How to Understand the Tether FUD and Conspiracy Theories

Tether (USDT) Acts as a Stable Coin, Trading for Roughly $1 USD. But Expectations and Skepticism have Led to Lots of Conspiracy Theories; We Summarize

Tether (USDT) is a stable coin meant to trade for $1. The idea being that dollars are held in a 1:1 ratio by the company Tether. We discuss the FUD and conspiracy theories surrounding Tether. To do that, we will also describe how Tether works and what benefits it provides cryptocurrency users and exchanges.^{[1][2][3][4][5][6]}

This is the essence of what you need to know about Tether and the Pros and Cons of Tether page. The goal will be to remain unbiased and present all sides of the story up to the end of January 2018 and then update as needed.

Summary: Tether is a useful replacement for a dollar in the crypto economy. It gives users a stable crypto currency and exchanges that can’t use dollars liquidity. There are some complex conspiracy theories regarding Tether, but we need to note that 1. Tether has addressed the conspiracy theories, and 2. this sort of FUD is very common in the crypto space (and is often spread by those who want prices to fall so they can buy more crypto or short crypto). Conspiracy theories aside, Tether has its pros and cons, and the details below are worth familiarizing yourself with. See the official “Tether Update” for Tether’s side of the story.

UPDATE 2019 PT 2: The New York AG’s office is accusing Tether’s parent company of moving funds around to cover up missing money. You can get the full story here.

UPDATE 2019 PT 1; Is Tether Backed 1:1? Tether has changed the wording on its site regarding how Tether is backed. In short, Tether is not claimed to be backed 1:1 by dollars in a bank account anymore. Instead the new wording reads, “Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.” Please keep this change in mind as you read the article below (which was written before the change was made).

Facts, Thoughts, and Opinions on Tether – A Story of Tether and its Pros and Cons in Bullet-Points

Let’s do this in bullet-point form to keep this wide range of ideas readable:

• Tether (USDT) is a Bitcoin blockchain-based token (it’s built on the “Omni Layer“) run by a company of the same name, Tether. NOTE: There is also a Euro-based Ethereum-based Tether token (built on the Ethereum network) that functions in a similar way called EURT.
• Tether, the company, essentially has some of the same leadership as Bitfinex, a leading Bitcoin exchange (like many other crypto-to-crypto exchanges they can’t use dollars, so being able to use Tethers is key to being able to operate and provide services like margin trading to customers).
• The idea behind Tether is to create a “stable coin” (a coin that holds a stable value). By creating a stable coin, exchanges and crypto users can work with a token that mimics the stability of dollars but avoids the complex rules of states and the need to interface with banks.
• The bottom line being: Tether takes the place of the dollar on many cryptocurrency exchanges and for many cryptocurrency users.
• How Tether works at its core is Tether the company converts dollars into digital currency (Tether the token) to anchor or “tether” the value of the coin to the price of national currencies like the US dollar, the Euro, and the Yen.
• Tether the company claims to hold a reserve of dollars to Tethers at a 1:1 ratio (see “transparency“). The general concept is that, when an investor or a user puts in dollars, they get Tethers out. The dollars are held in reserve; the Tethers are circulated. Further, according to Tether: “the Tether Reserve remains in surplus of the 1:1 backing of USDT and has more than the necessary currency on deposit to redeem all existing Tethers.”^[7][8]
• The crypto community has been trying to create a stable coin for a long time, there are a lot of good efforts out there (some defunct, some still in circulation), but arguably no one has gotten it just right yet. Tether is probably the most historically successful stable coin in terms of volume and lack of fluctuation; it is also the most widely used stable coin today.
• Tether is tradable on many top exchanges. It is often granted to these exchanges directly. Presumably, the exchange gives Tether dollars, and Tether gives them Tethers; see “Tether grants.” However, users can also transfer their Tether between exchanges by theoretically depositing dollars into a Tether account and getting Tethers back out. Sign-ups have been down for months, so its hard to verify this.

The conspiracy and controversy take issue with a few of the above points.

