Op-Ed: Tether cryptocoin stays steady during crash of cryptocurrencies

Posted Jan 17, 2018 by Ken Hanly
Tether is a cryptocoin that is different from others in that it is pegged to the US dollar. While many other cryptocurrencies are crashing tether is actually up a bit.
File photo: James MacWhyte  a member of bitcoin trading club poses with a bitcoin medal at a club me...
File photo: James MacWhyte, a member of bitcoin trading club poses with a bitcoin medal at a club meeting in Tokyo.
Yoshikazu Tsuno, AFP
Tether was founded in November 2015. It is incorporated in Hong Kong but has offices in the US. Tether has close connections with the cryptocurrency exchange Bitfinex. BItfinex is about the world's third largest cryptocurrency exchange by volume.
While originally based on the bitcoin blockchain, in June of 2017 tether changed to the Litecoin system. The tether tokens(USTD) are issued by Tether Limited. The CEO of the Tether company is Ian van der Velde, who is also the CEO of Bitfinex the exchange that has a close relationship to tether.
Tether supposedly holds one US dollar for each tether issued
Tether claims to have one U.S. dollar for each tether issued. However, there seems to have been no completed audit to check this and there are claims that millions of tethers have been issued all of a sudden. Some even think that there has been manipulation of bitcoin's price by the tethers being used to buy bitcoin.
The tether can be used as a store of value, spent as a medium of exchange, and has a fixed unit of account like a traditional currency. Some cryptocurrency advocates see tether as acting like a central bank, do not like it, and are suspicious of it. Wikipedia says that tether holdings are in the process of being audited.
In September of 2017 an internal memo was released but it was not an audit and did not really show critics had been wrong. The memo says it is just for internal management.
Tethers are simply issued rather than mined. Just as a central bank, Tether simply issues money, but regular fiat money is backed by the government and laws that make it legal tender. Tether is not.
The $31 million theft from Tether
In November of last year about $31 million's worth of tether tokens were stolen. Tether suspended trading and said that it would roll out a hard fork in the blockchain that would prevent the stolen tokens untradable. As of December 19 last year it had re-enabled limited wallet services and began processing a backlog of trades that were pending.
Bitfinex, Wells Fargo, and tether
In April last year Bitfinex announced that it was no longer able to let users withdraw their funds in U.S. dollars as Wells Fargo had cut off all wire transfers. Bitfinex and Tether sued Wells Fargo for making this decision but a few days later dropped the case.
Since users could not withdraw funds in U.S. dollars on Bitfinex, they began buying bitcoins on the exchange using their tethers.. These could easily be traded on other exchanges for US dollars and their tethers converted into U.S. dollars via that route. The result was the price of bitcoins on Bitfinex soared about 100 U.S. dollars over what it was on other exchanges.
Not long after the Wells Fargo cutoff, Bitfinex reported that the Taiwanese banks it dealt with also cut off all international wires. Bitfinex was forced to deal with a series of banks in other countries, without revealing to customers where their money is stored.
Why would tether go up while other cryptocoins went down?
As with central banks, as long as people accept the currency they issue it can still be used as a medium of exchange. While Bitfinex will not change tethers into U.S. dollars they will trade them for bitcoins. The price is around $1.04. People can still convert tethers to US dollars by trading their bitcoins on exchanges which will trade bitcoins for dollars as explained earlier.
Tethers can also be bought to use as a store of value, to in effect park U.S. dollar equivalents and wait for other cryptocoins to decline in value until they appear so low as to be a buying opportunity. By being pegged to the U.S. dollar, tethers cannot decline in the way that other cryptocurrencies have.
However, if the whole tether operation is fraudulent passing off tokens of no value as equivalent to one U.S. dollar, then this could change drastically. The appended videos go in to some details about tether's suspicious activity. However, there are apparently lawsuits pending against some critics. The Paradise Papers video is from November 30 last year. There were eleven views.