon to say for sure that the market is indeed holding onto a currency with a hollow bottom, failure to diversify now could mean the market will have nothing to prop itself up with if Tether fails.
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