Tether, the world's largest stable coin, can't seem to keep out of hot water. Suspicious connections to shadow banking, lawsuits, and possible ties to short-term Chinese corporate debt. If this is accurate, it will have a disastrous impact on the cryptocurrency market. Is this the final chapter for Tether? Is it best if we stay away entirely? We need to know what Tether is to get the complete picture.
What is USDT (Tether)?
Tether is a fiat-collateralized stablecoin under the ticker symbol USDT. And this is just a fancy way of saying that Tether is a cryptocurrency that is always worth $1, and it allows you to purchase and sell blockchain-based assets without worrying about price swings.
The concept is that if investors don't have to worry about volatility, they'll just leave their money on cryptocurrency exchanges. Tether began as RealCoin in July 2014, before rebranding to Tether later that year. Massive growth stems from humble origins.
Tether's total assets were $77.4 billion as of December 12, 2021, and they've only risen since then. Since the beginning of 2021, their assets have grown by 360 percent. If Tether was a country, Tether would be the 91st largest country in terms of assets, barely ahead of Libya.
Tether's connection with Bitfinex
Tether sprang to prominence in 2016 after the Panama Papers exposed 11 million papers containing information on 200,000 offshore corporations. According to the Panama Papers, another business, previously thought to be associated with Tether, actually established Tether in the British Virgin Islands in 2014.
This company was Bitfinex, the world's 37th largest cryptocurrency exchange and Tether's puppet master behind the scenes. This is significant since previous to the Panama Papers disclosure in 2016, Bitfinex flatly lied about their ties to Tether.
And the reason for this secrecy became evident when it became clear that this was just the beginning of a succession of poor decisions, court fights, and questionable behavior that the firms haven't been able to shake off until now.
The first major legal controversy arose in 2017 when Wells Fargo and other banks decided to stop processing transactions between Taiwanese banks and their American customers. Bitfinex was obliged to use a shadow bank to handle payments as a result of this. Crypto Capital Corp is the name of this company.
Bitfinex's problems were exacerbated by this banking link. Crypto Capital Corp, on the other hand, is embroiled in its own scandals, including allegations of customer theft, loss concealment, and a criminal manhunt. Crypto Capital Corp was the go-to shadow bank for many large cryptocurrency exchanges by 2017, four years after its inception. Clients included BitMEX, Bitfinex, and Kraken.
What is Shadow Banking
Now, as frightening as the term "shadow banking" may sound, it isn't actually that dangerous. A shadow bank is a financial institution that provides services comparable to commercial banks but operates outside of traditional banking laws.
Okay, that still sounds horrible, but believe me when I say it isn't. The shadow banking business could include insurance companies and even pawn shops. In fact, the shadow banking industry is roughly six times the size of traditional banking. It's enormous.
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What does this have to do with Tether?
Tether is Bitfinex's sister firm. In truth, the CEOs of Bitfinex and Tether are the same. So it's more like identical twin sister corporations than merely sister companies. In any case, the connection was more than simply about people.
After Bitfinex suffered a big loss with a certain payment processor, Crypto Capital Corp., Tether lent Bitfinex $625 million. The Bitfinex exchange was not functioning properly due to the large amount of money missing, causing significant delays and transaction difficulties for consumers.
This is when the authorities became aware of the situation. Tether, Bitfinex, and their parent firm, iFinex, were approached by the New York Attorney General's office. The companies were told to stop everything and report to them right away.
The money BitFinix lost through Crypto Capital Corp was actually taken directly from Tether's reserve, according to the Attorney General's office. We haven't even discussed the messages yet.
The New York Attorney General discovered messages between a Tether-Bitfinex executive known as "Merlin" and a Crypto Capital Corp executive known as "Oz." Merlin pleaded and begged Oz for the recovery of their missing cash, hundreds of millions of dollars from Tether's reserves, in the texts.
