Tether stablecoin may have backed itself into a difficult corner after a recent update on its website suggests that the Tether USD stablecoin may not be fully backed by an equivalent U.S. dollar holding, as expected.
Stablecoins are cryptocurrencies pegged to the value of fiat currencies which helps in the transition between cryptocurrencies and fiat currencies. Tether USD, for instance, is maintained at a ratio of 1:1 to the United States dollar.
To issue a stablecoin, however, issuers maintain the equivalent an equivalent amount of the token capitalization in a fiat deposit probably in a bank. With this arrangement, users holding the stablecoin are guaranteed that it is truly worth the fiat equivalent despite the volatility in crypto markets.
Tether has now updated the content of its website to indicate that its reserves which back the Tether USD contains “other assets” apart from the USD and this has immediately thrown sections of the crypto community into a furor.
“Tether used to claim that 1 USDT was backed by 1 USD in reserves. This has now been silently changed,” a user wrote on a Reddit thread.
The updated content on Tether website reads:
“Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.”
This new information has a number of implications which stablecoin users will definitely not be comfortable with.
On the one hand, the description refers to affiliated entities, one of which is Bitfinex which share the same leadership as Tether. This means that loans given to loans given out to Bitfinex and any other Tether partner are part of the reserves.
“They openly admit they send funds to Bitfinex,” the Reddit user reacted while concluding, “I guess we’re back to trusting 3rd parties, running fractional reserves, to run the market.”
From another perspective, the other assets Tether referred to could include other cryptocurrencies. One of the many commenters on the Reddit thread suggested this could be the case.
The Reddit user wrote:
“If I read this correctly, they are actually backed by cryptocurrency. So, when the price drops and people flock to Tether, it increases the amount of Tether and it decreases the funds it’s backed by.”
At the time of writing, there is no information about what percentage of the Tether reserves is still USD or any guidelines that determine the breakdown of all assets that make up the Tether reserves. The link to the latest proof of funds published by Tether seems to lead to a dead end.
Tether, which is by far the most common stablecoin in the market, has been criticized in the past by cryptocurrency community. Last year, there were claims that its USD holding could not be substantiated. In October, Tether lost its peg and traded below about 10 percent below the USD on some exchanges. And though Tether provided documents to prove its reserves, some critics would only be convinced by an independent audit.
Smartereum reported earlier in March that Tether is developing a version of its stablecoin on the TRON blockchain which will allow the users on the TRON network to use USDT as a native token. The TRON version of the USDT token will launch in the second quarter of this year.