The New York State government dealt another blow to the cryptocurrency industry this week. New York announced that their investigation into Bitfinex exposed an immense shortfall in their Tether (USDT) reserve fund. Over $850 million USD is missing or blocked from access to the group that manages USDT. As a direct result of these announcements, Tether is suffering an immense store-of-value crisis that threatens to damage the entire industry. Without physical monetary reserves to back up the price of Tether, it can no longer be considered a peg to the US Dollar. This is a major problem for what is supposed to be a “stablecoin.”
This comes in the immediate aftermath of New York rejecting another exchange’s application for a BitLicense. Bittrex had sought the license to allow their operation within New York State. As one of the first states to establish crypto-regulations, New York is often seen as one of the harshest environments for the cryptocurrency industry. With these two actions, they are beginning to impact the market outside of the state itself.
The Ticking Time-Bomb of USDT
The existence of a stablecoin such as Tether was necessary for the growth of the cryptocurrency industry. However, most long-term cryptocurrency investors have long suspected that Tether could not live up to their promises. Immediately after the crypto-bubble burst, Tether dissolved their relationship with Friedman LLP – their auditing firm. Soon after, they produced their own report – which did very little to soothe investor confidence.
As a result, few are surprised by the New York AG’s revelation. Some even welcome the announcement as a potential push towards more trustworthy stablecoins. The specter of Tether’s failure has haunted many crypto-investors for years. Although the fallout of Tether’s collapse could cause serious damage to the value of Bitcoin, it may also be a band-aid that needed to be ripped off. Despite this, the most paradoxical component of the recent shortfall lay in the suggestion that Tether was, in fact, once fully backed.
Alternative Stablecoins Preserve Market Health
The fall of Tether will not be positive for Bitcoin’s short-term value. Yet, if this crisis occurred even a year ago, the impact could have been much worse. We’ve recently seen a proliferation of alternate stablecoins – Paxos, USDC, TUSD and a variety of others – that offer a quick alternative to Tether. Paxos CEO Charles Cascarilla even went as far as to say “they knew it was coming,” in relation to the Tether fiasco.
The market is still in the early stages of responding to the revelation. It could ultimately amount to no more than a hiccup – much as Ethereum Classic’s (ETC) 51% attack did little to sidetrack the hard fork coin. Bitcoin’s recent rally from $3200 shows that investors are ready to buy, and this may not prevent that mindset.
Article By: Adam Stone