Consumers who invest in crypto assets “should be prepared to lose all their money,” the U.K’s Financial Conduct Authority warned cryptocurrency investors on Monday. That message came amid an 11 percent decline in the price of Bitcoin, the industry’s premier asset, whose value had tripled in the last three months. But it’s a warning that might also apply to holders of a cryptocurrency that’s supposed to be one of the pillars of this innovative financial system.
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Tether, the third-most widely held coin by value (Ethereum is second), is unique among its peers. In a market built largely on speculation, Tether is a stablecoin, pegged to the dollar at a 1-to-1 ratio. Tethers help provide liquidity and offer a widely recognized token that can facilitate transactions between various cryptocurrencies. In the world of crypto markets, they essentially act as a digital dollar, and they’re everywhere. On some days, Tether’s trading volume exceeds that of Bitcoin.
But the question that hounds Tether — and is the subject of an investigation by the New York attorney general’s office — is whether its most attractive quality is really just to artificially inflate the value of Bitcoin. In other words, is Tether actually a tool for cryptocurrency insiders to get rich on the market’s hottest — and highly manipulable — commodity?
Tether, which was founded under the brand name Realcoin in 2014, isn’t decentralized like Bitcoin or many other cryptocurrencies: One company owns, mints, and manages the Tether supply, which means it’s also not transparent. And Tether isn’t scarce; unlike currencies that are “mined,” its production isn’t bound by math and code that titrate the supply. Tether Limited, the company behind the eponymous coin, can mint as many coins as it wants. From there, it can use its own currency — and its relationship with Bitfinex, a cryptocurrency exchange also managed by Tether Limited’s executives — to buy other cryptocurrencies, conduct unregulated trading, and even potentially launder money.
While Tether claims that it mints new coins in response to need — for example, I give Tether $100,000, and it, in return, gives me 100,000 USDT, as Tethers are called — its most pointed critics argue otherwise. High-powered lawyers, jaundiced traders, rogue economists, industry whistleblowers, crypto gadflies, and several U.S. law enforcement agencies claim that Tether is part of an elaborate scam that essentially boils down to using the company’s in-house currency to buy Bitcoin, which has the intended side effect of juicing the price of Bitcoin, and to otherwise manipulate cryptocurrency markets. As a document from one lawsuit warns, “control of an exchange and the opportunity to trade with non-existent money can allow a single individual or entity to dramatically influence crypto commodity prices.”
If you believe New York Attorney General Letitia James’s court filings, there’s a great deal of support for the accusations, and we may soon find out more. Bitfinex and Tether face a January 15 deadline to transfer millions of pages of documents to James’s office. Tether is also facing a major class-action lawsuit accusing it of contributing to “the largest bubble in human history”: In 2017, Tether printed a flurry of its currency in patterns that appeared to be linked to rises in Bitcoin, as an influential scholarly paper later found. The bubble popped, with Bitcoin losing 45 percent of its value across five days in December 2017. Billions of dollars of value disappeared almost overnight, with the decline continuing through 2018.
Tether’s importance, and its value to the overall crypto economy, has vastly increased since then, when only a few billion Tethers were in circulation. Now there are more than 24 billion Tethers out there. In the first week of January, Tether printed more than 2 billion USDT. (It’s worth noting that it’s exceedingly hard to redeem USDT from Tether Limited for U.S. dollars; Tether requires a $100,000 minimum per transaction, along with a 0.1 percent fee.)
