- Tether recently settled a $1 trillion lawsuit revolving around the unbacked issuance of the stablecoin.
- Senator Cynthia Lummis has stated that any regulatory framework for stablecoins will require full cash-backing, similar to money market mutual funds.
- Tether loaned $1 billion to Celsius Network, a crypto lending firm that has come under the ire of financial regulators several times.
Tether finds itself at the forefront of controversies when it comes to backing its stablecoin with USD reserves. Tether's reserves have remained a mystery for years, despite publishing transparency and audit reports.
Tether's $69 billion reserves raise questions from regulators
Tether is no stranger to scrutiny from regulators. Tether Limited is the company behind the stablecoin USDT, and Bitfinex owns it.
Tether was under investigation for issuing stablecoins backed without cash reserves. Tether's $69 billion worth of stablecoins (issued, authorized or both) are supposed to be backed by USD. However, no entity can validate the $69 billion reserve.
Interestingly, 30% of the Tether under circulation was issued in 2021. Despite inadequate proof, the stablecoin is relevant in crypto circles and used extensively, so much so that it ranks fourth in terms of market capitalization.
Crypto Twitter is abuzz with questions on Tether's reserves and where the company holds the USD that backs its stablecoins. An anonymous blog post titled "The Bit Short: Inside Crypto's Doomsday Machine" recently went viral.
Jim Cramer, the host of "Mad Money" on CNBC, was quoted as saying,
We need to accept the beatdown in speculative assets for the greater good of the entire stock market. This speculative meltdown can temporarily weigh on the entire market, sure, but once the speculators get shaken out, I'm betting it's a win for the Dow and definitely the S&P.
Cramer's argument leads proponents to the question: What happens when a cryptocurrency is too big to fail?
If the downfall of Tether triggered a collapse in the crypto economy, it would mean a meltdown of $2.3 trillion. Experts consider this a sizable threat to the global economy.
Steven Mnuchin, former Treasury Secretary, says,
They shouldn't be like casino chips- if you are going to issue a stablecoin, the actual money should be held in a regulated bank, and people who hold stablecoins should be able to exchange those for real dollars at any time.
On its website, the stablecoin issuer reveals a $30 billion investment in commercial paper. However, there is no evidence to back this claim. Similarly, the company states that it registered with the British Virgin Islands Financial Regulator, but the agency denies the claim.
A paper trail backs the investment of $15 billion in cash and extremely low-risk bonds. Jean Chalopin, Chairman of Deltec Bank & Trust, admitted that the Bahamas-based bank overlooks Tether's $15 billion. However, this accounts for 21% of the $69 billion reserves.
Tether has offered billions of dollars in loans to companies like Celsius Network, a firm under scrutiny by Kentucky's securities regulator. Further, Tether recently settled a trillion-dollar lawsuit filed against it by five cryptocurrency traders who claimed to have suffered losses due to unbacked USDT issuance.
Proponents in the cryptocurrency ecosystem are asking what's next once Tether comes under further scrutiny from regulators. Alex Krüger, a cryptocurrency analyst, tweeted:
How does crypto change once Tether falls under the umbrella of US regulators and complies with regulations? Odds are very high this happens.https://t.co/anTuFnhaN1— Alex Krüger (@krugermacro) October 1, 2021
The controversy looms as traders continue buying Tether to get started with cryptocurrency trading and exchange. In countries where Bitcoin and cryptocurrencies are unregulated or banned, there is a higher demand for Tether.
Pseudonymous cryptocurrency analyst @CryptoWhale considers that Tether's downfall and lack of real utility are expected to impact Bitcoin negatively.
Without Tether, and no real utility for Bitcoin, I would make an estimated guess of No. I think Bitcoin will be replaced from #1 by alts likely in 2022-2023.— Mr. Whale (@CryptoWhale) September 24, 2021
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