*Experts say a tether, a lynchpin of crypto trading, has come under increasing scrutiny and shown signs of weakness in recent months

Zaheer Merchant

In May 2022, a so-called stablecoin, terraUSD, lost all its value in a matter of days.

Less than a month later, Celsius, a major crypto lender, froze all withdrawals and left countless depositors in the lurch.

Over the past seven months, the total market cap of all crypto assets has plummeted from about $3 trillion to about $880 billion 鈥� a 70% drop.

Crypto is having a nightmare in 2022, it鈥檚 safe to say, but things could get even worse. That鈥檚 because a tether, a lynchpin of crypto trading, has come under increasing scrutiny and shown signs of weakness in recent months.

What is tether?

Tether, like terraUSD, belongs to the breed of cryptocurrencies called stablecoins. Unlike regular cryptocurrencies such as bitcoin, a stablecoin is designed to have a fixed value, which is most commonly done by pegging its price to a traditional currency.

Tether was launched in 2014 by iFinex, which is also the parent company of cryptocurrency exchange Bitfinex.

It is pegged to the US dollar, and iFinex claims it holds actual dollars, bonds, treasury bills and other assets in reserve to serve as collateral.

This means in theory, anyone who wants to exchange tethers for US dollars can do so quickly and easily.

Indeed, tether can only hold its value so long as it continues to redeem its tokens for $1 each, and investors have faith that the tokens are fully backed by liquid assets. If that faith were to vanish, it would take down not just tether but arguably all of crypto.

Tether, after all, is not just any stablecoin 鈥� it鈥檚 The stablecoin, and the third most-traded cryptocurrency in the world after bitcoin and ether.

And because stablecoins are used mainly to buy other cryptocurrencies, tether鈥檚 tentacles touch most 鈥� if not all 鈥� other digital coins.

Tether, in fact, doesn鈥檛 have its own blockchain. Instead, users can transact with it on some of the bigger blockchain platforms, such as Ethereum, Tron, Algorand, Solana, Avalanche and Polygon.

There are currently 70 billion tethers in circulation, making it three times the size of terraUSD before it collapsed.

鈥淭ether is really the lifeblood of the crypto ecosystem,鈥� Hilary Allen, a finance expert at American University, told The New York Times. 鈥淚f it imploded, then the entire facade falls down.鈥�

The emerging controversies

You might think such a vital cog of the crypto machine would be trusted and widely respected, but you鈥檇 be wrong. iFiniex, rightly one of the most scrutinised companies in all of crypto, hasn鈥檛 always inspired trust, to put it mildly.

In January 2018, the company dismissed an accounting firm it had hired for an audit, citing “the excruciatingly detailed procedures [the auditor] was undertaking for the relatively simple balance sheet of Tether.”

In 2019, the New York Attorney General鈥檚 office initiated a probe into whether Bitfinex sought to cover up the loss of $850 million funds held by Tether.

Almost two years later, Tether and Bitfinex reached a settlement with the attorney general鈥檚 office in February 2021, under which it would pay $18.5 million in fines and release a quarterly report detailing the reserve鈥檚 composition for the next two years.

The company started to publish reports on its assets in 2021, but still does not specify exactly where its reserves are held.

Tether may also have been used from time to time to artificially inflate the price of bitcoin and other cryptocurrencies.

In 2018, an academic study looking at the 2017 crypto bull run found that a particular player on the Bitfinex exchange would use newly minted tether to buy bitcoin and support the price of the world鈥檚 largest cryptocurrency when it fell.

Since the start of the crypto crash, investors have pulled more than $10 billion out of tether, in what has been described as a slow bank run. This was accelerated by the crash of the terraUSD stablecoin in May and the freezing of withdrawals on the Celsius Network 鈥� another crypto 鈥榖ank鈥� 鈥� in June.

Is this the crumbling edifice of crypto, as tether鈥檚 critics claim, or much ado about nothing?

Only time will time. (Piece extracted from ETTech)