Unraveling Tether: The Mechanics and Mystique Behind USDT’s Stablecoin Saga

The Tether (USDT) stablecoin remains one of the most debated subjects within the cryptocurrency market, especially in the Bitcoin community. Master The Crypto has compiled a three-part guide for you to explore in order to gain a clearer understanding of Tether, the mechanics of Stablecoins, and the connection with Bitfinex along with the related price manipulation controversy. Let’s get started:

1) What is the Tether stablecoin (USDT)
2) How Stablecoins function + stablecoin comparison with Facebook Libra competition
3) The comprehensive narrative of the Tether cryptocurrency token and Bitfinex exchange, along with future implications

Current Tether Price: USDT Coin Market Capitalization

Tether, whose official site can be found at tether.to, is a stablecoin cryptocurrency represented by the token symbol USDT, designed to mirror a 1:1 USD-pegged US Dollar token. As the slogans of Tether emphasize, it’s a ‘digital currency for a digital era’, with the goal of ‘introducing real-world currency to blockchain’, making USDT a focal point of extensive community discussions.

The cryptocurrency landscape has significantly expanded since the inception of Bitcoin in 2008. With a span of 11 years since its modest beginnings, there is now a vast array of digital assets within the market. These various currencies distinguish themselves through unique functionalities or by trying to leverage the successes of established virtual currencies.

While these distinct assets provide intrinsic worth for their diverse users and investors, another ‘category’ of digital currency has also seen remarkable growth. Backed by fiat, Stablecoins have emerged over recent years as an extension to well-known currencies like the US Dollar, to illustrate one example.

It’s worth noting that these stablecoins haven’t quite reached the same explosive growth trajectory as other digital assets but there are several fascinating iterations available that deserve attention. One such example is Tether (USDT), renowned as one of the more favored stablecoins for those inclined to use, hold, or lend it out. Regardless of where you search for Tether’s price—be it CoinMarketCap, CryptoCompare, or CoinGecko—you will find USDT consistently ranking in the top 10, if not the top 5 by market capitalization and alternating in trading volume rankings with Bitcoin for the #1 and #2 positions within the blockchain token ecosystem.

But how did Tether initially come into existence? What is the rationale behind its usage? And how are you actually able to acquire it? We will delve into these inquiries right here and now.

Quick Overview – About Stablecoins

Interestingly, one aspect of Stablecoins is that they are not as ‘new’ as we might assume; in reality, some early versions of these currencies even predate what we recognize as some of the most significant coins in the cryptocurrency universe.

<p

fully supported and reserved at all times.”

One intriguing aspect of Tether relates to its seamless integration on both Bitcoin and Ethereum. Unlike its counterparts that sometimes function within their own blockchain as isolated systems like MakerDAO, Tether stands apart because the bulk of its digital tokens predominantly operate on the blockchains of Bitcoin and Ethereum; accounting for 97 percent of its token transactions.

So, why is this true? It’s a widely utilized token that is made accessible to investors and potential purchasers through numerous centralized and decentralized exchanges.

The reasoning behind this is quite straightforward – it offers a reliable speculative cushion for buyers should the primary crypto market take a downturn; for investors, it provides a fallback to a reserve asset that remains stable in value if they decide to leave it there. Furthermore, it enables them to efficiently transition from one currency to another.

For cryptocurrency exchanges, the presence of Tether adds an extra layer of liquidity to their platform, which is particularly crucial for smaller centralized or decentralized exchanges.

What makes this a bit peculiar is that, from a financial standpoint, it doesn’t entirely add up to leverage these two blockchain protocols. Conversely, other stablecoins typically create and launch their own databases.

This approach allows them to circumvent any extra expenses that may arise from engaging with, for instance, miners in line with the proof-of-work consensus protocols utilized by both Ethereum and Bitcoin.

The 97 percent figure might not seem significant at first glance, but its substantial impact is clear when we account for the fact that Tether’s token, the USDT, is pegged at a 1:1 ratio with the dollar. With 2.2 billion of them available, it signifies that Tether maintains a reserve of at least the equivalent amount.

Why utilize Tether?

As previously noted, there is significant value in having a digital currency linked (in some capacity) to a fiat currency. This particularly pertains to exchanges and users, as it offers a sort of financial safety net in the volatile crypto market.

However, the same benefit also extends to businesses and retailers wanting to accept cryptocurrencies from potential clients. As evidenced by companies like Microsoft and Expedia, there are compelling reasons to engage in crypto transactions, but various challenges arise when attempting to do so.

Firstly, the volatility associated with accepting payments in Bitcoin is substantial. Secondly, third-party payment systems that aim to facilitate this process ultimately detract from the advantages of accepting crypto as a payment method; thus, what’s the point?

Tether aspires to close this gap between merchants and regular users by delivering an optimal solution; a digital currency that can leverage Bitcoin or Ethereum while being backed by a relatively stable fiat currency.

For exchanges, providing a pathway for users interested in purchasing cryptocurrencies to swiftly convert real-world cash into digital currency is a key reason for Tether’s rise among exchanges.

The exchanges and businesses that endeavor to offer Tether can tap into a significantly larger market of potential investors, presenting a potentially beneficial opportunity in the near term.

In comparison to any other form of stablecoin, Tether is the most widely utilized token within the ecosystem outpacing other options available.

How Does Tether Operate?

