Tether, Most Widely Used Cryptocurrency, Is Under Scrutiny

Although Bitcoin accounts for 70 percent of all the global digital assets’ market value, Tether is the world’s most widely used cryptocurrency, said CoinMarketCap, which revealed that Tether, despite the fact that it’s market capitalization is 30 times smaller than Bitcoin, has the highest daily and monthly trading volume. Tether surpassed Bitcoin in April and, said CoinMarketCap, has done so consistently since early August, at about $21 billion per day, with monthly trading volume 18 percent higher than Bitcoin’s.

Bloomberg reports that Tether is “arguably the most important coin in the crypto ecosystem … [and] also one of the main reasons why regulators regard cryptocurrencies with a wary eye, and have put the breaks on crypto exchange-traded funds amid concern of market manipulation.”

“If there is no Tether, we lose a massive amount of daily volume — around $1 billion or more depending on the data source,” said ConsenSys global financial technology co-head Lex Sokolin. “Some of the concerning potential [patterns] of trading in the market may start to fall away.” Tether falls in the category of stablecoin, which attempts to avoid price fluctuations via pegs or reserves and is “also a pathway for most of the world’s active traders into the crypto market.”

A Hong Kong-based private company issues Tether, but “the exact mechanism by which Tether’s supply is increased and decreased is unclear … [and it] is not independently audited.” Whereas the company previously said it had a 100 percent reserve, in April it “disclosed that 74 percent of the Tethers are covered by cash and short-term securities.”

The New York Attorney General is investigating Tether, accusing the proprietors of “a cover-up to hide the loss of $850 million of commingled client and corporate funds.” Bloomberg earlier reported that the U.S. Justice Department is investigating whether “half of Bitcoin’s runup in 2017 was the result of market manipulation using Tether.”

Seventy percent of all the cryptocurrency trading takes place in Asia, said Circle chief executive Jeremy Allaire, whose company supports a rival stablecoin, USD Coin. Coin Metrics stated that Tether was used in “40 percent and 80 percent of all transactions on two of the world’s top exchanges, Binance and Huobi, respectively.”

According to Sokolin, in China, where crypto is banned, people can pay cash for Tethers and then trade them for Bitcoin or other cryptocurrencies.

MIT research scientist Thaddeus Dryja noted that, “many people don’t even know they use Tether.” “I don’t think people actually trust Tether — I think people use Tether without realizing that they are using it, and instead think they have actual dollars in a bank account somewhere,” he said.

University of Texas at Austin finance professor John Griffin added that “being controlled by centralized parties defeats the entire original purpose of blockchain and decentralized cryptocurrencies.”

“By avoiding government powers, stablecoins place trust instead in the hands of big tech companies, [which] have mixed accountability,” he said. “So while the idea is great in theory, in practice it is risky, open to abuse, and plagued by similar problems to traditional fiat currencies.”