Tether and the Never-Ending Scandal: What Does the Future Hold for Stablecoins?

What started as a notable solution to the highly volatile nature of cryptocurrency markets has since turned into a never-ending scandal. Tether and its USDT token was launched as a means to protect cryptocurrency holdings against wild market swings. In doing so, the USDT token is theoretically pegged to the dollar and thus, bills itself as a cryptocurrency store of value.

At the time of writing, the USDT token represents $2.8 billion in client funds, all of which, reportedly, is backed by real-world dollars.

However, the general consensus in the blockchain space is that things aren’t quite what they seem.

Tether: How many more scandals will we see?

In March 2019 it was reported that Tether updated their terms and conditions without making the amendment public. If a traditional PLC did the same thing, not only would there be an investor, media and governmental uproar, but the company would likely face serious regulatory sanctions.

The aforementioned Tether update states that reserves "may include assets other than fiat currency". In layman’s terms, this means that the USDT is potentially not worth the cryptographic paper it's written on, insofar that Tether doesn’t actually hold enough reserves to cover its circulating supply.

If you thought that things couldn't get any worse for the beleaguered project, news has recently surfaced that leading exchange Bitfinex used $850 million worth of USDT tokens to covers its losses. Once again, in the corporate world, such a non-disclosure would result in both institutional and personal fines, potentially worse.

The murky relationship between Bitfinex and Tether is nothing new, as both entities appear to be operated by the same company - British Virgin Islands-registered iFinex Inc.

So where does this leave a cryptocurrency industry that is in dire need of a true store of value that has the capacity to protect personal wealth from the threats of volatility, inflation and market downturns?

Ultimately, the most pertinent characteristic that a legitimate stablecoin must yield is an ongoing audit by a reputable third party entity. Anything less and investors should tread with extreme caution.

Stablecoins are here to stay - but a third-party audit is paramount

One such example of a notable stablecoin is that of TrueUSD (TUSD). Much like its USDT counterpart, TUSD claims to be backed 100% by real-world dollars. However, the key difference between the two projects is that TrueUSD has already had its reserves verified and validated by third-party auditors.

Cohen & Company Accounting Firm - the entity behind the audit, concluded that the amount of dollars held in reserve by TrueUSD surpasses the amount of TUSD tokens in circulation.

An additional project that appears to be making headway in the stablecoin arena is that of diamDEXX, DIAM. Unlike the aforementioned concept of both TrueUSD and Tether, diamDEXX instead offers the option to purchase a stablecoin that is backed fully by diamonds, within its platform.

Diamonds have a long-standing history as a means to store value, protect wealth, and shield against market fluctuations, which makes it an ideal reserve against both the cryptocurrency and fiat-money arenas.

In order to retain the integrity of the DIAM tokens, reserves are fully audited by IDEX (International Diamond Exchange) - a reputable third-party diamond exchange with an established history that spans almost two decades.

CEO of the diamDEXX project - Jeremy Dahan, explained:  “It's become a common occurrence to see investors disappointed in the crypto world. Nowadays, Tether has gone so far to lose its stable value that people are starting to speculate on its price, such as they do with other currencies. Remember, USDT is supposed to be a store of value.”

Dahan continued by adding that “In my opinion, investors should openly demand a 3rd-party auditor to intervene and vouch for the funds at all times. This would, at least in principle, avoid scandals such as an $850 million 'discrepancy'”.

The future of stablecoins

Ultimately, it remains to be seen how long Tether can hold on to its status as the de-facto stablecoin. The only real surprise is that the project has been able to hold on to its crown for so long.

It is safe to say that stablecoins will play a significant role in the future of cryptocurrencies and blockchain technology. The key takeaway is that the space must operate in the most transparent of manners. At an absolute minimum, this must involve an external third-party audit of stablecoin reserves by a reputable auditor.

CME Looks to Double Bitcoin Futures Limit, but Is This Wise?

The Chicago Mercantile Exchange (CME) has a new request for its regulator, as it looks to double open position limits on bitcoin futures contracts in the face of significant interest.

Nasdaq reports that the CME has already petitioned its regulatory body, the Commodity Futures Trading Commission (CTFC), asking for an increase from 1000 contracts per spot month to 2000 per investor. Each contract represents five BTC, so essentially, at its peak,  a single investor's total position may edge towards a monumental 10,000 BTC.

This is in direct response to the contract's recent growth which is currently depicting record levels of activity, citing $370 million being traded per day. A spokesperson for the CME noted that the idea to increase limits was proposed on the continued maturity of the market:

Based on the significant growth and acceptance of our financially-settled CME Bitcoin futures markets, as well as our analysis of the underlying bitcoin market.

However, as Nasdaq writes the increase in the upper limit of positions is somewhat superfluous. As of July, the number of open interest contracts reached an all-time high of just 6100; given this, it seems the CME may be future-proofing.

Open to Manipulation?

However, concerns remain about the limit increase, as without them, the potential for manipulation rises; often to the detriment to the underlying asset. Although, as per the CTFC website, the threat of manipulation from bitcoin futures contracts is "low":

In general, position limits are not needed for markets where the threat of market manipulation is non-existent or very low.

Instead, Nasdaq posited that this might point to a lessening on the CTFC's strict rule of bitcoin; as well as a maturing of the market in general.

Nevertheless, some believe the CME's bitcoin futures contracts do pose a significant threat to the price of BTC; with some suggesting that blatant manipulation continues unchecked within the market.

As reported, there seems to be a correlation between the expiry dates of CME bitcoin futures contracts and a lull in the price point of BTC. In several instances, a significant drop in bitcoin's price has coincided with a closure from the CME. The most recent example of this occurred on Labor Day, September 2, when bitcoin rose an extraordinary 8% shortly after the CME shut.

Crypto analyst, Alex Kruger, highlighted this, noting the large gaps which formed on the CME chart, from the price discrepancy before and after closing.

This has become a pretty accepted practice within the market. Kruger has even gone to the lengths of compiling statistics each time this phenomenon transpired:

On these occasions, bitcoin cited an average 4.6% price discrepancy following the close of the CME.

Whether this is a coincidence or the market is indeed being actively manipulated is as yet unclear. Either way, with the increase of these limits it might be only a matter of time until we know for sure.

Featured Image Credit: Photo via Pixabay.com