Tether currently functions on top of the Omni Protocol, a widely adopted framework for digital assets that utilize the Bitcoin blockchain. Although the fundamental concept of Tether (USDT) is to serve as a digital equivalent of the US Dollar, its operation doesn’t precisely mirror this concept.

For one, while the US Dollar, in practical terms, remains relatively stable while it resides in your wallet, USDT experiences some level of fluctuation but generally maintains a value hovering around $1.

How does it actually function? Hypothetically, if a user were to wire funds to a cryptocurrency exchange like Kraken, they would receive an equivalent amount in Tether. These users can then utilize their USDT for transactions involving other cryptocurrencies.

While this was the standard procedure for all users seeking Tether in the past, this is no longer the case due to banking complications the company encountered over the past years.

So, this is how it USED to operate. What about now? While it no longer engages in those types of transactions, it remains functional on the Omni Protocol, which is a layer-2 solution.

It is within Tether’s technological framework that the current process is observable; while Tether exists on Omni, users can acquire it through a combination of decentralized exchanges and centralized ones that have established themselves as accepted issuers or custodians of the stablecoin.

For those keen on obtaining Tether, here are some of the exchanges currently offering it:

Kraken
Binance
Bithumb Global
Bittrex
KuCoin
Gate.io
Bitsdaq
BTCTurk
UpBit
Max Maicoin
OmgFin
BitoPro
IndoDax
CITEX
WazirX
Kuna Exchange
BitSonic
FTX
PieXGo

Each of these exchanges currently supports Spot Trading of Tether, along with others that also provide Futures trading for users.

Controversies Surrounding Tether

For the first three years, no one truly knew the individuals behind this initiative. It wasn’t until 2017 that Tether surprisingly released its own ‘About us’ page between December 5th and 17th. With this information finally disclosed, it became clear that the primary figures behind this project hailed from the Bitfinex team; specifically:

JL van der Velde (CEO)
Giancarlo Devasini (CFO)
Philip

Potter (CSO)
Stuart Hoegner (general counsel)
Matthew Tremblay (chief compliance officer)

Bitcoin Price Manipulation

At this point, this might be easily dismissed as individuals from an enthusiastic cryptocurrency community striving to balance the field for newcomers in their domain. The issue arises from the considerable number of accusations directed at the Bitfinex team, indicating that there could be more behind the scenes than just this.

As the driving force behind a cryptocurrency exchange and a readily available type of stablecoin used on those platforms, this is more of a tangible threat rather than a speculative one.

According to media outlets such as Bloomberg, the Bitfinex team clearly acted upon these matters, as reported during that period, along with the attention drawn from the U.S. Justice Department and its Commodities and Futures Trading Commission back in November 2018.

These worries, observations, and inquiries made by the CFTC and Justice Department stem from the aftermath of the Bitcoin surge witnessed in 2017. Serious accusations surfaced that Bitfinex, due to its direct connections with Tether, was utilizing the stablecoin to bolster or perhaps even provoke the rally in the market during 2017.

Here’s how Bloomberg commented on the situation at that time:

“Certain traders — along with scholars — have claimed that these Tethers are employed to purchase Bitcoin during critical moments when the value of the more prevalent digital coin declines. JL van der Velde, the CEO of Tether Ltd. and Bitfinex, has formerly dismissed such allegations.”

The CEO also responded concerning claims regarding Tether’s involvement in possible price manipulation:

“Tether issuances cannot be used to sustain the price of Bitcoin or any other coin/token on Bitfinex.”

Additionally, on June 25, 2018, a research document titled “Is Bitcoin Really Un-Tethered?” by John M. Griffin from the University of Texas at Austin’s Finance Department and Amin Shams from Ohio State University was notably revised in November 2019, making several assertions regarding market manipulation and the bitcoin price. Another recent analysis by Carol Alexander and Michael Dakos titled, “A Critical Investigation of Cryptocurrency Data and Analysis” was published in May 2019.

Below is a chart illustrating Tether issuance during 2017, 2018, and 2019, showing the amounts generated alongside the frequency of Bitcoin correlating with USDT market cap increases (keep in mind that correlation does not always imply causation):

Much of this enigma is still unfolding at the moment of this Tether cryptocurrency evaluation, however, since we have a foothold in the USDT stablecoin realm, let’s fully immerse ourselves and comprehend how stablecoins function, while also comparing Tether to other dollar-pegged digital currencies and explore the impact of the Facebook Libra stablecoin on Tether.

What exactly is a Stablecoin? What are the leading and most recognized Stablecoins? How do Stablecoins function? Discover everything you need to understand about Stablecoins.

Stablecoins are digital tokens that link their value to a specific asset, like the US Dollar. As the cryptocurrency sector continues to expand, there’s been a noticeable rise in the demand for stablecoins.

In spite of the increasing demand for stablecoins, a significant number of individuals remain completely uninformed about how stablecoins function. What is a stablecoin? Which stablecoins are regarded as the most trusted and superior on the market? In this guide, we aim to address all your inquiries regarding stablecoins.

What is a Stablecoin?

A stablecoin is a digital token designed from the outset to maintain a consistent value. The majority of stablecoins are pegged to the US Dollar simply because it is the globally most utilized currency. Nevertheless, we’ve also encountered stablecoins pegged to various significant and minor fiat currencies.

Some stablecoins are not pegged to any fiat currency or linked to any national economy. They utilize smart contracts to manage reserves, for instance. The smart contract issues stablecoins when prices are high and then repurchases them from the market when prices drop.

