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Tether as a threat to the cryptocurrency market

28.02.2022 |

For an article about the collapse of the tether

Tether, having released the first secured cryptocurrency, was able to conquer more than 70% of the digital asset trading market on the online exchange. Such results were achieved in just the previous three years, while all this time none of the investors knew the real structure of the collateral, and all investments in it were based on trust and agreements of market participants.

How USDT Became the dollar standard of Cryptocurrencies

At the beginning of the first cryptocurrency boom of 2017, most transactions on the cryptocurrency market were paired with bitcoin. Then the first cryptocurrency occupied up to 50% of the entire exchange. Cash dollars, which occupy about 40% of the market, were also actively used. Some experts partially attribute such extensive use of bitcoin to the growth of its prices to the highs of that time at the level of $20,000.

At the present time, the picture has changed dramatically. Now up to 80% of the total turnover of the cryptocurrency market occurs in pairs with stablecoins, while the leader is USDT from Tether, the rest of the players account for only about 5-10%. Also, a number of derivative cryptocurrency instruments preferred to use a stable coin from Tether for their security.

The current situation in the near future can only be reversed by the adoption of certain restrictions by the regulators of the United States. As will be discussed further, it will be difficult for USDT to fit into the American legal field, and the restructuring will be too long and expensive, which will lead to a decrease in confidence on the part of participants in the cryptocurrency market and a transition to other, more reliable assets in this regard, for example, USDC. Up to the same point, stablecoins other than Tether have been distributed only in the distributed finance sector and similar instruments.

Although such a high popularity of USDT has one significant advantage - it indirectly indicates the stabilization of the cryptocurrency market and an increase in confidence in it as an instrument of the financial system.

The capitalization of stablecoins is more than $120 billion

In September 2021, the issue of all secured cryptocurrencies exceeded over the $120 billion mark, about 60% of which fell on USDT. However, it is much more interesting to issue coins of the latest stablecoin, or rather the beneficiaries of this issue.

About 55% of all coins issued by Tether were paid for by just two market makers. These are Cumberland Global and Alameda Research. More than three-quarters of them were bought during the last 12 months. Almost all the coins of the secured cryptocurrency were distributed on exchanges, where they already fell into regular circulation.

If we take the capitalization of each stablecoin separately, then USDT occupies a confident fourth position among all cryptocurrencies, although lagging behind the leader of bitcoin by more than ten times. The closest direct competitor of the USDC is located only in ninth place,periodically changing with the meme cryptocurrency Dogecoin. At the same time, the gap between the secured coins by capitalization is about two times.

The overwhelming volume of Tether’s stablecoin turnover is provided by traders and institutional investors. De facto, USDT is the standard of transactions on cryptocurrency exchanges. However, this state of affairs has developed due to several circumstances.

The first and perhaps most important thing is the prohibition of buying and selling cryptocurrencies for cash in China. At that time, they talked mainly about bitcoin, but still they tried to withdraw other coins from circulation without a direct ban. This forced Asian investors, known as enough gamblers, to look for ways to circumvent the ban of the authorities, namely, the transfer of fiat funds or their equivalent to international online exchanges. This is where Tether came to the rescue.

The second reason can be considered the scam of a large number of exchanges just in the period of the emergence of secured cryptocurrencies. At the same time, the use of USDT will allow you to get some reliability in tracking funds and complicating the withdrawal of capital from projects.

Also, stablecoins have become a convenient tool for investors as a safe haven for the period of the fall of the main cryptocurrencies. Traders no longer had to switch to fiat and worry about withdrawing funds to their own bank accounts, which not only simplified reporting, but also allowed them to perform a large number of operations without having to report for each transaction.

And the last, but no less important reason was the growing popularity of the distributed finance sector. Most projects still prefer to use a less volatile currency than the same bitcoin, preferring to block funds originally denominated in bitcoin. At the same time, currently about half of service providers accept USDT as payment for their services, and payment services are actively introducing stablecoins into their infrastructure.

Criticism of Tether and possible imminent collapse

Immediately after entering the market, USDT and Tether were severely criticized by the expert economic community.

The main thing that can lead to the bankruptcy of Tether is the lack of obligations of the company itself to depositors. Firstly, the project site itself does not provide sufficient information about the address and actual location of the company. Although it is stated that the head office is located in Hong Kong, and the legal registration was made in the British Virgin Islands, however, this does not give absolutely no guarantees.

On the regulatory side, the Virgin Islands does not oblige the company to conduct its activities transparently, there are no audit requirements and many other principles that would allow critics to gain confidence in the reliability of USDT.

At the same time, Tether itself declares that their stablecoins are not money and they have no real value, and the company itself does not undertake to guarantee the security of each issued coin. Also, the issuer has no obligation to exchange coins for fiat dollars, although the opposite is declared in words, when it is said that each coin can be exchanged for US dollars at any time. That’s only in the company’s agreement there is a clause according to which Tether can refuse service without explanation when violations are detected by the user. Also, the company is not legally liable in terms of compensation for losses received from its activities.

The latter means that if Tether declares itself bankrupt, users’ funds will not be returned.

The expert community also requires the company to conduct an independent audit of assets. There is still no reliable information about the real software, its structure and volume. Many analysts are sure that in fact USD, if not fully secured, then not a small part of it has no real assets under it. In May 2021, Tether tried to confirm the security of the coins they issued by publishing a report on the structure, however, this only caused a new wave of criticism.

  • The list of issuing counterparties, which accounted for 65% of the total amount of collateral at that time, was not presented
  • Less than 10% of the funds were in fiat currencies and instruments allowing to receive cash dollars within two days.
  • At the same time, more than 12% were issued in the form of loans to unnamed companies, which further increases the risk of the collateral structure.

What are the dangerous positions of USDT and the consequences of its collapse

As it is clear from the above, Tether may have problems if the United States Department of the Treasury begins to implement its project on the regulation of secured cryptocurrencies. In this case, most likely, the company will either simply abandon its obligations to retail investors, or declare itself bankrupt and stop making reverse conversion altogether.

Since USDT for the most part finds its application in the cryptocurrency market, the ruin that is inevitable with the current approach of doing business will lead to stagnation of the entire digital asset market. So, most cryptocurrency exchanges have most transactions taking place in stablecoins, so a large number of coins are accumulated on their accounts. If Tether renounces its obligations, then the exchanges will find themselves in a situation where it is impossible to make settlements with their customers. All this will lead to a chain of bankruptcies and ruin, and the authorities of most states will have nothing better than to completely ban free cryptocurrencies for circulation.