By Alex Verge (Reporter, UK)
The stablecoin Tether (USDT) is the eighth largest cryptocurrency in terms of market cap and is the second most-traded coin behind Bitcoin, but it is finding it difficult to stay away from controversy. Quick reminder – a stablecoin, sometimes called stable token, is a digital asset that maintains price stability by being pegged to the value of a stable asset, like a fiat currency. In the case of Tether, tokens are allegedly backed by physical US dollars at a 1:1 ratio. Many people in the industry recognise the need for stablecoins if cryptocurrency markets are to mature. But, in light of the issues surrounding Tether, many also think competition is due and necessary.
Two main issues have emerged over the cryptocurrency. A running concern has been the lack of transparency displayed by Tether and its inability to be properly audited. A preliminary report was conducted by audit firm Friedman LLP in September 2017, saying that Tether had $442.9m in cash reserves, matching the outstanding issuance of USDT. However, Tether Limited, the company that issues Tether tokens, announced in January that its relationship with the audit firm had dissolved and that a comprehensive audit would not eventuate. This caused concerns in the crypto community, particularly due to the printing shortly after of an additional 300 million USDT. Subsequently, Tether engaged Freeh, Sporkin & Sullivan LLP (FSS), a law firm co-founded by former FBI director Louis Freeh, to look into its financial situation. In June, a report by FFS known as the Tether Transparency Update was published. Again, critics were swift to point out that the report, three pages long, was not an audit, since all it showed was that at a single point in time, the 1st of June 2018, Tether held enough US dollars to back each USDT. What it did not show was that Tether has consistently backed its coins in the past, nor whether it is doing so now.
Although the Tether Transparency Update does constitute some evidence, we are talking about $3 billion of unaudited liability. Stuart Hoegner, Tether’s general counsel, admitted that Tether cannot be audited by the major auditing firms (EY, Deloitte, KPMG, PwC) since they “are anathema to that level of risk.” Under US law, auditors can be held liable for negligence to the extent of fraud. Given past occurrences in the crypto industry and the lack of regulatory oversight, the position of these auditing firms is understandable.
The legitimacy of Tether is also in question due to reports it has been ‘printing’ (i.e. issuing) USDT coins to prop-up the price of Bitcoin. According to researchers at the University of Texas: “Tether seems to be used both to stabilise and manipulate Bitcoin prices.” A research paper by Chainanalysis, a firm that analyses blockchain data, linked Tether printing to several altcoins, such as Litecoin and Ether, showing an eighty-five percent correlation which, subsequent to the general bear market affecting cryptocurrencies, fell to an average of seven percent. Back in December 2017, it was widely reported that the US Commodity Futures Trading Commission (CFTC) sent subpoenas to both Tether and Bitfinex – one of the world’s largest crypto exchanges, and which is closely linked to Tether – citing an anonymous source that claimed the company was issuing USDT to raise the price of Bitcoin.
Since then fears have somewhat subsided, with certain sources refuting the theory that Tether is propping-up prices, or at least that it is not doing so any longer. According to Bloomberg, huge influxes of Tether over the course of August failed to increase or stabilise the prices of Bitcoin, or other Tether-linked cryptocurrencies, like EOS and NEO. In total, Tether printed over $500m, which went straight to Bifinex, with the majority of those then being sent to a further six exchanges, namely Binance, Bittrex, Huobi, Kraken, OKEx, and Poloniex.
Although it did not receive as much coverage as the paper from the University of Texas, a Queensland University Professor wrote his own paper around the same time which concluded the following:
“In conclusion, we do not find any evidence suggesting that Tether issuances cause subsequent increases in Bitcoin returns. However, we do find that Tether issuances are highly autocorrelated and cause subsequent increases in Bitcoin (and Tether) trading volume over the short term.” With no definitive answers yet, it seems we will have to wait for the next substantial increases in Bitcoin prices so further research can be conducted into such trends.”
In spite of all the uncertainty around it, Tether has experienced huge growth, which to many highlights further the need for stablecoins in the crypto marketplace. According to Philip Gradwell, the chief economist at Chainanalysis, this need stems from the fact that crypto-to-crypto exchanges do no offer fiat “as most fiat banks would not want to work with exchanges that offer trading in large numbers of altcoins.” In his eyes, “the future depends a lot on whether crypto-to-crypto exchanges start accepting fiat as they get their compliance in order, and whether altcoin trading continues, given the declines in that.” Additionally, due to the bear market, Tether has been like a bank in the crypto space in that it provides a place for investors to store funds whilst remaining on crypto exchanges, thereby allowing them to withstand the price volatility of the market.
In consideration of this apparent need for stablecoins, it is not surprising that competitors of Tether seem to be stepping up their game. Gradwell has predicted that “if Tether cannot be audited, then it will face competition from stablecoins that are more transparently backed or are algorithmic.” Only recently, Digifinex, a top-20 crypto exchange based in Singapore, announced it was replacing its platform’s stablecoin, Tether’s USDT, with TrustToken’s TrueUSD (TUSD). Digifinex co-founder, Kiana Shek, spoke to CoinDesk, a news site specialising in Bitcoin and digital currencies, and said “I simply don’t believe in Tether” and explained she had been trying to get rid of USDT for months. Another blow for Tether will have been the news in early September that New York State had approved both the stablecoins of Gemini Trust Company and of Paxos Trust Company, meaning these will offer a degree of protection and assurance for investors which is not guaranteed by Tether.
Consistently, Tether has maintained that it holds enough US dollars in reserve to match its issuance of USD, and that it has not manipulated the price of Bitcoin, but, if it keeps displaying the same lack of transparency, it seems difficult to see how it will retain the trust of investors in the long-run. At the moment, other tokens are still behind – the market cap of TrueUSD stands at just over $100m, while that of Tether is just under $2.8bn, but in the near-future we may see more instances like what happened with Digifinex.