What Is Tether (USDT)? A Stablecoin Fully Backed by US Dollars? Some Think Not
Tether (USDT) was first launched in July 2014 under the name Realcoin. A few months later, in November, Realcoin was rebranded to Tether in order to avoid association with other altcoins.
What is Tether and why it was created?
Tether is a cryptocurrency, claimed to be one-to-one pegged to the US dollar, issued by a private company called Tether Limited. Its creators claim that every USDT token in circulation is backed by a dollar in the bank. The ultimate goal of Tether is to bring stability in the crypto world and provide an easier way for people to get in and out of a position.
There is a huge demand for such a service in the crypto space. It is extremely useful for most exchanges because they can use Tether and not deal with fiat currencies, avoiding some legal headaches.
For instance, if market volatility is going crazy, people can easily convert their cryptocurrencies into USDT and stay calm on the sidelines until they feel confident enough to enter a long position again. In addition, Tether allows traders to move money between crypto exchanges, rather than using bank wire transfers.
In theory, anyone who holds USDT has nothing to worry about because at any given time Tether tokens can be redeemed for real US dollars.
There are, however, some aspects of Tether, which anyone who is holding USDT should be familiar with.
First, the state of Tether’s reserve has been a subject of controversy for months. The company claims that one USDT in circulation is backed by one dollar in their bank account and it will be like this forever. However, there aren’t many significant proofs that this is true.
In June 2018, Tether finally published a third party report, which declared that as of June 1, 2018, the USDT circulating supply is even less than company’s bank accounts balances, which stood at USD 2.55 billion. In other words, the report claimed that everything is fine, the money is there, there is nothing to worry about.
However, this couldn’t manage to settle the debate in the crypto community.
The report was prepared by a law firm called Freeh Sporkin & Sullivan (FSS), but it wasn’t a full audit. Eventually, FSS maintains that “all Tethers in circulation as of June 1, 2018 are fully backed by existing USD reserves”.
However, the firm also states that “FSS has not performed any procedures or made any conclusions for activity prior to or subsequent to June 1st, 2018”, which means that those were the balances just for that particular day.
Even Tether’s general counsel Stuart Hoegner has admitted that this was not a full audit because “the barriers to getting audited are simply too big to overcome” for the moment. Until Tether doesn’t produce an independent audit, no one can be absolutely certain that it is reserved 1-for-1.
Second, when you convert your coins to USDT you basically trust that a private company will turn your tokens into cash when you want so. However, as a private company Tether Limited has its own terms of service and part of that documentation states that Tether “reserves the right to refuse to issue or redeem Tether Tokens” if there is some sort of violation of their service.
For many people, this sounds like a potential risk that Tether might use their terms of service to create a reason not to allow a user to redeem their USDT.
Another controversial issue with Tether is its link to crypto exchange Bitfinex. The managers who run both companies are the same. The CEO is JL van der Velde, CFO is Giancarlo Devasini and CSO until June 2018, when he resigned, was Phil Potter.
The problem is that until November both companies insisted that the two operations were separate. However, leaked documents dubbed “Paradise Papers” revealed Bitfinex and Tether are run by the same individuals.
The Omni Protocol – the technology behind Tether
Originally, Tether was using the Mastercoin protocol, but since 2015 it was rebranded to Omni Protocol. Omni consists of three layers.
The first one is the Bitcoin blockchain, where the Tether transaction ledger is embedded.
The second is the Omni Layer Protocol, which basically offers new rules without changing the foundation of Bitcoin. It has three main functions:
- to allow the creation and destruction of digital tokens on the Bitcoin blockchain
- to track and report the current circulation of USDT
- to enable users to transact and store Tethers and other assets/tokens.
The Omni protocol was originally specified to embed data using fake Bitcoin addresses but it later came up with a friendlier message that embeds the data in a multi-signature transaction instead.
The final layer is Tether Limited – the business entity, whose responsibilities are to control the creation and revocation of USDT, to report publicly the Proof of Reserves and to manage the technology behind Tether in order to increase its adoption.
Tether vs TrueUSD
In terms of market value and adoption, we may say that Tether doesn’t have significant competitors, being the 10th biggest cryptocurrency ranked by market capitalization. Probably, the only competitor worth mentioning is TrueUSD (TUSD), which is also a stablecoin, backed 1-for-1 for US dollars. TrueUSD is built on the TrustToken Platform where you can easily create asset-backed tokens. As of July 2018, it has only 79 million TUSD in circulation. Compared to Tether’s 2.6 billion this is quite irrelevant.
Nevertheless, TUSD is already available on some of the biggest exchanges like Binance and Bittrex, so it may increase its adoption in the future.
USDT manages to stay stable
USDT is trading since March 2015 and we may say that Tether is pretty much accomplishing its goal to be a stablecoin. During most of the time of its existence, the value of 1 USDT is hovering around $1. One of the bigger deviations was in April 2017 when the value of 1 USDT fell to $0.913 in less than a week. This is the current all-time low of USDT.
The reason for this drop was that Bitfinex’s international wires had been cut off by Wells Fargo and the Taiwanese bank the exchange was partnering with. Back then, there was a lot of uncertainty whether the money from Tether accounts could be withdrawn and as a result, many people were willing to sell their USDT for less than one dollar per coin.
On the upside, when cryptocurrency prices dropped at the end of May 2017 more people wanted to use Tether in order to enter a position. The increased demand resulted in a spike of Tether’s value. On May 27, 2017, the USDT price reached USD 1.19 which is its current all-time high.
The increased circulating supply fueled the controversy
Being a stablecoin where every unit of USDT should be backed by a US dollar, it is probably far more interesting to see the evolution of the circulating supply of Tether than its price development.
The circulating supply of Tether is the reason why this cryptocurrency became one of the most controversial projects in the space.
We’ve seen a dramatic rise in the total amount of USDT in circulation. It spiked from 60 million in May 2017 to 440 million in September the same year. However, the subsequent run from 450 million in November to 2.2 billion in January 2018 was even more impressive. As of July 2018, the total number of USDT in circulation is 2.6 billion.
The increasing market capitalization of Tether resulted in increasing speculation regarding its legitimacy. Reasonably, more people started to doubt Tether’s statements that all those newly created coins are backed by actual cash because there wasn’t any audit to support those numbers.
What is the long-term potential of Tether?
There is a strong need for a coin like Tether in the crypto market. It is extremely useful to have a cryptocurrency which is not supposed to fluctuate in price. However, at the moment I don’t think there is a trustless way to prove that Tether or any other similar coin is fully backed by US dollars.
All those speculations that the team behind USDT is the same who runs one of the largest cryptocurrency exchanges in the world, as well as the facts surrounding Tether, make this project not very reliable to me. If those rumors are true, this basically means that a few people can buy/steal a significant percentage of a big cryptocurrency project by creating monopoly money.
In my opinion, holding your capital in USDT exposes you to even higher risk than just holding your money on an exchange. The main purpose people use Tether is to make trading easier on the biggest exchanges.
However, cryptocurrencies are meant to be decentralized and to eliminate the middlemen, not to increase them. If you hold USDT on an exchange, first, you risk losing your money if the exchange gets hacked and second you add more risk to lose your investment if something happens to the private company creating and managing this cryptocurrency.
If we are heading to a world where paper money will be obsolete, how much time do you think will pass before the US government takes action against a private company, basically claiming that it is creating digital dollars?
I personally don’t see long-term potential in Tether. In my opinion, the more its market cap grows, the sooner the bubble will burst.
I believe we will get to the point where most national currencies will have their blockchain representation. If this happens, the need for coins like Tether will be pretty much eliminated.
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