Why Do We Require Stablecoins?

Stablecoins have become a crucial component of the crypto ecosystem. They emerged due to several significant reasons. However, the two most vital reasons for the existence of stablecoins include:

Cryptocurrency Volatility

Bitcoin and other digital currencies are infamously unstable. It’s currently challenging for businesses, vendors, or individuals to accept Bitcoin because its value can drastically shift day to day. For instance, consider a dealership purchasing a car from Honda for $20,000 and subsequently selling that car for 2 BTC a few days later. As long as 2 BTC corresponds to $20,000, the dealership is fine. However, if the value of BTC declines, the dealership could incur significant losses.

Regulatory Scrutiny of Fiat Currencies

Crypto trading platforms that manage ‘genuine’ USD or other fiat money commonly encounter heightened regulatory examination. Due to this regulatory oversight, several exchanges prevent any fiat trading altogether. Stablecoins tied to fiat currencies enable traders to reap the advantages of fiat transactions without certain regulatory barriers.

How Do Stablecoins Operate?

Currently, stablecoins function in various manners to maintain a consistent value.

Tether, for instance, is among the most recognized stablecoins in circulation. It is pegged to the USD at a ratio of 1 US Dollar Tether (USDT) to 1 USD. Tether maintains its value by possessing a reserve of USD assets.

Initially, Tether asserted that it held every USDT in a 1:1 ratio with cash reserves. This means that for every $1 billion of USDT circulating in crypto markets, Tether maintained $1 billion in liquid cash within its bank account. That assertion was soon revealed to be misleading, and Tether now simply states that USDT is supported by equivalent “cash and other assets” rather than solely cash reserves.

Some stablecoins achieve stability through embedded algorithms or smart contracts. If the stablecoin’s value falls below a specific level, the smart contract purchases stablecoins from the market, thus increasing their price. Conversely, when the stablecoin’s value rises beyond a specific threshold, the smart contract liquidates the stablecoin to decrease market demand.

Other stablecoins utilize even more intricate frameworks that encompass a sophisticated array of algorithms, buyback schemes, and fiat reserves. As the stablecoin ecosystem keeps evolving, we witness fresh and innovative stability measures being implemented.

Advantages of Stablecoins

Several advantages of utilizing, holding, or trading stablecoins include:

Enhanced and Simpler Mainstream Adoption of Cryptocurrency: Imagine walking into Subway and telling the sandwich maker you’ll pay 0.0005 BTC for a footlong sandwich. Good luck with that. Although everyone is now familiar with Bitcoin, few can instantly comprehend its value as they can with USD or other prominent fiat currencies.

You Don’t Pay Rent or Shop for Groceries in Bitcoin: The vast majority of people do not pay rent or purchase groceries in Bitcoin. Unless significant changes occur in the next few years, this scenario is unlikely to shift anytime soon. While individuals continue to pay rent, buy groceries, and take care of daily essentials using major fiat currencies, there remains a pressing need for some straightforward fiat-to-crypto conversion method.

Market Hedge: Suppose you’re holding Bitcoin. You have strong faith in the technology—but you also sense that a market correction is imminent. A wise trader would safeguard her position by converting some BTC into an asset with stable value—like a stablecoin. You exchange 1 BTC for $10,000 USD worth of a stablecoin. Weeks later, BTC drops to $5,000 per BTC. Then, you convert your stablecoin back to BTC and end up possessing 2 BTC instead of 1. In essence, stablecoins offer traders more options and a superior ability to hedge against market fluctuations.

Stability: Thousands of vendors now accept Bitcoin and other cryptocurrencies. Nevertheless, the widespread adoption of Bitcoin is impeded by its volatility. A vendor might hesitate to accept 1 BTC for their product today when they still operate in cash. During times of high volatility, it’s challenging to utilize an asset as a currency.

Acquire Stocks with Stablecoins: Certain crypto markets have elevated the experience, allowing you to manage cryptocurrencies, stablecoins, and stocks from one unified dashboard. However, these platforms rarely permit stock purchases directly using BTC, and you may need to convert funds from crypto into a stablecoin beforehand.

Legal and Regulatory Advantages: There are numerous legal and regulatory implications associated with the use of stablecoins. Specifically, stablecoins aren’t necessarily subject to the same trading constraints as cash reserves. It’s often more convenient for an exchange to utilize a proxy currency—such as USDT—rather than managing USD cash directly.

It Remains Decentralized: Critics of stablecoins might argue that they are merely creating an alternative form of cash. However, that’s not entirely accurate. Many stablecoins are linked to the USD and other fiat currencies; however, other stablecoins align with different assets or have no assets at all. A quality stablecoin has a decentralized governance framework that appeals to advocates of cryptocurrency.

Blockchain-Based Digital Tokens: The majority of stablecoins are blockchain-based, which is why they can be effortlessly traded across crypto exchanges. Traders of stablecoins enjoy the advantages of both worlds, benefiting from the security and decentralization of blockchain-based tokens alongside the stability and familiarity of fiat currencies.

Categories of Stablecoins

Several distinct types of stablecoins are available today. However, generally, stablecoins are classified into two primary categories: collateralized and non-collateralized stablecoins.

