Rumors of Tether Shutdown
“Counterparty risk”, “lack of transparency”, “time bomb” – these are the words that have been used in relation to Tether over the last couple of weeks, even months. Simply put, Tether, whose main raison d’être is to be a stablecoin whose price is identical to the price of USD, is supposed to be a way of trading USD without actually trading USD. It comes in handy when certain exchanges, for example, don’t have access to traditional banking systems or if they do not want to deal with the hassle of wire transfers. So far, Tether has been doing its job, i.e. it is traded heavily, and is certainly one of the main sources of liquidity on the cryptocurrency market. For the market to stay alive, people need to trade a lot – and they trade Tether a lot. It is understandable, since the USD is among the fiat currencies with the highest trading volume – one of the main reasons why traders use crypto exchanges is to buy cryptocurrencies for cash. If you don’t have cash, but you have Bitcoin let’s say, you can still get Tether, which puts you in a similar position.
So, Tether is a virtual projection of the USD for crypto users who don’t have actual USD. However, for Tether to do its job, it needs to be backed by actual USD. For every USDT out there, Tether needs to have someone (and by someone, we mean a bank or similar) guarantee that an equal amount of USD will be paid out – in case.
To be able to service crypto users who don’t do banks, Tether itself actually has to do banks. The concern, however, is that it doesn’t. Moreover, Tether has close ties to Bitfinex, and critics have argued that Tether issues too many USDT tokens to drive up the price of BTC and benefit the exchange.
Is Tether fully backed? And what happens if it isn’t?
At the moment it seems that everyone has an answer (or an opinion, rather) when it comes to the second question, while nobody is able to provide a clear answer to the first question, which means that speculations abound.
As we’ve already established, Tether changes hands quickly, making it systemically important. Which means that anything that could topple Tether can be seen as a “systemic risk”. As in, a risk for the whole cryptocurrency ecosystem.
To answer the question whether Tether is fully backed or not, Tether agreed to an audit with Friedman LLP, “an accounting, tax and business consulting firm”. However, after the audit came to an abrupt end with no explanation as to what happened and who cancelled the audit, people are understandably worried.
A Bitmex research determined that, even though Tether has chiefly become a substitute for wire transfers for exchanges and users who don’t have access to bank accounts, it is highly likely that Tether is also struggling when it comes to finding “appropriate banking relationships”. This would explain the lack of transparency. The main reason why banks are kind of unwilling to work with Tether is Tether’s unwillingness to comply with KYC/AML procedures. According to the same Bitmex research, Tether has been trying to bypass that requirement by seeking support from Puerto Rican banks, which are a bit laxer.
The biggest fear is that authorities could shut down Tether over the KYC/AML legislation, just like Liberty Reserve and E-Gold in the past. Such a shutdown would likely cause the market to collapse, considering the number of exchanges that rely on USDT. Nevertheless, if Tether can finally resolve these issues and either find a stable banking partner or a way to comply with legislation and prove that it is fully backed, it will continue to grow and become an even more integral part of the system.