The $20 Billion Question about Tether: What’s Wrong with the Key Stablecoin in the Crypto Industry


Tether (USDT) is the largest and oldest stablecoin in the crypto industry. Its capitalization exceeds $4 billion and the daily trading volume tops $20 billion. But there is another side to the coin: The Tether company is at the center of constant scandals, it cannot proof reserves, and it is accused of manipulating the price of BTC.

The first Tether token appeared in October 2014. At that time, the market was still in the early stages of development and almost no one had heard of stablecoins. These coins were founded on a revolutionary concept: cryptocurrencies could be fully backed by reserves in fiat currencies like US dollars and euros.

The main benefit of this type of coin was, of course, that it would save traders and investors from the value roller coaster — the excessive volatility of cryptocurrency prices, which has been known to rise or fall by 20% or more in just one day.

This idea immediately took off, with Tether leading the way. Tether quickly entered the list of top cryptocurrencies and became a favorite trading tool of traders. According to Coinmarketcap data, the daily trading volume of Tether exceeded $20 billion on July 20, 2019. The stablecoin even managed to beat Bitcoin by daily trading volume ($19 billion), becoming the most traded crypto on the market.

At the time of publication, tether ranks 7th by market capitalization, according to Coinmarketcap. On July 20, the value of all Tether tokens exceeded $4 billion.

On the surface, the coin appears to be doing incredibly well. Theoretically, that $4 billion market cap is real fiat dollars and euros. But in reality, the situation with the reserves of the stablecoin raises many questions in the crypto industry and beyond. Scandals with centralization, connections with crypto exchange Bitfinex, and manipulation of the Bitcoin price — we’ll cover it all in this article. But first, what is Tether?

How Does Tether work?

Tether is a stablecoin. Hence, each of its tokens should be backed with a certain asset, that is kept in the company’s reserves. In the case of USDT, the reserves mainly consist of the US dollar or the euro.

The USDT issuing process looks like this: an investor contacts Tether and transfers the desired amount to the company’s bank account in USD. Then the firm deposits this money into reserves. In return, the company issues the equivalent amount in USDT tokens to the investor. The Tether company regularly provides proof of reserves to investors. If the client wants to make a reverse exchange, the company is obliged to return him the entire investment amount, dollar for dollar.

This system protects USDT from excessive price fluctuations in the cryptocurrency market, such as the dip that hit Bitcoin last year. At the end of 2017 Bitcoin was worth almost $20,000. By July 20, 2019, its price collapsed to about $10,000, according to Coinmarketcap. BTC lost 50% of its value during this period. The price of Tether, in contrast, did not change a penny over this period. One USDT token is still worth $1.

Obviously, these reassurances are the key driver behind Tether’s popularity. Thanks to stability, traders can cash out their profits with Tether, and a business can use stablecoin in day-to-day activities without worrying that the cryptocurrency will depreciate tomorrow by 50%. At least, that’s the theory.

While the USDT was relatively small, there were almost no complaints about cryptocurrency. But with the growth of the stablecoin, the crypto community began to express more and more doubts about Tether reserves. Their fears were not unfounded. In 2019, the company admitted that, in fact, the coin is not 100% backed with fiat currencies.

Scandals, Intrigues, and Tether

The first hints that all was not well with Tether reserves began appearing in late 2017. At that time, several bloggers and experts stated the company was issuing coins from thin air.

In early 2018, the story began to gain momentum. An investigator under the pseudonym “32E3690D50B3B477DF7841212D4BB938DC9CDB50307618328E7F8B53F37CC1E2” published research claiming that the Tether company, in cahoots with crypto exchange Bitfinex, was issuing USDT that was not backed with USD in order to manipulate the price of Bitcoin.

Almost simultaneously, at the end of January 2018, Tether announced that it had ceased cooperation with its auditor, Friedman LLP, which was responsible for confirming the stablecoin’s reserves.

The plot thickened when Bloomberg, citing own sources, stated that the US Commodity Futures Trading Commission had sent a subpoena to Tether and Bitfinex due to the release of unsecured tokens. At that time, the information had not been confirmed. The authorities did not comment on the journalists’ findings, and Tether replied that it “routinely receives legal process” from authorities.

Yet discontent with Tether reserves continued to grow, and it was reflected in the stablecoin price. Although the USDT token was meant to be worth exactly $1, bits price had fallen to $0.94 by February 5, 2018, according to Coinmarketcap. But by that spring, it had bounced back to one dollar.

At this time, the founders of Tether began searching for a new auditor to prove its reserves. The firm achieved this goal only at the beginning of the summer when the company reached an agreement with the law firm Freeh Sporkin & Sullivan.

On July 1, 2018, USDT tokens were worth, in total, $2.54 billion. Tether lawyers claimed that there was even more money in Tether reserves than needed to cover tokens — $2.55 billion.