Collateralized Stablecoins

Collateralized stablecoins are those that are supported by an asset. This asset possesses value, and each unit of the asset corresponds to a specific quantity of stablecoin. For instance, with USDT, every USDT is backed 1:1 by USD cash. Each Tether unit is fully collateralized. Other stablecoins may be collateralized by cryptocurrencies instead of fiat currencies.

Fiat Collateralized: Fiat-collateralized stablecoins utilize fiat currency as collateral. For example, Tether maintains USD reserves, allowing traders to exchange a USDT 1:1 for a USD. This characteristic is what gives Tether its value. Other fiat-collateralized stablecoins function similarly. If there’s $1 million worth of stablecoin in circulation, it means that there’s $1 million housed in a vault supporting the value of that stablecoin.

Crypto Collateralized: Certain stablecoins are secured by cryptocurrency reserves. For instance, MakerDAO’s lending platform is supported by ETH, requiring users to lock up 150% ETH to borrow the Dai stablecoin. Consequently, each Dai is collateralized by ETH at a minimum ratio of 150%.

Asset Collateralized: There is a third variety of collateralized stablecoin. Asset-collateralized stablecoins are not backed by fiat currencies or cryptocurrencies; instead,

they’re supported by another form of asset. They might be underpinned by gold ingots, for instance, or equities and other investments.

Non-Collateralized Stablecoins

Some stablecoins lack any kind of collateralization. There’s no particular asset securing the stablecoin’s value. The stablecoin’s worth isn’t linked to the USD, EUR, BTC, or any other conventional asset; rather, it’s sustained by algorithms, smart contracts, or some other innovative technology.

These stablecoins could represent the most captivating option moving forward. They utilize sophisticated blockchain technologies and decentralized, automated smart contracts to implement specific rules. In theory, a well-crafted non-collateralized stablecoin could maintain its value indefinitely, irrespective of larger crypto or fiat market fluctuations.

Drawbacks of Stablecoins

Stablecoins are far from flawless. Like other nascent technologies, stablecoins are already displaying some flaws. Some stablecoins have faltered early on. Others – even significant players like Tether – persistently confront inquiries regarding their stability, authenticity, and transparency.

Several of the drawbacks associated with stablecoins include:

Fiat Collateralized Stablecoins Function Like Banks

Why would a private entity maintain a reserve of $1 million USD in cash solely to sustain the value of a stablecoin? There’s no reason to keep this money as cash, and the organization is losing money daily due to inflation. To make holding that cash worthwhile, the enterprise would need to lend it out or invest it.

Simply put, there’s no motivation for anyone to keep cash in a bank reserve just to support a stablecoin. Despite this seemingly evident conclusion, companies like Tether initially asserted that they were doing just that. Tether stated that they maintained billions of dollars’ worth of USD cash in a bank to back every USDT stablecoin in circulation. If that statement was accurate, then Tether was hemorrhaging tens of thousands of dollars each day merely due to inflation.

Tether would later modify its stance, asserting that their USD reserves were in “cash and other assets”. Tether currently seems to be investing its cash reserves for interest earnings. Naturally, investing comes with inherent risks. If Tether makes a poor investment decision, the value of the USDT could crash.

All of this culminates in a straightforward conclusion: certain fiat collateralized stablecoins operate just like banks. Did we genuinely go through all the trouble of creating blockchain and cryptocurrencies just to establish a new lending and banking system?

Aren’t We Simply Re-Creating Currency? What’s the Purpose?

From 1879 to 1933, every USD in circulation was supported by a fixed amount of gold. However, in 1933, President Franklin Delano Roosevelt removed the United States from the gold standard following a series of bank collapses during the Great Depression. The price of gold was raised to $35 per ounce, theoretically stabilizing the USD’s value. That price point remained until 1971 when President Nixon declared that the United States would forsake the gold standard. Since that moment, the US Dollar has not been linked to gold’s value and vice versa. Critics argue that stablecoins merely recreate the gold standard framework of previous eras. Some consider this beneficial since it provides currency with tangible value. Others contend it hinders economic advancement.

Stablecoins Haven’t Demonstrated Their Worth During Actual Market Crises

It’s easy for stablecoins to assert stability during standard market conditions. Yes, markets have fluctuated over the past two years, but no substantial crashes have occurred. Stablecoins only started gaining traction after cryptocurrency ascended to $20,000 and subsequently dropped to the $5,000 to $10,000 range in late 2017 and early 2018.

Will stablecoins retain their value if bitcoin surges to $50,000 or plummets to $1,000? Will stablecoins maintain their worth if the USD collapses and we plunge into another global recession? These are all pertinent questions that may remain unanswered.

A ship is most secure when it’s docked – but that’s not where a ship is meant to remain. A stablecoin is most secure under stable market conditions, but we cannot ascertain its performance until it undergoes significant volatility.

Frauds and Insufficient Transparency

Another issue within the stablecoin sector is its struggle with frauds and a deficit of transparency – akin to the broader crypto marketplace as a whole.

No stablecoin has encountered as much scrutiny as Tether. Tether was founded amid a cloud of secrecy, with its founding members linked to various questionable banks and exchanges like Bitfinex. Subsequently, there was the controversy over Tether’s cash reserves, particularly regarding the actual amount Tether was holding in reserves.

Part of the dilemma with Tether was its rapid rise to fame. Suddenly, a small group of individuals possessed the ability to create $100 million USD out of thin air whenever they desired. Tether asserted this money was consistently backed 1:1 with actual USD cash reserves, yet audits were infrequent.

