Can we trust Tether?

Conor Maloney

February 8, 2018

Should you trust Tether?

Here’s one of the big problems faced by people holding and trading crypto: if prices start to drop and you want to get out fast, it can be difficult to cash it in for fiat. This is where Tether comes in.

Many of us dream of a day when it won’t be necessary to cash out at all, and crypto will be a stable and widely used form of currency. You’ll be able to leave your money in a wallet and use a crypto debit card to make your daily transactions without the concern that overnight your funds will suddenly lose value. That’s the goal, but we’re a long way off from that yet.

That’s a problem that the Tether project proposes to solve by creating a token with a value constantly equal to that of the US dollar. By holding a US dollar for every USDT Tether token, Tether claim that the value is pegged to the USD and will remain stable.

This is great for people looking to secure profits from their holdings, and even better for day traders – nobody wants to profit by exchanging one coin for another only to see both plummet in value.In theory, it’s a great idea – people fleeing market volatility can seek refuge in by exchanging coins for USDT and either cash out in fiat or swap back in when things have died down. But as you may have heard, it’s not that simple.

The Tether project has been marred by widespread fear, uncertainty, doubt, and a host of different rumours claiming that the project is a scam. The aim of this article isn’t to provide financial advice as to whether you should trade USDT or not, but just to get a closer look at the rumours and their validity so that you can make up your own mind as to whether Tether can be trusted or not.

The issue behind Tether is that as more people transfer holdings to USDT, Tether has to “print” or create more tokens and put them in circulation. As long as the company has the fiat assets to back that up, there’s no cause for concern. And obviously, they have those assets, right?

Yeah – about that. While Tether certainly claim to have the $2 billion USD required to back up USDT, the lack of transparency on that claim is a major cause for concern. Tether recently dissolved the relationship between them and their third party auditor, and have stated that they can’t reveal their account balance due to issues with the US government. Feeling uncomfortable yet? Let’s start at the beginning.

Think about that for a moment

This is a token supposedly pegged to the US dollar. 1 USDT = 1 USD, that’s the whole point. What happened was, people began to sell their Tether at below market value in case they couldn’t get out in time. Of course, that new low price became the market value, and the price dropped 8% – not even noteworthy for most volatile cryptocurrencies, but a huge red flag for Tether, and entirely created by the panic of the holders.

It ended up being an unfounded panic, and nobody had their Tether frozen or removed permanently – however, many people “lost out” simply by choosing to sell their assets at a reduced price, defeating the purpose of the token. The company was only indirectly at fault – panic was to blame here, but the situation illustrated that the token could be destabilized with relative ease.

The very next month saw a market pullback in crypto across the board, leading people to once again flee to Tether. However, so soon after the April scare things weren’t quite stable yet, and the sudden surge in people buying back in to Tether to secure their holdings led to the price increasing and decreasing by several cents, most likely due to day traders taking advantage of the volatility that Tether is never supposed to exhibit.

These were far from the only problems that came into play

In September 2017, the company was “audited” and everything was said to be in order, with 1 USD per one USDT in the company’s possession. Despite my reassuring phrasing, everything was not quite above board here – the audit was revealed to be an internal memo, and not an audit at all. The auditors themselves, Freidman LLP, said that the information was “not to be relied upon”.

Seemingly Tether had the money alright, but there was no verification of whether the funds were procured legally, whether they related to the project, and the name of the bank was redacted. Furthermore, the amount of USDT in circulation and USD required to back it up has drastically increased since that time.

Everyone happy so far? No? Moving on, then.

In November 2017, $31 million dollars were stolen from Tether’s main wallet, and in the same month the company parted ways with their third party auditor Freidman LLP. The scepticism and doubt surrounding the project was further fuelled by the reason cited for this by Tether themselves, who blamed Freidman’s “excruciatingly detailed procedures”. Ditching an auditor for being too thorough after they admitted that they hadn’t been thorough enough to validate the project seems like just about the worst PR move I can think of, and many others felt the same way.

Finally, the next month dealt the project another blow – in September 2017 project details were leaked in the Paradise Papers, revealing that an offshore law firm helped Bitfinex founders Phil Potter and Giancarlo Davisini incorporate Tether in the British Virgin Islands, something that further reduces the transparency of the company and sheds more doubt on their intentions in the eyes of many sceptical observers.

The remote tax haven location didn’t stop US regulators from issuing Bitfinex a subpoena in December 2017, the results of which may eventually shed light on the reality of Tether’s holdings. While many big names in crypto seem to think that Tether have the assets to put their money where their mouth is, the fact is that they haven’t proved it yet – there’s no evidence whatsoever that USDT is indeed backed by USD, and that’s a pretty scary thought. Is Tether a safe place to keep your money?

The convenience offered by a stable cryptocurrency is plainly evident, and Tether has been a great project for a lot of people.

As in all things crypto, there’s a risk involved. In Tether’s case, they’re unregulated, centralized, USDT isn’t classified as a financial instrument, and Tether have no legal obligation to redeem USDT for your fiat – so bear that in mind when you’re looking for a place to wait out the storm of the next market scare.

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