If 2018 was the year of the ICO (initial coin offering), then October of 2018 was “Stablecoin Month.” Between the launch of new “stablecoins” like the Gemini Dollar and the ominous news surrounding Tether (the most commonly-used stablecoin in the crypto markets), last month was one of the most significant months ever for these new coins.
For the first time, Tether’s price fell to $0.92 per coin in October. For much of November, it was trading between $0.95-$0.98 per coin. It’s normal for the prices of cryptocurrencies to fluctuate rapidly; it isn’t normal for a stablecoin to do that. This has caused many to revisit long-standing concerns about Tether’s business practices that could potentially threaten the stability of the entire crypto market.
Tether: the first stablecoin
You may be wondering what on earth a “stablecoin” is. A stablecoin is a digital asset that differs significantly from cryptocurrencies like bitcoin in that it is a proxy for a fungible resource like the U.S. dollar. It’s like a virtual poker chip that represents a fixed value of fiat currency.
Unlike bitcoin, which is supposed to have a somewhat volatile value, a stablecoin is designed not to significantly fluctuate in value; that’s what allows it to be used as a medium for cryptocurrency-to-fiat and fiat-to-cryptocurrency transactions. In theory, this solves the fundamental problem of liquidity for bitcoin and other digital assets: if bitcoin is worth a certain amount of a stablecoin – which is worth a fixed amount of fiat currency – then it’s possible to exchange bitcoin, an asset backed by nothing but its price on a speculative market, for good old-fashioned cash. As long as each stablecoin is backed 1:1 by a U.S. dollar, its price shouldn’t change.
Tether is the prototypical stablecoin. Its value is supposed to be pegged to the U.S. dollar. Tether was created in 2014 by Brock Pierce, the founder of numerous crypto organizations. Tether is by far the most popular stablecoin, used by crypto exchanges all over the world to manage crypto trades.
Although it is used by many exchanges, Tether is issued only by Bitfinex, a Taiwan-based exchange with the same CEO, chief financial officer, and general counsel as Tether, despite Tether supposedly being unaffiliated with Bitfinex. A number of high-ranking Bitfinex employees were working at Tether early in 2018, but many have left since January.
In addition to the questionable nature of some of its business partners, Tether has been accused of price manipulation several times over the past four years. These accusations sometimes make Tether seem like a Sword of Damocles hanging above the crypto markets.
Concerns about transparency (or lack thereof)
Tether is relied upon to regulate the liquidity of digital asset exchanges all over the world. John Griffin – a finance professor at the University of Texas, Austin – and his student Amin Shams published a paper in June that alleged to have found evidence of price manipulation in the crypto markets. The paper linked this activity to suspicious orders for Tether.
Griffin is an expert in spotting fraudulent and manipulative activity in financial markets. In addition to his role at UT Austin, he runs a consulting firm that specializes in financial fraud cases and has published research papers on fraudulent activity in financial markets. In 2016, he published a paper suggesting that some trading firms had been manipulating the VIX index markets.
The other major concern about Tether is that it is rumored to be insolvent, an accusation that has also been made against Bitfinex within the past year. If the rumors turn out to be true and Tether is proven insolvent, that could cause the proverbial sword to fall.
(Attempts to contact Tether and Bitfinex for comment were unsuccessful as of press time.)
Burning bridges with banks
Several individuals and news outlets have raised questions about Tether’s transparency. Before the paper by Griffin and Shams, Wired published an article in January describing how the crypto markets may depend on Tether for stability. The article also discussed how, if the accusations of insolvency are true, the resulting loss of faith in Tether by traders could have far-reaching negative consequences for the market, such as a crypto bank run. CNBC, Coindesk, the Washington Post, and others have published similar stories.
Earlier this year, Tether hired an accounting firm called Friedman LLP to assess and publish a complete report on the company’s asset holdings. According to the report, as of mid-September 2018, Tether had approximately $442,984,592 and €1,590 held in multiple bank accounts. The names of the banks on the report were blacked out, making it impossible to verify the information in the report. As soon as the report was released, Friedman LLP cut ties with Tether, and Tether cut ties with Friedman LLP.
This, of course, looks very bad for Tether – why would the company pay an independent firm to compile a public report on their assets, then redact the names of the financial institutions that supposedly manage those assets? Did those institutions insist that their dealings with Tether not be made public? Do they even exist at all?
In October, several posts made by independent crypto traders on the popular blogging site Medium.com accused Bitfinex of insolvency. The posts referenced Puerto Rico’s Noble Bank, which according to research posted by BitMEX (a bitcoin derivatives exchange based in Hong Kong) is likely the primary bank that Tether used to store its fiat currency holdings. Bitfinex denied the accusations on the company’s official blog, insisting it was not insolvent and that “a stream of Medium articles claiming otherwise is not going to change this.” Then, Tether’s price slipped below $1.
Many speculated that this was caused by the crypto market finally losing faith in Tether, the inevitable result of long-standing, unassuaged concerns by many with skin in the crypto game.
In November, Tether revealed that the Bahamas-based Deltec Bank & Trust Ltd. was the company’s primary bank. Following the news, Tether publicly released a letter of confirmation, supposedly from the bank, confirming that the bank held $1,831,322,828 for Tether, Ltd. as of October 31, 2018. The phone number printed on the form’s letterhead does indeed go to Deltec Bank & Trust Ltd. in Nassau, the capital city of the Bahamas. The statement itself appears to be real, yet the signature on the page is an incomprehensible squiggle, and there is no name printed beneath the signature, other than that of the bank.
Jean Chalopin, chairman of Deltec Bank & Trust Ltd., told Coindesk that the letter is indeed authentic. The interesting thing is that the bank itself has not released any official statements confirming or denying its affiliation with Tether.
More stablecoins, please
Recently, stablecoin alternatives to Tether have begun entering the market, perhaps in some cases to proactively mitigate the damage a potential crash could cause.
A company called Intangible Labs, Inc. has begun raising funds to create one, and the Paxos Trust Company was licensed in September by the state of New York to issue a new stablecoin as well. The crypto exchange Gemini has also created its own stablecoin, which has allegedly been adopted by 25 cryptocurrency exchanges at the time of this writing.
If the “fall” doesn’t happen, adding more stablecoins to the mix will at least create competition for Tether that can benefit the market as a whole. If the “fall” does happen, those affected the most will be exchanges and private crypto companies who rely more heavily on Tether…but those who don’t will suddenly find themselves in a very advantageous position.