A “stablecoin” is branded anything but, adding to jitters in crypto-markets
Is that hissing noise the sound of air coming out of the crypto-bubble? On February 21st bitcoin hit a new high of more than $58,000, after a host of big firms and investors, led by Tesla, signaled that they were beginning to take the cryptocurrency more seriously as an asset class and a means of exchange. By February 23rd, though, the price had tumbled by over a fifth from those giddy heights amid rumors of large-scale liquidation of leveraged bets. Then confidence in the crypto-sphere took another knock, as one of its most closely watched components, Tether, fell foul of American regulators.
Tether is a so-called stablecoin. Its issuer, a company of the same name, has long claimed that Tethers—of which more than 34bn are in circulation—are backed one-to-one by dollars. One purported advantage of such pegging is lower volatility; bitcoin’s price, by contrast, is notoriously erratic. Another is that stablecoins make it easier to move between cryptocurrencies and the ordinary sort.
Doubts have long swirled around Tether’s claim to be a sort of digital dollar. Critics say the one-to-one-backing claim looks flaky. They also suspect that Tether has been used—not least by Bitfinex, a cryptocurrency exchange owned by some of the same people—to manipulate bitcoin; one academic study found that purchases with Tether were “timed following market downturns and result in sizeable increases in bitcoin prices”. A related concern is the degree of control Tether’s owners have an oversupply. Whereas only a fixed number of bitcoin can be “mined”, Tethers can be issued at will, giving those behind the stablecoin central-bank-like printing powers.
The growing queasiness spurred investigators on. New York’s attorney-general, Letitia James, has spent more than two years unpicking Tether’s opaque operations and its relationship with Bitfinex. On February 23rd she branded the firms “fraudulent” and “deceptive”, fined them $18.5m, and ordered them to end all trading activity with New Yorkers. The settlement did not require Tether or Bitfinex to admit wrongdoing.
This will ensure the light is shone on a dark but surprisingly large part of the cryptocurrency world. Though Tether is nowhere near as much of a household name as bitcoin, its influence has grown enormously. A recent analysis found that the majority of bitcoin purchases on several crypto-exchanges, including Binance, Bit-Z, and HitBTC, are made using Tether. (By contrast, on Coinbase, a smaller but more transparent exchange that is soon to list on the stock market, they are mostly paid for with dollars, euros, and sterling.)
According to the analysis, more than two-thirds of all bitcoin bought on all crypto-exchanges in one 24-hour period studied were purchased with Tether. In other words, Tether makes up far more than just a corner of the market. Indeed, their rampant minting—hundreds of millions were reportedly once pumped out in a single day—has led to jokes: in one popular meme, an armored truck sporting the Tether logo hurtles by, money billowing out of its open rear door. That is why the outcome of the New York investigation—along with reports of other probes, growing talk of a regulatory crackdown on opaque trading, and the market’s latest wobbles—is likely to make many punters in the $1.4trn cryptocurrency market nervous. Strategists at JPMorgan Chase, a bank, summed up the risk in a recent note: “Were any issues to arise that could affect the willingness or ability of both domestic and foreign investors to use Tether, the most likely result would be a severe liquidity shock to the broader cryptocurrency market.” An unTethered market is a scary prospect for many.