There have been many discussions about Tether not being solvent, running fractional reserves and about to be shut down on the 15th of January 2021.
We are creating this research report as a way to provide anyone and everyone a solid piece of analysis about the Tether situation that is backed by facts rather than fads and hype.
For anyone “wishing” failure for Tether, perhaps it is important that we remind you that USDT plays a very important role in crypto; the highest volume token, and its introduction has increased efficiency significantly (see the counter-productivity?). BUT we are not here to discuss wishful thinking, we’re here to discuss hard facts regardless of what the outcome may be.
To better understand the situation, let us wind the clocks back to when Tether was founded: 2014.
Stablecoins play an important and primordial role within the cryptocurrency markets. Tether was created out of a need for a smoother and faster method to move fiat currencies in between exchanges.
Before Tether, it was common to see significant differences in prices on different venues/exchanges because moving USD from one exchange to another to arbitrage the opportunity was a lengthy process that had to be done through banks.
Tether wanted to resolve this by taking away the banking complications and handling it themselves. All users had to deal with was a digital token, pegged 1:1 to the US dollar that could easily and quickly be transferred around via blockchain networks such as Ethereum.
How Stablecoins maintain their 1:1 Peg
Another important aspect to understand is knowing what the mechanism used by Tether is, otherwise judging is as useless as a back pocket on a tee shirt.
Broadly speaking, centralised stablecoins maintain their pegs by the processes of “Issuance & Redemption”:
- Issuance: Any approved party is able to go to the company, send them USD and get 1:1 of the USD stablecoin sent to them.
- Redemption: Any approved party, is able to send the USD stablecoin and have 1:1 USD sent back to them.
If at any point in time, the stablecoin begins trading at $1.20 for example, a large arbitrage opportunity opens up to issue 1:1 and then sell the stablecoin which eventually brings it back to peg.
The other scenario is the stablecoin trading at 0.80, in which case it can be bought and redeemed for 1:1 USD, offering yet another arbitrage opportunity, also eventually bringing it back to peg.
*These are extreme examples for illustration purposes only.
Tether functions in the same manner for USDT but has a few more steps which we’ll explain below.
How Tether Functions
There are four different types of Tethers (USDT):
- Authorised Tether: USDT created on a certain blockchain (Ethereum, Tron, Algorand…) which are available for issuance but not yet in circulation as they have not been requested by anyone yet. The main reason they do this is to avoid touching the private keys required for USDT creation as much as possible. This is a sort of inventory ready for shipping but still stored in Tether’s Treasury. This type of USDT is “unbacked” but that is normal as they are ready for sale and not yet in circulation.
- Issued Tether: USDT in circulation that has been requested by a third-party and paid for with USD via bank transfer. When USDT is issued, the reserve of authorised USDT is then refilled.
- Redeemed Tether: Customers selling USDT to receive USD in exchange, these become redeemed USDT and go back to Tether’s Treasury.
- Destroyed Tether: In the event of authorised USDT being unnecessarily large, after a lot of redemptions for example, the USDT is destroyed.
A common critique circulated about Tether is: “How come every mint is a nice round number?” (Example below)
💵 💵 💵 💵 💵 💵 💵 💵 💵 💵 400,000,000 #USDT (397,719,172 USD) minted at Tether Treasury
— Whale Alert (@whale_alert) January 12, 2021
That is simply because Tether pre-prepares USDT as “Authorised USDT” by estimating the amount that may be required by clients. If after the sales come through a certain extra amount remains, it can be destroyed.
Is USDT backed 1:1 with USD?
The short answer is no, USDT is not 1:1 backed with USD (Tether Truthers feeling good here, keep reading…).
This has been previously stated by Tether itself, that each 1 USDT is not backed by 1 USD in their accounts but rather by a basket of assets. These assets include traditional currencies (such as USD), cash equivalents and may include other assets and receivables from loans.
Conclusion: USDT is fully backed but not all with USD but rather by a basket of assets.
This is not preferential but also not as big as a flaw as most illustrate it to be. However, this brings us to the main problem at hand: The Lawsuit.
The Tether Lawsuit
New York Attorney General, Letitia James, accused both Bitfinex and Tether of conspiring to cover up an $850 Million loss by Bitfinex without accurately reporting it to investors. Another allegation has also been made regarding serving clients in the NY jurisdiction where they should not be allowed to.
Bitfinex and Tether are closely linked, they are both owned by iFinex and the CTO of both firms is the same person: Paolo Ardoino. This of course raises eyebrows on its own.
The way Tether frames it, from a legal and economic standpoint is as follows:
The debt Bitfinex owes to Tether is part of the basket of assets backing USDT and Bitfinex is in a strong financial position to repay that “reasonable” debt. Up until now, every interest payment was allegedly made on time and $300 Million have been repaid already.
This date has been circulating very often, everyone asking if it is going to signal the “End of Tether” and induce a broad market crash. Before jumping to conclusions let’s check what is actually happening on that date.
The 15/01/2021 deadline is the date set by the court (the court set the date as January 15 2020 but it is believed to be a typo and is actually meant as 2021) for iFinex to hand over all requested documents to the NYAG. This is a technical date where no decisions, conclusions or rulings are expected.
There are certainly questionable aspects of the Tether and Bitfinex relationship, however does this mean they are a complete fraud? No. Most desks dealing with Tether on a regular basis have vouched for their high business standards, including Ryan Salame the head of OTC at FTX.
The main problem with Twitter is there is no filter, anyone can say anything regardless of their level of knowledge. That of course is freedom of speech but it is up to the audiences to seek factual information for their own sake. The speculations have mainly been made by not-so-well-versed individuals whom have not completed their due diligence.
Also, the ones screaming for “TETHER IS MANIPULATING THE MARKET”, no one is suing them for that and it isn’t the first time people scream it during a bull-market (2017 example). Seems like it is a coping mechanism for those whom have missed the majority of the rally. Perhaps just join the trend? It is your friend after all.
Now does this mean there are 0 risks associated with Tether? No and we’ll be sharing one method of hedging that risk in a quasi risk-free manner in Cryptonary Pro.