Tether USDT is one of the most popular and controversial stablecoins in the cryptocurrency market. It claims to be backed by US dollars at a 1:1 ratio, meaning that for every USDT in circulation, there is a corresponding US dollar in reserve. However, this claim has been challenged by many critics and regulators, who doubt the veracity and transparency of Tether’s reserves and audits.
Tether USDT is a stablecoin, which is a type of cryptocurrency that aims to maintain a stable value relative to another asset, such as a fiat currency or a commodity. Stablecoins are designed to reduce the volatility and unpredictability of crypto prices, which can deter some users and investors from adopting them.
Tether USDT was launched in 2014 by Tether Limited, a company based in Hong Kong and registered in the British Virgin Islands. Tether Limited is affiliated with Bitfinex, one of the largest and oldest crypto exchanges in the world. Tether USDT is issued on various blockchain platforms, such as Bitcoin (via Omni Layer), Ethereum, Tron, EOS, Algorand, Solana, and others.
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According to Tether’s website, each USDT is backed by a reserve of traditional currency held in Tether’s bank accounts. Tether claims that its reserves are regularly audited by independent third parties, and that it publishes monthly reports on its website showing its assets and liabilities. Tether also states that it follows strict anti-money laundering (AML) and know-your-customer (KYC) policies, and that it complies with all relevant laws and regulations.
However, these claims have been met with skepticism and scrutiny by many observers, who question the validity and reliability of Tether’s backing and reporting. Some of the main issues raised by Tether’s critics are:
Lack of transparency: Tether has not provided a full audit of its reserves by a reputable accounting firm, nor has it disclosed the identity and location of its banking partners. The monthly reports published by Tether are not verified by any external auditor, and only show aggregate numbers without any breakdown or detail.
Moreover, Tether has changed its reserve policy several times over the years, from claiming to hold 100% USD reserves, to admitting to holding other assets such as loans and securities, to stating that its reserves include “cash equivalents” and “other receivables”.
Legal troubles: Tether has faced multiple lawsuits and investigations from various authorities around the world, including the US Department of Justice (DOJ), the New York Attorney General (NYAG), the Commodity Futures Trading Commission (CFTC), and others. Some of these cases are still ongoing or unresolved, while others have resulted in settlements or fines for Tether.
For example, in February 2021, Tether agreed to pay $18.5 million to settle a case with the NYAG, which accused Tether of misleading investors and customers about its reserves and liquidity. As part of the settlement, Tether also agreed to provide quarterly reports on its reserves to the NYAG for two years.
Market manipulation: Tether has been accused of inflating the supply and demand of USDT to manipulate the price of Bitcoin and other cryptocurrencies. Some studies have suggested that there is a positive correlation between USDT issuance and Bitcoin price movements, implying that Tether prints new USDT tokens without sufficient backing and uses them to buy Bitcoin on exchanges, creating artificial demand and driving up the price.
Some critics have also alleged that Tether is involved in wash trading, spoofing, pump-and-dump schemes, and other fraudulent activities to manipulate the crypto market. Wash trading is a form of market manipulation where a trader buys and sells the same asset repeatedly to create artificial volume and price movements. This can be used to attract more buyers or sellers, or to influence the price of other assets that are correlated with the manipulated one.
Spoofing is a similar tactic where a trader places large orders that they do not intend to execute, to create a false impression of supply or demand. Pump-and-dump schemes are where a group of traders coordinate to inflate the price of an asset by buying it in large quantities, then sell it at a profit before the price crashes. Tether has been accused of using these methods to manipulate the price of Bitcoin and other cryptocurrencies.
For example, a 2018 study by John M. Griffin and Amin Shams found that Tether was used to buy Bitcoin at times of low demand, creating artificial support for the price. The study claimed that Tether accounted for more than half of Bitcoin’s price increase in 2017.
Another 2019 study by Wang Chun Wei found that Tether issuances were positively correlated with Bitcoin returns, and negatively correlated with Bitcoin volatility. The study suggested that Tether was used to stabilize and drive up the price of Bitcoin. However, these studies have been challenged by other researchers and industry experts, who argue that they suffer from methodological flaws, data limitations, and confounding factors. For example, a 2019 paper by Richard K. Lyons and Ganesh Viswanath-Natraj argued that Tether was not used for market manipulation, but rather for arbitrage and liquidity provision across different crypto exchanges.
The paper claimed that Tether flows were driven by demand from traders who wanted to move funds quickly and cheaply between exchanges, rather than by supply from Tether issuers who wanted to manipulate prices. Another 2020 paper by Sean Foley, Jonathan R. Karlsen, and T?lis J. Putni?š also found no evidence of Tether-driven price manipulation and suggested that the correlation between Tether and Bitcoin was due to common factors such as investor sentiment, market conditions, and regulatory events.
The debate over Tether’s role in the crypto market is still ongoing, and there is no definitive answer to whether Tether is involved in wash trading, spoofing, pump-and-dump schemes, or other forms of market manipulation. However, the controversy has raised some important questions and concerns for the crypto industry and investors. For instance, how reliable and transparent is Tether’s claim that it is fully backed by US dollars?
How vulnerable is the crypto market to potential shocks or disruptions from Tether or other stablecoins? How can regulators and law enforcement agencies monitor and prevent market manipulation in the crypto space? These are some of the issues that need to be addressed as the crypto industry matures and grows.