NEW YORK — USDT, the stablecoin issued by Tether Holdings, is not the most valuable cryptocurrency or the most likely to get you rich. Tether simply promises that if you give it US$1, it will give you a coin that will almost always be worth US$1.
This annoying utility has made it the most traded digital token in crypto. It has also become a matter of concern following the collapse of the FTX exchange, whose ripple effects continue to be felt throughout the sector. If USDT stumbles, the risk of broader turmoil in already struggling crypto markets could increase significantly.
1. What is USDT?
It is a stablecoin, a class of crypto-asset designed to always be worth a fixed value, usually 1 USD. This is in contrast to most cryptocurrencies, which can experience large fluctuations.
Most stablecoins maintain their peg by promising to hold an equivalent value of funds in reserve as collateral to match the coins being sold. For fiat-backed stablecoins like USDT, the majority of this collateral stack is typically held in the form of a mix of cash and highly liquid cash equivalents.
2. What is the appeal of USDT?
USDT is by far the largest stablecoin, with approximately US$65 billion in circulation today. Its closest rival is Circle’s USDC, with a circulation of around US$42 billion; meanwhile, Bitcoin and Ether are the only cryptocurrencies of any kind to surpass Tether in market value.
Investors can use stablecoins either as an easier entry point to buy crypto or to trade between different tokens. Their price stability makes trading much easier, and because there is so much more USDT than anything else, using this particular stablecoin may be easier than the alternatives, as exchanges will offer more options to convert USDT to other tokens.
3. Why is this important?
USDT can be traded for over 4,000 other currencies on centralized exchanges, and possibly even more on decentralized exchanges that don’t always accept regular dollars.
As a result, it is quite difficult for traders to actively engage in crypto without using USDT at some point. If USDT were to experience any issues that reduced its appeal or usage, it could cause a chain reaction throughout the industry and drastically reduce trading volumes.
4. What are the concerns about Tether?
The big worry is the “almost” in the claim that USDT is “almost always” worth $1. The question is whether Tether, as an issuer of USDT, is really setting aside enough assets to keep its peg to the dollar secure. These questions arose soon after it was first released in 2014, in part because the company has never released the kind of audited financial statements that normal depository banks are required to report.
Investor doubts prompted the company to begin issuing certifications on its reserves in 2017, currently conducted by outside accounting firm BDO Italia (although the Wall Street Journal reported in mid-December that the company was “assessing” its needed to continue his work for Tether and other crypto companies).
As part of a 2021 settlement with the New York Attorney General that included allegations that Tether lied about its reservations in the past, these attestations are now being filed quarterly.
5. What do we know – and don’t know – about Tether’s finances?
The certificates are not real audits, like those that public companies publish each year for shareholders. This means that while Tether’s reports indicate that it has around 82% of its reserves in cash and near-cash, we don’t know exactly where those assets are held, what money market funds it invests in, or other details that might involve the level of risk around its guarantee.
For example, the proportion of Tether’s reserves that it lends to other companies has increased, according to the attestations – but we don’t know who is borrowing the money, or what due diligence Tether has conducted to ensure that they can pay it back. Tether said on Dec. 13 that it plans to gradually reduce its secured lending business to zero in 2023.