Tether, abbreviated USDT, is a cryptocurrency whose value is linked to the US dollar. Put simply, you could say that USDT is a cryptocurrency version of the US dollar. The value of Tether should preferably remain at a stable level of USD 1.00 and should not deviate more or less than 1 cent from the US dollar. Since the company is not a bank after Tether, Tether Limited, and is therefore not entitled to print money, the company undertakes to maintain reserves in USD at a ratio of 1:1 to the USDT.
However, it is important to note that Tether Limited is not obliged to exchange tether for US dollars. The legals expressly state:
There is no contractual right or other right or remedy against us to exchange or exchange your Tethers for money. We do not guarantee any right of return or exchange of Tethers by us for money. There is no guarantee against losses when you buy, trade, sell or redeem Tethers.
Numerous critics strongly doubt whether the company behind Tether actually holds US dollars in a ratio of 1:1 to Tether and have never been sufficiently proven by Tether. More about this later in the Tether controversy.
The fact is, however, that tether enjoyed growing popularity in 2017. The fixed price link to the US dollar exchange rate on numerous crypto currency exchanges such as Binance, Poloniex and Bittrex has led to Tether replacing trading in Fiat currencies.
Why does USDT exist?
Tether has practically become the standard trading pair on almost all major crypto currency exchanges. And not without reason. Tether offers numerous advantages over the exchange for Fiat:
- Stablecoin: Crypto currencies are subject to high volatility. Traders can exchange their Bitcoins and Altcoins for the stable USDT and hedge profits or avoid losses.
- Shortened transaction times: Tether allows traders on exchanges to immediately exchange other crypto currencies for USDT. In contrast, the exchange for fiat currencies may take several days.
- No transaction fees: There are only the normal fees of a trade at the respective stock exchange, but no withdrawal fees.
The Tether Controversy
Due to the importance of tether on many major crypto currency exchanges, USDT has become virtually synonymous with the Fiat price. As long as a tether actually represents the value of a USD, this seems harmless. However, if Tether Limited could print money out of nothing and thus control the market according to its own interests, this would be very questionable.
Similar to a central bank, Tether Limited could pursue a pricing policy to promote its own interests. For example, Tether Limited may have issued new USDT to boost the market. Bitfinex may have benefited from increased trading volume due to the fees charged.
In June 2018, researchers at the University of Texas published a study to prove that Tether was used to support the price of Bitcoin in times of market downturns. Further studies have also dealt with the topic. However, some of the studies have come to different conclusions. Other studies point to an insignificant influence and other, more important factors for the market movement at the end of 2017. Nevertheless, it is noticeable that very often new tether were printed when the Bitcoin price was at an important support point.
In addition, however, there are also great doubts as to whether tether is actually covered 1:1 with the US dollar on a bank account. From October 2017, approximately USDT 1.8 billion was spent within three months, although Wells Fargo ceased to be a banking partner during this period. In addition, several attempts at an audit by external auditors have failed. In 2017, for example, Tether Limited commissioned the auditing company Friedman, LLP to carry out an audit. However, after 5 months Tether broke off the test without a result.
The (controversial) chronicle of USDT
- July 2014: Brock Pierce (the Disney star of “The Mighty Ducks”) announces Realcoin, a crypto currency supported by the value of the US dollar.
- September 2014: Tether Limited is founded in the British Virgin Islands by Dutchman Jan Ludovicus van der Velde, who also owns Bitfinex.
- November 2014 – Brock Pierce sells Realcoin to Tether Limited. In addition, Brock establishes Pierce Noble Markets in Puerto Rico, better known as Noble Bank. Realcoin then rebranded to Tether. At the same time, Tether announces several partners, including Bitfinex.
- February 2015 – Tether starts trading. The amount of tether in circulation will remain relatively constant until the end of 2016.
- March 2017 – Wells Fargo, the last bank ready to handle Bitfinex transactions, interrupts all services for Bitfinex and Tether. Bitfinex and Tether do not name the new banking partners. As it turned out later, Noble Bank took over the banking services from Brock Pierce.
- November 2017 – The “Paradise Papers” show that Bitfinex and Tether are run by the same people.
- December 2017 – The CFTC sends a precharge to Bitfinex and Tether. However, the content and the document itself will not be published.
- January 2018: The amount of tether in circulation increased from around 450 million USDT at the end of October 2017 to more than 2.27 billion USDT at the end of the year. Doubts are growing as to whether Tether Limited was able to build up such assets within this short period of time.
- January 2018 – After five months Tether separates from the auditor Friedman LLP. The auditors call Bitfinex and Tether “not testable”.
- May 2018 – The U.S. Department of Justice opens an investigation into whether tether manipulates the price of Bitcoin and other crypto currencies.
- October 2018 – The now primary banking partner Noble Bank breaks off the partnership – Numerous users complain about missing cash deposits, Bitfinex blocks Fiat deposits for one week – There is renewed speculation that Bitfinex and therefore Tether could be heading for bankruptcy