- Cristina J. Orgaz @cjorgaz
- BBC News World
27 May 2021
Image source, Getty ImagesPhoto clip,
A tether is worth about $1.
The cryptocurrency in the shadow, the oil that greases the system orstablecoinare some of the ways in which he has referred to tether, a digital currency that, although less known, is more used than bitcoin.
This is because tether – or USDT – is one of the financial vehicles that open the door to the vast world of cryptocurrencies.
In other words, it is the key to passage.
Except for the largest ones, such as ether or bitcoin, cryptocurrencies cannot be bought with dollars, euros or Chilean pesos directly, for example.
On most platforms clients have to go through an intermediate currencybefore accessing any cryptocurrency and the most used for this is the tether.
According to data collected by asset management firm NYDIG, since 2019 around 60% of bitcoin transactions go through USDT first.
If we add to this the rest of the cryptos that are transferred, we can intuit why tether dominates the marketsince its launch at the end of 2014.
Image source, Getty ImagesPhoto clip,
The tether is considered a “stablecoin” because of its parity with the dollar.
Its 1-to-1 parity with the dollar makes it very stable, as it maintains a fixed value or very close to the US currency.
This contrasts sharply with the extreme volatility of the rest of the digital currencies.
That is its main advantage and the one that classifies it as a stablecoinor stablecoin.
“The idea is that, whenever they wish, users should be able to exchange their USDTs for dollars again without being affected by price fluctuations such as those that usually occur in other cryptocurrencies thanks to the fact that the price is virtually ‘anchored’ to that of the dollar,” explain the experts of the BBVA bank.
Hence, its name on USDT platforms results from joining USD, the financial symbol of the dollar, with the T, from theter.
Image source, Getty ImagesPhoto clip,
Around 60% of bitcoin trades are made with tethers
It has a market capitalization— the measure of a cryptocurrency’s “size” and popularity, calculated by doubling its current value by the amount available — of about $60 billion, according to digital currency price information platform CoinGecko.
As a sign of how much it is used in the system, its trading volume on Tuesday was more than US $ 162,000 million, compared to for example the US $ 65,000 million of bitcoin.
And, to the extent that large companies and investment funds adopt or open their doors to cryptocurrencies, their use has spread among retail investors causing the market to experience an unprecedentedboom.
The company that issues the USDT is committed to keeping on its balance sheet the same number of dollars in reserve as the tether put into circulation.
That is the main difference with the rest of digital currencies: this currency does depend on a centralized entity that backs the value with real assets behind.
And it contrasts with the vision that the creator of bitcoin, whose pseudonym is Satoshi Nakamoto, had: the cryptocurrency would be exchanged between users, without intermediaries or anyone to control the operations.
Bottleneck
But tether’s function as a liquidity provider resembles the company that issues USDT, Tether Ltd., to a central bank.
And this has given it many uses, but it has also given it an“inordinate power“ that many analysts and experts in cryptocurrencies have been warning about.
According to them, the use of tether is a bottleneck for the entire market.
And this could have unintended consequences, as analyst Josh Younger, an expert at investment bank JP Morgan, explained in a lengthy report.
“If any issues arise that could affect investors’ willingness or ability to use USDT, the most likely outcome would be consequenceson the liquidity of the cryptocurrency market that could be amplified by its disproportionate impact on high-frequency trading, which dominates flows,” he said.
Image source, TetherPie photo,
Tether dominates the market.
Little transparency
Another problem that is attributed to cryptocurrency is the lack of transparency.
Since its inception Tether Ltd. has ensured that it keeps in its reserve the cash equivalent to the digital currency in circulation; that is, when you issue a USDT, you put a dollar on your balance sheet and, conversely, when someone sells, you withdraw a dollar.
However, an inquiry by the New York Attorney General showed that this was not always the case.
Specifically, the prosecutor’s office investigated for two years the tether platform Bitfinex for allegedly making “false statements” about its endorsement of the virtual currency and “covering up” massive losses.
The legal process was settled in February with a millionaire agreement, according to the prosecutor’s office itself, in which the managers of Bitfinex and Tether promised to stop operating in the state, pay a fine of US $ 18.5 million and “increase their transparency”, although “without admitting or denying” the allegations of fraud of the authorities.
“Tethers have always been fully supported,” Tether general counsel Stuart Hoegner said in a statement.
Image source, Getty ImagesPhoto clip,
Bitcoin mining produces large energy expenditures.
Detail reservations
However, as a result of this agreement with the Prosecutor’s Office, the company will be forced to publish its reportof its reserves several times, putting an end to the refusal of the directors to submit to an independent audit in these years.
And the first of the public documents already available on tether revealed that its cash reserves are the same as it had in 2019 and that it has not kept pace with the issuance, which has sounded the alarms again.
Its dollar holdings total US$2.1 billion in various assets, representing only 3.5% of the USDT in circulation.
Finally, the JP Morgan specialist recalls that although tether “is immersed in a classic liquidity transformation in the line of traditional commercial banks, it is not subject to the same strict regime of supervisionand disclosure as those entities.”
And this continues to be a risk for those involved in the crypto market.
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