“Is Tether manipulating the price of Bitcoin?”
I have heard many people ask this question recently and it’s one I will try and answer in this blog post.
I am an UK based accountant and founder of @kbr, I got involved in cryptocurrency a few years ago, but only recently have I started to read about it in more detail after a number of my clients started asking me tax questions in relation to their cryptocurrency holdings.
[As always: this does not constitute financial advice and all views expressed in this post are my personal views and provided to you for discussion and information. Any actions taken on the basis of this information is done at your own risk.]
To answer the question of the day, we have to look at a number of factors
- What is Tether?
- Is every USDT actually backed by USD?
- How would any FUD about Tether affect Bitcoin and the Cryptocurrency markets?
What is Tether?
According to the FAQ section of the Tether website (https://tether.to/faqs/):
“Tethers exists on blockchains through the Omni Protocol. The Omni Protocol is open source software that interfaces with blockchains to allow for the issuance and redemption of cryptocurrency tokens, in our case, “tethers”.
Tether Platform currencies are 100% backed by actual fiat currency assets in our reserve account. Tethers are redeemable and exchangeable pursuant to Tether Limited’s terms of service. The conversion rate is 1 tether USD₮ equals 1 USD.”
In summary, they are issuing cryptocurrency tokens, each one supposedly backed by one USD.
This looks and smells like a security! Why the SEC haven’t started investigating, I am not sure.
Is every USDT actually backed by USD?
USDT, allows crypto-only exchange users to hold their money in “dollars”.
For example, when you use Binance and move money from BTC to “dollars”, you’re essentially swapping Bitcoin for a token from Tether, that may or may not be backed by actual money!
Currently there is more than $2.5bn worth of USDT tokens in circulation, this means that Tether should be holding $2,507,140,346 in their bank accounts. However, we have no reliable confirmation this is happening.
Tether could very easily be issuing new USDT tokens and using these to purchase Bitcoin, artificially stoking demand as suggested by this article from The Financial Times
Tether are aware of these fears and the most recent update that is on the Tether website shows a report produced by Friedman LLP, a US based accountancy practice that is part of the DKF network. The aim of this report is to assure investors that the one USDT is actually worth one USD by checking the USD held by Tether.
If you’re wondering who Friedman LLP or DKF are, you’re not alone. As someone who has worked in the accountancy profession since 2006, I have never heard of this firm. So I went to check the top 100 global accountancy firms (https://www.accountancyage.com/rankings/international-accountancy-firms). They are not on the list!
For any serious investor, this would raise alarm bells. If a company has over $2.5bn in assets, surely they can pay for a full audit by a reputable global firm? If they have chosen not to, we need to ask, why?
You can see the Friedman LLP report here:
It’s not worth reading, I know, I have read it.
Firstly, it’s not an audit report, its a “memorandum”, this means that if the findings are not correct, Friedman LLP has no exposure.
Secondly, the exclusions in the notes mean the report is worthless
In normal language, this means the money is held in trust, but if Tether collapses, there is no guarantee the money will be paid out and the second note means the money held in trust could be used for other purposes!
And finally, the most recent report on the Tether website is from September 2017 - why nothing since then?
What does this all mean?
If USDT is not actually backed by real dollars, you are essentially holding a worthless cryptocurrency.
How would any FUD about Tether affect Bitcoin and the Cryptocurrency markets
When investors are fearful and want a safe harbour, they move their funds out of cryptocurrency and into USDT or some use USDT to move funds from one exchange to another.
If investors are forced to abandon USDT due to its ambiguous backing, it could go either two ways depending on investor sentiment. They could move out of USDT and into fiat or they could move from USDT back into Bitcoin or other more liquid/stable currencies like BNB (Binance).
If investors chose the latter option, it could actually be a boon for Bitcoin as some of that $2.5bn moves back into Bitcoin.
USDT sounds good on paper, but when you look in detail, there are so many holes, the paper is not worth holding. Use USDT with extreme caution and if you need to hold in fiat, use a full exchange, such as Coinbase.
Here is the full report that has got everyone asking questions (it has not yet been peer reviewed, so take what it says with caution)
An honorable mention to @beggars who’s post inspired me to look into this
Thank you for taking time to read my post. If you’ve got this far, you might as well upvote and resteem the post too!
Keep HODLing or SODLing or whatever acronym is the fashion of the day.