Future of Tether and Tether Role in the Crypto Market
Fund management is part of maximizing profit by forming the optimal portfolio and part marketing. Here, marketing is the art of cajoling risk-averse investors to trust you with their funds. This issue is of huge importance when it comes to crypto-asset investment firms due to the ups and downs that often define the characteristics of the crypto market—where any news can serve as a tool for energizing investment in bitcoin and other cryptocurrencies or dissuade investors from dwelling any thoughts of putting a dime in the novel class of asset. That is why when on April 25th, New York Attorney General, Leticia James pointed the finger at Tether and Bitfinex and accused them of a cover-up in order to hide $850m loss in client and corporate funds; it was a big deal.
Tether is a “stable-coin” with more than $850bn in circulation at the time of the crisis and Bitfinix is the exchange on which it is traded. There is a claim that the accusation cost not just Tether, but the whole digital currencies some $10bn. Lessons are to be heeded in this story that might come even more of use in the days that cryptocurrencies seem to do quite nicely.
A solution for crypto Investors?
By the time Tether was into deep trouble, the dominant virtual stable-coin was in use for four years. Tether, though, is not just any coin that you might see flourish in an ever-changing market—it was once hailed as “the central bank of the crypto world”. The power it enjoyed was that of an intermediary. Indeed, having a bank account for many cryptocurrency exchanges is not the easiest thing to do, mainly because of banks’ concerns over money-laundering. That is unnerving for many investors and lenders.
Enters Tether with a solution. Pegging itself against hard currency, Tether offered a cure to the chronic disease of crypto market—weakness in the face of volatility. Unshackled by regulation and barriers of bank clearing system, Tether flew smoothly between exchanges.
Boasting that every coin issued is backed by a real dollar in real bank account, Tether did monopolize the stable-coin market, doing nearly 80% of digital coins trades made in dollars. The widespread use of Tether in crypto exchanges served as a secret to its prominence. At the same time, failure to provide any audit of the hard currency holdings made Tether look like to some as the “greatest systemic risk in cryptocurrency.”
Stability: Victim of Conflict of Interest
The good era last not much long. The value of Tether trembled, and so did the value of all crypto assets. But, what was the problem? Inflicted with the usual crypto challenge, Bitfinex found it hard to have accounts at banks. So, it resorted to a back channel: through a Panamanian firm named Crypto Capital, Bitfinex wired dollars to traders. But the whole process of transferring funds was “without any written contract or assurance.” This is the account of AG James.
But, even in her telling, the issue was not that the funds which were supposed to back Tether did not exist. Indeed, the problem arose when the very cash could be used for other purposes, without the consent of the customers. So, when that $850bn disappeared, Bitfinex tried to conceal it through “a series of conflicted corporate transactions.” That means that the exchange that Tether is traded on made it possible for itself to access to near a billion-dollar account belonging to Tether—or, to be more accurate, the very account that should provide the stable-coin with virtual currency one-to-one backing.
Digest the story would be much easier if you know that managers and owners of both Tether and Bitnifex are an identical group of persons. One can hardly be surprised at the sight of this clear case of conflict of interest.
What do crypto Investors want? Transparency.
Had this Tether thing happened a few years ago, the consequences might have been much worse. A relatively mild and short-lived slump that cryptocurrencies went through, though, is a sign of the ongoing maturity of crypto market. The incident also happened to boost the niche market of stable coins, with now some 30 of them being under development, as of mid 2019—a majority of which abiding by the money-laundering checks set by national regulators.
Tether’s rivals seek now to prove that they are not Tether. Some were successful. Even in the wake of allegations against the major stable coin, those peers enjoying more transparency, benefited from the compromising developments surrounding Tether, with TrueUSD and Paxos Standard jumping by about 2 percentage points. If all this proves one thing, it is that the investors in crypto assets are hungry for transparency and the disgrace of Tether just raised the bar.
However, by framing the recent developments solely within the bounds of crypto market, you might miss the whole picture. The full scene shows that, alongside the substitution effect that crypto market enjoyed from by the fall of Tether and emergence of better stable-coins, there have been forces from the outside that benefited the insiders.
Even before the fall of Tether, nervous regulators were determined to end the string of scandals in the crypto market. In a show of force, Securities and Exchange Commission, a U.S. state agency responsible for regulating the securities industry, put forth nine enforcement actions in 2018. Some may say that the results are yet to be whiteness in the novel market; however, what is clear is that unlike cryptocurrencies which cannot be shut down, due to their nature as a software program, exchanges can. This might be a deterrent, through which regulators can crackdown on crypto market, specifically, if the market does not engage in the process of self-correction. Whatever the process, evident it is that if the output is more transparency, investors will be the most pleased.