If you could generate $100 million for yourself overnight, wouldn’t you do it? This is one reason why stablecoins may never function effectively without a proper, decentralized regulatory framework in place.

The Most Reliable Stablecoins Are Centralized

Another challenge facing stablecoins is that the largest stablecoins are frequently centralized. They were created by specific exchanges – like Gemini. Or, they are entirely managed and overseen by a centralized entity like Tether.

Indeed, individuals have attempted to develop decentralized stablecoin systems, and many of these frameworks exhibit significant potential. If we could establish a decentralized currency like bitcoin that can’t be extinguished or dominated by any organization, then why can’t we create a decentralized stablecoin? That’s the optimistic viewpoint – and it’s a possibility that could materialize.

Leading 14 Stablecoins

There are approximately 20 prominent stablecoins traded and exchanged on today’s cryptocurrency platforms. Tether, boasting a market capitalization exceeding $4 billion, is the most prevalent and widely-traded stablecoin by a considerable margin.

Other stablecoins, however, have demonstrated increasing potential. They continue to expand. Exchanges are backing newer stablecoins based on their

transparency and authenticity. Typically, the community has greater confidence in firms such as Gemini compared to entities like Tether.

Keeping that in consideration, here are the leading ten stablecoins currently on the market.

Tether (USDT)

$4.01 Billion Market Capitalization
$18.4 Billion 24h Trading Activity (September 2019)
Linked to USD
Fiat Backed
Managed by Tether

USD Coin (USDC)

$436.28 Million Market Capitalization
$172.7 Million Trading Activity (September 2019)
Linked to USD
Fiat Backed

Paxos Standard Token (PAX)

$241 Million Market Capitalization
$383 Million Trading Activity (September 2019)
Linked to USD
Fiat Backed
Managed by Paxos Trust Company

TrueUSD (TUSD)

$190.94 Million Market Capitalization
$637 Million Trading Activity (September 2019)
Linked to USD
Fiat Backed
Managed by TrustToken

Dai Stablecoin

$80.05 Million Market Capitalization
$4.57 Million Trading Activity (September 2019)
Linked to USD
Crypto Backed
Managed by MakerDAO

USDK (USDK)

$28.45 Million Market Capitalization
$40.1 Million Trading Activity (September 2019)
Linked to USD
Fiat Backed
Managed by OKLink

Stasis EURS (EURS)

$35.46 Million Market Capitalization
$387,225 Trading Activity (May 2019)
Linked to EUR
Fiat Backed
Managed by Stasis

bitCNY (BITCNY)

$9 Million Market Capitalization
$151,000,000 Trading Activity (May 2019)
Linked to CNY
Crypto Backed
Managed by Unknown Company

Gemini Dollar (GUSD)

$8.5 Million Market Capitalization
$2.87 Million Trading Activity (September 2019)
Linked to USD
Fiat Backed
Managed by Gemini

StableUSD (USDS)

$6.4 Million Market Capitalization
$678,000 Trading Activity (May 2019)
Linked to USD
Fiat Backed
Managed by Stably

USDQ

$5.49 Million Market Capitalization
$119,000 Trading Activity (September 2019)
Linked to USD
Fiat backed
Managed by Platinum Securities

BitUSD (BITUSD)

$3.87 Million Market Capitalization
$650,000 Trading Activity (September 2019)
Linked to USD
Crypto Backed
Managed by BitShares

1SG (1SG)

$1.3 Million Market Capitalization
$3,800,000 Trading Activity (May 2019)
Linked to SGD
Fiat Backed
Managed by Mars Blockchain Group

sUSD (SUSD)

$1.3 Million Market Capitalization
$115,000 Trading Activity (May 2019)
Linked to USD
Fiat Backed
Managed by Synthetix

Other Stablecoins

The aforementioned stablecoins are the most well-known ones in today’s marketplace. Each possesses a market capitalization exceeding $500,000. Conversely, the stablecoins listed below have lesser market caps but may gain significance in the time ahead:

Alchemint Standards (SDS)
White Standard (WSD)
NuBits (USNBT)
Constant (CONST)
SDUSD (SDUSD)
USDCoin (USC)
QUSD (QUSD)
StableCoin (SBC)

Facebook’s Upcoming Libra Cryptocurrency is a Stablecoin

Facebook has generated significant excitement following the announcement of its Libra cryptocurrency. Yet, many are unaware that Libra is indeed a stablecoin.

Facebook envisions Libra as an adjunct to the US Dollar. The organization intends to support Libra with a collection of currencies and US Treasury securities to minimize volatility.

Additionally, Facebook will collaborate with various financial entities. Each collaborator will contribute an initial $10 million USD, giving Libra comprehensive asset backing at its inception.

New units of Libra currency will be produced as required. If there is a demand for an additional $1 million in Libra currency units, then members of the “Libra Association” must contribute another $1 million.

Libra will implement a distributed ledger – a blockchain – to manage payments between service partners.

However, a significant distinction exists between Libra and a conventional cryptocurrency like bitcoin: Libra is not decentralized; rather, it is a centralized blockchain governed by the Libra Association, which functions similarly to a central bank. In contrast, bitcoin operates on a permissionless blockchain.

Facebook’s Libra seems to be on a promising path to launch shortly. The platform has already founded the Libra Association in Geneva, Switzerland. The Libra Association consists of 28 founding members, including Mastercard, PayPal, Visa, Spotify, Lyft, Uber, Coinbase, Andreessen Horowitz, Union Square Ventures, eBay, and numerous other major enterprises.

