Usually, when a cryptocurrency tanks, the holders of a rival coin tease them with “SFYL,” which means sorry for your loss.

But, the whole industry needs to keep an eye on USDT token of Tether May, as if something were to happen to it, the results could be everyone’s loss.

That is because the coin, which is also known as a tether, has become a pivotal source of liquidity for the crypto markets. Without wanting to spread further fear, uncertainty, and doubt (FUD) in a community that’s had more than its share, a collapse of the tether may would be remarkably bad for these markets, causing a ripple influence and, in the worst case, conceivably toppling exchanges.

To be sure, so far, tether has lived up to its description as a so-called stable coin, whose value is pegged to the U.S. dollar. Trading data shows tether has hovered around $1, occasionally dipping as low as $0.80 or jumping as high as $1.10.

But, the online critics of the company have long alleged that Tether, which has close ties to the crypto exchange Bitfinex, has been issuing more USDT than it has dollars in the bank, to drive up the price of Bitcoin.

That is a problem for investors, as the tether is unique among cryptocurrencies in that it carries counterparty risk, or in other words, the possibility one party to a contract may not fulfill its end of the bargain. In the case of Tether may, the “obligation” is redeeming USDT tokens for dollars.

An adult by the firm Friedman LLP was supposed to prove that USDT was fully backed. But, recently Tether abruptly announced that its relationship with Friedman had ended. It also remains unclear who dumped whom and why.

Now, with no audit forthcoming, the doubts are as pervasive as ever.

When contacted for this column, a spokesperson for Tether would say just “Regarding the adult, we have no further comment.”

Systemic risk

One thing would be if the risk were confined to the traders that are holding tether, which according to CoinMarketCap ranks among the top 20 cryptocurrencies and altcoin exchanges with a market cap of over $2 billion.

But, Weiss Ratings, a decades-old investment research firm which recently started evaluating cryptocurrencies is warning investors that Tether poses a risk to the whole ecosystem, explaining:

Tether is the only ‘cryptocurrency’ that has a trading volume which regularly exceeds that of its market cap. This also means that the entire Tether supply changes hands on a regular basis, sometimes more than once a day…This is significant to know, as it tells us that Tether is used for trading a lot. It is one of the main sources of liquidity in the cryptomarkets.

Hence, Tether could be described as “systematically important,” which also is the polite term regulators use for too big to fail. Do not count on a government bailout, though. The Weiss report goes on:

Liquidity is the lifeblood of a market. It is what makes prices stable and seamless trading possible. The consequences could be far-reaching. What will happen if Tether does turn out to be shaky? What if this large source of liquidity suddenly evaporates?

Besides from mysterious serving of ties with the auditor, Tether’s had some other problems.

In November 2017, the company claimed that a hacked snatched nearly $31 million of the token from the own wallet of the company. More recently, Bloomberg reported that the U.S. Commodity Futures Trading Commission (CFTC) sent subpoenas to both Bitfinex and Tether.

Another view

There is one more charitable, as well as nuanced interpretation of this situation, however than the one that is offered by Jordan Belfort, the Wolf of Wall Street, who has recently given an interview with The Street which has called Tether a “massive fraud.”

To understand the alternative explanation, you need to remember how tether, which was created in 2014, ascended to its current prominence.

Last year in April, Bitfinex had its wire services suspend by Wells Fargo. To continue trading, tether became a substitute for wire transfers for Bitfinex and it with possibly some other exchanges which had a hard time getting or keeping bank accounts.

According to Bitmex research, Tether itself may also have the same problem, and this can also help explain why it is so cagey about its finances:

We suspect that Tether may have struggled to find some appropriate banking relationships…We also believe that this is likely to be the primary reason for the apparent lack of transparency, rather than a lack of USD reserves.

The transparency that some Tether stakeholders seem to expect may not be possible in the financial sector when the underlying activity is not completely clearly authorized or regulated by the authorities.”

We have to see how things pan out on the Tether front, but for now, investors have to be cautious and sit tight – whether they are holding USDT or some other crypto coin.


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