Tether is a blockchain network that is most well-known for creating the stablecoin, USD₮
Tether Holdings Limited (Tether) is a blockchain company that was founded in 2014 and is most well-known for its USD₮ token. This token is designed to maintain a peg of USD1 each, with Tether maintaining USD1 worth of reserve assets for each USD₮ token issued.
This token is one of the first and largest stablecoins and is widely used by crypto investors. USD₮ has an almost USD70 billion market capitalization in 2022, only smaller than Bitcoin (BTC) and Ether (ETH) at the time.
Tether also provides stablecoins for other currencies, as well as a stablecoin linked to the price of gold.
Tether was founded back in 2014 by the trio of Reeve Collins, Craig Sellars, and Brock Pierce – a former child actor in a few Disney movies. The original uptake for their stablecoin token, called Realcoin, was not great.
However, in 2015, Tether was purchased by new owners based in Hong Kong, who also owned the Bitfinex crypto centralized exchange, and the subsequent integration of the token into the Bitfinex ecosystem increased its popularity.
As Tether grew, its Taiwanese legacy banking partners became increasingly worried about the lack of KYC and other checks in the token once the stablecoin passed on from the first holder into circulation on numerous blockchains and eventually terminated their banking relationship with Tether in 2017, which jeopardized Tether’s ability to move fiat currency into cryptocurrency and vice-versa.
However, they managed to find banking partners in Puerto Rico and the Bahamas, and during the crypto bull run that followed, Tether’s stablecoins became the most popular, with its flagship, the USD₮ among the top tokens by traded volume and market capitalization.
Tether was originally created to use the Bitcoin network but has now expanded to many leading blockchains.
Tether is registered in the British Virgin Islands and lists JL van der Velde as its Chief Executive Officer. The company and Bitfinix are both owned by iFinex.
Stablecoin refers to a type of cryptocurrency that tries to tackle price fluctuations to maintain a more stable price by linking the stablecoin’s market value to some external reference, most commonly a fiat currency like the USD, although some stablecoins are linked to commodities, such as a precious metal like gold.
The price stability can be achieved by collateralizing it with some underlying asset – real, fiat, or virtual.
Being asset-backed enables stablecoins to maintain their prices and avoid excess volatility, which essentially defines the cryptocurrency market.
There is another type of stablecoin that is not collateralized but rather uses computer programs, or algorithms, to balance supply and demand to maintain a stable price.
Stablecoins are meant to address the short-term volatility of cryptocurrencies, which makes them unsuitable for everyday use by retail investors or non-experts since a currency must be a store of value, which implies that their value must be stable over a long period. An investor needs to be sure that the purchasing power of a currency will appreciate or remain stable in the future.
Being a stablecoin, every Tether token is pegged to one unit of fiat currency or precious metal. So, for example, a single unit of USD₮ should maintain a market price of one US dollar or very close to it. It does this by ensuring that each stablecoin is backed 100% by reserve assets held by Tether.
As the assets are primarily cash or cash equivalents issued by legacy financial issuers or commodity-backed, their stablecoins are examples of off-chain stablecoins.
Since each token must be backed by fiat-based collateral, Tether maintains control of how many tokens are in circulation at all times. New tokens can only be minted by Tether and cannot be created by any other party.
When tokens are first purchased from Tether, the buyer must go through registration and verification in order to pass Tether’s KYC due diligence process. However, once purchased from Tether, Tether tokens can then be sold, transferred, or used like any other cryptocurrency coin without the new holder going through any of Tether’s due diligence process.
To redeem the token back into fiat currency, holders may sell through any cryptoexchange that allows for off-ramping or redeemed through Tether. If redeemed, Tether tokens may be burned to reduce the number of outstanding tokens existing on a specific blockchain.
Alternatively, redeemed and returned USD₮ could be held by Tether’s treasury but not circulated, ready for future issuance if there is new market demand.
Tether is available on many different blockchains, such as Algorand, Avalanche, Bitcoin Cash’s Simple Ledger Protocol (SLP), Ethereum, EOS, Liquid Network, Omni, Polygon, Tezos, Tron, Solana, and Statemine.
Since Tether tokens are currently available using different blockchains, users need to be careful to confirm they are using the correct version for that blockchain or transport protocol.
In order to maintain trust in Tether’s peg, Tether updates the amount outstanding for all of its tokens and the value of its reserves and publishes the figures on its website daily.
USD₮ is Tether’s flagship stablecoin and, as of October 2022, had almost $70bn in outstanding stablecoins.
Tether discloses the balances of stablecoins that it has outstanding on the various blockchains that it trades on. So, for example, the screen above shows the amount authorized for USD₮.
