The Truth About Tether and It's Not-So-Hidden Scams

We all know that the cryptocurrency market is not just volatile but also largely unregulated. Because of this, there are many opportunities for market manipulators and unscrupulous actors to exploit the system. In fact, in January of this year, we saw a perfect example of this when an obscure company called Tether briefly became the sixth-largest capitalized cryptocurrency by issuing an outlandish quantity of “hidden” tokens from another entity that listed their address as being in the same building as Tether’s official headquarters. However, what most people don’t know about Tether is that it isn’t actually backed one-to-one by traditional currencies like USD or EUR. In fact, instead of being backed by real currency, it appears that all existing Tether tokens are only backed by other tokens issued by the company itself. So what does all this mean? Let’s take a closer look at how Tether works and its potential implications on the future of digital currency trading…

What is Tether?

Tether (or USDT) is a virtual coin that is designed to act as a substitute for regular cash. This means you can use it to buy and sell items online like you would with USD or any other traditional currency. Unlike regular money, though, you can store USDT in a virtual wallet on your computer or phone and use it to shop online at any participating merchants. Tether was created in 2014 by a company of the same name. Tether aims to provide a digital version of the dollar that is backed by actual cash reserves held by the company. Tether is meant to be a reliable substitute for cash. It’s meant to be more secure than other digital currencies because it’s “backed by real money.” As of this writing, Tether is the 11th most valuable cryptocurrency, with a total market cap of over $2 billion.

How Does Tether Work?

Tether actually works a bit differently from other cryptocurrencies (like Bitcoin or Ethereum). Instead of using blockchain, the technology that underlies most other coins, Tether uses a centralized “federated Byzantine Fault Tolerant” (FBFT) system. This is a fancy way of describing a centralized database controlled by one organization. Unlike most other cryptocurrencies that are decentralized and independent, Tether is owned and controlled by a single organization — the company Tether Limited. This means that all Tether tokens are actually created and controlled by the same organization that issues them. This is in stark contrast to other cryptocurrencies, which are created and distributed through a decentralized network. In fact, it is this difference that makes Tether different from other coins and allows the company to issue new tokens whenever they want. So this begs the question, what backs up Tether?

Tether’s Dark History

Like most cryptocurrencies, Tether had its fair share of growing pains. Back in 2015, the company’s bank lost their trust and refused any further banking services. At this point, the company lost their ability to accept USD deposits and hold USD reserves. The company had to conduct an emergency one-to-one token swap and issued all users with “new” Tether tokens. This meant that the number of Tether tokens in circulation increased dramatically. Many suspected foul play due to the fact that Tether’s address was shared with that of Bitfinex, an exchange that was also based in the same building. This was the first major red flag that Tether may not be holding the USD reserves they claimed.

The Big Tether Fraud Scandal

If you are to believe the Feds, this is only the tip of the iceberg. According to a controversial and anonymous document, the company may have been printing USDT “out of thin air” for years. Apparently, the company holds no USD reserves and the USDT is backed only by the company’s own tokens. This is a brazen lie and a bold scam that has made Bitfinex and Tether rich at the expense of the entire cryptocurrency market. This is outrageous since most people buying and selling cryptocurrencies expect them to have some connection with real cash. With Tether, you get nothing of the sort.

Is Tether a Scam?

The fact that Tether’s entire business model seems to be based on an elaborate scam is truly shocking. If the Feds are right, then the entire Tether organization is a complete sham. They don’t hold any real cash and the USDT isn’t backed by real USD at all. Indeed, if you look at the numbers, it’s hard to believe that Tether is anything more than a giant Ponzi scheme. In 2018, the company’s total revenue was only $23 million. That’s a lot of money, but it’s also an extremely small amount that wouldn’t be enough to back even a single dollar of USDT tokens. And now, the Feds are involved in this mess. Even if Tether is innocent, the scandal has done lasting damage to the reputation of the cryptocurrency market.

TL;DR

Tether is supposed to be backed by real cash, but the government is investigating whether or not they actually hold those funds. If they don’t, then Tether is essentially worthless. Tether is also associated with Bitfinex, one of the biggest cryptocurrency exchanges in the world. The connection between the two companies is shady at best, and there is no reason for a major exchange to be holding funds in the same account as a smaller company. If you want to invest in cryptocurrency, you should avoid Tether like the plague.