The arrival of Tether (USDT) in 2014 transformed the face of the cryptocurrency market. A cryptocurrency pegged at the price of the U.S. Dollar offered a theoretically safe place to store funds during times of volatility. Rather than constantly comparing inter-currency prices, users could quickly shift back to direct USD values.
This allowed an entire class of investors to dive into the market with renewed confidence. Both sides of a trading pair no longer needed to have volatility, and funds could safely be stored through the use of Tether. However, this also drained a significant amount of capital from the market and into Tether. It created an environment where investors could flee when a downturn started – often making the slight downturn into a full crash.
A Lack of Transparency
This market behavior is easy to written off as simply the nature of the game. However, Tether suffers from a major problem with transparency. While most cryptocurrencies do not require any form of backing – and often specifically avoid such – Tether is dependent on a reserve currency. For USDT to remain pegged to the U.S. Dollar, there must be a supply of cash on hand equal to the amount of Tether issued. Tether Limited, the company that issues USDT, is notoriously avoidant of auditing.
They originally partnered with Friedmann LLP to perform an internal audit of their reserve supply. A Tether spokesperson complained that their process was excessively intricate, and the partnership was dissolved. That this coincided with a large issuance of new coins left many uneasy.
Current Legal Review
Now, Tether released a new ‘audit’ by Freeh, Sporkin & Sullivan LLP that supposedly verifies their reserve currency supply. However, critics quickly pointed out that the legal review completed by the company did not count as an ‘audit.’ In fact, it was simply confirmation that the funds exist in some form – quite possibly illiquid or in the form of debt to other entities.
While Tether provides an important service to the cryptocurrency market, the lack of transparency is alarming. Investors that rely on ‘tethering’ funds are dependent on the reserve cash supply to prevent a sudden crash in the value of Tether. If this happened, it could have a greater effect than that of the crypto-crash that started 2018. Worst case scenario, the crash could be comparable to the Mt.Gox meltdown or worse.
Article By: Adam Stone