The term “Authorized but not issued” is the amount that Tether is holding in its buffer to allow new purchasers to buy without the need to issue new tokens. Since these Authorized but not issued tokens haven’t been sold, Tether doesn’t hold 1-1 fiat-backed collateral for those tokens.
The liabilities for Tether on their USD₮ stablecoin token is the amount of coins held by investors and traders since Tether is obligated to hold 1-for-1 collateral to maintain price stability.
The Total Assets is the value of the assets that are held as collateral. So the Total Assets value should equal or exceed the Total Liabilities amount. The excess is known as Shareholder Capital Cushion.
In addition to their USD₮ stablecoin pegged to the US dollar, Tether also provides stablecoins pegged to other fiat currencies:
Tether Gold, known as XAUt, is a centralized token that links the price of each digital token to one troy ounce of gold. The token is collateralized by physical gold bars. According to the whitepaper, this gold is held in Switzerland at a secure location by a custodian, and each XAUt token represents ownership of physical gold on a particular gold bar.
This token is built upon the Ethereum network, and anyone can identify the specific gold bar(s) associated with each on-chain address where XAUt tokens are held.
A holder of a XAUT token, in theory, can redeem their token for one ounce of that gold delivered in Switzerland or can elect to have Tether liquidate the gold for them.
According to Tether, each stablecoin token issued is 100% backed by their reserves, which include “traditional currency and cash equivalents, and may include other assets and receivables from loans made by Tether to third parties.”
On their website, Tether provides financial statements that show what assets they hold as backing collateral. Their most recent report from June 2022 was done by their accounting provider, BDO.
Tether makes money by charging transaction fees for new fiat deposits on their platform (currently 0.1% with a minimum deposit amount of USD100,000). They also charge fees for redemptions of their tokens, as well as a verification fee, for new accounts to undergo their KYC process.
Much like most cryptocurrencies, Tether has also had its fair share of controversy, including:
While Tether started publishing Independent Auditors’ Report by BDO Italia on their website, the accounting firm does not provide a full audit of Tether.
Before June 2022, Tether used MHA Cayman to provide confirmation that the company’s reserve report was only “correctly stated” and was also not a full audit.
Because there is no regulation of the reserve assets, it is up to Tether how to invest their reserves. According to the latest published reserves report, Tether maintains approximately 85% of its USD₮ reserves in cash, cash equivalents (called money market securities), and other public market assets. There are Other Investments and Secured Loans (which may be to related companies) that account for over 15% of the backing assets of USD₮.
Unfortunately, there are no notes in the financial statements that provide any clarity on these investments and loans. Without clarity, no one knows if the loans are to very risky crypto-projects or whether some of the reserves are invested in cryptocurrencies that increase the wrong-way risk. We also do not know how liquid or redeemable these assets are should Tether need to cash to honor its liabilities.
Additionally, according to an article on Bloomberg in 2021, Tether’s holdings of money market securities would make them one of the largest holders of that type of debt. Yet, Bloomberg was unable to find any Wall Street traders who had seen Tether buying these securities.
Firstly, as a cryptocurrency, Tether is not subject to any government regulatory oversight of its business. This means that there are no rules that regulate how they manage the reserves backing their stablecoins. Also, unlike a bank deposit, there is also no government assurance in case of loss.
Given the size of Tether, it has not only attracted the attention of the US Securities and Exchange Commission but also the US Commodity Futures Trading Commission (CFTC), which levied Tether a fine of USD42.5 million in October of 2021 for falsely stating that each minted USD₮ was “100% backed by fiat USD” when it was actually backed by other assets.
As a further result of the fine, Tether had to revise its website to describe each Tether token as being “backed 100% by Tether’s reserves”.
Lastly, Tether is also being investigated by the Justice Department of the United States for bank fraud, stemming back to its early days when the company was alleged to have misled banks by hiding the intent of Tether’s transactions, namely cryptocurrencies. That case is yet to be resolved.
In April 2019, the New York Attorney General filed a lawsuit against iFinex for allegedly dipping into Tether’s reserves when Bitfinex lost access to USD850 million held by its payment processor, Crypto Capital Corp. From 2014 to 2018, Bitfinex placed over USD1 billion with the Panamanian Crypto Capital, allegedly without a contract, who stole USD850 million from Bitfinex. The parties behind Crypto Capital were arrested, and the President, Ivan Manuel Molina Lee, was charged as part of an international drug cartel and as a money launderer.
The NY AG office investigated Bitfinex for commingling client and corporate funds to cover up USD850 million in missing funds without notifying holders of Tether. Eventually, Tether and Bitfinex paid a substantial fine of USD18.5 million to the NY AG without admitting any wrongdoing.
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