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<\/a>\nTether is the world\u2019s most used stablecoin, a category of tokens that seek to avoid price fluctuations, often through pegs or reserves. It\u2019s also a pathway for most of the world\u2019s active traders into the crypto market. In countries like China, where crypto exchanges are banned, people can pay cash over the counter to get Tethers with few questions asked, according to Sokolin.<\/p>\n
From there, they can trade Tethers for Bitcoin and other cryptocurrencies, he said.<\/p>\n
\u201cFor many people in Asia, they like the idea that it\u2019s this offshore, opaque thing out of reach of the U.S. government,\u201d said Jeremy Allaire, chief executive officer of Circle, which supports a rival stablecoin called USD Coin.\u00a0 \u201cIt\u2019s a feature, not a problem.\u201d<\/p>\n
Tether, which is being sued by New York for allegedly commingling funds including reserves, says using a know-your-customer form and approval process is required to issue and redeem the coin.<\/p>\n
Asian traders account for about 70% of all crypto trading volume, according to Allaire, and Tether was used in 40% and 80% of all transactions on two of the world\u2019s top exchanges, Binance and Huobi, respectively, Coin Metrics said earlier this year.<\/p>\n
Many people don\u2019t even know they use Tether, said Thaddeus Dryja, a research scientist at the Massachusetts Institute of Technology. Because traditional financial institutions worry that they don\u2019t sniff out criminals and money launderers well enough, most crypto exchanges still don\u2019t have bank accounts and can\u2019t hold dollars on behalf of customers. So they use Tether as a substitute, Dryja said.<\/p>\n
\u201cI don\u2019t think people actually trust Tether – I think people use Tether without realizing that they are using it, and instead think they have actual dollars in a bank account somewhere,\u201d Dryja said.<\/p>\n
Some exchanges mislabel their pages, to convey the impression that customers are holding dollars instead of Tethers, he said.<\/p>\n
The way Tether is managed and governed makes it a black box. While Bitcoin belongs to no one, Tether is issued by a Hong Kong-based private company whose proprietors also own the Bitfinex crypto exchange.<\/p>\n
The exact mechanism by which Tether\u2019s supply is increased and decreased is unclear. Exactly how much of the supply is covered by fiat reserves is in question, too, as Tether is not independently audited.<\/p>\n
In April, Tether disclosed that 74% of the Tethers are covered by cash and short-term securities, while it previously said it had a 100% reserve.<\/p>\n
The disclosure was a part of an ongoing investigation into Tether by the New York Attorney General, which accused the companies behind the coin of a coverup to hide the loss of $850 million of comingled client and corporate funds.<\/p>\n
John Griffin, a finance professor at the University of Texas at Austin, said that half of Bitcoin\u2019s runup in 2017 was the result of market manipulation using Tether. Last year Bloomberg reported that the US Justice Department is investigating Tether\u2019s role in this market manipulation.<\/p>\n
Convenience Versus Risk<\/strong><\/p>\n \u201cBeing controlled by centralized parties defeats the entire original purpose of blockchain and decentralized cryptocurrencies,\u201d Griffin said. ‘<\/p>\n \u201cBy avoiding government powers, stablecoins place trust instead in the hands of big tech companies, who have mixed accountability. So while the idea is great in theory, in practice it is risky, open to abuse, and plagued by similar problems to traditional fiat currencies.\u201d<\/p>\n On the other hand, because Tether is key to their growth, many crypto exchanges would likely be willing to bail it out if needed, said Dan Raykhman, who is developing a platform for issuing digital assets and used to be head of trading technologies for Galaxy Digital.<\/p>\n \u201cThere\u2019s this implicit support from all these exchanges to help Tether stay afloat,\u201d he said.<\/p>\n While dozens of stablecoins have come out in the past year, many of them independently audited and regulated, Tether remains the favorite, by far.<\/p>\n \u201cTether has been around since 2014 – ancient antecedents in crypto – and has retained its value,\u201d said Aaron Brown, an investor and a writer for Bloomberg Opinion. \u201cI don\u2019t say it\u2019s perfect, but its convenience outweighs its risk for many people.\u201d<\/p>\n
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