Tether has been around since 2014 – owing its unique existence for being able to peg itself with the US Dollar. Infact, it was marketed as a redeemable token, where 1 Tether would be equivalent to US$1.00! However, while it was a good idea, it wasn’t totally managed properly, some might say. For one, many parties questioned its accountability and trust standards.
Recently, the unimaginable happened – Tether fell below the promised US$1.00 during open trading, even at one point trading around US$0.85! It happened around the time when the big exchanges were pushing their own regulated stablecoins into the market. What didn’t help Tether were rumours of it unable to find a banking partner, on back of the news that its banking partner, Noble Bank was about to go bust. It also didn’t help that Tether was backed by Bitfinex, one of the biggest crypto-exchanges in the world – which was also rumoured to be going bust due to it taking the action of suspending fiat wire deposits.
Stability through indispensable usage
Tether’s use-case was fairly straightforward and attracted a variety of investors, since the venture claimed that it is backed by the US dollar and at every instance, 1 Tether would be backed with 1 US Dollar. This was a very thoughtful move by the team which was aimed at boosting the utility of cryptocurrencies by introducing a stability mechanism for traders to trade in and out of, while maintaining liquidity and access to fiat.
Despite the recent incident, there are still more Tethers in circulation than any other stablecoins. It also saw its value moving close to parity against the US Dollar once again – so kudos to punters who bought Tether when it was down. While there’s no doubt that Tether is back to its former self, it is not due to trust, but rather its important function for traders to move money in and out of fiat. One must not discount the fact that “stability” of any token value can come partly from usage, which breeds some level of trust (though not completely).
Trust is expensive, and small mistakes can be costly
From the time of its inception, the team clarified that Tether has a significant amount of fiat currency to back up the token and maintain a 1:1 ratio with the US Dollar. Even the website maintains a real-time ledger showing the underlying monetary reserves and the availability of tokens.
But in the last couple of months, we have seen “strong” claims from pundits that not all of the issued tokens have a fiat value backing them up. In other words, it was minting new Tethers without US Dollar backing. Since it is a major allegation and Tether did not even conduct a third-party audit in 2017, the suspicions grew – to its expense. Following that episode, the company hired Friedman LLP to conduct an audit BUT very soon after, they were stopped from their work. Tether’s response? An official statement was released by the Tether management, claiming that Friedman was taking unnecessarily complex procedures for a fairly simple business model.
Of course, this move helped to rack up even more suspicions.
Not the only game in town
Recently, we have witnessed the launch of multiple stablecoins, including the stablecoins each by Gemini and Paxos. This will no doubt bring more competition to the market, and it’s quite possible we might be witnessing a stablecoin war, where its backers try to establish their own coins as the “standard” of in the industry. Again, there’s little doubt that controlling the market can be very lucrative – akin to running a mini central bank, because the stablecoin market will grow in the next few years as it serves a huge need for institutional players who are entering the market, as well as major crypto players who are pushing for increased decentralization.
Cover photo by: Nathan Graham/ethnews
Journalist and Blogger. Azeem has a keen interest in blockchain technology and he frequently writes about different applications and services to make the general public aware of blockchain's extensive utility in daily life.