Tether is meant to be
'tethered' to the value of the US dollar.
Sean
Gallup/Getty Images
Bitcoin price fell on Tuesday on news that US
regulators are investigating companies behind cryptocurrency
Tether.
Rumours have been circulating that Tether, a crypto
pegged to the dollar, does not have the currency reserves to
back it up.
The company behind Tether strongly denies
allegations.
Fears that if they are true, Tether crash could tank
bitcoin and crypto exchanges due to the central role it plays
in the market.
LONDON — The price of bitcoin dived late on Tuesday night after
news that two companies, Bitfinex and Tether,
had been subpoenaed by the US Commodity Futures Trading
Commission (CFTC).
Concerns have been swirling in the cryptocurrency market for
months about the status of Tether, a cryptocurrency issued by
Tether Limited. It plays a central role in the operation of many
leading cryptocurrency exchanges, including Bitfinex, but there
is speculation that the company behind it may not hold the dollar
reserves it claims.
If this theory is true, it has the potential to crash the price
of bitcoin and potentially hobble the operations of many
exchanges. Here's what you need to know:
What is Tether?
The Tether symbol.
Tether
Tether is a cryptocurrency that's meant to be backed one-for-one
by the US dollar. The idea is to have the price stability of the
dollar combined with the operational ability of a cryptocurrency.
It's what people in the crypto world call a "stable coin."
The cryptocurrency was created in 2015, originally called
Realcoin, and there is $2 billion-worth of so-called USDT in
circulation today, according to
industry data source CoinMarketCap.com. It was
hit by a $31 million hack last November.
Who is behind it?
Tether tokens are issued by Tether Limited,
a company based in the British Virgin Islands according to the
New York Times. Tether's website says it is incorporated in
Hong Kong, with offices in the US.
The company has many of the same management team as
Bitfinex, the Hong Kong-based cryptocurrency exchange that is one
of the biggest in the world. Jan Ludovicus van der Velde is
CEO of both Bitfinex and Tether, and Philip Potter is chief
strategy officer for both businesses, for example.
Who uses Tether?
"Anybody who's trading on some of the major exchanges [holds
Tethers]," Mati Greenspan, a market analyst with eToro, told
Business Insider. "What exchanges like Bitfinex do is, rather
than having a client's balance held in dollars, they hold them in
USDT. So if somebody's got their money on an exchange such as
Bitfinex and they don't have any current open positions, they're
actually probably in Tether."
Many cryptocurrency exchanges have difficulty working with
traditional banks, who are wary of working with crypto
businesses. Tether offers a stable alternative, offering the low
volatility of the dollar to both exchanges and users.
An industry source who didn't want to be quoted told BI: "Tether
is used by crypto-to-crypto exchanges as it allows them to price
crypto assets in USD without having to maintain/own
USD-denominated bank accounts – this is of particular interest to
many platforms due to the difficulties involved in maintaining
banking relationships in the crypto space."
Tether's website says that it "allows you to store, send and
receive digital tokens person-to-person, globally, instantly, and
securely for a fraction of the cost of alternatives." Holding
client funds as Tether means exchanges can cut down on
transaction costs until a client wants to redeem their funds as
dollars. Then, Tether can be exchanged for those dollars.
Traders also use USDT to lock in returns during times of
volatility and also transfer funds from one platform to another.
Why are people worried?
The company that controls and issues Tether is meant to hold US
dollar reserves to back up all of the Tethers that have been
issued — a little like the Federal Reserve backstops dollars with
gold. In theory, Tether holders can sell one USDT back to Tether
Limited for $1.
Bitfinex
and Tether share management teams.
REUTERS/Dado
Ruvic/Illustration
But fears have emerged in the cryptocurrency community that
Tether Limited doesn't hold sufficient currency reserves to back
all the Tethers in circulation.
"The claim is — and the claim has been growing lately — that
they're not holding those reserves," Greenspan told BI. "They
haven't been incredibly transparent about where they're holding
them and how much they're holding in different places."
The New York Times reported in November: "One persistent
online critic, going by the screen name Bitfinex’ed, has written
several very detailed
essays on Medium arguing that Bitfinex appears to be creating
Tether coins out of thin air and then using them to buy Bitcoin
and push the price up."
A recent anonymous statistical analysis of Tether published
online and circulated in the crypto community made the same
claim, saying: "It is
highly unlikely that Tether is growing through any organic
business process, rather that they are printing in response to
market conditions."
