Tether (USDT) is the 3rd largest cryptocurrency in the world, worth more than $83 billion. It is also the largest stablecoin. So let’s have a look at when and why it came into being.
USDT was originally launched as Realcoin in July 2014. However, its founders Brock Pierce, Reeve Collins and Craig Sellars wanted to get away from the association with altcoins, and re-branded to Tether in November 2014. It started Trading in February 2015. Let’s find out more about Tether as a stablecoin.
What is a Stablecoin?
A stablecoin refers to a cryptocurrency that pursues stability by maintaining reserve assets.
The majority of stablecoins have a value that is pegged to a fiat currency such as the U.S. dollar or to a commodity such as gold.
Some stablecoins use other cryptocurrencies as collateral, and others maintain a stable value by using an algorithm to control supply.
Which Type of Stablecoin is Tether?
In the case of Tether USDT, it is pegged to the U.S. dollar at a rate of 1 for 1.
Actually, the founders of Tether pitch USDT not as a true cryptocurrency, but focus on its value as a medium of exchange. One of the founders Reeve Collins said:
‘It’s simply a dollar that works on the blockchain’.
They view Tether as a digital tie to ‘real world currencies’.
Tether claim that the number of USDT tokens in circulation will always equate to the dollars in its bank account. This is controversial however for several reasons that we will examine below.
Other Currencies and Commodities
Tether also issues tokens pegged to two other currencies at 1 for 1, plus one commodity, as below:
- EURT (pegged to the euro)
- CNHT (pegged to the offshore Chinese yuan)
- XAUT (pegged to gold)
Advantages of a Stablecoin
- Stability. As indicated in the name, it is more stable than other cryptocurrencies. Cryptocurrency values can swing wildly, gaining or losing high percentages of their value. Sometimes this can happen even within one day. This makes investing in them potentially more lucrative but much more risky than a stablecoin.
- Security. If you are hacked and lose money with most cryptocurrencies, because of there being no controlling authority, there is no recourse. However, stablecoins are centralized and have the ability to freeze stolen assets. This makes it pointless for a hacker to target USDT or other centralized stablecoins.
- Stablecoin are more useful as a medium of exchange, as it is risky for merchants to accept a cryptocurrency which may go down in value and incur a loss.
- Stablecoins are at the heart of Decentralized Finance (DeFi). DeFi is a developing technology that increasingly removes control from the traditional large financial institutions.
What is the Controversy Around Tether?
The whole point of a stablecoin is that it is stable, right? This stability relies on the reserves being there, and there have been questions about that with Tether.
Firstly, after an alleged hacking and theft of $31 million from Tether in 2017, they carried out no audit to verify that sufficient reserves were still in place. Rather they fired the auditors for being too ‘detailed’.
Secondly, in 2019 Tether’s parent company iFinex were accused of trying to cover up a loss of $850 million by taking over around $700 million of Tether’s cash reserves. At this time, the statement on their website which said ‘every tether is always backed 1-to-1 by traditional currency held in our reserves’ disappeared!
It emerged that Tether and their partner Bitfinex were controlled by the same people, and appeared to be drawing on the same funds.
The investigation and lawsuit in New York State around this issue, led to a settlement agreement. Tether didn’t admit wrongdoing, but paid a fine of $18 million and were banned from operating in New York State. The New York State Attorney in charge of the case found that at certain times Tether had no reserves at all to back USDT.
Furthermore, it is also alleged that USDT is used by Bitfinex to manipulate the price of Bitcoin. When the Bitcoin prices fall, a certain player at Bitfinex uses newly minted USDT to buy Bitcoin and support its price. And it works! Some experts believe that this is the real purpose of USDT. Consequently, calls for more regulation are getting louder. The chair of the U.S. Securities and Exchange Commission Gary Gensler is demanding more authority to regulate cryptocurrencies.
Tether and other stablecoins are a vital part of the cryptocurrency world. However, their centralized nature forms a contradiction to the decentralized ideal of cryptocurrencies. It remains to be seen what kind of government regulation the decentralized industry would find acceptable. If no regulation is forthcoming, and there is no mechanism for stablecoins to prove their reserves, they may pose a risk to the whole ecosystem of cryptocurrency.