Tether (USDT): a controversial company

Over the past several years, numerous events have cast doubt on Tether’s assurances that there is one dollar for every USDT in circulation, which amounted to 14.16 billion in September 2020. Among other things, repeated requests for independent audits have gone unheeded, and the storage of the funds is carried out at a rather anonymous bank located in the Bahamas. All this does not fail to worry investors.

If it were proven that Tether’s reserves do not correspond to reality, it would represent a gulf in the cryptocurrencies market. We could see a probable drop in the overall market valuations and a loss of confidence, which would be reported with delight in the mass media.

A decline in public confidence would first be visible in the valuation of Tether, as the price of the asset is an indicator of Tether’s ability to secure its reserves. At one dollar per USDT, this capacity is judged by the robust market. At lower price levels, doubts are raised.

By observing the evolution of the USDT valuation, the asset actually remains around the expected value of one dollar, even pointing regularly above it when demand warrants.

However, we identify an event of a sharp drop in the rate in April 2017 corresponding to the announcement made on April 17, 2017. At that time, Tether announced that it would be unable to make deposits and withdrawals through its Taiwanese banking partner, making it very complex, if not impossible, to convert a USDT into USD.

At the origin of this “blockade”, a number of American banks, including Wells Fargo, who do not wish to maintain a relationship with the bank as long as Tether remains their customer. A lawsuit will be opened between Tether and Wells Fargo, which will then be dismissed.

After a short period of panic in the markets, lacking an alternative and needing a stable wedge to secure their positions, investors returned to the USDT despite greatly eroded confidence, and the asset returned to its target value of one dollar.

Too big to fail?

The market, in great need of a stable corner, will prefer to look at the situation with optimism and will no longer specifically sanction the USDT.

Even when it will be proven that $850M have been seized by the US authorities as well as several other jurisdictions, Bitfinex will easily succeed in raising $1 billion from private investors for the creation of the LEO token to compensate its losses.

This fund raising will even be profitable in the end, as the value of the LEO token is estimated at $1.2 billion.

Even when it will be proven that $850M have been seized by the US authorities, Bitfinex will easily succeed in raising one billion dollars.

So Tether seems “too big to fail”. Representing 80% of the valuation of the Stablecoin market and almost the entire volume, it remains an indispensable asset for speculators who need to have an asset that allows them to quickly rebalance their positions in a relatively stable currency.

The entire market prefers to turn a blind eye to the weaknesses of Tether’s model for fear of seeing it collapse like a house of cards. Cynical observers can easily draw a parallel with the classical economic model based on debt management.

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