Another 50 million Tether created, but how is the digital dollar backed?

  • August 13, 2018
  • 5:19 am ET

Img via @Tether_to

The Wall Street Journal is raising some red flags after recent news of more Tether being created, and reported that “there isn’t hard evidence the cash supporting it exists.”

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One of the most popular cryptocurrencies is a fiat-backed stablecoin called Tether, but some are claiming there isn’t enough evidence of the cash that supposedly backs the tokens.

The Tether tokens, which are tied to the U.S. Dollar (USD₮), the Euro (EUR₮), and the Japanese Yen (JPY₮), have come to serve an important role in the cryptocurrency markets as they provide liquidity and a seemingly safe and easy place to park assets when traders want to move away from other cryptocurrencies that are too volatile.

In fact, the most popular Tether token, USD₮, has a massive daily trading volume of almost $5 billion USD and falls only second in line behind Bitcoin, which has a daily trading volume of $6.5 billion according to CoinMarketCap.


Cryptocurrencies ranked by trading volumes as of August 13, 2018

After news of another 50 million Tether being created on August 11th, The Wall Street Journal presented a report that claims there isn’t hard evidence the cash supporting it exists, and explained the way Tether tokens are created is a cause for concern among market participants:

“Unlike other cryptocurrencies, there isn’t a set amount of Tether in circulation. In theory, demand drives new issuance. Cryptocurrency exchange Bitfinex places orders for new tokens with Tether and wires dollars or euros to the company’s bank account, according to both companies. Tether sends the newly created tokens to Bitfinex, which distributes them to investors.

Investors have little visibility into the process. Bitfinex shares ownership and management with Tether, and it is the only entity through which Tether issues tokens.”

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The Tether website explains “all Tethers are backed 100% by actual assets in our reserve account,” and says that the account is regularly audited. They also maintain a webpage which shows the following figures, but they haven’t ever produced any audit proving they have the purported funds, leaving many wondering if the claims are actually true.

Current balances of funds which Tether claims are held in their reserves as of August 13, 2018

Img via Tether

Last year, Tether did hire New York accounting firm Friedman LLP, to conduct an audit of their reserves, but severed ties with them before any final numbers were released. Tether’s chief compliance officer, Leonardo Real, said that since then the company has had difficulty finding a firm willing to take on a cryptocurrency client.

Instead, Tether hired a new team of attorneys from Freeh, Sporkin & Sullivan LLP, who issued a report stating that it believed Tether had the funds to back the tokens, but critics have noted the report is not an audit.

“FSS is confident that Tether’s unencumbered assets exceed the balance of fully-backed USD Tethers in circulation as of June 1st, 2018.”

Freeh, Sporkin & Sullivan LLP, also decided not to identify the banks it contacted to verify the reserves, which doesn’t make people feel any more confident about the way things work behind the scenes at Tether.

Ding’An Fei, a managing partner at Beijing based Ledger Capital commented on the importance of Tether and said:

“There are a couple of forces in this market that if they failed, it would be catastrophic… Tether is one of them.”

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Despite the Securities and Exchange Commission (SEC) recently calling out Tether in its rejection of the Winklevoss Bitcoin Trust ETF, claiming it might possibly be being used to manipulate crypto markets, not everyone seems as concerned as the The Wall Street Journal…

Last month, during an interview with CNBC’s Crypto Trade, the CEO of Binance, Changpeng Zhao (“CZ”), was asked about the impact of a Tether crash on Binance. This is what he had to say:

“We have seen fiat currencies go down in history a lot. Probably more times than they have been in cryptocurrencies. So yes, the concern is always there and that’s also why we’re listing other stable coins as well, so we actively promote other stable coins including True USD and others… I haven’t personally seen their bank accounts, but from a logical point of view they have so many profits from their regular exchange business, they don’t need to do anything crazy about the Tethering. I think the reason they cannot release their bank account details is because if they release whichever bank they’re using, then the bank account gets shut down.”

Until Tether actually releases an audit, no one will know for sure how their digital stablecoins are backed so you’ll have to decide for yourself if it’s a risk you can afford to take.


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