Tether is a cryptocurrency token pegged or “tethered” to the US dollar, so 1 Tether (USDT) is always equivalent to 1 US dollar (USD). To use an analogy, Tether is a bit like a casino chip. Casino chips represent money without being money. However, in theory, at the casino, you can always exchange the casino chip into cash. Tether works on a similar principle. The Tether token is like a proxy for cash. Since it’s pegged one-to-one to the US dollar, the cryptocurrency community sees Tether as a stable coin.
The Tether token can help merchants and traders reap the benefits of maintaining a stable price from fiat currencies while leveraging the operational advantages of a cryptocurrency. Tether can also be very useful for many cryptocurrency exchanges that have difficulty working with banks.
In this article, we’ll explore Tether’s features and demonstrate how it maintains its pegged rate. We’ll also look at the advantages of using the Tether token as well as some of the controversies surrounding the coin, while covering the following topics:
Tether is a cryptocurrency token issued by Tether Limited. Tether Limited is incorporated in Hong Kong with offices in Switzerland. According to CoinMarketCap, the Tether token is currently ranked the 14th most popular cryptocurrency with a market capitalization of $2.3 billion USD as of April 9, 2018.
While the most popular cryptocurrency by Tether Limited is their Tether token backed by US dollars (USDT), they’ve also released another option to purchase Tether backed by the Euro (EURT).
Tether Limited believes that cryptocurrencies are a new technology that should be leveraged to transact, store, and account for assets. However, there are still many obstacles that prevent their widespread use. These include price volatility, lack of understanding by the general public, and slight difficulty for non-technical people. Tether Limited saw this problem as an opportunity to bridge and utilize the advantages of fiat currency and cryptocurrencies.
Tether’s transactional ledger and Tether token existed on the Bitcoin blockchain using the Omni Protocol, an open-source software that allowed the company to design, create, and trade the Tether token. However, on September 2017, Tether announced that they are collaborating with Ethfinex to develop and launch the first Ethereum-based Tether.
The ERC20 Tether will have lower network transactions fees and faster confirmation times (15-30 seconds) compared to Tether on the previous Omni network. Tether Limited believes that this upgrade will facilitate more efficient exchange arbitrage.
There are five primary steps in the typical lifecycle of a Tether token.
- A user deposits fiat currency into Tether Limited’s bank account.
- Tether Limited credits the user’s Tether account while Tether tokens are issued to the user and enter circulation. (Tether Limited issued the user some Tethers equal to the amount of fiat currency they deposited. For example:1k USD deposited = 1k Tether USD issued)
- Users transact with the Tethers. The users can transfer, exchange, and store Tethers through a peer-to-peer open-source, pseudo-anonymous platform.
- The user then deposits Tethers with Tether Limited to redeem their fiat currency.
- Tether Limited destroys the Tethers and sends fiat currency to the user’s bank account.
Since users are entrusting Tether Limited with their tokens (that are redeemable in their fiat currency), Tether Limited needs to prove that they have enough currency reserves to back up all the tokens in circulation. Tether Limited’s currency reserve closely resembles the Federal Reserve before 1971, when they backed their USD with gold.
Tether Limited ensures that the corresponding total amount of USD and EUR held in their reserves is shown by publishing their bank balance and undergoing periodic audits. Users can access this information from the company’s website on their transparency page which is regularly updated and available 24/7. The image below is Tether Limited’s current balances as of April 6, 2018.
According to the company’s balance sheet table, total Assets represents how many assets Tether currently holds. Their assets are balanced out with their Liabilities; how many tokens are in circulation. Shareholder Equity is the amount of money they would have remaining if their assets were liquidated and they repaid remaining debts.
Total Assets – Total Liabilities = Shareholder equity
Tether Limited also agreed to have regular audits to verify their reserves. Following through on this promise, however, has proven to be a point of controversy.
Public information on Tether’s “regular audit” can be found on their homepage, you can access a PDF from an audit performed by “Friedman LLP accountant and advisors,” for a “Memorandum regarding consulting services performed September 28, 2017.”
Source: Tether’s Funds Update
While Tether Limited claims to be transparent with their currency reserves, the company’s last audit was conducted over seven months ago. According to CoinMarketCap, Tether had a market capitalization of $40 million at that time, which is significantly smaller than their $2.29 billion market cap today.
