Is tether.to a scam?

My thoughts on the much talked about crypto token.

 

Disclaimer: All opinions expressed in this post are my own and are in wo way intended to be financial advice. Please perform your own due diligence prior to making any sort of investment.

I was having a discussion with a friend at a bar the other night about the pros and cons of various different ICOs and coins. One token that that came up time and time again was tether. After I got home that night I got to thinking and decided that a blog post on tether should be the next thing to go up on my site.

Whilst many of you have probably heard of this coin before on various different social media platforms like Facebook and Twitter very few of you probably know exactly what this it’s all about. In this blog post, I’m going to try and do my best to cover some the pros and cons that I see surrounding tether and ultimately answer the big question is tether a scam.

A quick trip to the tether website will easily net you a copy of their white paper (here).

That abstract sums up the currency…

“Abstract​. A digital token backed by fiat currency provides individuals and organizations with a robust and decentralized method of exchanging value while using a familiar accounting unit. The innovation of blockchains is an auditable and cryptographically secured global ledger. Asset­backed token issuers and other market participants can take advantage of blockchain technology, along with embedded consensus systems, to transact in familiar, less volatile currencies and assets. In order to maintain accountability and to ensure stability in exchange price, we propose a method to maintain a one­ to ­one reserve ratio between a cryptocurrency token, called tethers, and its associated real ­world asset, fiat currency. This method uses the Bitcoin blockchain, Proof of Reserves, and other audit methods to prove that issued tokens are fully backed and reserved at all times.”

On face value everything here reads really well, tether is basically a cryptocurrency that is “pegged” to the US dollar. For those of you that have never heard of the “currency peg” before it essentially means that a currency is held at a constant value relative to another currency. To use tether as an example their token is designed to always be worth one US dollar irrespective of how the US dollar fluctuates or how tether token fluctuates. This pegging is done by tether holding a physical US dollar for every single tether token in circulation allowing them to guarantee the value of every token in circulation. Think of it like a throwback to the gold standard, where once upon a time every US dollar had an equivalent value in real metallic gold (this was back when US dollars had real value) except in the case of tether every single tether token will have a value backed by one US dollar.

This all sounds amazing but ultimately it comes down to the honesty and will of the company in control of tether to actually acquire and then hold the US currency to back the crypto token and this is where a lot of the FUD is coming from, but I’ll get back to that later.

As far as this goes, for a concept for a token I think it’s fantastic! A token that always has a fixed value in US dollars would be an amazingly beneficial asset for cryptocurrency traders. It would give traders the ability to move their crypto assets such as Bitcoin Litecoin or Ethereum into a stable (relative to the US dollar that is) token that they could then transfer and transact with in a way that non crypto investors could understand.

This is where some of the question marks start to come up for me. In order for a pegged currency to work the entire market needs to have faith in the fact that the currency peg will hold. If the market loses faith in the company controlling the currencies ability to maintain the peg then it can cause what is commonly known as a bank run where every investor rushes to convert their pegged currency in to that which it is pegged against ie exchange their tether to USD only to find out that their is not enough USD to cover the withdrawals.

In order to provide the market with the reason to trust the peg, the reserve of currency used to peg the secondary currency should be audited routinely by a third party and the results be publicly released. This is essentially what happened with the US dollar back when the gold standard existed. The world trusted the US dollar and the term “as good as gold” came about because the market could trust the United States to cover every US dollar with its equivalent value in gold. The US government had proven gold reserves large enough to back the currency.  Tether is currently attempting to prove to the market that it is capable of the same feet and that it has the currency required to cover the US dollar peg but at this point in time they have cut ties with their auditor and are internally auditing and publishing all figures their own website. This is far from an independent audit and quite rightly the market is very cautious when it comes to these figures.

An in-depth read of the tether token terms of service also unearths a range of protections for the company. Essentially, if you violate any of the terms of service they reserve the right to refuse exchanging your tethers for US dollars. I strongly urge anybody considering using tether as a means of exchanging currency to read the terms of service and only ever buy tether if you fully understand the terms of service and a comfortable with their connotations.

As for whether or not I think it’s a scam, it’s really hard to say… At this point in time I’d have to say no. Do I have any that I’m holding though? Hell no! To me tether seems like an interesting intermediary tool. Something you might use when the need arises and only for a short amount of time. At this point in time though I just don’t have enough trust in Tether International Limited to leave any sort of real amount of money sitting in tether tokens for any sort of extended period of time.

Thanks for reading.

Rambo