Created in 2014 by a group of Bitcoin enthusiasts and early crypto adopters, Tether is a blockchain-enabled platform designed to facilitate the use of fiat currencies such as United States Dollars (USD), Euros, in a digital manner. United States Dollar Tether (USDT), which has grown to become an integral part of the cryptocurrency market, is Tether’s native token and the world’s first stablecoin. It is represented by ₮.
The pioneer stablecoin, USDT has grown exponentially to become the largest stablecoin in the crypto industry by market capitalization. It is also the most actively traded stablecoin in the crypto market in terms of 24-hour trading volume. In June 2023, USDT surpassed its previous all-time high market cap of $83.2B set in May 2022.
Unlike conventional crypto assets such as Bitcoin (BTC) and Ether (ETH), TetherUSD (USDT) offers price stability and low volatility to merchants and investors when exiting positions in the crypto market.
USDT operates on various leading blockchain networks, including Ethereum, EOS, Bitcoin Cash, Arbitrum, Avalanche, Polygon, Algorand, Tron, amongst others. It is a crypto asset designed to maintain a fixed value relative to fiat currencies such as USD. To achieve this, Tether tokens are pegged to real-world currencies on a 1-to-1 basis and are backed by Tether’s reserve. This explains why USDT is labeled a fiat-backed stablecoin.
Notably, Tether’s reserve constitutes several traditional currencies and cash equivalents as well as other assets and receivables from loans made by the blockchain company’s third parties. The currencies and commodities supported by Tether include USD, euros, Mexican peso, offshore Chinese yuan, and Gold, with the following Tether tokens, respectively: USD₮, EUR₮, MXN₮, CNH₮ and XAU₮.
While USDT has a plethora of use cases and offers many advantages to businesses, crypto traders and investors, it bears noting that there are myriad risks and disadvantages associated with using the top stablecoin. This article covers all of that.
Use Cases of Tether (USDT)
Below are some of the major use cases of USDT, the biggest and most widely adopted stablecoin in the crypto market:
- Trading and liquidity: Tether is mostly used to enhance trading and provide liquidity on crypto exchanges. USDT has become instrumental in facilitating cryptocurrency trading and enhancing liquidity across both centralized and decentralized crypto exchanges. By making use of USDT as a trading pair, users can easily transition between different cryptocurrencies without the need for direct fiat currency conversions. This feature provides traders with convenience and efficiency in executing trades and transactions.
- Risk mitigation and store of value: The cryptocurrency market is popularly known for its high volatility in terms of crypto asset price movements. The prominent fiat-backed stablecoin can be used by crypto traders to preserve profits. In other words, USDT serves as a means to hedge against market volatility. During periods of extreme price fluctuations, traders and investors can convert their holdings to USDT to mitigate risks. This strategy allows them to safeguard the value of their assets and re-enter the market when conditions stabilize.
- Cross-border payments and remittances: USDT provides a viable option for individuals and businesses seeking to transfer funds internationally. Compared to traditional banking systems, which can be slow and expensive, USDT enables faster and more cost-effective cross-border transactions. Additionally, Tether’s blockchain-based infrastructure ensures transparency and security throughout the payments process.
Read also: What is cryptocurrency?
Strengths of USDT
Whether it is for personal use or business purposes, Tether tokens offer many benefits as a highly stable, liquid and trusted stablecoin in the crypto industry. Below are some of the pros of USDT:
- Stable value: Because USDT is pegged to fiat currencies such as the US dollar and is fully backed by Tether reserves, it is able to maintain a stable value amid the highly volatile cryptocurrency market landscape. This stability allows users to store their wealth in USDT, minimizing exposure to market fluctuations.
- Accessibility and availability: USDT enjoys widespread adoption and integration across numerous cryptocurrency exchanges, resulting in high liquidity. Also, its availability and compatibility with various blockchain networks make it easily accessible to users worldwide. Also, Tether is available in different currencies including the US dollar (USD), euro (EUR), Mexican Peso (MXN), and offshore Chinese yuan (CNH). Represented by ₮, Tether tokens are denoted as USD₮, EUR₮, MXN₮, and CNH₮ accordingly.
- Transparency: USDT operates on public blockchain networks, which allows users to verify the crypto asset’s tokenomics, including circulating supply, burned supply, and newly minted supply. The company has also undertaken third-party audits to enhance transparency and instill confidence in users. Tether tokens issued and reserve assets are publicly available and regularly updated.
- Business enhancement: Tether tokens enable businesses, including crypto exchanges, wallets, payment gateways, financial services, and ATMs to easily use fiat currencies on blockchains. Individuals can also use Tether-enabled platforms to transact with Tether tokens.
- Multiple blockchains support: Tether tokens are built on multiple blockchains, offering easy integration and adoption. Some USDT-supported blockchains are Bitcoin (Omni & Liquid protocol), Ethereum, TRON, EOS, Algorand, Solana, Polygon, and Bitcoin Cash (SLP) amongst others.
Weaknesses of USDT
While USDT presents many advantages to players in the crypto industry, it is crucial to be aware and acquainted with some risks associated with the project. Below are some cons of USDT:
- Centralization Issues: Notably, USDT is not a decentralized crypto project as it is fully governed by a centralized entity called Tether. Accordingly, there has been a rising skepticism regarding the future of USDT because of how tightly controlled its operations are by the entity in charge of administering and issuing the fiat-backed stablecoin. Concerns have been expressed about problems such as a possible single-point failure.
