Tether (USDT) is a stablecoin pegged to the US Dollar. Tether was developed by cryptocurrency exchange Bitfinex in 2014 to create a connection between fiat currencies and cryptocurrencies.
One of the biggest barriers to mainstream adoption of crypto is price volatility. Stablecoins have been designed to combat this issue. A stablecoin is a cryptocurrency that is tied into the price of a more traditional stable asset (such as gold) or fiat currency.
Tether is pegged to the US Dollar. Unlike other cryptocurrencies, tokens are not “mined”. Instead, for every US dollar deposited in the reserves held by its parent company, Tether Limited, 1 USDT is minted in return.
There are 78 billion tokens in circulation according to CoinGecko. In theory, Tether should have this backed with the equivalent in cash in its reserves.
Tether is currently the most traded cryptocurrency, with daily trading volume surpassing Bitcoin in 2019. It has become an important asset for crypto exchanges to connect fiat currency and the cryptocurrency markets. Tether is also popular as a secure way for these exchanges to store value without the inherent volatility of most digital currencies.
Although Tether has seen huge success, Tether and its associated companies Tether Limited and Bitfinex, have been plagued by hacks and legal issues. In 2017 Tether was hacked and over $30 million dollars worth of USDT were stolen.
Between 2017 and 2018 the amount of Tether minted grew from 10 million to almost 3 billion. This raised concerns about Tether’s reserves. Tether Limited failed to undergo an audit on its reserves and by late 2018, US federal prosecutors were looking into these claims.
And in 2019, the New York Attorney General sued Bitfinex, claiming they used Tether’s reserves to cover up losses of over $850 million. This was settled in February 2021 for $18.5 million and Tether and Bitfinex have ceased doing business in New York State. Tether Limited and Bitfinex have denied any wrongdoing.
In 2021 Tether Limited released a report as part of its settlement that revealed its reserves breakdown. Only 76% of its reserves were held in cash or cash equivalents. Of this only 3% was held in actual cash which clashed with previous claims that Tether was backed up with 100% cash reserves.