ADVERTISEMENT

Why Crypto Traders Are So Worried About Tether: QuickTake Q&A

Is Tether telling the truth when it says that each of its digital tokens is backed by one U.S. dollar?

Why Crypto Traders Are So Worried About Tether: QuickTake Q&A
The Tether logo is seen on a smartphone in this arranged photograph taken in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)  

(Bloomberg) -- It’s one of the most hotly debated questions in the world of virtual currencies: Is Tether telling the truth when it says that each of its digital tokens is backed by one U.S. dollar? News on Jan. 30 that American regulators are scrutinizing the company has given fresh ammunition to the skeptics.

1. What is Tether?

It’s an issuer of a cryptocurrency with an unusual twist. Unlike Bitcoin, whose value fluctuates wildly from day to day, Tether’s tokens are designed for stability. Prices for the coins have stayed near $1 because Tether says each one is backed by a dollar in its bank accounts.

2. Why are the coins popular?

Many traders use them as a substitute for dollars. Tether’s tokens are more easily transferable between cryptocurrency exchanges and other online platforms because they don’t have to travel through the banking system. Stable prices have made the coins handy instruments for betting on the direction of other cryptocurrencies.

3. Why are there skeptics?

While Tether has repeatedly said that its coins are fully backed by dollars, the company has yet to provide conclusive evidence of its holdings to the public or have its accounts audited. It recently cut ties with accounting firm Friedman LLP. “So far it has been a black box,” said Neelabh Dixit, co-founder of Cryptomover, a digital-currency investment company in Hong Kong. There are also questions about Tether’s relationship with Bitfinex, one of the world’s biggest cryptocurrency exchanges. Some market watchers have alleged that trading in Tether’s tokens on Bitfinex has helped prop up Bitcoin prices.

4. What do we know about Tether’s connection with Bitfinex?

While the companies don’t disclose on their websites or in public documents where they’re located or who’s in charge, Ronn Torossian, a spokesman for the firms, said in a Dec. 3 email that Jan Ludovicus van der Velde is the chief executive officer of both. Phil Potter is a Tether director, according to documents -- dubbed the Paradise Papers -- leaked by the International Consortium of Investigative Journalists. He’s also the chief strategy officer at Bitfinex.

5. What are U.S. regulators doing?

The U.S. Commodity Futures Trading Commission sent subpoenas on Dec. 6 to Bitfinex and Tether, Bloomberg reported, citing a person familiar with the matter. “We routinely receive legal process from law enforcement agents and regulators conducting investigations,” Bitfinex and Tether said in an emailed statement. “It is our policy not to comment on any such requests.” Erica Richardson, a CFTC spokeswoman, declined to comment.

6. How did markets react to news of the subpoenas?

Not well. The market value of all cryptocurrencies tracked by Coinmarketcap.com dropped by almost $30 billion within an hour of the news breaking, while Bitcoin sank below the closely watched $10,000 level. Tether’s coins have been more resilient. After a brief dip to around 98 cents, they’ve rebounded back toward $1, according to Coinmarketcap.com.

7. Why is Tether so important for cryptocurrency investors?

Despite their relatively small total market value of about $2.2 billion, Tether’s coins play an outsized role on cryptocurrency exchanges. They were the third-most traded among all digital currencies after Bitcoin and Ethereum during the past 24 hours, according to data compiled by Coinmarketcap.com.

8. What’s next?

If authorities were to find any wrongdoing at Tether, the company’s tokens could quickly lose value, said Peter Sin, co-founder of the Singapore Bitcoin Club. While only time will tell if the critics were right to be concerned, some market observers have applauded the CFTC’s decision to take a closer look. “A regulatory inquiry will be useful to put this to rest one way or another,” said Urszula McCormack, a Hong Kong-based partner at King & Wood Mallesons, a law firm that has advised on initial coin offerings and blockchain projects.

The Reference Shelf

--With assistance from Justina Lee

To contact the reporters on this story: Andrea Tan in Singapore at atan17@bloomberg.net, Benjamin Robertson in Hong Kong at brobertson29@bloomberg.net, Matthew Leising in Los Angeles at mleising@bloomberg.net.

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Nick Baker at nbaker7@bloomberg.net, Michael Patterson

©2018 Bloomberg L.P.