When you hear the word 'tether', what comes to mind?

If you own a dog, you might walk him on a tether; some cat owners tether their pets as well. You might feel at the end of your tether or slip your tether altogether to have a hen night or an evening out with the lads.

Tether, in the general sense, represents a line to which someone or something is attached. By that definition, 'tether' is the perfect name for a cryptocurrency - actually a stablecoin tied to the smallest US paper currency denomination, the $1 bill. Essentially, each Tether was meant to be worth $1.

Somewhere along the way, Tether slipped its tether. It's now in some fairly hot water and has caused massive shifts in the cryptocurrency markets.

These days, everyone from investors to law enforcement officials is looking into Tether, all for different reasons.

Your Superprof had a look too, and this is what we found.

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Tether's Creation Story

Way back in the early days of cryptocurrency, with Bitcoin having only mined its genesis block three years before, a white paper was published, detailing how new cryptocurrencies could be built as another layer atop the Bitcoin blockchain.

You can layer atop the blockchain
The elegant simplicity of the blockchain design allows for many layers atop of it. Photo credit: U.S. GAO on VisualHunt

That paper's author, one J.R.Willet, then implemented the idea with the help of a few collaborators. Thus, Mastercoin was created, soon followed by the Mastercoin Foundation, to boost its visibility and recognition. The Mastercoin Foundation is now called the Omni Foundation and their Bitcoin blockchain overlay is known as the omni layer.

That overlay protocol,  initially called the Mastercoin protocol, became the foundation for Tether. The tokens, initially called Realcoins premiered in October 2014; a month later came the announcement that they would henceforth be called Tether.

The company then announced that there would be three Tethers, one each tied to the US, Japanese and European currencies. Each token was to be backed by its sovereign currency, meaning that anyone who cashed out would receive face value of their tokens, paid out in their country's currency.

In hindsight, that's where the trouble started.

Woes notwithstanding, Tether is still one of the top five cryptocurrencies the UK is keen to invest in.

How Does Tether Work?

The answer to that question depends on which perspective you take. How it works from a technical standpoint was briefly covered in the previous section. The main point is that it does not have its own blockchain like Bitcoin and Ethereum do; it's layered atop the Bitcoin blockchain.

Tether also works on many other blockchains, including Ethereum's.

Another important point is that the number of available coins is not defined or constrained by its environment. In that sense, it is more of a virtual currency in that coin production is centralised. As demand increases, Tether releases more coins... provided they have the cash reserves to back up their value.

Remember that each coin is supposed to be worth its equivalent value in sovereign currency. Hence, its stablecoin designation.

That claim is controversial because Tether Limited emphasises that coin owners have no legal or contractual claim - or, indeed, any guarantee that they will receive $1 for each USDT they cash in. As recently as May of this year, their published report showed that way more than half of Tether was backed by what essentially amounts to IOUs, known as commercial paper in financial market terms.

It's rather disturbing to know that, despite their typical 270-day maturation limit, commercial papers can be traded and sold. What happens to Tether investors' money if those promissory notes are sold off and their new owner refuses to honour the debt owed on them?

It's even scarier to know that more than two-thirds of Tether's holdings are backed by promissory notes.

By contrast, predicting Cardano's price and value is much easier because its infrastructure does not allow for any such manipulations.

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The Tether Controversies

Perhaps based on its shaky reserves structure, in March 2019, Tether Limited formally listed loans from affiliate companies as a backer of their tokens, further removing them from their guarantee that each USDT would be worth $1 as long as they had the reserves on hand.

Nobody but Tether knows where Tether is located
A great deal of uncertainty surrounds Tether's physical location and material assets. Photo credit: Sworldguy on VisualHunt.com

Bitfinex and its parent company, Ifinex, are a Hong Kong-based cryptocurrency exchange with whom Tether shares a management team; they also benefit from the same shareholders. As far back as 2017, concerned parties have launched pointed questions at that partnership.

The Bitfinex exchange has lost a substantial amount of its traders' money through hacks - some $145 million, all told.

The exchange also has trouble maintaining relationships with banks around the world, including in the US, Taiwan and Europe. These days, Bitfinex does not disclose to its customers which countries it banks in nor which banks back it, making it impossible to track or prove their financial statements.

