This article by “Crypto Anonymous” claims that Tether will bring a crypto “doomsday.” The author makes many good points in building his case, yet the overall conclusion is less than the sum of its parts.
Here’s the short version of why he’s wrong: Yes, Tether creates systemic risk for Bitcoin. But the key claim that new Tethers are fraudulently created without dollars to back them is pure speculation. Furthermore, the impact of a Tether collapse decreases as the ecosystem grows, so there’s no need to be “frantic” about a “crypto doomsday.” Finally, stablecoins like Tether should not be confused with true cryptocurrencies like Bitcoin, which do not fall in the same category of risk.
Speculation about whether Tether is backed by dollars has been going on almost since the currency was created in 2014. Tether is the primary onramp to buying cryptocurrencies on many exchanges, so during Bitcoin bull markets, Tether issuance does too. This fuels speculation about whether Tether is backed by dollars. It’s a fair question to ask. But note that Tether honored withdrawals from 2017 to 2018, when the price of Bitcoin fell from 20K to $3.2K. Total market capitalization decreased from $821 billion to $105 billion, and Tether’s market cap fell from 2.8 to 1.6 billion. I question the accuracy of all of these numbers, but it’s clear that Tether weathered a major selloff.
At this point, everyone in the know has accepted that Tether is less than 100% backed by dollars, but as long as the crypto selloff is not too severe, it has enough reserve to weather most storms. Even if Tether comes up short and becomes unable to honor all withdrawals, a partial devaluation will result in a haircut for Tether holders, not a doomsday for a market that is used to huge day to day swings.
Let’s speculate on a key question: if Tether isn’t a fraud, why don’t they perform an audit and come clean about their books? The answer is that crypto occupies a legal gray area, and exposing all their accounts would put Tether’s banking relationships at risk. Until about a year or so ago, banks categorically avoided any crypto business. They would close accounts of consumers who wired money to crypto exchanges and scan peer to peer payments for any mention of crypto. Legitimate crypto entrepreneurs had to stash vast amounts of cash like drug dealers cash because they couldn’t maintain any bank accounts for long. My partners and I were very fortunate to have relationships to open a bank account for our hedge fund in 2017.
Now imagine how difficult it would be for Tether to store billions of dollars in a fully disclosed manner. It’s clear now that Tether decided to obscure their banking relationships and use less-legitimate partners, and lost some of their funds as a result. Today, fully audited stablecoins such as USDC and USDG compete with Tether, but their market share is still a minority.
Regulated stablecoins are a great solution for many, but not all. For a stablecoin to be audited, their banking partners require strict KYC, and exchange partners that redeem those coins must obtain government licenses. This means that there is an ongoing demand for stablecoins that can be redeemed in a less-regulated environment. This is one of the reasons why Tether is so popular: it helps crypto traders work around currency controls in various Asian countries, especially a big one that starts with C. The other reason is that Tether allows less-regulated exchanges to exchange in leverage, market manipulation, and other practices that regulated exchanges can’t get away with. Still, the bottom line is that stablecoin competition is great and lowers the overall systemic risk posed by Tether.
Finally, a stablecoin like Tether should not be confused with Bitcoin. There’s no doubt that market manipulation, massive leverage, and fake trading numbers dramatically inflate the demand for crypto and market cap numbers during each bull run. However, unlike a Ponzi scheme, Bitcoin recovers after each crash, even as most other cryptocurrencies falter. Bitcoin serves a practical purpose and that in turn, drives legitimate long-term investors and institutions to Bitcoin.
Tether may collapse one day. But with ever-growing competition from audited stablecoins, there’s no reason to think that it will take the entire crypto market with it, that it will happen soon, nor that Tether holders will be left with nothing.
A year later, Tether and Bitcoin are doing better than ever. Furthermore, Tether now represents a minority of stablecoin holdings, with the new players being fully audited and even US-based. Tether publishes details about its holdings and has completed *seven* independent audits that confirmed that Tether is indeed fully backed. (I tried to link to their audits, but Facebook blocks it as “spam”)
But most importantly, what all critics missed is that Tether *had* to be secretive about their holdings because creating a stablecoin had no legal precedent. Tether pioneered the field and made it possible for all of its fully-regulated and compliant competitors to exist.
Regulators are hostile to innovation, and entrepreneurs often have to take risks and prove that their ideas are sound before their business model is accepted as legitimate.