On page 4 of the audit report, there are also a lot of blacked out sections most likely due to privacy concerns. However, this does not provide the public complete transparency into their currency reserves.
Source: Tether’s Funds Update
On Tether Limited’s website under transparency update, the company also mentions that “these consulting services do not constitute an audit or attestation engagement,” alluding to the change in Tethers in circulation today compared to what it was in September 2017.
Source: Tether’s Transparency Update
In an email to Coindesk on January 27, 2018, Tether Limited also mentioned that they are no longer working with Friedman LLP, their previous auditor.
“We confirm that the relationship with Friedman is dissolved. Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame. As Tether is the first company in the space to undergo this process and pursue this level of transparency, there is no precedent set to guide the process nor any benchmark against which to measure its success.”
According to an interview with Cointelegraph, American accountant and auditor Abhishek Shah, who had reviewed the memorandum released by Friedman LLP said that the document demonstrated that Tether did have the US dollar required in their currency reserves during that time. Shah however found it concerning that Tether terminated the audit due to the timeframe provided.
“The reason given by Tether was certainly not clear and precise, neither acceptable.”
Tether has not released an announcement after dropping their auditor. There is also no information available on their website that indicates who the new auditors are or when new audits will occur. Having the last audit over 7 months ago is just one of the many controversies shrouding Tether. There have been further controversies about Tether’s founders and their connection to the Bitfinex exchange.
While the potential benefits of Tether are clear, the cryptocurrency community on Reddit and Twitter have raised numerous concerns surrounding Tether’s approach — many of which revolve around security, accountability, and centralization. There are a few aspects concerning Tether’s history that you should take into account:
- Massive Growth: Tether experienced high levels of growth from a $7 million market cap to $2.2 billion today. Since Tether claims to be backed by fiat reserves, there was a lot of questions as to where the additional funding came from.
- Bitfinex Exchange: Bitfinex is deeply linked to Tether Limited. Giancarlo Devansini is a director of both Tether and Bitfinex while Phil Potter is a director of Tether and chief strategy officer at Bitfinex. Some have called this a liability.
- Bitfinex and Tether were hacked within an 18 month period: In August 2016, 120,000 BTC was stolen from Bitfinex however, since the 2016 hack, Bitfinex has not published an official audit. While they mentioned following the hack that Bitfinex was “in the process of engaging Ledger Labs to perform an audit of our balance sheet,” they soon announced later in a blog post that Ledger Labs does not do audits. In addition to this hack, in November 2017, $31 million in Tether dollars was hacked from Bitfinex. Following the hack, the US Commodity Futures Trading Commission subpoenaed Bitfinex and Tether on December 6, 2017. The CFTC has, however, not taken any further action.
- Problems with regulators and auditors: Bitfinex also has ongoing problems with international regulators and auditors. They’ve had challenges with their banks. Tether’s historic auditors are also no longer involved with the company
The Tether token can be extremely useful as an alternative to fiat currencies.
- Low Fees: Tether has incredibly low fees when compared to alternative options. Once the Tether token is in a Tether.to wallet, there are no fees to transfer. These fees, however, may change if you are on an exchange.
Source: Tether’s Fees
- Ethereum Blockchain: Tether exists on the Ethereum blockchain as an ERC20 token. The Ethereum Blockchain is a well developed and tested blockchain that is open sourced and decentralized.
- Easy for non-technical users: Tether’s one-to-one backing makes it simple for non-technical users to understand.
- Does not face significant price volatility: Tether’s currency reserves ensure that one Tether will always equal one USD
- No pricing or liquidity constraints: Users can choose to buy or sell as many or as little Tether tokens at whichever pace they choose without liquidity concerns
- Easy integration: The Tether token can be integrated with merchants, exchanges, and wallets like Bitcoin or any other cryptocurrency.
- Strong industry supporters and partners: Tether has a group of industry supporters including Poloniex, ShapeShift, Kraken, Bittrex, and HitBTC.
Beyond these advantages, Tether has three key beneficiaries from their token. These include exchanges, individuals, and merchants.
With the Tether token, exchanges can begin accepting crypto-fiats as a deposit/withdrawal/storage method rather than using a traditional bank or payment provider, allowing users to move fiat in and out of exchanges more freely, quickly, and cheaply. Exchanges can then outsource fiat custodial risk to Tether Limited and add other Tethered fiat currencies as trading pairs to the platform. By using the Tether token, exchanges are exposed to less risk than continually holding fiat on exchanges.
