Established in 2014 and based in Hong Kong, Tether is a stablecoin – a cryptocurrency pegged to a stable asset, in this case, the US dollar. It uses the Bitcoin blockchain via the Omni Layer, an open-source platform that was designed to support custom digital assets and currencies.
Tether’s 2016 whitepaper describes the token as a way to hold fiat currency values in a digital asset while also avoiding crypto market volatility and the need for trusted third parties.
“Once a Tether has been issued, it can be transferred, stored, spent, etc., just like Bitcoins or any other cryptocurrency,” the Tether whitepaper states. “The fiat currency on reserve has gained the properties of a cryptocurrency and its price is permanently tethered to the price of the fiat currency."
Such a cryptocurrency offers a number of advantages over other altcoins, Tether’s developers noted: it can be used just like Bitcoin, avoids pricing and liquidity restraints, and is easier for non-technical users to understand compared to other assets that are instead based on collateralisation or derivative strategies.
“At any given time the balance of fiat currency held in our reserves will be equal to (or greater than) the number of Tethers in circulation,” the whitepaper states. “This simple configuration most easily supports a reliable Proof-of-Reserves process; a process which is fundamental to maintaining the priceparity between Tethers in circulation and the underlying fiat currency held in reserves.”
Despite such assurances of US dollars held in reserve to fully back the cryptocurrency’s value, a disclosure by Tether general counsel Stuart Hoegner on 30 April 2019 revealed that Tether is backed by cash and cash equivalents worth around $2.1 billion, “representing approximately 74 per cent of the current outstanding Tethers”. The revelation came during legal proceedings related to a New York Attorney General probe into a reported loss of $850 million covered with Tether funds by iFinex, which operates both Tether and the cryptocurrency exchange Bitfinex.
As of early May 2019, Tether had a market cap of just over $2.8 billion, making it the eighth most valuable cryptocurrency, according to CoinMarketCap, with a 24-hour trading volume of nearly $11.6 billion.
Here are some other important things would-be investors should know about Tether:
‘Most popular stablecoin’
Tether represents “the lion’s share” – more than 90 per cent – of transactions on the Omni Layer, reports Blockgeeks, which calls the cryptocurrency “the world’s most popular stablecoin”. The site adds that ensuring a value consistent with the US dollar also requires Tether to be “more of an entirely centralised system which is in contradiction to what it claims”.
Funds lost… or seized and safeguarded?
According to the New York Attorney General’s office, iFinex operators handed over $850 million of co-mingled client and corporate funds to Crypto Capital, a Panamanian entity, and then filled in the financial gap with up to $900 million of Tether’s cash reserves. Tether responded: “The New York Attorney General’s court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million ‘loss’ at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers.”
US authorities raise questions
In addition to the New York investigation, Tether and Bitfinex are reportedly being scrutinised by the US Justice Department and the US Commodity Futures Trading Commission, according to Bloomberg. The enquiries are connected to suspicions that traders using Tether might have manipulated the value of Bitcoin.
Vital for crypto market liquidity
Tether’s heavy daily transaction volumes stem from the fact that it’s used to enable trades on many cryptocurrency exchanges that don’t accept fiat currencies, Weiss Crypto Ratings noted in a February 2018 analysis. Because the stablecoin is pegged to the US dollar, such exchanges “use Tether as an equivalent to the USD”. This results in Tether being “one of the main sources of liquidity in the cryptomarkets”, as well as being the only cryptocurrency with “trading volume that regularly exceeds that of its market cap”. Weiss Crypto Ratings concludes this suggests that any issues with Tether could have “far-reaching” consequences for liquidity of the overall market.