Is crypto at the end of its tether?
Less than a month later, Celsius, a major crypto lender, froze all withdrawals and left countless depositors in the lurch.
Over the past seven months, the total market cap of all crypto assets has plummeted from about $3 trillion to about $880 billion – a 70% drop.
Crypto is having a nightmare in 2022, it’s safe to say, but things could get even worse. That’s because a tether, a lynchpin of crypto trading, has come under increasing scrutiny and shown signs of weakness in recent months.
What is tether?
Tether, like terraUSD, belongs to the breed of cryptocurrencies called stablecoins. Unlike regular cryptocurrencies such as bitcoin, a stablecoin is designed to have a fixed value, which is most commonly done by pegging its price to a traditional currency.
Tether was launched in 2014 by iFinex, which is also the parent company of cryptocurrency exchange Bitfinex.
It is pegged to the US dollar, and iFinex claims it holds actual dollars, bonds, treasury bills and other assets in reserve to serve as collateral. This means in theory, anyone who wants to exchange tethers for US dollars can do so quickly and easily.
Indeed, tether can only hold its value so long as it continues to redeem its tokens for $1 each, and investors have faith that the tokens are fully backed by liquid assets. If that faith were to vanish, it would take down not just tether but arguably all of crypto.
Tether, after all, is not just any stablecoin – it’s THE stablecoin, and the third most-traded cryptocurrency in the world after bitcoin and ether.
And because stablecoins are used mainly to buy other cryptocurrencies, tether’s tentacles touch most – if not all – other digital coins. Tether in fact doesn’t have its own blockchain. Instead, users can transact with it on some of the bigger blockchain platforms, such as Ethereum, Tron, Algorand, Solana, Avalanche and Polygon.
There are currently 70 billion tethers in circulation, making it three times the size of terraUSD before it collapsed.
“Tether is really the lifeblood of the crypto ecosystem,” Hilary Allen, a finance expert at American University, told The New York Times. “If it imploded, then the entire facade falls down.”
You might think such a vital cog of the crypto machine would be trusted and widely respected, but you’d be wrong. iFiniex, rightly one of the most scrutinised companies in all of crypto, hasn’t always inspired trust, to put it mildly.
In January 2018, the company dismissed an accounting firm it had hired for an audit, citing “the excruciatingly detailed procedures [the auditor] was undertaking for the relatively simple balance sheet of Tether.”
In 2019, the New York Attorney General’s office initiated a probe into whether Bitfinex sought to cover up the loss of $850 million funds held by Tether.
Almost two years later, Tether and Bitfinex reached a settlement with the attorney general’s office in February 2021, under which it would pay $18.5 million in fines and release a quarterly report detailing the reserve’s composition for the next two years.
The company started to publish reports on its assets in 2021, but still does not specify exactly where its reserves are held.
Tether may also have been used from time to time to artificially inflate the price of bitcoin and other cryptocurrencies.
In 2018, an academic study looking at the 2017 crypto bull run found that a particular player on the Bitfinex exchange would use newly minted tether to buy bitcoin and support the price of the world’s largest cryptocurrency when it fell.
Since the start of the crypto crash, investors have pulled more than $10 billion out of tether, in what has been described as a slow bank run. This was accelerated by the crash of the terraUSD stablecoin in May and the freezing of withdrawals on the Celsius Network – another crypto ‘bank’ – in June.
Is this the crumbling edifice of crypto, as tether’s critics claim, or much ado about nothing?
Only time will time.
Written by Zaheer Merchant
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Curated by Judy Franko in New Delhi. Graphics and illustrations by Rahul Awasthi.
That’s all from us this week. Stay safe.