Tethered
It's been a while since we last covered Tether here, but a recent headline related to the bank where the stablecoin issuer parks its funds is as good a reason as any to check in. In a year-end video recording sent to its customers, and recently surfaced in the crypto media, Deltec Bank & Trust Chief Investment Officer Hugo Rogers said it was investing some client funds in bitcoin.
According to the video (which I haven't personally seen), Rogers said the bank bought bitcoin before its latest run-up, at about $9,300. "[S]o that worked very well through 2020 and we expect it to continue working well in 2021 as the printing presses continue to run hot," Rogers said in the video. The money machines go brrr.
Apart from the revelation that an investment officer at a Bahamian bank is a bitcoin bull, the quote did raise questions about Tether's reserves. Tether is a U.S. dollar-pegged stablecoin. It's issuer, Tether, a company that shares executives with the Bitfinex crypto exchange, maintains the stablecoin's one-to-one relationship with the greenback based on cash or cash equivalents held by Deltec.
Deltec has clarified that Roger's statements "had no relation whatsoever to Tether's depositary assets with Deltec." So Tether's reserves are definitely not backed by bitcoin. Or at least not bitcoin that investment officers at Deltec had begun purchasing in Q4 2020.
So what is backing tether?
There are now more than $24 billion in tether in existence, approximately a fivefold increase from the beginning of 2020, when there were fewer than 5 billion tethers. In theory, there should be approximately $24 billion in tether reserves parked in the Bahamian bank.
While many vouch for the company and coin, Tether has yet to produce a full audit of its reserves. In 2019, Bitfinex and Tether told the New York courts tether is only backed 74% by cash and short-term securities rather than maintaining a complete peg, though months later they walked back that claim.
In short, no one outside of Tether can be entirely sure what's backing the popular stablecoin. Tether isn't decentralized like other cryptocurrencies, nor does it have a hard cap to the amount that can be created.
Now the third-largest crypto by market cap, tether is likely the most trafficked crypto in terms of trade volume. It's used not only as a legitimate means of payment (CoinDesk reported it's frequently used to skirt sanctions in China and Russia), but also as a common trading pair and a place for investors to park their money during periods of market volatility.
"Tether's growth in 2020 has been spectacular. We are now starting to speak of the Tetherization of trading, with the lion's share of spot trading volume now denominated in tether (USDT) tokens," Chief Technology Officer at Bitfinex and Tether Paolo Ardoino told CoinDesk over email through a spokesperson in December. "As commercial activity rises, so does the use of tether," he continued.
As Ardoino suggests, the amount of tether is based purely on demand for the preeminent stablecoin. The company mints tethers based on orders from exchanges, traders and others, though because of its limited know-your-customer rules it's not always obvious who is calling to turn on the mint.
Some of these questions might soon be answered. As part of an ongoing lawsuit pursued by the New York Attorney General, Bitfinex and Tether face a Jan. 15 deadline to provide millions of pages of documents related to a loan Tether allegedly provided to Bitfinex to cover an $850 million hole.