This is significant because all 70 billion USDT coins are intended to be backed exactly by $1, a promise that Tether proudly publicized on its website, but one that cannot be fulfilled if $850 million is missing.
Tether revised their website a few months later, stating that every Tether is 100 percent backed by reserves, not currency. Tether's reserves might be made up of currency, investments, or loans to third parties. Isn't the problem now solved? Change your promises if you can't keep them.
In February 2021, Bitfinex reached an agreement with the New York Attorney General's office, paying $18.5 million in fines. The riddle of what Crypto Capital Corp did with the lost $850 million in cash remains unsolved, and we may never know the answer.
Tether's story, however, does not end here. It's just getting started because questions remain about whether Tether has a full asset backing, let alone a one-to-one dollar backing. They do have third-party audit reports done on a quarterly basis, and the most recent one shows full asset reserves.
However, there are concerns about what they're investing this money in, as well as a request for greater openness.
Tether was embroiled in yet another major controversy when a group of traders claimed that Bitfinex manipulated the cryptocurrency market with USDT during the 2017 and 2018 bull runs. However, one of the most important claims has been disproved, thus this appears to be doubtful.
Tether's competitor, Circle's CEO, defended the company, stating that exchanges employ wallets that pool all user balances together, thus a study that reveals a single wallet was involved in this prank can't be correct. Aside from that, there's the issue of stable coin regulation to consider. This is unlikely to cause a market crash, but it may alter the way cryptocurrency is traded.
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Stablecoin lending
Now that we've learned about Tether's history, let's speak about stablecoin lending and why interest rates are so high when compared to traditional finance. Stablecoin lending is one of the few ways to earn an interest rate of 8% to 20% on the currency.
The average interest rate on savings accounts in the United States is currently 0.6 percent, which is more than 100 times lower than the rate on Tether or other stablecoins.
How is this possible? How is this sustainable?
There are several elements at work here. The first is the element of Risk. Cryptocurrency does not have the same traditional financing channels as other industries. Furthermore, your stablecoin investment is not protected by the Federal Deposit Insurance Corporation (FDIC).
As a result, the supply and demand curve for stablecoin loans may differ from that of traditional US dollar lending. Most people would not put all of their money in a stablecoin, but they would put their money in a bank account. Then there's the creditworthiness of the borrower.
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| pic credit: Forbes |
Many crypto loans are obtained by persons who may be unable to obtain traditional loans due to credit problems. As a result, rates rise. Exchanges are now introducing insurance funds to mitigate this danger, although there is still a risk. Finally, some of the rates are fake.
In a way, yes. Users will flock to exchanges that offer high payouts on these "risk-free" stablecoin loan rates. As a result, many exchanges will simply lose money in order to attract more clients by offering these prices.
Will rates remain this high forever?
Probably not. More regulation will come, bringing more safety to the space, and companies will eventually begin lowering their rates as they attract more and more users.
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Where does all this leave Tether?
Given the amount of attention this company and its reserves have received, it's difficult to believe they'll ever go bankrupt. Even if they did collapse, they're so huge that we're approaching the point where they're too big to fail.
Tether's demise would bring crypto to a halt, which is something we don't want to happen. The best we can hope for is that alternative stablecoins with more reliable backings and more frequent third-party audits are used more frequently.
In terms of safety and popularity, USDC and Dai are the most well-known. USDC was created in collaboration with Coinbase and Circle. They are audited on a monthly basis. Dai adopts a slightly different approach in that it is backed by other cryptocurrencies rather than fiat currency.
Djed is an algorithmic stablecoin that will be released soon on the Cardano blockchain. The largest stablecoin on Avalanche is Internet Money, which is backed by fiat currency.
So the issue is that it's difficult to entirely avoid Tether at this time. If given the option, I would rather not utilize it. However, this isn't always an option. The good news is that alternatives appear to be becoming increasingly popular. We appear to be slowly but steadily escaping our terrible connection with Tether.