Yet the crypto community remained skeptical. The main red flag was that Freeh Sporkin & Sullivan, the company contracted to conduct audits on Tether reserves, is not an auditing company. The company even itself stated that it does not conduct audits.

Despite all the warning signs, however, Tether managed to keep investor concerns at bay until new information emerged in the spring of 2019 that changed everything.

$700 million loan for Bitfinex

In the spring of 2019, Tether finally admitted that its reserves might not be backed with only US dollars and euros.

In mid-March, the company said that other assets could also be in the USDT reserves, in particular, loans to third parties. At the end of the month, this story took an unexpected turn.

The New York Attorney General’s office revealed details of the case against Tether and Bitfinex, which it had initialized in 2018. According to the authorities, Bitfinex, which is a joint owner of Tether, transferred $850 million of customer money to the savings account of Crypto Capital firm. But the exchange failed to return the funds due to regulatory issues. As a result, Bitfinex received a multimillion-dollar hole in its balance sheet. To cover it, the trading platform borrowed $600 million from the Tether reserves.

Neither company disclosed the details of the deal. The authorities claim that this transaction violates the rights of investors. Even more significantly, Tether’s failure to reveal that the coins were backed by loans rather than dollars, as claimed, means that the company could be prosecuted for fraud.

In the face of this escalation, Tether and Bitfinex conceded the existence of the loan. According to the exchange, the deal had to be carried out only because the authorities “seized” their funds.

Already on April 30, 2019, Tether acknowledged that only 74% of USDT tokens were backed with hard fiat cash. The remaining amount was supposedly secured by loans and credit lines to third parties. The company did not disclose who those borrowers were.

In July, the court documents revealed that Bitfinex borrowed $700 million from Tether reserves through a credit line in early 2019. The exchange had paid back $100 million of this debt plus interest. All payments allegedly were made in fiat currencies.

Now the parties are waiting for the next court hearing, which is scheduled at the end of July this year. But Tether has a lot of other issues too.

BTC price manipulation and $5 non-existent billions

The problems with the reserves are not the only scandal Tether is dealing with. In particular, the company is accused of manipulating the Bitcoin price, and more recently it accidentally issued $5 billion worth of tokens.

In June 2018, professors John M. Griffin and Amin Sham from the University of Texas published a study on the jump in BTC in 2017 when it reached $20,000.

According to Griffin and Sham, “entities associated with Bitfinex” used Tether to buy BTC during the period of price fall before the surge in 2017. They say that’s what fueled the latter bull run. Allegedly, Bitfinex exchanging less than 1% of USDT tokens was enough to inflate the BTC price.

The researchers came to these conclusions by comparing the activity in the blockchain of the two cryptocurrencies. This allowed them to trace the stablecoin’s movement. Allegedly, Tether released the USDT and transferred them to the Bitfinex account. Some of these tokens were exchanged for BTC, and the rest was transferred to other crypto exchanges, with the majority of coins going to Poloniex and Bittrex.

A year since their research was published, Griffin and Shma’s theory has not yet been confirmed.

At the beginning of July 2019, another embarrassment with Tether occurred. The company decided to expand and issued tokens on the Tron blockchain. Previously, only the Omni, Ethereum and EOS blockchains were used for this purpose.

The problem arose when Tether “accidentally” issued tokens worth $5 billion on the Tron blockchain. According to Tether CTO Paolo Ardoino, an error occurred on the Poloniex crypto exchange when it moved USDT tokens from the Omni blockchain to Tron. Allegedly, the developers confused token decimals.

As a result, the company had to burn all the extra USDT tokens.

King is dead, long live the king

In its short time on the market, Tether has managed to surround itself with not just one, but three major scandals. Yet in spite of them all, USDT remains the most popular stablecoin in the market. Tether even bypasses all existing cryptocurrencies by trading volumes.

Partly, this situation can be explained by the fact that other stablecoins that have the potential to compete with Tether appeared only last year.

Since Tether, Gemini Dollar, TrueUSD, Paxos, Circle USDC have entered the stablecoin market. All of them also are backed with fiat currencies in the ratio of 1 to 1.

And in September last year, the top 20 crypto exchange even agreed to gradually introduce other stablecoins on their platforms to eliminate Tether’s monopoly of the crypto stablecoin market.

However, the market share of other stablecoins is too small for now. None of Tether’s competitors can be found in the list of top-20 cryptocurrencies by market capitalization. And the aggregate daily trading volume of the new stablecoins does not even reach $1 billion, according to Coinmarketcap. By comparison, Tether trading turnover exceeds $20 billion.

Tether, due to its monopoly position, can be called “too big to fail”. The crypto industry is highly dependent on Tether, and problems of the coin can affect the entire crypto market. The only good thing is that there are now alternatives to it. Though they are not yet popular enough to directly challenge Tether, at least investors and traders have a choice. And that choice may well make the difference between the development of a stable, competitive stablecoin market and one that operates — as Tether — with smoke and mirrors.

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