Blockchain technology took the world by storm. Cryptocurrencies quickly became the most interesting piece of technology ever created. Many saw them as an opportunity to make regular transactions without the oversight of any central authorities. It soon seemed like the world was poised to move away from government-controlled fiat currencies. However, one danger always loomed around the new type of currency – volatility.
Unlike other assets, the value of cryptocurrencies typically rises and falls in dramatic ways. For example, Bitcoin’s price soared over $65 thousand in November 2021. A couple of months later, it had dropped to around $40 thousand.
For some people, this was a great opportunity to become rich. Yes, it came with a lot of risks but the reward potential was very high – especially because the crypto market has been growing faster than any asset class in human history – reaching a market capitalization of 1 trillion dollars within 13 years of its creation.
Many other people, on the other hand, see volatility as a problem. And for good reasons. Saving and investing money in cryptocurrency could easily lead to painful losses just because of a market correction.
Even worse, making regular payments in a fluctuating currency would be less than ideal. To that problem, the crypto industry responded by creating stable coins.
Cryptocurrencies that would be pegged to regular fiat currencies at a rate of 1:1. This seemed like the magic bullet. Finally, cryptocurrencies could be used in regular everyday payments. I mean the technology would make international transactions faster and cheaper right? Well, not exactly. It turns out that Stable coins are not perfect. Is USDT safe?
They have their unique own problems that make them just as risky as other cryptocurrencies. If you’ve heard of Luna’s recent demise, then you would know what I’m talking about.
Although they were warnings in the past, Luna’s misfortune has increased scrutiny and mistrust for the once-beloved stable coins. In today’s video, we will be looking at one stable coin that’s still going strong – Tether.
Tether has had its fair share of controversies in the past – some of which we’ll touch on later on. But it has managed to stay afloat. It has even announced some exciting plans – more on that later so make sure you stick around.
Before you can understand Tether and what it has been up to lately, I’d need to talk more about how Stable coins work.
What are Stable coins?
Stable coins are cryptocurrencies that have their value pegged to that of a real world asset. Stable coins were created as a way to add stability to the crypto industry.
As we said earlier, the cryptocurrency market is marked by high volatility and huge price swings. Stable coin are attached to real world assets thus making their price more stable. There are several types of stablecoins. Some of them include:
Fiat Backed stable coins
These are cryptocurrencies that have their value tied to fiat currencies like dollars and euros. These cryptocurrencies usually hold a reserve of the fiat currency they are tied to in a reserve bank. So when one fiat back stable coin is issued, there is an equivalent fiat note held in a reserve. Holding large reserves of fiat currency allows them to keep their price level. Examples are Tether, Binance USD, and USD coin.
Algorithmic stable coins
Algorithmic stablecoins rely on algorithms to keep their price level. The algorithm works by linking two coins and then regulating their price via consumer demand and supply levels. Algorithmic stablecoins are pegged to real world assets. However, they are not backed by those real world assets.
Examples are Dai, TerraUSD, FRAX, and Neutrino USD.
Now we know how stable coins work, let’s briefly touch on Tether and what the project is about.
What is Tether?
Tether is a fiat backed stable coin that was launched in 2014. Tether was launched as Realcoin – a second layer token built on the bitcoin blockchain. It was later renamed USDT and it was upgraded to work on Ethereum, Algorand, Tron, and other blockchains.
Tether is a fiat-backed stable coin which means it relies on holding fiat currency reserves to maintain its price. Tether is one of the largest stable coins in the world and it has a combined market cap of $67 billion. It also has a circulating supply of 67 billion tokens.
Tether launched with a value equal to $1. It reached an all-time high of $1.22 in February 2015. A month later, it crashed to $0.5
The current price of Tether as at August 2022 is $1 maintaining its peg as a stable coin should. Now let’s look at some of the controversies Tether has been involved in.
Tether, the largest stable coin in the world, has had its fair share of controversies since it was launched. Just like Terra, most of these controversies surround the stable coin’s ability to keep its peg.
Tether has been involved in a series of lawsuits alongside another company over claims that Tether intentionally mislead members of the public on the real size of its cash reserves. When the project launched, the company had claimed that all Tether coins were backed by a dollar note. However, in 2019, the company then revealed that some of its holdings were in loans and other cash equivalents.