The Tether token can help individuals transact in fiat value, pseudo-anonymously without any intermediaries or middlemen. Users can cold store fiat value and avoid the risk of storing fiat currency on exchanges by moving cryptocurrency-fiat instead. Individuals can also avoid opening a fiat bank account to store fiat value.
The Tether token can help merchants price goods in fiat currency rather than Bitcoin (so there are no moving conversion rates), prevent chargebacks, reduce fees, and gain greater privacy.
On Tether Limited’s Whitepaper, the company acknowledges many implementation weaknesses.
These include being bankrupt, banks that are currently backing Tether Limited freezing or confiscating Tether Limited Funds, the banks working with Tether Limited going insolvent, and Tether Limited absconding with their reserve assets. Tether Limited, however, mentions that cryptocurrency exchanges also face these problems as well.
Other disadvantages of the Tether token include:
- Unclear Audits: Tether’s most recent audit was in September 2017. While the company has released many updates on their website, they have not mentioned anything concerning new auditors or when new audits will take place. Tether has always promised a full public audit but has never managed to produce one. There is also no full professional public audit of the currency reserve.
- Deanonymization to purchase and sell Tether: While users can deposit and withdraw Tether anonymously, any purchasing and selling for fiat money on Tether website requires confirmation and verification of accounts.
- Centralized, permissioned, and trust dependent: While Tether claims to be decentralized, Tether Limited and their currency reserves are completely centralized. The entire Tether system is dependent on Tether Limited’s capability and willingness to maintain the currency peg.
- Dependent on good financial relationships and legal authorities: Tether is heavily reliant on the banks that they work with as well as legal institutions.
Tether Limited’s latest general update was in September 2017. The company is unfortunately not very active on Twitter and other social media websites.
Tether is working with “other payment avenues and channels, including third-party payment processors and banking relationships in countries with friendlier correspondent banking connections.” The news comes after their primary banks in Taiwan were being blocked by US correspondent banks. They have also opened an escrow-based relationship with a US based company to service qualified corporate customers.
New Tether Currencies
Tether Limited is looking into offering additional currency options. They currently have Tether-backed USD (USDT) and Tether-backed EUR (EURT). Tether Limited is looking to issue a Tether-backed Japanese Yen JPY, and a Tether-backed Great Britain Pound GBP next.
Tether on Trezor
Tether Limited’s Omni Layer team was reported to be working with TREZOR, a cryptocurrency hardware wallet.
Tether on Lightning
Tether announced an “initial discovery and integration discussion” with the Lightning team for “low-cost, instant transactions of Tether currencies on the Lightning network.”
Tether openly stated that they are “aware of online discussions about Tether’s lack of publicly available audits. They’ve released previous versions for the community from December 31 2016, January 31 2017, February 28 2017, and March 31 2017.
Buying Tether (USDT) from your bank account often requires a 2-step process. The most common and recommended approach is to buy Bitcoin (BTC) or Ethereum (ETH) from an exchange that accepts deposits from a debit/credit card or bank account. Most exchanges like Coinbase allow you to buy BTC or ETH.
Afterwards, you need to transfer your recently purchased cryptocurrencies to a marketplace that sells Tether (USDT) in exchange for BTC or ETH. There are many supporting exchanges that support Tether (USDT). Examples include Binance, Bittrex, and Bitfinex.
Tether Digital Wallets
While Tether.to previously hosted a local wallet, as of December 19, 2017, the company has limited wallet services as they are in the process of developing and building a new platform.
As mentioned on their website update:
“We will be slowly phasing out and discontinuing the current wallet services and all old addresses. To prevent against possible loss of funds, users should not attempt to deposit any funds to their old wallet or deposit addresses. Additionally while the new system is being built, we will be disabling new signups on the platform.”
Tether’s $2.2 billion market capitalization shows that there is significant demand in the cryptocurrency market for fiat-backed solutions. A stablecoin like Tether has many potential benefits, but it’s important to consider whether Tether’s approach is feasible and realistic.
At this point, there is no clear evidence to support either case. As with many other cryptocurrency tokens, Tether is still in its early stages. It remains to be seen whether Tether Limited can realize the full potential of its product. For now, Tether offers the advantages of a cryptocurrency with the stability of a traditional fiat, but the Tether token also exposes you to the risks in both systems as well.