Tether is a type of cryptocurrency belonging to a category called "stablecoins." Stablecoins attempt to minimize volatility by having their value pegged to a traditional asset, in Tether's case, the US dollar.
The idea is that 1 USDT should always be worth approximately $1. This provides a less unpredictable asset for crypto traders to use as they move in and out of other, more volatile cryptocurrencies.
In theory, Tether Limited, the company behind USDT, holds actual US dollars in reserves equal to the number of USDT tokens in circulation. This should guarantee that anyone holding USDT can always exchange it for $1.
When someone wants to buy USDT, they deposit fiat currency (like US dollars) with Tether Limited. In return, they receive the equivalent amount in newly created USDT. The process can work in reverse.
A USDT holder can "burn" (destroy) their tokens in exchange for an equivalent amount of US dollars from Tether's reserves.
Stability: USDT aims to be a safe haven within the often chaotic crypto markets.
Trading: Traders use it to quickly exit positions in volatile cryptocurrencies without having to cash out to traditional fiat currency.
Global Transactions: Tether can facilitate easier, cheaper cross-border transactions compared to dealing with traditional banks.
Lack of Transparency: Tether Limited has faced criticism for a lack of transparency about its true reserves. Doubts exist over whether it truly holds enough to back all circulating USDT.
Regulatory Scrutiny: Tether has been fined by regulators and faces ongoing investigations into its business practices.
Peg Stability: Even if fully backed, there is still a risk that the peg may temporarily break during periods of extreme market stress.
Here's a breakdown of the main controversies surrounding Tether (USDT), the world's largest stablecoin:
Transparency and Backing Concerns:
Central Issue: The core controversy is whether Tether Limited actually holds enough US dollar reserves (or equivalent assets) to guarantee that each USDT token is truly backed 1:1 with the value of a US dollar.
Doubtful Statements: Tether initially claimed to be fully backed by US dollars. Over time, this expanded to include other assets like cash equivalents, commercial paper, and other less liquid holdings.
Lack of Audits: Tether has been reluctant to provide full, independent audits. They often release attestations, which are less rigorous, leaving many unsatisfied with the level of proof offered.
Accusations of Market Manipulation:
Concerns: Some researchers and critics allege that Tether may issue unbacked USDT during specific periods to artificially pump up the price of Bitcoin and other cryptocurrencies.
Limited Evidence: While suspicion exists, proving this type of manipulation definitively is incredibly difficult.
Regulatory Fines and Investigations:
New York Settlement: In 2021, Tether agreed to pay $18.5 million in penalties to settle charges brought by the New York Attorney General that it misrepresented the extent of its reserves.
Ongoing Scrutiny: Tether remains under investigation by regulatory bodies, raising uncertainty about potential future penalties and the impact on the long-term viability of the stablecoin.
Peg Stability Concerns:
Even with full backing, extreme market shocks could lead to a temporary loss of the peg between USDT and the US dollar. This creates a degree of risk, particularly for large holders.
Past De-pegging: There have been moments where USDT has briefly traded slightly above or below its $1 target. However, these deviations have usually been minor and relatively short-lived.
Why the Controversy Matters:
Stablecoin Importance: Tether's huge usage makes it systemically important within the crypto world.
Trust Undermined: Lack of clarity about its true reserves erodes confidence in the cryptocurrency market as a whole, hindering broader adoption.
Risk Exposure: If Tether is less backed than advertised, a collapse or bank-run-like scenario could cause massive losses for investors and wreak havoc on the whole crypto ecosystem.
Despite the controversy, USDT has maintained its dominant position. This suggests many investors either accept the company's explanations or are willing to assume the risk for the benefits provided by a major stablecoin.
As of mid-Febrauary 2024, Tether maintains its status as the third largest cryptocurrency by market capitalisation, behind - though considerably - only Bitcoin and Ethereum, with an MC of nearly 100 billion dollars.
