In the conventional world, eMoney is the electronic version of “fiat” currencies – dollars, yen, etc. The “money” you see in your mobile banking app is eMoney. In the blockchain world, stablecoins are the electronic version of “fiat” currencies – dollars, yen, etc. There are other versions of stablecoins – algorithmic, crypto-backed, asset-backed – but let’s ignore them for this post.
Tether is the big-daddy of stablecoins and issues stablecoins on multiple blockchains – Bitcoin (Omni and Liquid Protocol), Ethereum, EOS, Tron, Algorand, SLP, and OMG.
Tether stablecoins are “backed” by US Dollars, Euros, and the offshore Chinese Yuan. If you are a crypto trader/investor, you would have used USDT, Tether’s US dollar “backed” stablecoin. USDT has a daily trading volume of over $73 billion – that’s more than Bitcoin & Ether combined!
Then there is Tether Gold – 1 XAUt token represents “one troy fine ounce of gold on a London Good Delivery bar”.
1. What I love about Tether
USDT is an extremely useful risk management tool for crypto traders. If you feel that the markets are too volatile for your liking, you can easily convert your cryptos into USDT. There are other competing stablecoins, but as of now USDT is the largest and has the most trading pairs.
The second thing I love about USDT is that it makes it very easy and cheap to receive and send money around the world.
The third thing I love about it is the interest rates! Earlier this year, you could earn over 14 percent per annum on your USDT deposits. Even at the current 10.5 percent rates, it pays much more than a bank fixed deposit. But of course, there are many risk factors to factor in.
Fourthly, since Tether stablecoins are “centralised”, they have some security features that are not common in the crypto ecosystem. A “5-day hold” can be triggered if your account is compromised and a hacker is attempting to steal your funds.
2. What I hate about Tether
According to its website, Tether’s platform is built to be “fully transparent at all times”. But that’s not really the case. First of all, there are multiple legal entities involved. According to Tether’s whitepaper, Tether Limited is a Hong Kong company that is wholly owned by Tether Holdings Limited, a British Virgin Islands company.
Then there is Tether Operations Limited that holds the copyright to Tether’s website. And there is TG Commodities Limited that operates Tether Gold. The 2017 Paradise Papers leak showed that the Bitfinex crypto exchange and Tether are controlled by the same people — iFinex Inc.
I have not been able to do thorough due diligence on these companies.
For a very long time, the Tether website said that “Every tether is always backed 1-to-1, by traditional currency held in our reserves.” In early 2019, this changed to tether being backed by “reserves” that include loans made to third parties including affiliated entities. I think that’s a recipe for disaster!
There are reports that only 2.9 percent of Tether was backed by cash and over 65 percent is backed by commercial paper. The moral of the story so far — Tether may be a giant scam waiting to be blown wide open.
3. What I fear about Tether
My first fear is that Bitfinex would go bust. And it probably deserves to, too. It first got hacked in May 2015 and lost 1,500 bitcoin.
Then it got hacked in August 2016 and lost 119,756 BTC. Unable to absorb these losses, it gave its customers a “36 percent haircut”. It even took money from customers who were not holding Bitcoin at the time of the hack!
In September 2021, Bitfinex “mistakenly” paid $24 million in fees while sending $100,000 Ether. The actual fee was $33. Just a few days ago, Tether and Bitfinex have settled a case for “allegedly” making misleading statements and illegal transactions. They will pay $42.5 million to settle civil charges from the US Commodity Futures Trading Commission (CFTC).
Many people believe that Tether’s “real use” is to keep the price of Bitcoin high! The media loves to bash Tether and this creates a lot of FUD. What if this FUD is true and Tether goes bust? That’s my second fear.
I think that will have a massive negative impact on the entire crypto sector and erode hundreds of billions of dollars in crypto market cap.