The report claims that the printing of Tethers tends to coincide
with a dip in the price of bitcoin, suggesting it may be being
used to buy up cheap bitcoin. "Tether printing moves the market
appreciably; 48.8% of BTC’s price rise in the period studied
occurred in the two-hour periods following the arrival of 91
different Tether grants to the Bitfinex wallet," the analysis
said.
$850 million worth of new Tethers have been printed in January
alone and many market participants are worried about the pace at
which new Tethers are being minted without proper documentation
showing their backing.
Tether
published an accounting document last September meant to verify
its holdings but a lawyer told the New York Times that the
phrasing of the document "did not prove that the Tether coins are
backed by dollars."
Accountants Friedman LLP prepared that document and were auditing
Tether's books fully, but
news emerged earlier this week that the relationship has
"dissolved." This has further fuelled concerns.
What could it mean for crypto markets?
If there is a problem with Tether, it could have wider knock-on
effects for the cryptocurrency market as a whole due to its
central role in many exchanges.
"The issue is that the volumes against Tether have been growing
lately," Greenspan said. "They've been above 10% of total volumes
on bitcoin for a few weeks already.
Tether's website.
Screenshot/Tether
"If there aren't sufficient reserves in US dollars, then the
price of Tether should not then be pegged to the US dollar and
it'll just be decided by the market."
The fear is that a collapse in the price of Tether could also
bring about a collapse in the price of bitcoin and other crypto
assets that people have been trading with USDT.
The Daily Express
predicted a price drop of as much as 80%, calling it a
"bloodbath." Bitcoin fell modestly on the news Tuesday that
the CFTC has subpoenaed Tether and Bitfinex.
If Tether becomes untethered from the dollar then it will also
cause problems for exchanges that use it as a proxy for client
funds. This could potentially create liquidity issues and, in a
worst-case scenario, force them to seek extra capital. Wired
wrote this week:
"If traders lose faith in tether, they could end up triggering
the crypto version of a bank run."
What does the company behind it say?
Tether Limited has strongly denied all the accusations against
it, insisting that it has the dollar reserves to back up all
Tethers in circulation and saying it is using its funds properly.
The company said in a
statement in December that it is aware of "questions and
doubts throughout the community" but said it "cannot disclose
much about ongoing investigations," related to the hack in
November.
It said that accusations
it does not hold dollars to back up its cryptocurrency are
"uninformed and baseless" but admitted that it "cannot create
or redeem tether for any U.S.-based customers at this time." The
company has hired a law firm to take legal action against the
person behind the anonymous Bitfinex'ed Twitter account.
Tether told Business Insider this week in an emailed response to
questions about its audit:
"We confirm that the relationship with Friedman is dissolved.
Given the excruciatingly detailed procedures Friedman was
undertaking for the relatively simple balance sheet of Tether, it
became clear that an audit would be unattainable in a reasonable
time frame. As Tether is the first company in the space to
undergo this process and pursue this level of transparency, there
is no precedent set to guide the process nor any benchmark
against which to measure its success.
"We remain committed to the process and, as we’ve consistently
done, we will continue to provide material updates at the
appropriate times."
The company told Bloomberg in an email responding to the CFTC
subpoena: "We routinely receive legal process from law
enforcement agents and regulators conducting investigations. It
is our policy not to comment on any such requests."
What happens next?
"I hope that this whole thing gets shaken out as soon as
possible," Greenspan told BI. "The uncertainty isn't very good
for the market."
After a huge price run-up before Christmas, the price of bitcoin
has collapsed by around 40% in January. Other cryptocurrencies
have seen similar retractions. While this slump is not driven by
Tether fears, the issue comes at a jittery time for
cryptocurrencies.
The next steps for Tether are somewhat unclear at this stage.
Possible scenarios include further action from US regulators or
Tether Limited engaging a new auditor to look over its books.
Nolan Bauerle, director of research at CoinDesk,
told Business Insider he's optimistic because Tether has
issued new USDT since the CFTC's subpoena in early December.
He said: "That means Bitfinex has issued Tether under the eye of
the CFTC since then, which in important ways suggests the coin is
indeed backed by USD. If Bitfinex has been issuing Tether not
sufficiently backed by USD, despite being under CFTC monitoring,
it'll be one of the most brazen acts we've seen from an exchange
in this space."
Whatever happens, Greenspan is optimistic that cryptocurrency
markets can survive it.
"Look, this market survived a blanket ban from China," he said.
"It can survive anything."
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