WSJ: the Secret of Tether, a Digital Dollar

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According to the research company China lysis, Tether has also become a sort of ‘cryptobank’ for cryptocurrency companies, which are not allowed to work with traditional banks. Tether provides liquidity and fiat exchange to those.

Paul Vigna and Steven Russolillo speculated on how Tether, a crypto that is allegedly backed by the U.S. dollar, made it to the top of the volatile crypto market so quickly. However, no proof of any dollars on the back has been found, and it poses a serious risk to the industry, they denote.

Tether, main feature of which is attachment to real dollar, has rapidly grew in the last year. Its daily trade rate has reached some $3 billion with only Bitcoin ahead of it, trade rate of which is around $5 billion. According to the research company China lysis, Tether has also become a sort of ‘cryptobank’ for cryptocurrency companies, which are not allowed to work with traditional banks. Tether provides liquidity and fiat exchange to those.

That is why Tether would require dollar stock that bolster each token worth of $2,5 billion together. However, Tether had never conducted audit which would confirm this connection to dollar. The company, which controls stablecoin, claims that it has such reserves, but does not specify the names of banks in which they are allocated, nor it reveals under which jurisdiction they are regulated.

Last year, Tether had hired auditors from Friedman that released a preliminary report, but then Tether announced that it ceased the cooperation before finishing the audit. Friedman insiders do not give any comments on the situation. The Tether’s director of marketing said that the company has been encountering difficulties in finding a reputable auditor since then, but he denied to comment on why they refused from Friedman services in the first place. He only stressed that the company “has nothing to hide” and that it is not “three managers that are grinding out money in the basement.”

In june, Tether partnered with law firm Freeh Sporkin & Sullivan which had been established by the former FBI directors Louis Freeh. It publicated a report claiming the stablecoin was completely backed by dollar. Sceptics, however, concluded that the report was not based on a robust audit, and the law firm could not reveal the bank names to which the law firm addressed to scrutinize the reserves. Eugene Sullivan, a senior partner of Freeh Sporkin & Sullivan, denied to give comments saying that the report incorporates all required information.

Real says that Tether has plans to reveal more evidence to confirm existence of the reserves, but the obscurity of stablecoin already makes many investors and market participants worried.

Unlike other cryptocurrencies, Tether does not have a specific amount of the released coins; in theory, demand stimulates generation of more coins. Trading platform Bitfinex puts new orders for new Tether tokens and transfers dollars or euros to the company’s banking account. Tether, in turn, sends new tokens to Bitfinex, and the latter distributes them among the investors.

David Gerard, a programmer and the author of the Attack of the 50 Foot Blockchain denotes that Tether is “kind of a central bank for crypto,” but it does not seem to be a responsible and reasonable financial institute.

By contrast, the Bitfinex’ head of communications Kasper Rasmussen argues that tether “is not a bank and does not strive to be one, but abides the actual rules and regulations.”

The initial goal of Tether was to overcome the market’s volatility by merging dollar’s reliability and speed and anonymity of cryptocurrencies - and it actually worked. Tethers market cap has risen from $10 million to $2,4 billion in 18 months, starting from the Q1 of 2017 when it had been announced. According to Chainalysis, trade volume of stablecoin has risen fifteenfold in the period between October 2017 and March 2018.

As a result, stablecoin has become a key source of liquidity. According to the analytical web resource CryptoCompare, Tether had been having around 80% of Bitcoins trade volume from time to time compared to 10% at the beginning of the year. Some investors are stressing that this connection with dollar has become ‘systemically important’ for crypto market. The executive partner of Ledger Capital Ding’An Fei claims that there are “some powers on the market: if they fail, it will result in catastrophe. And Tether is one of these powers.”

Chainalysis also revealed pump-and-dump schemes applied by smaller coins around Tether. The U.S. SEC also emphasized Tether in its recent denial from Bitcoin ETF relating to some research, which confirms that the crypto is used for manipulations on Bitcoin market.

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