The cryptocurrency world, with its volatility, is all about FUD–fear, uncertainty, doubt. And nothing is generating more FUD right now than an unusual currency called tether.
Unlike bitcoin and its many siblings, tether is what is called a stablecoin, an entity designed to not fluctuate in value. With most cryptocurrencies prone to wild swings, tether offerings people who dabble in the market the option of buying a currency that its backers say is pegged to the US dollar. Trading bitcoin for dollars at a bank is also possible cumbersome and expensive; by comparison, acquiring tether is simple, inexpensive and fast.
But in recent weeks a chorus of skeptics has called into question nearly everything about tether. The root of the dispute is whether the company behind it, also called Tether, is telling the truth when it claims that every division in circulation is is in accordance with a U s dollars it comprises in reserve. If the company has a dollar for every tether, that means in theory any holder can sell leashes back to the company for an equal number of dollars at any time. This notion keeps the value of a tether pegged to a dollar.
Critics on Twitter, Reddit, in blog posts, and at a recent bitcoin conference have been demanding that the company prove its reserves through external audits. Not only has Tether failed to do so, last week it corroborated rumors that it had severed ties with Friedman LLP, the accounting firm on tap to perform those inspections. On Tuesday, Bloomberg reported that the US Commodity Futures Trading Commission had sent subpoenas to Tether. A Tether spokesperson said, “We routinely receive legal process from law enforcement agents and regulators conducting investigations. It is our policy not make a few comments on any such requests.” The spokesperson waned other comment.
If tethers are not backed by a matching number of dollars, then Tether can publish an arbitrary amount of money.( Other cryptocurrencies, by contrast, make new tokens according to strictly prescribed, predictable rules .) Other problems ensue, including mistrusts that Tether is day the liberate of new leashes to coincide with drops-off in the cost of bitcoin and then utilizing those leashes to scoop up bitcoins. Some commentators fear that these purchases are artificially inflating the cost of bitcoin. “It’s possible that a nontrivial rise in the price of bitcoin and other cryptocurrencies has come from this asset being published perhaps out of thin air, and that is very concerning, ” says Jill Carlson, a former Wall Street trader who now invests in and consults for cryptocurrency startups.
If merchants lose faith in tether, they could end up triggering the crypto version of a bank run. Tether helps stabilize cryptocurrency exchanges in various ways, so its collapse could also induce some exchanges to topple, wiping out billions of dollars of such investments overnight and potentially undoing much of the public’s growing interest in new technologies like bitcoin.