Despite facing criticism regarding its centralization, Libra could quickly become the world’s leading stablecoin in the near future. Stay updated for more details about Libra as the launch approaches: the initial version of Libra is anticipated to launch in June 2020.

Now, transitioning to the third and concluding section of this Tether cryptocurrency guide, let’s delve into the controversy involving Bitfinex and Tether and its implications for the value of bitcoin, cryptoasset market manipulation, and what lies ahead for Tether (USDT).

For a lot of individuals, Tether is somewhat tricky to comprehend. Is it merely another currency? Is it intended to act as a substitute for the USD? What is its actual function? To be frank, the truth is grimmer than the assumptions.

To summarize, Tether is a fraud, akin to scandals that haven’t been witnessed since Bernie Madoff’s incarceration. How can this be? Well, I will substantiate this in the following article.

However, a caution: this will be an extensive read, so grab your cup of coffee, tea, or your preferred beverage, and prepare to spend at least 10 minutes absorbing this content (I thought it was better to provide you with a comprehensive insight into everything this involves).

If you’re earnest about investing in USDT, this is an essential read – to prevent any future regrets.

What’s Crypto Best Used For?

While blockchain possesses numerous legitimate and concrete applications, the most effective use case for crypto lies in its speculative traits. Generally, individuals acquire cryptocurrencies hoping that speculation will amplify their prices, leading to profits for the “investors.”

To support the trading of these tokens, countless exchanges have emerged across the globe. Purchasing

Choosing a cryptocurrency is frequently as straightforward as depositing some fiat currency and swapping it for those tokens.

Moreover, since it’s an entire ecosystem regardless of the exchange selected, prices are largely uniform—except for fees and similar costs. Naturally, given that the crypto community places a strong emphasis on decentralization, the ecosystem is not cohesive, unlike the conventional financial system.

Its framework closely resembles that of Liberty Reserve—a previously well-known network of peer-to-peer exchanges throughout the globe. This time, however, it’s distinctive in that a shared ledger facilitates the transfer of value between parties worldwide.

This ledger is referred to as blockchain. It’s decentralized, so no single entity possesses it. Nevertheless, despite this structure, the crypto community still maintains certain connections to traditional banking since individuals need to convert their fiat currencies into cryptocurrencies.

Consequently, many exchanges have some form of partnership with banks. This explains why bitcoin exchanges face difficulties—often needing to adhere to Know Your Customer and Anti-Money Laundering regulations.

Ironically, this contradicts the fundamental principle of cryptocurrency—a private, permissionless, trustless, and regulation-free currency that is globally accepted. This way, funds can be transferred among numerous parties without requiring permission, compliance, or identity verification.

Regrettably, there’s little that can be done about this situation currently. Hence, the ingenious exchanges have embraced an approach that allows them to benefit from these regulations while also providing essential services to their customers.

Let’s Discuss Bitfinex

As one of the pioneering cryptocurrency exchanges, Bitfinex gained traction shortly after the collapse of Mt. Gox—the most prominent exchange at that period. Naturally, this was not without its own challenges, as it became the target of hacking incidents in 2016, leading to the loss of approximately 120,000 bitcoins (roughly $70 million in monetary value).

To avert experiencing the same destiny as Mt. Gox, Bitfinex performed a process known as a bail-in. In response to mounting liabilities, they essentially developed their token and offered it as “collateral” to depositors to fill the gap created by the stolen 120,000 bitcoins. Consequently, customers ended up possessing Bitfinex equity, courtesy of the token.

These tokens functioned as utility tokens, allowing individuals to trade them on the platform. Furthermore, customers who wished to could redeem their tokens for cash—1 BFX = $1 USD at that time. The primary concern was the company’s liquidity problems—they required cash swiftly.

Introducing the Bitcoin Exchange/Wells Fargo Banking Controversy

At this juncture in Bitfinex’s operations, the firm lacked a permanent headquarters, though they were allegedly headquartered in Hong Kong. They maintained several accounts with various banks located in Taiwan.

Following the hacking incident, the leading bank—Wells Fargo—announced that they would not process funds originating from or sent to Bitfinex’s accounts held with these banks. This effectively paralyzed Bitfinex’s activities, as they were unable to conduct transactions, and customers could not transfer their funds in and out of the exchange.

Consequently, they initiated legal action against Wells Fargo—unsuccessfully, it should be noted—and began employing a previously dormant company they owned. What was the name of that company? Tether.

Interestingly, Bitfinex had consistently denied any affiliation with Tether prior to the lawsuit. However, post-lawsuit, they began utilizing the company for their operations.

Brief Introduction to Tether and Its Functionality

Tether is well-regarded due to its 1:1 currency peg. Thus, 1 USDT = $1 (or euro or GBP). This effectively enables it to operate akin to a stablecoin. Unlike Bitcoin and other cryptocurrencies that frequently experience price volatility, Tether aims to maintain stability—at least that’s the intention.

Essentially, it behaves like an ordinary money market fund where you can place some of your funds without fearing significant risk. However, in contrast to a money market fund that is typically supported by specific financial assets, Tether is designed to be backed by reserves.

In other terms, for every 1 USDT purchased, there is supposedly $1 secured in a bank somewhere. Notably, Tether is not the sole stablecoin available. Other entities have identified the potential profitability of tether and entered the market, offering similar services and values.

