The purpose of stablecoin such as Tether is to be less volatile than other cryptocurrencies due to having its value pegged to the dollar. But what if it isn’t? Tether is mired in so much controversy that it puts all stablecoins in doubt. So, are stable coins trustworthy?
What is Stablecoin?
Before we can decide, we must first discuss what stablecoin is. According to Investopedia, a stablecoin is a class of cryptocurrencies that attempt to offer price stability and are backed by a reserve asset. These reserve assets are usually a type of currency. This supposably makes their value more stable.
Tether, founded in 2014, is a type of stablecoin. It “tethered” itself to currencies, including the U.S. Dollar and the Euro. The U.S. Dollar Tether (USDT) is pegged to the dollar one for one. This means, that, in theory, one token of Tether is worth one dollar. The creators do this by supposably having a dollar for every 69 billion tokens of Tether in circulation. Questions about whether they do, I will discuss later in the article.
The main use for stablecoins, such as Tether, are as a way to convert cryptocurrencies from one to another. Converting cryptocurrencies to dollars so you can buy a new cryptocurrency takes longer than converting it into a stable coin backed by the dollar to buy a new cryptocurrency. This is because complying with anti-money laundering laws causes a delay in the conversion.
To Start with the biggest controversy, there are serious doubts that Tether’s company has the $69 billion that it would need to back its cryptocurrency. In fact, the Commodity Futures Trading Commission fined Tether holdings limited $41 million for lying about being back by U.S. dollars.
So, how much money is backing Tether? Well, it’s hard to know. According to the New York Attorney General, Deltec Bank & Trust Ltd. of the Bahamas holds their cash reserves; but their last verification of its cash reserves was November 1st of 2018. The next day, Tether’s parent company transferred large sums of money out of its accounts.
This isn’t the only scandal that Tether is leashed to. Remember when I said that Tether avoids anti-money laundering laws? It’s potential for facilitating money laundering is widely known. Most cryptocurrencies can be used for money laundering due to the lack of regulations on them compared to normal currencies, but Tether being pegged to the dollar allows it to be used as a substitute for the dollar in cryptocurrency transactions.
Tether’s scandals aren’t only about Tether. The U.S. Justice department also accuse it of being used to illegally prop up Bitcoin’s value. Tether supposably does this by a technique called spoofing. Spoofing involves making fake orders for Bitcoin using Tether and then cancelling them when they heighten the price by enough.
For a discussion of the environmental effects of cryptocurrencies, go to this article.
Are They Trustworthy?
Tether’s multiple scandals has not only destroyed many investors’ ability to trust them but has threated to harm the entire cryptocurrency market. All this while being the third largest cryptocurrency by market share. It is likely not backed by enough money, it’s used to facilitate money laundering and it’s possibly propping up Bitcoin. With all this taken into account, I wouldn’t trust of any cryptocurrency claiming to back itself with real money. As always, do your own research before making any investments.