- Regulatory uncertainty: Although Tether claims to be compliant with regulations, the regulatory environment in which stablecoins like USDT operate is still developing. Uncertainties and potential regulatory problems may arise as governments and financial regulators continue to adjust to the rising popularity of cryptocurrencies. Should Tether experience any regulatory setback, the company’s operations and USDT value may likely be adversely impacted. Such was the fate of Binance USD (BUSD), one of the three biggest stablecoins in the crypto market, when the New York Department of Financial Services (NYDFS) ordered in February 2023 that new BUSD must not be minted. Issued by Paxos in 2019 in partnership with Binance, BUSD has also attracted legal action against Binance by the United States Securities and Exchange Commission (U.S SEC) over allegations of BUSD being an unregistered security. Therefore, it may be only a matter of time before Tether also comes under the regulatory radar, if it is not already.
- Trust and reserve authenticity: Although Tether has been subject to several third-party audits to show transparency, the authenticity of the reserve claimed by Tether has been questioned from time to time. This is because every USDT is not solely backed by the fiat, USD, but combines both USD and other assets. More regular and thorough audits may be required to completely verify the reserves supporting USDT’s value. For the stablecoin to remain viable, trust and faith in its reserves must be strengthened.
How about the risks involving Tether’s secured loans, treasury holdings, gold and bitcoin holdings?
In 2021, there were several red flags reported against USDT operator Tether Holdings Ltd, resulting in an investigation. One of the allegations against Tether was that the company was investing the tens of billions of dollars that supposedly formed its 1-to-1 US dollar peg in short-term loans to Chinese companies and crypto companies (including the now-bankrupt Celsius). It used bitcoin as collateral. All of these formed a part of Tether’s reserves at some point.
The New York Attorney General’s office (NYAG)’s Investigations, Findings, and Agreements
The New York Attorney General’s office (NYAG) investigated Tether over alleged lies concerning its reserves and losses. It was discovered that USDT was once backed by securities issued by China’s state-owned Industrial and Commercial Bank of China, China Construction Bank, and Agricultural Bank of China as part of backing its USDT stablecoin reserves.
NYAG also found that Tether covered up the truth about its dealings with customer funds as well as losses. According to NYAG, “[t]hese companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system”.
Contrary to Tether’s representations, Tether allegedly had no access to banking anywhere in the world, starting no later than mid-2017. Also, it held no reserves to back USDT in circulation at the rate of one dollar for every USDT. NYAG discredited Tether’s self-proclaimed verifications of its cash reserves.
From Tether’s dealings with Deltec Bank & Trust Ltd of the Bahamas to a purportedly Panama-based entity known as “Crypto Capital Corp”, and Bitfinex, NYAG questioned these business relationships and Tether’s claims of stability and transparency.
Consequently, NYAG reached an agreement with Tether, and iFinex, the operator of Bitfinex, with its related entities, requiring them to:
- cease any further trading activity with New Yorkers;
- pay $18.5 million in penalties;
- submit quarterly reports showing the proper segregation of corporate and client accounts, including segregation of government-issued and virtual currency trading accounts by company executives;
- submit to mandatory reporting regarding transfers of assets between and among Bitfinex and Tether entities;
- offer public disclosures, by category, of the assets backing tethers [USDT], including disclosure of any loans or receivables to or from affiliated entities; and
- provide greater transparency and mandatory reporting regarding the use of non-bank “payment processors” or other entities used to transmit client funds.
Tether’s position on the allegations and how it continues to improve transparency
On 15 June 2023, Tether announced that after its settlement with the NYAG in 2021, it has completed its quarterly reporting obligations. According to Tether:
“Tether is in a completely different position compared to 2 years ago. It demonstrated, leading the industry during the biggest black swan events in 2020 and 2022, that its reserves are extremely liquid, of high quality and ready to be made available to support any size of redemption, as shown in 2022, when Tether repaid US$7 billion in 48 hours, almost 10% of its reserves at that time.”
On Chinese loans forming part of USDT reserves
Tether maintains that its exposure to Chinese commercial paper is mainly in the banking sector and “all Chinese paper held was liquid and issued by large and well known issuers in the international Commercial paper market”, stable, within conservative portfolios, and rated A2 or better. While the commercial paper lasted, Tether maintained that it “did not lose a dime on any commercial paper, including the Chinese commercial paper.”
In any case, Tether reduced its commercial paper holdings to zero last year. Tether is also reducing its secured loans to zero, which has dropped from 8.7% to 6.5%.
On Bitfinex’s role in Tether reserves
According to Tether, there is a lending relationship between Tether and Bitfinex. Bitfinex is also Tether’s “favourite choice” for purchasing BTC, says Tether.
On the lending part, Bitfinex got on an interest-bearing loan. This has been fully repaid in 2021, ahead of schedule. Consequently, the lending facility has been closed.
On lending to Celcius and other companies
Tether confirmed that it engages in lending, but only disclosed in its “independent, third-party assurance attestations – to a select group of larger Tether customers.” According to Tether, these loans are “overcollateralized and Tether has never lost a penny on them”. To protect clients’ privacy, however, Tether maintains that it will not disclose clients’ names.
On Tether’s US Treasury holdings
Tether’s US Treasury holdings reached an all-time high of over US$53 billion – representing more than 64% of its total reserves.
Tether has made a record net profit of US$1.48 billion. This effectively brought Tether’s reserves surplus to another record high of US$2.44 billion. Bank deposits have reduced by over 90%.
All in all, Tether appears to be “stronger than ever, with its largest market cap in history” attained in June 2023. Tether’s continuing commitment to transparency and accountability will however determine its long-term stability as the biggest stablecoin in the globe.
The USDT stablecoin remains an integral part of the crypto market given its enormous use cases and benefits to players in the industry. Over the years, the adoption of USDT has been increasing as many merchants and crypto investors see it as a tool to hedge against inflation and market volatility. However, as things continue to evolve in the crypto space around the world today, it is important to be aware of the existing and potential risks associated with USDT and stablecoins in general.