Tether’s and other stablecoins’ unique selling points encompass ease of transfer across Bitcoin exchanges, a relatively safe crypto haven for storing funds when not actively trading, and steadiness in value as long as your holdings are parked somewhere.

One crucial aspect that often goes unmentioned is its potential use in extensive money laundering activities. Indeed, there are factions that assert Tether is exploited for money laundering purposes.

Consequently, it’s straightforward to purchase Bitcoin, convert it into Tether—bypassing the KYC process—and not worry about the value of illicitly obtained gains depreciating, all thanks to the 1:1 value peg.

This scenario is undoubtedly quite enticing for money laundering entities in search of a “secure space” for their illicit assets. Furthermore, the absence of documentation in case of a hack means these illicit activities remain untraceable.

However, it’s not solely criminals that utilize Tether. There are advocates for digital privacy, individuals resistant to financial regulations and compliance, tax evaders, and those who simply do not trust the government. This group constitutes the majority of USDT users.

With claims of a $1 reserve for each 1 USDT, questions arise regarding the authenticity of these assertions. Strong speculations suggest that Tether’s reserve claims may not hold true; that the company has not maintained control of a significant portion of its reserves.

And these suspicions were validated. While Tether presents itself as a cryptocurrency backed by traditional currencies held in reserves, legal proceedings involving the firm demonstrated that this was, in fact, not the case. To put it bluntly, the majority of their reserves originated

from dealings involving identified money-laundering organizations such as Crypto Capital Corp and other dubious entities.

So, Where Were These Funds Stored?

During the period from 2017 to 2019, enthusiastic observers of the industry posed questions regarding where Tether maintained the reserves it claims to hold. Well, it seems the company predominantly utilized shell corporations to transfer their funds around.

Some banks became aware of this and froze their assets upon realizing that the company wasn’t being honest with them. Ultimately, Tether managed to secure a banking relationship with Noble Bank, located in Puerto Rico, which was willing to conduct business with them and hold their funds.

Nonetheless, this came with a few complications. For instance, the bank’s board was reportedly opposed to Tether banking with them due to their affiliation with the well-known NYC-based custodial bank, BNY Mellon.

For those unfamiliar with BNY Mellon, it is a major financial institution primarily engaged in safeguarding assets for other banks situated outside the US. Thus, banks with significant assets seeking safety often choose to bank with them.

Moreover, as a standard practice, NYC Mellon is known for its strict policies against collaborating with money launderers. Hence, Noble Bank was primarily concerned that NYC Mellon would sever ties with them due to their connection with Tether, potentially jeopardizing the bank’s operations.

Regardless, after overcoming the initial obstacle, Noble Bank subsequently received deposits worth hundreds of millions of dollars from Tether. Naturally, this resulted in a significant boost in their balance, leading some analysts to question how such a rapid escalation occurred.

To obscure their actions, Tether cautioned depositors against sharing bank information publicly. The intention was to prevent BNY Mellon’s wrath. Sadly, human behavior can be unpredictable, and someone eventually leaked information.

Ultimately, the entire affair resulted in the collapse of Noble Bank, compelling Tether to seek alternative banking solutions. The subsequent recipient of this reserve was Deltec Bank, which received the funds through Crypto Capital Corp.

Let’s Discuss Crypto Capital Corp

This organization was known for its involvement in money laundering with numerous crypto businesses as clients. These included Kraken, Quadriga –Canada’s largest bitcoin exchange– and Tether –its most significant client. Rumors also circulated about their engagement with Colombian drug cartels as clients.

It operated by identifying banks with inadequate compliance systems and depositing reserves through shell companies. Naturally, when these banks discovered they were implicated in money laundering operations, they closed the accounts, prompting Crypto Capital Corp and its subsidiary companies to seek other avenues.

In response to these issues raised in court, Tether itself denied any wrongdoing. They feigned surprise regarding the modus operandi of Crypto Capital Corp. Whether this claim was genuine was irrelevant. The critical aspect was that Tether protected itself from any allegations, as CCC took the blame for the mishaps.

Compounding the issue, CCC was collaborating with partners, Spiral and Reggie Fowler, to receive Tether’s depositors’ funds into their accounts. Hence, the funds never even passed through Crypto Capital Corp; they were directed straight to these individuals’ accounts –particularly Reggie Fowler’s.

So, What Effect Did This Have on Customers?

Customers were required to adhere to stringent procedures whenever they wished to deposit funds for Tether. Initially, they needed to reach out to Crypto Capital Corp, which would provide them with the account particulars of a shell corporation.

Next, they were instructed to transfer the funds with memos designed to appear innocuous and unrelated to cryptocurrency. Once this was accomplished, customers had to await payment confirmation.

Upon confirmation, their accounts would be credited with the corresponding Tether value. The concerning aspect of this scheme was that although Bitfinex asserted it had no knowledge of CCC’s operations or directives, existing evidence contradicted this claim. Instructions such as

“[Do not share these instructions] except with your financial institution. Divulging this information could harm not only yourself and Bitfinex but the entire digital token ecosystem. Therefore, you are cautioned that serious negative outcomes could arise if this information becomes public.”

were consistently communicated to customers intending to purchase Tether. This clearly indicated their awareness of the situation. Unfortunately, this was merely the tip of the iceberg. Further evidence indicated that Reggie Fowler was actively siphoning 10 percent of all deposits. This 10 percent was essentially his compensation for his “services.”

