Rather Than Reassure Investors,Tether’s Bank Deal Makes Things Murkier

Controversial cryptocurrency Tether (USDT), currently the tenth most popular cryptocurrency by market cap, continues to make headlines as questions remain about issues surrounding its transparency. The alt-currency, which bills itself as a stablecoin because each token is supposed to be pegged to one US dollar, hasn't always traded to the 1:1 USD fixing.

USDT/USD Weekly

Currently, Tether is trading at 0.99029 and has a market cap of $1.76B. In part the fluctuations in the stablecoin have occurred because the token's parent, Tether Limited, hasn't been open about providing any verification that the company has the cash reserves to back the alt-currency with the fiat currency, as the owners of the company claim.

At the beginning of November, however, Taiwan-based Tether Limited announced it is now a client of Bahamas-based Deltec Bank & Trust Limited, which the token issuer says has conducted a "due diligence review" of their company including:

"Our compliance processes, policies and procedures [as well as] a full background check of the shareholders, ultimate beneficiaries and officers of our company; and assessments of our ability to maintain the USD-peg at any moment..."

Tether Limited also said it now has $1.8 billion in an account at the bank. The announcement garnered both criticism and skepticism from crypto traders and media commentators.

Deltec Bank & Trust has neither confirmed or denied the reports about its relationship with the controversial cryptocurrency issuer. However, last week, Bloomberg published a visual of a letter that Tether claims was issued by the bank attesting to the relationship. Nonetheless, even after the 'proof' was published, a spokesperson for the bank refused to comment on the information.

Even though Tether has become one of the most widely traded cryptocurrencies, Evan Kereiakes, core researcher at Terra notes that concern around the veracity of Tether's dollar-peg claims has translated into more frequent price fluctuations for the alt-token and significant capital outflows. As well, in his view, it calls into question the very notion of a 'stablecoin':

“While the latest announcement around its banking relations does provide greater clarity, the prolonged Tether banking saga highlights the inherent risk of a centralized stablecoin model. A price stable cryptocurrency that is explicitly tied to a single central authority is by its very nature centralized.”

Issues Beyond Transparency

Kereiakes also has doubts about the viability of the token beyond its possible relationship with the Bahamian financial institution. Though he thinks the allegiance to a single sovereign currency is a bold move, he believes it's not a robust method for creating a global decentralized currency that can be widely adopted.

As well, beyond transparency and capital, he notes that Tether’s stability may also be hampered by inadequate broadening of demand and a lack of focus on real-world adoption that goes beyond trading.

Alex Disney, head of blockchain at LXDX sees yet another downside to Tether's ongoing transparency issues. In his view, a primary reason users and investors have confidence in the technology backing cryptocurrencies is the fact that much of it is open source. Disney says:

“That level of transparency allows auditors and individuals alike to verify the claims made by the asset's creators regarding the capabilities and limitations of the underlying software. It's of concern that Tether doesn't operate similarly."

Because Tether has become an important tool for cryptocurrency investors, he's uneasy about the fact that Tether doesn't operate with a similar amount of transparency as the rest of the assets in the crypto space. Disney believes a truly independent audit of Tether would go a long way toward rebuilding confidence in this increasingly valuable piece of crypto-investing ecosystem.

Until a truly independent audit happens, says Disney, most claims made by the organization must be treated with skepticism. “In my book, not much has changed regarding confidence in the state of Tether's collateralization despite recent realizations,” he adds.

Qiao Nan Han, CEO of Transcendence agrees with Disney. And, he adds, based on the current publicly available information regarding Tether, it still isn't reassuring enough for traders and investors to continue using it.

“The fundamental value of a well circulated currency requires the trust and belief from the users of the system, with the underlying value it provides. With Tether having such a tainted track record while being very centralized, it's very difficult to rebuild that level of trust.”

Adding yet more uncertainty, earlier this week, major Brazilian newspaper O Globo reported that Deltec is suspected of being involved in a money laundering scheme which the Federal Public Prosecutor's Office in São Paulo is investigating. Though not related to Tether, the situation does cast additional doubt on the stablecoin's banking relationship, the very thing that was supposed to bolster the token's integrity.