Tether says its coin is backed by “cash equivalents” and “other assets.” But what are these?
Tether, the company responsible for the development of the USDT stablecoin, has made a small-yet-vital update to its website. The update has the crypto-community abuzz with rumors the company may not be operating as advertised.
The update, noticed by a keen-eyed redditor, appears to contradict Tether’s claim that its USDT coin is backed 100 percent by the US dollar. Tether now states that, while it fully backs every USDT token, these may not always be backed by US currency. Instead, Tether told its customers that its USDT coins are backed by “reserves” that “include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, ‘reserves’).”
Frances Coppola of Forbes speculates that when Tether says it’s using “cash equivalents” to back its token, this refers to other crypto tokens, such as bitcoin, to ensure the stability of the USDT. “[L]ike pegging to a volatile asset is such a good way of ensuring stability,” Coppola quips. Coppola says this means the company is acting as a “very risky fractional reserve bank.”
Fractional reserve banking is a financial model in which banks keep only a fraction of their customers’ money in reserve and use the rest to make loans and grant customers interest on their deposits. While this model works well for banks that are regulated by the Federal Reserve and produce interest, it may not work so well for a coin that promises stability. This is especially true if Tether is backing up its crypto with “other assets,” such as oil, that are subject to daily fluctuations in price.
Wednesday’s announcement added to existing questions about Tether’s financial reserves and its relationship with Bitfinex. In June 2018, the Bitfinex exchange platform was brought under scrutiny by researchers at the University of Texas at Austin, who claimed the platform was using the USDT to buy bitcoin when bitcoin prices were low to manipulate its value. And, earlier that year, the value of the USDT coin, ostensibly pegged to the US dollar, dropped below $1.00, which only added to the list of investor concerns.
Between this website update, Tether’s cancelled audit of its funds, and its tenuous relationship with banks, Tether’s reputation is on shaky ground.
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