1. First, there is some doubt that Tether truly has and always has held exactly a 1:1 ratio in reserve of dollars to Tethers. This is partly due to Tether’s history of promising a full public audit but never producing one. They have released partial audits and stats and have a public blockchain, and they also promise there is private audits, but there is no full professional public audit of the reserve. Other questions exist here such as “what if that 31 million Tether hack was a way to cover up bad bookkeeping?” Why exactly is it that neither Tether nor Bitfinex operates in the U.S.? These are valid concerns.^[9]
2. Second, there is concern that Tether grants are being used for purposes that are not fully known (for example, being used to prop up Bitcoin’s price on Bitfinex). Odd timing has been noted between Tether grants and big Bitcoin price movements or increases in margin trading and questionable timing with the release of Bitcoin futures.
3. Third, there is a general concern that tethering the crypto economy to a centralized version of the dollar, which can potentially be printed on a whim, flies in the face of everything cryptocurrency stands for. The idea of crypto is to be decentralized, distributed, and not centrally controlled; to be “untethered.”
4. Lastly, putting that together, there is a specific concern that Tether is granting new Tethers to exchanges like Bitfinex to prop up (or even pump up) the price of Bitcoin without actually putting dollars in the Tether reserve.

Those are the basics. We’ll explore those points a bit more below and present counterpoints, as each of those concerns has a potential rational explanation. For now, the above sums up the concerns with Tether.

QUICK REBUTTAL: To quickly off a rebuttal to the conspiracy theories before going into detail below. The non-conspiracy version of Tether is explained like this: In the crypto space a number of important exchanges can’t use dollars or don’t want to use dollars. Therefore Tether the company offers Tether in exchange for dollars. Tethers are backed at a 1:1 ratio as advertised (which is why they retain the business of so many big players). When the price of cryptos fall, and buyers are thus incentivized to play the market (to short, to go long, to protect their investment with buy orders) we see large amounts of Tethers being printed off at once (to satisfy the need of exchanges and traders directly). The large Tether injections thus come right before prices stabilize / move up, but not as prices as correcting from highs.

NOTE: This can all be understood by browsing through the articles in our citations, namely the FUD inducing: The Tether Report, by 32E3690D50B3B477DF7841212D4BB938DC9CDB50307618328E7F8B53F37CC1E2.

The next notes now have to address why people spread FUD in the crypto space (HINT: there are legitimate reasons as well as shady reasons):

• Those who want to see crypto fail and those who want to see prices come down (so they can short the market or buy low) love to spread Tether FUD. Tether is so integral to the current crypto economy at this point, and so at the center of exchanges which can’t use dollars, that a Tether panic would be sure to drop crypto prices and set crypto on a temporary bearish path. Like MtGox, past stable coins that failed, or Bitconnect, this widely used crypto product can set crypto back but probably can’t end it.
• Thus, we have a bit of a catch-22. On the one hand, there are valid concerns over Tether. On the other hand, we have a sort of protectionist attitude of crypto traders. No one wants to see Tether fail because it has burrowed itself into many exchanges and currently provides a vital function on exchanges as a stand-in for the value of a dollar.
• Some would claim that the crypto community should not embrace tokens like Tether and should instead focus on creating a decentralized and distributed stable coin that provides liquidity to exchanges but remains trustless. But since that ideal reality is not the one in which we live, there is a lot of sense in playing the hand we have been dealt. That hand means figuring out a way to add assurance and trust to a system that needs it and to add transparency to a system that is not currently fully transparent.

With the above covered, let’s discuss potential problems and concerns with Tether in a bit more detail. Please note that a potential problem and concern is in me summarizing the range of conspiracy theories listed in the citations:

1. One main concern of Tether is a somewhat silly one, “what if it’s not backed in a 1:1 ratio?” First off, if Tether uses fractional lending, then it is like actual dollars. If you were looking for a dollar, you potentially got yourself a dollar. If you wanted a Satoshi, you never needed USDT in the first place. I can’t understand what the big deal here would be; the only real problem would be a problem of expectations (expecting a 1:1 ratio and not finding it). Meanwhile, if we take Tether at its word, then we can say, “but, they are backed by dollars.” This is a problem of trust. Trust problems come from having to trust centralized companies rather than decentralized software. Again though, Tether mimics a dollar, not a Bitcoin even though it is built on blockchain-based software.
2. A secondary and more serious concern of Tether is, “what if they can print Tethers at a whim.” Controlled and calculated printing of Tethers following deposits means Tether is acting as a central bank of sorts. If one wanted a central bank, they got a central bank. If one wanted a decentralized system, they already had it with Bitcoin. That said, if it is that Tether is sort of working as a Federal Reserve-like entity, the theory is that it would work like this: Bitcoin is declining, so investors (likely exchanges) deposit fiat, and then Tethers are granted, and those Tethers are used to stabilize Bitcoin. This avoids the entire crypto market tanking. This is essentially how state finance work. Centralized entities use their power to stabilize an economy. It would not be surprising to see similar tactics used in any other ecosystem. This would be concerning to some, but there is logic in it. Of course, it only gets more concerning if what is happening is less honest than that.

