- USDT issuer Tether is struggling with legal problems.
- The cryptocurrency market can get into trouble if the stablecoin goes broke.
Tether, the largest and most widely used stablecoin on the market, may prove too big to fail. What happens to the cryptocurrency market if Tether goes bankrupt or is banned by the authorities? How will Tether’s problems affect the larger market or will they go unnoticed as long as Bitcoin is perfectly solid?
Tether or USDT was born to bring more stability to the cryptocurrency market. It is pegged to the US dollar, with one USDT representing one USD. The stablecoin is issued by the Hong Kong-based company of the same name, Tether, which claims to hold reserves equal to the USDT in circulation.
Tether, Bitfinex and US authorities
Litigation between Tether, the Bitfinex cryptocurrency exchange, and US regulators is on the list of the industry’s loudest scandals. In April 2019, New York attorney accused Bitfinex of covering the loss of $ 850 million in user funds with stablecoins issued by Tether. Authorities claimed that cryptocurrency exchange operator iFinex Inc was also involved in creative bookkeeping. In addition, the companies deliberately misled customers by failing to inform them of the incident.
Investigators concluded that Bitfinex transferred users’ assets worth $ 850 million to the account of Panama-based payment service provider Crypto Capital Corp and replaced them with USDT.
Regulators banned iFinex from providing services to New York citizens and restricted iFinex and Bitfinex from accessing Tether assets.
Bitfinex confirmed the loss of $ 850 million. However, they claimed the money was from Crypto Capital Corp. been confiscated. They also confirmed that they borrowed $ 700 from Tether. The remainder was covered by other assets.
In May 2019, the New York Attorney General (NYAG) requested Bitfinex to provide the documents tied to Tether and to disclose the details of their collaboration. The company attempted to claim that USDT was neither a commodity nor a security, which meant that NYAG had no jurisdiction over the companies involved. However, the Appeals Division of the New York Supreme Court ruled that NYAG and Attorney General Letitia James can continue investigations into companies behind USDT.
Tether rules the market
The problem with USDT is that it is no longer backed by USD as Tether originally claimed. The company has tacitly changed pen; Now it’s made up of a basket of assets, cash equivalents, and some vague assets that Tether received from loans to third parties. In other words, the tether reserves can contain practically anything. USDT can be backed by dollars or bitcoins or loans or even thin air.
Tether appears to have become a digital version of Fiat that can be printed at will by the issuer. Since the beginning of 2020, USDT market capitalization has increased nearly fivefold, from $ 4 billion to $ 19 billion at the time of writing, meaning that over 15 billion coins have been injected into the cryptocurrency system in less than 12 months.
USDT, market capitalization
Also, USDT is the most actively traded coin, with an average daily trading volume of nearly $ 1 trillion. Bitcoin is falling behind at just $ 66 billion. Since many cryptocurrency exchanges don’t accept fiat, USDT serves as a convenient replacement.
Tether and Bitcoin Correlation
A research study conducted by TokenAnalyst in 2019 found that 70% of the time, Bitcoin growth coincided with USDT coinage.
The situation hardly changed in 2020. Over the past three months, over $ 4 billion worth of USDT has been pumped into the system. The injection coincided with a sharp rise in the price of Bitcoin, which meant the $ 4 billion invested in USDT was used to buy Bitcoin.
When the market collapsed in March, major cryptocurrency exchanges and whales poured money into USDT to keep the system alive. The stablecoin issuers effectively took over the role of the banks and acted as the savior of last resort for the cryptocurrency market.
On Tether life support
The industry has become too dependent on tether and USDT. While bitcoin price fluctuations certainly have something to do with USDT minting, other coins and cryptocurrency-related services also require USDT to stay afloat.
All of the cryptocurrency sub-industries, including the incredibly popular DeFi, use stablecoins in most of their operations. If USDT goes broke or is banned, they will all be in deep trouble holding a bag of nothing. No wonder the industry would do anything to support the stablecoin.
On December 2, a group of Democratic legislators from the US House of Representatives introduced the STABLE (Stablecoin Tethering and Bank Licensing Enforcement) law, according to which every institution that issues tokens secured with reserve assets must be registered with the banking authority. When the bill goes into effect, USDT will be boiled as there is virtually no chance Tether will get the banking license.
Once that happens, the entire industry will stare into the abyss.
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