Tether, the centrally issued crypto-token that is meant to be backed 1:1 to a dollar, has just issued $250 million more yesterday for the first time since May.
Tether’s market cap should now increase to nearly $3 billion, putting it in the top ten cryptos, above Monero, Dash and perhaps Tron.
They are primarily held by exchanges, Binance chief among them with nearly a billion worth of Tether, while Huobi has some 350 million USDT.
That means this fiat token is in many ways primarily brought into circulation by exchanges. When more people want USDT than exchanges have, those exchanges in question give Tether a lot of real dollars for USDT tokens.
That explains why Tethers are printed in such huge sums of hundreds of millions, and might even explain a law firm recently saying they are fully backed. Yet how exactly these exchanges form this conversion is unclear.
If we take Binance, which doesn’t have dollar pairs, then you would think when individuals convert their bitcoin or eth to usdt, at some point people would be holding more usdt than Binance actually has.
Let’s say Binance has 750 million usdt, but people have sold on Binance $1 billion worth of crypto for usdt. So then Binance presumably has some direct line to Tether and orders $250 million worth of USDT.
Yet where did that $250 million come from? The only thing that exists here in a real form is actual cryptos and a MySQL database which accounts Binance’s liabilities amounting to 250 million USDT to numerous individuals.
So Binance would have to convert all those cryptos into dollars and then send it to tether to receive tokens, unless tether accepts crypto payments.
In either case, there would be considerable risks especially during bear markets as cryptos are hugely volatile and therefore what was $250 million worth of cryptos can quickly become $200 million or even $100 million.
The question is, moreover, how exactly does Binance sell the cryptos for dollars? Considering they are such huge sums you’d think they’d need an Over the Counter (OTC) pipeline.
Nonetheless, if it works as above, much of it does make sense except one aspect. Why does tether’s supply never decrease? As in, why do exchanges never need to buy cryptos with dollars so requiring them to go back to tether to ask for real dollars?
The answer is probably because cryptos actually exist. Binance is of course a direct exchange, so any crypto sold is a crypto bought by someone, they simply change hands.
For tether it is slightly different as they are being created from cryptos converted into dollars. So you can not have a situation where people are holding more cryptos than Binance has which they are able to cover with usdt tokens as people can only buy cryptos with the usdt they have.
So tether’s supply grows in a bull market and in a bear market because once tether is created it needs not be destroyed in this set up where it is mainly a placeholder for traders on exchanges.
Concerns, of course, still remain regarding the possession and control of some $3 billion, which might grow to even more, but perhaps tether has managed to create a tokenized dollar which actually works.
Whether it does, however, remains to be proven, with the above explanation being our understanding of how something like tether can legitimately function.
They had an audit underway, but the accounting company responsible for it dropped out. Meaning they’ve had no actual audit as far as we are aware.
A law firm has confirmed balances, but Roger Ver also confirmed the balances of MT Gox in 2013 before it went bankrupt.
CFTC is of course investigating tether, and them printing these tokens while the investigation is on-going is a reason for some confidence, yet it could also be the case if they were nefarious that they might think they are in trouble anyway so why not go out by playing the game to the end.
Which all means we do not actually know whether this is all legitimate or not because we have to trust centralized tether which has provided no audit despite promising one.
They’ve claimed securing such audit is difficult and seeing how it went with the last accounting firm, others might be reluctant to perform an audit, but on the other hand there would be significant prestige for the company that does perform it.
So maybe we’ll just have to wait and see what CFTC ends up saying in the end. Congress has approved a new bigger budget for them, partly because they have now exerted regulatory jurisdiction over bitcoin, and soon probably ether, where fraud or price manipulation is concerned. So they should have the resources now to fully carry out their investigation.