EXPLAINER: What is Tether and USDT? – Sovereign Wealth Fund Institute

Posted on 06/28/2021


Stablecoins are cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities.

Examples:

Tether (USDT) Tether – Tether Limited

True USD (TUSD) TrueUSD – TrustToken, Inc.

Paxos Standard (PAX) PAX Gold – Paxos Trust Company, LLC

USD Coin (USDC) USD Coin – Circle Internet Financial Limited

Binance USD (BUSD) Binance Coin.

Tether is a cryptocurrency with tokens issued by Tether Limited that was launched as “Realcoin” in July 2014. Tether is called a stablecoin because it was originally designed to be always worth US$ 1.

Hong Kong-based Tether Limited is controlled by the owners of Bitfinex. According to Tether’s website, the Tether Limited is a fully owned subsidiary of Tether Holdings Limited.

In May 2021, Tether published a report showing that only 2.9% of Tether was backed by cash, with over 65% backed by commercial paper. On June 25, 2021, Tether (USDT) had 64.25 billion in supply. For example, Vanguard Federal Money Market Fund has total net assets of US$ 193.8 billion as of May 31, 2021 and invests in at least 99.5% of its total assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized solely by U.S. government securities or cash (collectively, government securities).

The first tokens were issued on October 6, 2014, on the Bitcoin blockchain and was done by using the Omni Layer Protocol. On November 20, 2014, Tether CEO Reeve Collins announced the project was being renamed to “Tether”. In January 2015, the cryptocurrency exchange Bitfinex enabled trading of Tether on their platform.

In a slide presentation on June 25, 2021, Eric Rosengren, president of the Federal Reserve Bank of Boston, listed Tether among the “financial stability challenges” the Federal Reserve is watching.

What is Bitfinex?

Bitfinex is a Hong Kong-based cryptocurrency exchange owned and operated by iFinex Inc., which is headquartered in Hong Kong and registered in the British Virgin Islands. Bitfinex is one of the largest Bitcoin exchanges by volume in the world.

New York AG Case

Bitfinex was accused of having sent the US$ 850 million to Crypto Capital Corp, a payment processor believed to be in Panama, without telling clients, and after the funds went missing, draining at least US$ 700 million from Tether’s reserves. The U.S. Department of Justice claims Crypto Capital had provided shadow banking services to several cryptocurrency exchanges, including Bitfinex, Binance, Cex.io, Coinapult, and QuadrigaCX.

According to the 2021 settlement, the New York Attorney General claims Bitfinex and Tether held a portion of Tether’s reserves in trust for several months in 2017 and failed to disclose its troubles with Crypto Capital Corp. in a timely manner in its findings of fact. The New York Attorney General also faulted the defendants with a blog post Bitfinex published after the inquiry was first announced, where the exchange said the funds held by Crypto Capital have been “seized and safeguarded.”

However, the settlement said, “As of Nov. 2, 2018, tethers were again no longer backed 1-to-1 by U.S. dollars in a Tether bank account, because a substantial portion of the backing in the Deltec account had been transferred to Bitfinex to make up for the funds taken by Crypto Capital, while the corresponding funds transferred from Bitfinex’s Crypto Capital account to Tether’s Crypto Capital account were impaired by Crypto Capital’s actions.”

In June 2013, Crypto Capital (then operating under the name Crypto Financial) was formed and produced an “initial public offering” to raise 30,000 BTC through Panama-based Havelock Investments in August 2013. By 2015, Crypto Capital had attracted several notable exchanges as clients, providing services to Bitfinex and Coinapult, among other exchanges.

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