NOTE: Tether has long said they are being audited, but no reliable audit has been performed and shared to the degree where it would calm people’s nerves. Further, Tether broke ties with an auditor in January leading to more fear, uncertainty, and doubt.

Those last points bring us to where the real conspiracy theory lays. I’ll explain it like this.

1. CASE 1, THE GOOD CASE: If it is the case that when Bitcoin struggles, people with good chunks of money like those invested in Bitfinex and Tether, power users of major exchanges, or exchanges themselves directly or indirectly deposit large sums of money in Tether, then they use margin trading to attempt to save their Bitcoin investments and provide support the crypto ecosphere, then this is essentially valid and good. This would be individuals working within the current system to use Tether injections to support the general system. That may not be ideal, but one might be able to justify it and see the benefits. A normal user can’t directly get Tethers; exchanges have to request them. Thus, of course, they get large grants especially in times when BTC is flying up or down. Those are times when more tokens are needed in the system. One can see how this would get misunderstood or used for FUD, but there is a logical, rational, and good case here.
2. CASE 2, THE BAD CASE: If it is the case that when Bitcoin struggles, Tether prints money in the form of Tether grants without backing, and then filters it through their other company Bitfinex, then this is bad. It is even worse if the resulting funds are then filtered through the crypto space. If the culprits then took BTC and cashed out for dollars elsewhere, this is even worse. This process could turn Tether into dollars without money ever being put in, or without holding the full amount in reserve, and thus act as a drain on the system. If this is the case, then we have individuals exploiting the entire crypto economy for gain. This is bad from most perspectives, as it sucks value out of the crypto space similar to how Bitconnect did. If the Tether subpoena results in us finding out this, it is essentially the worst case. However, this case is unlikely, as it would raise red flags with a range of people within the crypto community and it would likely result in less exchanges using USDT pairs than we see in practice.
3. CASE 3, THE MEDIUM CASE: If it is the case that a mix of all the factors mentioned above, mixed with Tether’s expressed mission statement, are true, then this is all rather boring. That is, if the end game is not a complex money creation scheme that leaves the entire crypto community holding bags, but is instead something more vanilla, then… why are we even talking about this. It is likely the case that the Tether we think we may be exactly what we have, and that is just plain old boring vanilla.

NOTE: Am I accusing Tether or Bitfinex of anything? No. Am I summarizing the wacky world of conspiracy theories that are pasted across Twitter, Reddit, and the media in general? Yes. Do I want cryptocurrency to do well? Yes. Do I want exchanges to fail and drive the prices of crypto down? No. Am I spreading FUD? If at all, it is for educational and informational purposes only. I’m more of the mind that the vanilla case and good case are likely true (and that the FUD is designed to drop BTC’s price so people can accumulate and margin trade. At worst, people may be benefiting on the side in a grey area. For example, they have a pretty good idea of which way the market will go, and when grants will come in, so they can use this information to make profitable trades.

Given the above points, the problem here is:

• On the one hand, if you stack all the worst cases and concerns on top of each other, it paints this picture of “a ticking time bomb” inside of cryptocurrency that ironically involves this sort of central bank and the dollar (- facepalm -).
• On the other hand, if you stack all the best cases, it helps us understand how the introduction of a stable currency into the crypto ecosphere helped to support one of the biggest crypto booms in history.

Of course, that crypto boom was followed by a crypto correction, so that complicates things (I mean, imagine the worst case also involved margin shorting and spurring on a correction; the rabbit hole goes deep!)

With all of that said, we have to keep something really important in mind, that is: Tether recently addressed all these points and essentially pointed out they are all bunk.

