This article looks at how over the course of this year (and especially during the last several weeks) Tether (USDT), the world’s oldest fiat-backed stablecoin, has become a lot less stable.

The Origin Story

The idea of building new cryptocurrencies on top of the Bitcoin protocol started with a white paper by J.R. Willett published in January 2012. This idea was implemented in cryptocurrency Mastercoin, which got rebranded to Omni in 2015. Tether is issued on the Bitcoin blockchain via the Omni Layer Protocol.

Tether was originally called Realcoin, which was announced in July 2014. Then, in November 2014, the rebranding to Tether occurred. In January 2015, crypto exchange Bitfinex launched trading of Tether. The CEO of both firms is Jean-Louis van der Velde. 

Is Tether Really Backed 1:1 by USD?

Although Tether says each tether token “is backed 100% by actual assets in the Tether platform’s reserve account”, because thus far we have not seen audited bank accounts (and we don’t even know for sure which banks it uses), nobody can be 100% sure that Tether’s claim is accurate. The closest thing that we have to an audit is a document released by Tether in June 2018 (published on their website in order to show proof of funds) from the Washington-based law firm of Freeh, Sporkin & Sullivan LLP (“FSS”), which was retained by Tether to carry out a review of its bank account documentation. 

In this document, FSS says that it was able to confirm that as of 1 June 2018, Tether’s two banks held the following amount of U.S. dollars in deposit:

BANK 1: $1,968,538,584.82 USD (unencumbered)

BANK 2: $576,528,652.00 USD (unencumbered)

TOTAL: $2,545,067,236.82 USD

It is worth noting that FSS points out:

“The above confirmation of bank and tether balances should not be construed as the results of an audit and were not conducted in accordance with Generally Accepted Auditing Standards.”

On 19 June 2018, in a phone interview with Bloomberg, Stuart Hoegner, Tether’s general counsel, said:

“The bottom line is an audit cannot be obtained. The big four firms are anathema to that level of risk,” he said in the interview. “We’ve gone for what we think is the next best thing.”

Reasons for the Untethering of Tether

There are multiple factors potentially explaining the decline of Tether over the past several weeks:

  • The emergence of new regulated fully dollar-collateralized stablecoins such as Paxos Standard, USD Coin, and Gemini Dollar. (All three of these examples are regulated by New York State’s Department of Financial Services.)
  • Rumors about Peurto Rico-based Noble Bank International (which some people think was Bitfinex/Tether’s primary bank) being on the brink of insolvency and trying to find a buyer. This is what Bloomberg reported on 1 October 2018:

“Noble Bank International, the Puerto Rican financial services firm with clients that have included prominent cryptocurrency ventures, is looking for a buyer, according to a person with direct knowledge of the situation… The bank has lost many of its customers, including Bitfinex and Tether, and is no longer profitable, the person said… Noble Bank attracted attention in cryptocurrency circles earlier this year because of its willingness to work with Tether and Bitfinex, which was dumped last year by Wells Fargo & Co.”

  • Stories on Reddit's “/r/bitfinex” subreddit (emerging around October 10th) from people who were allegedly having trouble with fiat withdrawals from Bitfinex. Lack of clear communication from Bitfinex only contributed to the nervousness in the crypto community about the future of Tether and Bitfinex.
  • Medium user “ProofOfResearch” claiming on 6 October 2018 that his investigation of complaints about Bitfinex on social media had led him to believe that “Bitfinex is No Longer Solvent ” and that Bitfinex users should remove their funds from the exchange immediately; this lead to a rebuttal by Bitfinex on 7 October 2018, which basically said that such rumors were false and that Bitfinex was not insolvent.
  • A report by crypto news website “The Block” published on 11 October 2018 claiming that Bitfinex had suspended all fiat deposits.
  • Around 00:19 UTC on 15 October 2018 crypto exchange KuCoin reporting that it had “temporarily” suspended USDT deposits and withdrawals (without saying when they would be resumed). Although a few hours later, they reported that USDT deposits and withdrawals had been resumed, by then, the damage had already been done, and even more panic was introduced into the markets:
  • OKEx (the third-largest exchange for Tether) announcing today that it is listing TrustToken’s TrueUSD (TUSD), Circle’s USD//Coin (USDC), the Gemini Dollar (GUSD), and Paxos Standard Token (PAX):

We are pleased to announce that TrueUSD (TUSD), USD//Coin (USDC), Gemini Dollar (GUSD), and Paxos Standard Token (PAX) are now listed on OKEx. Please take note of the following go-live schedule:

1. TUSD, USDC, GUSD, PAX deposit – 17:00, Oct 15 (HKT)
2. TUSD/BTC, USDC/BTC, GUSD/BTC, PAX/BTC spot trading – 14:00, Oct 16 (HKT)
3. TUSD/USDT, USDC/USDT, GUSD/USDT, PAX/USDT spot trading – 14:00, Oct 16 (HKT)
4. TUSD, USDC, GUSD, PAX withdrawal – 17:00, Oct 16 (HKT)

All of the above have led to panic selling by USDT holders. Most of them seem to be selling their USDT for Bitcoin (BTC) and Ether (ETH), but there is also increasing demand for regulated dollar-backed stablecoins such as PAX:

Is the Decline or Possible Collapse of Tether Good or Bad for the Crypto Markets?

Over the short-term, a correction in the price of Tether might be a good thing since represents the inherent risk of holding an unregulated dollar-backed stablecoin:

Also, the flight to regulated stablecoins is a good thing for the crypto space, because until recently, the volume of trading in them was tiny compared to Tether’s trading volume.

If Tether does eventually collapse, which seems unlikely given the attractions of an unregulated theoretically “dollar-backed” to certain traders and exchanges, it will probably hurt the crypto markets in the short term, but not in the long term.

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