A story making headlines this week comes from the offices of Tether, the well-known “stablecoin.” The company behind the USDT token, Tether Limited, released an important review of their account balances and holdings to corroborate their business model. The review, conducted by an American law firm, Freeh Sporking & Sullivan, LLP (FSS), is intended to show that each USDT token is full backed by the US dollar.
But for those in the cryptocurrency space who hear the name all the time, do you actually know what “Tether” even is? Today we’re looking at what it is, why it’s been in the news, and how it works. Read along below to get your questions about the token answered.
Tether as a Stablecoin
If you haven’t already read our explanation of “stablecoins,” then it will be helpful to do that first. Simply put, a stablecoin is just a cryptocurrency that’s backed by another asset to avoid large fluctuations in prices. Since the cryptocurrency is tied to an underlying asset, it’s less likely to have drastic price swings.
While this can be a bad thing for traders looking to make money off of volatility, it’s great for other reasons. Stablecoins allow investors and traders to let their money sit on the sidelines and remain “stable.” This is especially helpful for times of turmoil in the markets.
What Makes Tether Stable?
Unlike other stablecoins, Tether is supposed to remain stable because of the US dollar. Though many crypto-advocates are skeptical of fiat currency, there are clear benefits. The fact remains that the US dollar is less likely to shift in value dramatically overnight.
On the other hand, cryptocurrencies often undergo drastic price swings. Remember when bitcoin (BTC) was worth almost $20,000? Well, looking at the markets today, it’s now just shy of $7,000. That’s a big change in value.
Contrary to bitcoin prices, the value of the US dollar doesn’t change a whole lot. Sure, there’s inflation over time, but nothing like the constant price shifts of bitcoin. Because of that, Tether was designed to represent the value of the US dollar on a 1:1 ratio. That means that for every USDT token (“Tether”) in circulation, there are (supposedly), an equal amount of US dollars in reserve.
We say “supposedly” not because we know anything special, but because there is a lot of skepticism right now. In theory, a trader ought to have the right to trade in any amount of USDT tokens for a corresponding amount of US dollars. That’s exactly how Tether is supposed to work.
However, that may not be the case. In fact, we’re talking about Tether today because they’re in the news and many have questions. So what’s going on anyway?
Why is Tether in the News?
So what’s the deal? Right now, the company is in the news because of a recent review published about them. Tether Limited, the company responsible for the token, wants to prove that each token is fully-backed by the US dollar. Tether recently came under fire for potentially not having the funds to back each token.
Remember, each token is supposed to be completely backed by 1 US dollar. However, some think that the company may be simply minting more tokens without the USD to actually back them up. In order to restore faith in investors, Tether commissioned a review of the company’s holdings and account balances.
Tether Limited is getting so much attention because another report came out that suggested the cryptocurrency may have been used to inflate the price of bitcoin. It should be noted that that conclusion is not without its skeptics as well. The review, conducted by the American law firm Freeh Sporkin & Sullivan, LLP confirmed that Tether did in fact have enough USD to back their token supply. However, the report submitted only included a one day snapshot of the holdings.
Right now, there are people on both sides. You can read the full FSS report here and decide for yourself. Now you know a little more about what Tether is and why everyone is talking about it!