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Tether may not be fully backed with cash

tether fractional reserve

An update on the Tether website suggests that the value of its USDT stablecoin may be underpinned by other assets, not just dollar reserves.

Tether, the company behind the popular ‘stablecoin’ USDT, has suggested that it is not 100% backed by US dollars. The company has caused controversy by altering a statement on its website, which now 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.

Tethers exist as tokens on the Bitcoin blockchain, using a second layer known as the Omni protocol. This means that value can be transferred almost frictionlessly around the world and around the crypto ecosystem. Each USDT is supposedly backed 1:1 with a real dollar, held in the company’s bank account. However, Tether has repeatedly refused demands for a full audit of its accounts, leading many critics to suggest the company is running a fractional reserve.

Despite this, Tether remains a popular alternative for fiat money among traders, due to the ease with which they can be moved between exchanges. Additionally, because USDT is a crypto token, AML/KYC is often unnecessary.

Tether a not-so-stable coin?
The update to Tether’s website has again called into question the reserves that underpin the stablecoin. Although there are no specific details, the text suggests that USDT could be backed in part by debts – similar in principle to the way that commercial banks issue money backed by mortgage debt and other loans – among other assets.

Additionally, while the site attempts to reassure the community that ‘1 USD₮ is always valued by Tether at 1 USD’, the reality is that USDT often trades at a higher or lower price, depending on confidence in the currency and conditions on exchanges. Back in October 2018, for example, USDT came ‘unTethered’, dropping as low as $0.85 at one point. This was caused by traders panic-selling USDT and buying BTC in illiquid conditions, at a time when the company was temporarily unable to create or redeem USDT.

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