As expected, Bitfinex professed ignorance of the operation. In one of their court testimonies, Bitfinex mentioned that,

“Other than a nominal fee for each deposit or withdrawal, Crypto Capital imposed no charges for these services to [Bitfinex] since it could amass significant interest on the funds held on [our] behalf in its accounts.”

However, this statement was false since CCC never selected banks based on interest rates. They were solely focused on providing banks with lax or weak compliance. Bitfinex’s unwillingness to inquire into CCC’s operations likely allowed their habitual deduction of 10 percent commissions to go unnoticed.

Even if Bitfinex had been observant, recognizing such patterns would have been challenging given Tether’s continually increasing balance. Those likely to notice would be individuals attempting to withdraw substantial amounts of money –exceeding the inflows– or hackers seeking to exploit the system.

Nonetheless, after banking regulators uncovered Crypto Capital Corp’s deceptive practices, they promptly froze the accounts associated with the shell companies linked to the organization. These actions precipitated severe liquidity crises, which explained the company’s inability to process withdrawals.

As news spread regarding their liquidity struggles, withdrawal requests increased dramatically –everyone sought to retrieve their funds. The incapacity to extract those funds from CCC meant that depositors

and financiers couldn’t access their funds.

Although the liquidity concerns began in August 2018, the speculation regarding Tether’s financial instability didn’t arise until October 2018. And the speculations were accurate. To summarize, the regulators froze those assets and are unlikely to return them to Bitfinex. For anyone hoping for a similar resolution like the Mt. Gox settlement with the authorities, apologies. It’s highly improbable.

Is there a Possibility That Tether Ever Had the Reserves it Claimed it Possessed?

Perhaps at the project’s inception. While there’s no solid proof to support this assertion, we can only rely on Tether’s declarations. Regardless, it seems that it may no longer be supported by any reserve or illicit operation.

Whenever cryptocurrencies gain popularity, as Tether has, it becomes exceedingly challenging for trust to be reestablished with those entities. It’s rather astonishing they endured the banking crisis. How did they manage that?

They merely deceived and discovered methods to satisfy withdrawal demands until they could no longer do so. Fraudsters typically operate this way—they exploit a loophole that they often need to diligently conceal.

And when they’re exposed, they simply continue to manipulate the situation until more individuals get drawn in. It’s generally an extremely intricate scheme that most cannot comprehend. They even resorted to utilizing money mules to accommodate particular withdrawal requests:

“As clarified to [New York’s] attorneys by [Bitfinex’] counsel: Bitfinex and Tether have also employed several other third party ‘payment processors’ to manage client withdrawal requests, including various companies owned by Bitfinex/Tether executives, as well as other ‘friends’ of Bitfinex – implying, friends of Bitfinex employees willing to utilize their personal bank accounts to transfer funds to Bitfinex clients who had requested withdrawals.”

Other tactics involved using funds from Bitfinex clients to settle these withdrawals. While engaged in this activity, they maintained that they still had ample reserves to back their token. Consequently, they managed to evade bankruptcy for a while… until the New York Attorney General initiated an investigation against them.

They’ve devised alternative methods to keep reassuring the government and investors that all is well. They claimed to possess both short-term securities and liquid assets that would cover roughly two-thirds of all tethers in circulation. According to a statement made by the company’s legal representatives,

“As of the date I am signing this affidavit, Tether has cash and cash equivalents (short-term securities) on hand totaling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers.”

Why Does the Crypto Community Continue to Back Tether?

One primary factor is to preserve the market’s equilibrium. The cryptocurrency market is currently at a very sensitive juncture.

A significant setback like Tether collapsing is likely to undermine investor trust, leading to declines in prices and trading volumes—unacceptable given the current conditions. Considering that the market is just beginning to rally, it’s evident why the community continues to support it.

This perspective leads some individuals to argue that the cryptocurrency sector is a bubble.

What is the Current Situation at “Tether HQ”

To start, Reggie Fowler, a central figure in wrongdoing, has been apprehended and is currently facing legal consequences. Another key individual is still unaccounted for. Company president, Ivan Manuel Molina Lee, has been extradited to Poland from Greece on allegations of facilitating money laundering.

Oz Yosef was recently indicted in New York. All these perpetrators were associated with Crypto Capital Corp. On the contrary, Bitfinex maintains that they did not actively participate in the fraud executed by CCC and its numerous shell enterprises.

Consequently, they anticipate that their confiscated assets will be returned by banking authorities.

The cryptocurrency community requires stablecoins. It is very unlikely that stablecoins will disappear anytime soon. Nonetheless, we foresee stablecoins continuing to evolve and leverage new technologies.

In the long term, the drawbacks of stablecoins mentioned earlier may vanish. That’s the hopeful outlook. Tether is undeniably the current bitcoin ‘black hole’ filled with possibilities, with many contemplating how Tether will develop in 2019 and 2020.

The cautious viewpoint is that stablecoins could morph into new variants of what we initially aimed to escape: centralized banks and lending institutions.

Ultimately, we might not fully understand the value of stablecoins until the forthcoming market downturn in the cryptocurrency realm or broader economy. Stay tuned for the future of stablecoins. More updates regarding Tether and the USDT stablecoin legal cases, audits, and announcements will follow shortly.