Auditors

We are aware of online discussions about Tether’s lack of publicly-available audits. Periodic audits of our bank balances have been performed by the Taiwan-based auditing firm TOPSUN CPAs & Co. The results of those audits were for the benefit of shareholders and were not in a form suitable for general consumption (to begin with, they were in Mandarin). Nonetheless, we have asked them to prepare the following attestations (PDFs linked) in English, for release to the community, covering December 31, 2016; January 31, 2017; February 28, 2017; and, March 31, 2017. As we are no longer banking in Taiwan, and given that we are achieving substantial scale, we have engaged Friedman, LLP, in New York, to perform comprehensive balance sheet audits on a quarterly basis going back to Dec 31, 2016. We will share those results with you as they become available in the coming weeks or months.

Solvency

We have also read online about many outlandish conspiracy theories suggesting that Tether is not backed 1:1 by currency on deposit with banking institutions. Any such claim is unequivocally false, and the audits will bear that out. Our Terms of Service have been carefully picked apart by various malcontents and twisted to suggest that Tethers would not be redeemable for currency on some bizarre, malicious whim by Tether. That is untrue. While we reserve the right not to redeem for any particular customer, as we must, we will not do so for no reason. We have a duty to try to ensure that our service is not being used by persons from sanctioned countries, that is otherwise on a sanctions list, or that has some background check problem. In short, redemptions will not be unreasonably denied, but we reserve the right to selectively deny redemption and creation of Tethers on a case-by-case basis. As such, this policy, which is necessary from a regulatory perspective, has no bearing on our presentation of the liabilities of the company. The company considers all tethers outstanding to be liabilities for presentation on the balance sheet for which there is always an equivalent amount (or greater) held in assets to back those presented liabilities. Full stop.

In other words, it is very likely that the conspiracy theories are FUD spread by those who want to drop the price of crypto, and Tether is a useful token at the center of the crypto economy that provided the liquidity that helped crypto grow in 2017. How good and vanilla if that is all true then.

NOTE: One thing to keep in mind is this: If Tether is a scam… then why is Tether still printing Tethers and Bitfinex still operating? Would they have cashed out and run away by now, as Bitconnect did? That was a good point brought up in an exchange featured here: The Tether debate – can it crash the market, or not? And my conversation with Charlie Lee on the situation…. Of course, one must note, Bitconnect was not a primary trading pair on most major crypto exchanges. So there is a difference.

Conclusion – Mostly Opinions

The problem of conspiracy theories is the problem of humans seeing patterns that aren’t there (see also, TA; joke).

Not only that, but people want a villain and secretly want to watch some of the apocalypse.

They don’t want to see the pattern that says: Tether is pretty vanilla. The end.

They want a story about Roger Ver trying to kill Bitcoin and shady Bitfinex Tether people printing up money for one last margin pump before the flippening. And here it is, another 2014. Ponzi Fraud. :O

The point here is although it’s fun to correlate and create hypotheses, correlation doesn’t imply causation.

Yes, there are some odd correlations here. For example, it is true that the rise of crypto in 2017 and the rise of Tether went hand-in-hand. It is true that margin trading backed by USDT on Bitfinex is notable. It is true that Tether grants to exchanges tend to come before price increases and when Bitcoin’s price is looking bearish. Also, it is true that people periodically wrap that all up into a conspiracy theory and post it on Reddit. Sometimes the media goes ahead and picks it up.

However, none of those correlations imply causation. They only suggest we look for more answers.

Regardless of what those answers are, one could argue that it really shouldn’t matter if a stable coin is backed by a dollar, it should only matter if we agree the coin should be valued at a dollar. This agreement happens when people buy and sell it for a $1. Of course, agreeing to such things requires trust. In sticking with a company that can print stable coins, rather than leave that job up to an untrustworthy smart contract, the community has opened a somewhat dangerous door through which the FUDsters can now walk.

Further, one should other consider points like those below to weigh against any fears, uncertainties, and or doubts they may have:

