Tether (USDT) is a token that was introduced in November 2015 to act as a dollar substitute within the cryptocurrency space. Perhaps the most important principle to understand behind Tether is that each Tether coin is backed by a US dollar in a 1:1 ratio. With that ratio, it operates as a token that offers not only stability but also liquidity to exchanges that cannot issue US Dollars to its users. Many of the world’s largest exchanges, (including Kraken, Bittrex, and Binance) offer USDT as a trading pair to facilitate said liquidity. More recently, Tether has announced that it will begin pegging to the Japanese Yen (JPY) and the British Pound (BGP). The concept behind this stable coin, however, is not without controversy.
In December 2017, the U.S. Commodity Futures Trading Commission (CFTC) issued a subpoena to Tether and its former auditor, Friedman LLP, mainly involving the potential price manipulation of Bitcoin in late-2017. The subpoenas initiated an investigation concerning the increased amounts of tether being issued and associated trading at Bitfinex. Other main issue was the $150 million increase (or 20% increase) in tether supply, which many questioned as to whether all tethers were actually backed by reserves. More eyebrows were even raised after authorities discovered that both Bitfinex and Tether shared the same operators: Phil Potter and Giancarlo Devasini, according to Quartz.
Perhaps the greatest concern amongst people within the cryptocurrency community is whether or not Tether is actually backed by a 1:1 ratio. With Tether Limited as the centralized entity overseeing operations of the protocol, many have questioned the public’s ability to fully verify Tether’s documentation and audits. For the hardcore crypto-fundamentalists, Tether goes against the inherent principle of cryptocurrency: decentralization. But again, Tether argues that it acts as an vehicle for liquidity, and a bridge between the legacy and blockchain world.
Fundamentally, Tether aims to create an auditable and cryptographically secured distributed ledger that provides individuals and institutions a means of exchanging value with an already widely-adopted accounting unit (the US dollar). By pegging the value of Tether to the USD, it theoretically makes it impervious to Black Swan events, liquidity crunches, and overall market volatility. The aim is to instill confidence in users to actively engage in commercial activity with merchants, exchanges, and wallets with little fees. In order to facilitate this confidence, the balance of fiat currency held in its reserves will be equal (or greater than) the number of tethers in circulation. The Proof of Reserves process is the process in which price-parity is maintained and aims to reduce arbitrage.
Here are the legal and compliance steps Tether’s taken to legitimize its operations. It is currently registered as a Money Services Business with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury. It also has established a principal-agency agreement with RenRenBee Limited, a licensed Money Services Operator by the Hong Kong Customers and Excise Department to further its anti-money laundering compliance work. It has accounts with Cathay Bank and Hwatai Bank in Taiwan. However, Tether has received some obstacles in establishing partnerships with US banks, such as Wells Fargo. In late-2017, a joint-lawsuit was actually filed by Bitfinex and Tether against Wells Fargo when Wells Fargo decided to sever ties as a correspondent bank through which customers in the U.S. could send money to Bitfinex and Tether’s banks in Taiwan. The case was later withdrawn by Bitfinex and Tether.
It should be noted, however, that in the midst of growing Tether capitalization, the team has not revealed the names of its auditors, according to Cointelegraph. On Tether’s official blog, the team believes that it would be a mistake “to be too forthcoming about the specifics of any particular money transfer solution.”
Tether did, however, release a report conducted by law firm Freeh Sporkin & Sullivan LLP (founded by James Freeh, former FBI director) in June 2018. While not an official audit, the report indicates that the law firm had access to Tether’s accounts at two banks for several weeks and the amount totaled $2.54 billion. Tether’s market cap during the release of that report hovered at around $2.6 billion. In addition to reviewing Tether’s bank accounts and financial statements, the law firm relied heavily on “phone and in-person interviews with Tether executives and bank representatives to reach its conclusions.”
Initially built on top of the Bitcoin protocol, the Tether transactional ledger is embedded as meta-data via the embedded consensus system, Omni. During June 2017, it announced Omni-support for the Litecoin protocol as well. Tether announced that it would also The Omni Layer protocol is a foundational technology that creates and destroys digital tokens (tether) represented as meta-data embedded in the bitcoin and Litecoin protocols. It will track and report the circulation of tethers via Omnichest.info and Omnicore API. Like bitcoin or litecoin, tether can be transferred and stored in a peer-to-peer, pseudo-anonymous fashion in a cryptographically secure environment. The Tether protocol is an open-sourced and browser-based with a multi-signature and offline cold storage-support system.
Tether identified various shortcomings with exchanges and wallet audits- more specifically insolvency, hacks, mismanagement of assets, and fraud. Non-trivial fiat balances must be kept in exchanges at all times to maintain “counterparty risk.” Tether’s Proof of Reserves configuration aims to prove that the total number of tethers in circulation is always fully backed by an equal or greater amount of fiat currency in reserves. Each tether represents one USD, which means the system is fully reserved when the sum of all tethers is exactly equal to the balance of USD held in reserve.
The Omni Layer protocol, like other distributed ledgers, enables individuals and parties to audit all tethers that have been issued and redeemed. It should be noted that the Tether System differs from the Tether.to web-wallet. The Tether.to wallet is a consumer-facing interface that operates on closed-source code and centralized servers. However, the team notes in its whitepaper that it aims to deploy a Proof of Reserve transparency or the Tether.to wallet in the future.
Tether Limited, which is the protocol’s business entity incorporated in Hong Kong, acts as a centralized custodian to maintain the protocol’s overall reserve of fiat and digital assets. The team argues that this degree of centralization will help develop mobile payment facilitation between users and other parties (including merchants and exchanges). It accepts fiat deposits and issues corresponding tethers, sends fiat withdrawals and revokes corresponding tethers. On the compliance side, Tether Limited is also responsible for publicly reporting Proof of Reserves, amongst other audit results. For the holistic crypto-ecosystem, the entity also initiates and manages integrations with other cryptocurrency exchanges, third-party wallets, and merchants. Lastly, it operates Tether.to, the native web-wallet that allows users to conduct transactions with tether.
JL Van Der Velde — CEO of Tether, Bitfinex
Van Der Velde is a graduate of National Taiwan Normal University. Having worked with open-sourced technologies since 2000, he has occupied senior management positions in the IT, distribution, and manufacturing industries. He is currently the CEO of both Tether and Bitfinex.
Philip G. Potter — Chief Strategy Officer of Tether, Bitfinex
Potter previously worked at Morgan Stanley as a derivatives analyst, and at Bear Stearns as a VP of Private Client Services. In April 2013, Potter moved to the cryptocurrency space and has been serving as Chief Strategy Officer for both Tether and Bitfinex.
In its whitepaper, Tether has identified use cases for three parties: exchanges, individuals, and merchants.
Tether is currently running at $1.00 USD, and is ranked 10th in terms of total market capitalization (at $2.7 billion USD) on CoinMarketCap. It has a circulating supply of around 2.7 billion tokens and a total supply of 3.08 billion tokens.
There was no official ICO period for Tether, and Tether can be issued at the judgment of Tether Limited, which has caused concern for the actual reserve amount of fiat currencies.
Tether has certainly made waves in the crypto-space. As the premier stable coin, it has garnered unparalleled scrutiny (compared to other stable coins). The biggest irony behind Tether’s existence is that a central entity controls the distribution of the currency. What might be a fundamental contradiction to some, however, may be a necessary evil for others. With the arguments of Tether’s role as a crypto-market price manipulator set aside, the stable coin definitely has provided a modicum of stability for the crypto space.