At one point, to get around the lack of bank ties, Bitfinex unofficially partnered with Crypto Capital Corporation, an unlicensed cryptocurrency business in Panama. As they did not sign a contract, it is difficult to know the terms of their business deal but one thing is crystal clear: a lot of money disappeared. Investors were never told anything concrete (though their account balances were reduced) and, to date, no one knows exactly what happened.

According to a suit filed by US Attorney General Letitia James in New York, Bitfinex allegedly used Tether reserves to cover the $850 million or so that went missing.

Does all of this make Tether Limited a hapless victim of a rapacious parent company or a willing accomplice?

Many are coming to see Tether as a Ponzi scheme operating on a massive scale, but only in part because of its parent company's actions. Other reasons include:

  • In 2017, their lawyer's personal bank account housed all of their cash
  • their lack of any real accountability through any known financial institution
  • not having an official headquarters/physical office
  • shady money handling processes
  • failure to register their business with any country's trade/commodities bureau (specifically in the US)
  • cryptocurrency market manipulation
  • reserves that overwhelmingly consist of commercial paper

Any of these instances would send a cautious cryptocurrency trader running to a different exchange but Tether still has practical uses.

Do you exchange cryptocurrencies on Tether? Can you tell us how to buy the binance coin on their platform?

Practical Uses for Tether

Because tether tokens are always tied to the sovereign currency it represents, their assessed value is not subject to market volatility. Again, we invoke the term 'stablecoin'.

Unfortunately, because its value will not increase, it also means that it is not a suitable investment vehicle. However, USDT is useful to cryptocurrency traders because they can minimise the impact of crypto market volatility.

Let's say that you amass a healthy sum of cryptocurrency... right before Elon Musk launches another injurious tweet. With but a few clicks, you can convert the contents of your virtual wallet to USDT and hold them until the furore passes. Being a stablecoin, your cache will be safe from the inevitable Twitter-caused crypto market crash.

What if you would like to diversify your cryptocurrency holdings?

Let's say you currently have a lot of litecoin but wouldn't mind having a few bitcoins and some ether, too. Having a stash of USDT in your wallet makes those trades fast and effortless. Your fees will likely be lower, too.

The whole point of Tether was to be a bridge between fiat money and cryptocurrencies.

When used as intended - converting real money into crypto and then using that to buy other cryptocurrencies, all of the controversies surrounding Tether should be of no concern because you wouldn't own USDT for very long.

You can use Tether to trade real money for crypto
Using Tether as a bridge between real money and cryptocurrency is beneficial. Photo credit: Ivan Radic on VisualHunt

What Is Tether Worth?

As a stablecoin, USDT is pegged to a fiat currency at a 1:1 rate: 1 USDT is worth one unit of sovereign currency.

As an investment opportunity, it is fairly limited; holding on to USDT for however long will not cause it to increase in value. But if you used them as they were meant to be used, they can save you money on bank and trading fees.

Stablecoins are a relatively new development in the world of cryptocurrency trading. It will take some time for the crypto-savvy to latch onto this solution for converting money into coin.

Unfortunately, all of the controversy surrounding Tether Limited and its parent company doesn't help promote the concept and it may take a long time for wary traders to trust a company with so much baggage, especially if their opaque manoeuvring continues. Likewise, they may be turned off by Tether's ongoing ties with Bitfinex.

All of that aside, Tether currently sits just under Cardano as the most popular asset on the cryptocurrency market. As for its market capitalisation, a worth of nearly $58 billion is not too shabby.

What makes the USDT worthwhile is its potential.

It was the first stablecoin on the market and, growing pains aside - ugly as they were, it fulfils its function well. Even the bulk of their reserves being commercial paper is not uncommon in the world of business and finance, and it should not be of much concern to the USDT buyer.

That is unless there is a run on them, like what happened in 2017. The company could not fulfil all of the withdrawal requests, leading to another round of close scrutiny into the company's practices. 

Your turn to chime in: would you buy USDT to make buying Ethereum in the UK faster, easier and cheaper?

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Sophia

A vagabond traveler whose first love is the written word, I advocate for continuous learning, cycling, and the joy only a beloved pet can bring. There is plenty else I am passionate about, but those three should do it, for now.