Tether’s Messy USD `Peg´ May Be a Liability For Bitfinex

There are potential problems with Tether, according to a Hackernoon article by BitCrypto’ed called the “Curious Case of Tethers.” Tethers are supposed to be digital dollar pegs, but there is evidence to suggest they may not always be redeemable. The article implies investing in Tethers or using them to store value might be a risk. 

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Tether and Bitfinex Get Divorced From Legacy Finance

The article argues tether was stable throughout 2016 and did not start to increase until March 2017. Tether’s value seemed to take off along with Bitcoin’s dramatic rise.

Then about this same time, Bitfinex and Tether were suddenly let go by Wells Fargo and as such effectively cut off from the banking system. They were both cut off because Bitfinex and Tether are partner companies. This caused the companies to file a lawsuit against Wells Fargo.

The situation, according to the article, caused Taiwanese banks to halt all of both company’s incoming international transfers. This was the announcement Tether made a week later in response to the banking cutoff:

Since April 18, 2017, all incoming international wires to Tether have been blocked and refused by our Taiwanese banks. As such, we do not expect the supply of tethers to increase substantially until these constraints have been lifted.

BitCrypto’ed further explained Tether never provided information or an announcement that they solved their problem, and no other information about the lawsuit has been provided. Tether said in a statement that halting transfers creates an “existential threat to their business.”

How Tether “Solved” Their Problem

The Hackernoon article suggests Tether solved this problem by minting more Tether units, even though they said they would not increase their supply. Yet Tether has drastically increased its supply. The article said, “Tether claimed that the supply of tethers would not increase until their banking problem was solved, yet the supply of Tethers has actually increased by 482% since this announcement. From July 2017 to August 2017, the supply of Tethers has increased by over $100,000,000 ‘USD’.”

Tether may have also been involved in creating “shell corporations” and opening new bank accounts in their names in order to stay afloat. The author of the article believes all these strategies are bound to attract regulators, and then Bitfinex could end up in hot water, much like the exchange BTC-e. As a matter of fact, the author states Bitfinex is likely employing some of the same strategies as BTC-e.

Other Issues of Why Tether is a Precarious Dollar Peg

BitCrypto’ed thinks there are other issues why Tether is a precarious dollar peg. There is no liquidity, the author says. There is only one legitimate exchange the has a btc-tether pair besides Bitfinex, and that is Kraken.

Allegedly, there is also no limit to the supply of tether. The company can mint or create as many of them as needed. Nothing checks supply and demand of the asset. Furthermore, Tether says they are professionally audited, but BitCrypto’ed says there is no evidence of that claim. In a Medium article, the author also claims that Tethers have been used as fraudulent monetary instruments for margin trading on Bitfinex.

Since Tether also tends to move off of the dollar mark on exchanges, it could imply that people use Tether to hide in during times of uncertainty in the cryptocurrency ecosystem. This would explain why Tether’s price increases slightly when bitcoin and other cryptocurrencies are falling. However, the veracity of some of this information also depends on future developments and how Tether and Bitfinex deal with ongoing issues. The rest remains to be seen. Until then, BitCrypto’ed believes Tether is a precarious dollar peg and possibly used for fraudulent activities.