1 month ago- Knowledge -
Stablecoins Revisited, the Trouble(s) with Tether
Tether not following crypto market trends is not an unusual occurrence, but the community took notice today, Oct 15, as the ‘stablecoin’ fell to an 18-month low as investors lost confidence in the coin. We do know where the investors fled, the exodus led to an almost 9% jump in Bitcoin’s value.
As the title suggests, BNG has covered stablecoins in the past, if unfamiliar with the coins catch up on their apparent benefits and pitfalls with the article Salient or Scam, the Story of Stablecoins.
According to Bloomberg, Tether lost its $1 peg due to renewed rumors around the exchange Bitfinex’s financial health: “faith in Tether abruptly diminished on Monday amid renewed speculation over the financial health and banking relationships of Bitfinex, a crypto exchange that shares a chief executive officer with Tether’s issuer.”
As Bitfinex’s health and connection to Tether came under scrutiny, wary investors started to pull out of Tether. As suggested in BNG’s previous article stablecoins that lose investor confidence are quick suffer hardship, or as suggested by Vijay Ayyar, head of business development at Luno, a cryptocurrency exchange, “If traders start to flee Tether, it’s a potentially precarious situation. It basically implies a lot of volatility ahead.”
The crypto community has long been skeptical of Tether, as it has failed to produce a single, sufficient, third-party audit of their promised physical $1 USD backing to every $1 of Tether. Some have long suspected that Tether is in fact linked to nothing, that the money used to buy Tether is then used to buy Bitcoin, effectively propping up Bitcoin prices.
The plot goes deeper, as mentioned above Tether and Bitfinex share the same CEO, Bitfinex is the place where all newly minted Tether tokens are sent to the Bitfinex exchange. When Tether reaches Bitfinex, the price of Bitcoin tends to also go up. All a pretty damning set of circumstances.
Circumstances were doubtful enough for U.S. regulators to subpoena both Bitfinex and Tether in December of last year. Despite all the factors, the impetus for the subpoenas is still unclear. In June, the US Commodity Futures Trading Commission (CFTC) responsible for the subpoenas refused a Freedom of Information Act (FOIA) for a release of said subpoenas.
Despite these doubts, markets have mostly shrugged off concerns surrounding Tether’s peg and it’s legitimacy. Tether’s promised stability was enough for many skeptics, as it became a major part of the global crypto ecosystem, according to CoinMarketCap.com, Tether accounts for 20 percent of all virtual currency transactions it tracks, second only to Bitcoin.
Even with Tether’s market success, investors held tight to their suspicions of the strange-bedfellows of Bitfinex and Tether, evidence of this was manifest today.
Bitfinex issued a statement last week denying allegations that it was insolvent, this was enough to trigger the sell-off. It took a Medium post published by Bitfinex to staunch the exodus and calm the market somewhat. Bitfinex said that customers were still able to withdraw cryptocurrencies and fiat-currency holdings “without the slightest interference,” although “fiat deposits have been temporarily paused for certain user groups” pending the implementation of a new deposit system Tuesday.
Accusations have also been leveled at Tether for mass Bitcoin market manipulation. In June, University of Texas finance professor John Griffin and co-author Amin Shams published a paper titled Is Bitcoin Really Un-Tethered? that investigated whether Tether had influenced Bitcoin and other cryptocurrency prices during the December boom of last year.
According to Bloomberg Businessweek, “Griffin and Shams noticed that when Bitcoin fell to certain levels, purchases using Tether would flood in to stabilize prices. After crunching the data, they concluded this fit a pattern consistent with someone, or a group of people, trying to manipulate Bitcoin prices. The two researchers made the startling claim that half the gains in Bitcoin last year can be attributed to Tether.”
While Bitcoin burgeoned, Tether’s competitor stablecoins, the Gemini Dollar and Paxos Standard also received a boost from the mass exit. In conversation with Bloomberg, Jehan Chu, managing partner at blockchain investment and advisory company Kenetic Capital suggested, “Faith in Bitfinex’s financial situation and ability to fully back Tether has been a recurring question, Tether’s stablecoin dominance will only persist if they can settle community criticisms about their lack of transparency once and for all.”