1. Tether claims they do have a reserve, there have been partial audits, and they claim to be working toward a full audit
2. If people are putting money into the reserve and getting Tethers out, it is their right to trade Bitcoin or margin trade. It only makes sense to do this if you hold a ton of Bitcoin and you see the price going down; of course, that is when you make big moves. So the basic logic is: Crypto is down, thus big players convert big money from dollars to Tether to buy crypto, thus a lot of Tether is printed right before prices start to stabilize / go up.
3. It is tempting to see Tether grants correlating with market movements as somehow malicious, but what if demand increased when the price went down and Tether was needed to buy the dip (or margin short, or margin long positions due to the dip). What if the liquidity provided by Tether was vital for the crypto boom and helped ensure it in a natural way by the FUDsters? See citations; I’m talking about Bitfinex’ed and 32E3690D50B3B477DF7841212D4BB938DC9CDB50307618328E7F8B53F37CC1E2 and others like that, not insulting them. However, I see that they are spreading fear, uncertainty, and doubt which is having a Ripple effect. This is a focus on the worst case, but honestly, I could throw out conspiracy, vanilla, and good theories all day here. Humans are great at seeing patterns, especially ones that fit their world view.
4. Although crypto may want to be untethered eventually, there is demand for a digital dollar is present. The market demanded, Tether provided, here we are.

All musing aside, the bottom line is that there is no simple answer here. For the time being Tether is super useful. But now we find ourselves in a position where the health of the crypto economy is dependent on the relationship between an offshore company and some auditor from New Jersey. Satoshi’s dream that is not. Still, dealing with the hand we have been dealt means everyone needs to focus on solutions and not panic.

One solution: if you want to be in crypto, stop thinking about how you can get pennies from tokens and start thinking about how you can get satoshis and Ether (or XRP or whatever your crypto of choice is). If satoshis [for example] have real value, then complex schemes to turn tokens into pennies stop making sense, and at least complex schemes to turn tokens into satoshis and Ether will ensure a healthy crypto ecosystem. i.e., as long as people want to dump crypto for pennies, crypto will fail to reach its full potential.

Tether is great for what it is (as in the moment the fears have not been confirmed to be real and what is real is USDT trades for roughly a dollar, and people like to spread FUD on the internet).

However, all that said, if the point is to untether, and not to pass the hot potato in Ponzi-like fashion and play who is left with the tokens, then this all is only a stepping stone toward a more decentralized and distributed future.

Of course, for Bitfinex to succeed, is for Tether to succeed, is for crypto to succeed. This is why it’s important to not give into the FUD, and to instead focus on holding the entities that play in the crypto space accountable.

It might be tempting to panic and sell your Bitcoin and Ether because “what if Tether doesn’t work out?!?” But again, that translated is “I am tempted to give up on cryptocurrency because I’m worried about the ability of a central force to print dollars.”

Honestly, again, that is a little ironic.

Further, no cryptos are backed by dollars, and some are inflationary.

That means even if Tether could just be printed and were backed by nothing, ultimately it would only be jeopardizing its value.

Many of us have traded some now not so valuable tokens for BTC or ETH when the conversion rate was favorable. Some people out there ran an ICO or BTC scheme and ended up with a bunch of cryptos. We still value the coins they traded into. Criminals have stolen USD and spent it; we still value USD. Whatever happens with USDT, even the worst cases, can’t take down crypto.

Only people running around in a panic and losing faith can take down crypto and even then, the takedown is likely only to be temporary. One does not simply take down a behemoth with crude weapons like FUD or a single failed token.

Bottomline: Maybe you don’t want to put your life savings in Tether. However, for the time being, it is serving its purpose, and it only retains its value if there is trust. Now it’s up to Tether to reaffirm trust and squash fears (as you can see, they did start to do this with their Tether update; the next step will likely involve more transparency of audits). If Tether exhibits trust and people trust Tether, then Tether holds its value, and there is no panic. If Tether drops the ball, then we deal with the fallout, switch to Dai (an attempt at a decentralized stable coin) or something and carry on. Ultimately though it is not my insights you should concern yourself with, it is your research. You can start your research using the links in the citations below.

1. Tether Confirms Its Relationship With Auditor Has ‘Dissolved.’ Coindesk.com.
2. Bitfinex’ed. Twitter.com.
3. Bitcoin price CRASH ‘BLOODBATH’: Cryptocurrency could drop 80% as tether criticism rises. Express.Co.UK
4. The Tether Report. By 32E3690D50B3B477DF7841212D4BB938DC9CDB50307618328E7F8B53F37CC1E2.
5. Tether just granted another 10 Million USDT tokens! Reddit.com.
6. Tether Update. Tether.to.
7. Tether Announcement.tether.to.
8. Tether Transparency. wallet.tether.to/transparency.
9. Tether says nearly $31 million worth of its digital tokens have been stolen after hack. TheVerge.com.