Although the cryptocurrency Tether is less well known, the irony is that it used more than the world’s most popular Bitcoin.
This is because Tether – USDT – is one of the financial instruments that opens the door to a vast world of cryptocurrencies.
Except for the most major currencies, such as Ethereum and Bitcoin, cryptocurrencies cannot be purchased with dollars, euros, or others directly. On most platforms, customers have to go through an intermediary currency before accessing any cryptocurrency. The most used for this purpose is Tether.
According to data compiled by asset management firm NYDIG, since 2019, about 60% of Bitcoin transactions go through USDT first.
And if the rest of the cryptocurrencies that have been transferred to this coin are added, we can see why Tether has dominated the market since its launch at the end of 2014.
Its parity with the dollar makes it very stable, as it maintains a fixed or very close value to the US currency, in stark contrast to the extreme volatility of other cryptocurrencies.
This is the main feature that classifies Tether as a “stable cryptocurrency.
“The idea is that, whenever users want, they should be able to exchange their USDT for dollars back without being affected by price fluctuations like those typically occur in other cryptocurrencies thanks to the fact that the price is roughly pegged to the dollar,” BBC Mundo reported, About experts at BBVA Bank, one of the largest banks in Spain.
Tether has a market capitalization of around $60 billion, according to crypto price information platform CoinGecko. As a testament to how much it has been used in the system, its trading volume in late May was more than $162 billion, compared to just $65 billion for Bitcoin.
To the extent that large corporations and investment funds are adopting or opening their doors to cryptocurrencies, the use of Tether has spread among retail investors, causing the market for this currency to boom like never before.
The company that issues the USDT is obligated to keep the same number of dollars in reserve on its balance sheet corresponding to the value of Tether in circulation.
This is the main difference between it and the rest of the digital currencies, as this currency relies on a central entity that supports the value with real assets behind it. This contrasts with the vision of the creator of Bitcoin, whose pseudonym is Satoshi Nakamoto, of exchanging cryptocurrency between users, without intermediaries or anyone to control the operations.
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Tehther – Bottleneck
But Tether’s role as a liquidity provider makes its issuer, Tether Ltd, more like a central bank. This has given it many uses, but it has also given it an “excessive power” that many cryptocurrency analysts and experts have warned about.
Accordingly, the use of Tether is a bottleneck for the entire market. But, as analyst Josh Younger, an expert at investment bank JP Morgan, explained in a lengthy report, this could have unintended consequences.
“If a problem arises that may affect investors’ willingness or ability to use USDT, the most likely outcome will be consequences for the liquidity of the cryptocurrency market that can be amplified by its disproportionate impact on high-frequency trading, which dominates the flows.”
A little transparency
Another problem attributed to the cryptocurrency Tether is poor transparency. Since its inception, Tether Ltd has made sure to keep its reserves in cash equivalents of the digital currency in circulation, i.e. when it issues USDT, it puts dollars on its balance sheet.
However, an investigation by the New York Attorney General showed that this was not always the case. Specifically, prosecutors investigated Tether exchange Bitfinex for two years for allegedly making “false statements” about its support for the virtual currency and “covering up” huge losses.
The legal process was settled in February with a two-million-dollar deal, according to the same claim, with the directors of Bitfinex and Tether agreeing to stop operating in the country, pay an $18.5 million fine, and “increase transparency,” without “acknowledging or denying” the fraud allegations by the authorities.
Stewart Hoegner, Tether’s general counsel, insisted in a statement that
“Tether has always been fully backed.”
Tether – Requirements
However, due to this agreement with the attorney general’s office, the company will have to publish its report on its reserves several times, putting an end to the directors’ refusal to undergo independent review.
The first public documents already available about Tether revealed that its cash reserves are the same as they were in 2019 and that it has not kept pace with issuance, which once again set off alarm bells.
Its total holdings are $2.1 billion in various assets, just 3.5% of USDT in circulation.
Finally, the JPMorgan specialist recalls that although Tether is immersed in a classic liquidity shift in the line of traditional commercial banks, it is not subject to the same strict supervision and disclosure regime as those entities.
This still presents a risk for those involved in the cryptocurrency market.