Stablecoins, like Tether, are important for everyday transactions. Without stability, a seller will be sceptical of trading goods and services for fear of losing value due to price volatility — one of the reasons why cryptocurrencies haven’t been widely adopted yet.
What is Tether?
USDT is a controversial cryptocurrency with tokens issued by Tether Limited, a company under the umbrella of Bitfinex. Each token issued is claimed to be backed by one United States dollar (USD). Tether operates on the Omni protocol as a token issued on the blockchain. Every Omni transaction recorded in a Bitcoin transaction sharing the same transaction hash, boosting Tether’s network security.
It’s the world’s most popular stablecoin. It even acts as a dollar replacement on popular exchanges such as Bitfinex and Binance. Being backed by the USD means for every Tether issued there is an equivalent amount of dollars kept in reserve.
It brings a comparative advantage which its predecessors have failed to bring to the table – value for value conversion of fiat currencies into cryptocoins. This facilitates the ability to trade stablecoins.
There are some clear benefits of the cryptocurrency, including:
- Secure transit cryptocurrency: it facilitates the transfer of real cash into digital cash, considering the secured payments offered through the use of Bitcoin’s blockchain.
- Cheaper and faster than USD: it’s also faster and more reliable to convert in-between cryptocurrencies than from regular fiat to crypto. Traders can keep digital fiat ready to purchase crypto when the right time comes.
- Worldwide acceptance: Platforms that initially lacked a withdrawal option to USD can now use Tether instead, allowing them to open up to new markets and possibilities.
Are there any issues?
Because Tether is a privately held company in Hong Kong, it doesn’t need to meet the same legal criteria as some of the other cryptocurrency projects based either in Europe or the U.S.
Some problems are due to the centralised governance model used. Issues include:
- Lack of transparency: the organisation responsible for USDT has yet to come forward explaining the connection between Bitfinex and Tether Limited founders.
- No audit trails: it’s under no obligation to provide bank audit trails.
- Reserve-banking is a possibility: as there are no audit trails a serious possibility is one of reserve-banking behaviour. There is a chance Tether Limited does not hold a true 1:1 ratio, between USD and USDT, meaning a bank run would mean a significantly price drop.
- Price-manipulation: Tether has come under investigation for creating fake volumes, due to correlations found between Bitcoin’s exponential price-raise in late 2017.
As it stands, Tether seems to be a sitting duck for the U.S. regulators if, in any event, they decide to take actions on alleged cases of money laundering. Tether’s dependence on a formal banking arrangement is even more of a puzzle that will open a can of controversies if delved into it any further. To sum it all up, the technology used by Tether’s USDT is quite interesting and offers an alternative to volatile cryptocurrencies.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.