Over the course of 2010 to 2016, Bitcoin blossomed from being a cypherpunk thought experiment to an unprecedented economic phenomenon. Despite being one of the most economic experiments in nearly a century, it is plagued by volatility due to its nascency as a market. Many stablecoins, pegged to the dollar, such as BitUSD, SteemUSD, and NuBits were launched but failed to achieve product-market fit. Stablecoins were considered a failed concept – until Tether emerged.
Safe Haven for Traders and Investors
When Bitcoin was young, going from having Bitcoin on an exchange wallet to USD in your bank account was ever so simple thanks to a lack of regulation and no banking restrictions. There must have been a few dozen regulators who cared about Bitcoin, and once the ball started really rolling and the numbers added another digit, and then another, it got real and regulators started introducing barriers.
Tether was introduced as a USD pegged stablecoin; an efficient way to keep your funds hedged from volatility risk without having to pay exorbitant conversion fees and overcoming regulatory obstacles. Better yet, Tether was listed on cryptocurrency exchanges, so it was like having the stability of USD with the potential to convert that liquidity into crypto at a moment’s notice.
Launched in 2016, Tether got a chance to shine in 2017 when Bitcoin exploded in price and traders sought an easy way to hedge their positions, adding the ‘cash’ component to portfolios while still being able to easily deploy it. This success led to multiple stablecoins coming into existence, namely: USDC launched by Circle, PAX by Paxos, GUSD by Gemini, and TUSD by TrustToken. Following Tether’s system, TUSD also holds an amount of USD equivalent to the circulating supply of TUSD to create a one-for-one backing, keeping the peg safe.
This very system, notably called “Proof of Funds”, served as a key criticism of Tether by stakeholders inside and outside the industry.
That said, Tether has had a fair share of controversies and is still yet to overcome a tough legal battle.
Reputational and Legal Issues
Outside of their claims that each tether token was backed one-for-one by USD in a bank account, there was no evidence that this actually existed. Tether refused to publish audit results that were supposedly conducted by professional auditors, and even when they did publish some documentation, it was scanty and barely close to substantive.
It was finally revealed in 2019 that each tether is backed by $0.74 of cash. But they also claim the remaining 26 percent of the funds have been given out as short term loans that can be redeemed at any time. 2019 was the start of serious legal issues for Tether and it’s parent company iFinex. Tether was accused of single-handedly manipulating the Bitcoin market in 2017, an allegation they have vehemently denied despite a pending class-action lawsuit against them.
The New York State Attorney General filed a lawsuit against Tether under accusations of losing $800 million worth of customer funds and printing that equivalent in USDT to shield against said loss. Additionally, the NYAG claims Bitfinex and iFinex used shadow banking channels to process customer deposits when they were cut off from the traditional banking system. This debacle will continue in 2020, and there is no sense of how it will conclude at the moment.