One of Tether’s affiliate companies, Bitfinex was also sued alongside Tether in New York. The judge found that Bitfinex, a trading platform, had covered up $850 million in losses. According to the judge, the cover-up was done with Tether.
Both Tether and Bitfinex settled the case out of court with New York state. The conditions of the settlement included an agreement to stop Tether and Bitfinex from doing business in New York. Tether also agreed to provide quarterly financial reports to New York for two years. Both companies also had to pay a fine of $18 million. One of the most shocking details about the case was the claim made by Judge Letitia James who said that “Tether’s claim that it was backed by U.S dollars at all times was a lie”.
Tether came under a lot of scrutinies as Terra was crashing. Many people wondered whether Tether would be able to keep its price peg. Some feared that Luna’s demise would be the undoing of stable coins. However, Tether shocked a lot of people by maintaining its price peg.
Is Tether legit
Apart from the lawsuits, Tether also has a bad reputation for being a target place for scammers. Tether being the largest stable coin has the potential to attract a lot of investors. Sadly, scammers have capitalized on that opportunity to prey on innocent investors.
Tether has been a major target for phishing scams. Phishing scams involve deceiving users to give up sensitive details like login credentials, credit card numbers, and wallet passwords.
A typical phishing scam involves a message telling the victim that they’ve won some cryptocurrency – usually a high amount to entice the victim.
An unknowing victim then clicks the message looking to withdraw their winnings. A pop-up page asking for their log-in details and their wallet password appears on the screen. The unknowing user then fills in the details, thus handing their details to the scammer. The scammers then use that information to steal or hack into people’s accounts.
Tether has been the focus of phishing scams in the past and it’s no surprise as many people are likely to believe that they won money from the largest stablecoin in the world.
Tether has tried to boost user confidence in the security of its network by conducting third-party network security audits.
Other Stable coin controversies
Tether is not unique in stable coins with controversies. Stable coins are one of the most controversial types of cryptocurrencies because of their supposed ability to maintain their price peg. Already, cryptocurrencies are very risky but having a cryptocurrency that promises to keep its price stable is sure to raise some eyebrows.
Many people question the ability of stable coins to keep their price peg. Algorithmic stable coins come under more scrutiny as they have no bank reserves to help keep their currency’s price peg.
One of the most famous controversies regarding stable coins happened in the first half of 2022. Luna, an algorithmic stable coin, had reached $116 in early April 2022. It was supposed to be the stable coin success story. However, things turned sour when the network was attacked in what was a major sell-off. The sell-off tanked the price, taking it to $0.98. While Terra’s CEO dismissed the incident as a minor speed bump, the stable coin was in for a market-changing event.
The stable coin lost a chunk of its value over the next five days. Even though the company behind Terra chose to sell off some of its bitcoin reserves, it wasn’t enough to help the stable coin recover.
Tether latest developments
In line with the court settlement with New York, Tether has been publishing quarterly assurance reports. In a report conducted with MHA Cayman, Tether showed that its reserves contained $24.2 billion in commercial papers. While its cash and bank deposits were around $4.187 billion and treasury bills stood at $34.52 billion. By publicizing its financial records, Tether is working to rebuild some of the investor confidence it lost. It also helps investors make more informed decisions.
Cryptocurrencies are generally controversial. Stable coins are even more so. Yes, they hold a lot of promise but as recent events have shown, most of that promise is yet to be realized. The challenge for stable coins is to maintain their price peg in the face of short-term buying pressure. Stable coins take different approaches to maintain their price peg.
Some hold large fiat currency reserves to back their tokens while others rely on computer algorithms that link two currencies together and regulate their price based on demand and supply.
Recent events have shown that fiat backed stable coins are safer than algorithmic stable coins with Luna being a case in point.
Tether is the largest stable coin and it uses the currency reserve system to keep its price peg. There have been controversies surrounding the true size of Tether’s cash reserves. Tether has even been fingered in shady dealings with another company Bitfinex. Their dealings got them in trouble with New York state.
Many thought that after Luna’s demise, Tether would follow a similar fate. However, Tether has proved its naysayers wrong. They have been able to keep their currency level with the dollar despite the turbulent time the crypto market is having. Whether Tether will last for a long time is yet to be seen. However, Tether remains the largest stable coin in the world.