While Bitcoin, the world’s largest cryptocurrency by market capitalization, has been in the media spotlight, another hard-to-track crypto coin has surpassed it in daily global volume, as outlined in a recent Bloomberg report. Digital coin Tether, whose market cap is 30 times smaller than Bitcoin, has a daily trading volume around $21 billion per day, exceeding Bitcoin in April. This compares to Bitcoin, at roughly $17 billion, according to data from CoinMarketCap.com. This trend has resulted in growing concern from regulators.
Tether’s monthly trading volume is about 18% higher compared to that of Bitcoin. So while Bitcoin may be the most well-known cryptocurrency, Tether’s trading volumes make it an integral piece of the cryptocurrency ecosystem, per Bloomberg. It also explains why regulators have approached the digital coin space with such caution, given their distrust of Tether.
Tether is currently being sued by New York for allegedly commingling funds including reserves. Meanwhile, regulators have shot down attempts to market crypto ETFS, citing fraud, market manipulation, scandals, and other issues still facing the crypto world.
According to Lex Sokolin, global financial technology co-head at blockchain technology firm ConsenSys, without Tether, “some of the concerning potential patters of trading in the market may start to fall away.”
Tether is one of the world’s most popular stablecoins, meaning that it is designed to hedge against wide price swings with pegs or reserves. The digital coin is the preferred coin for active investors, and those in countries that ban crypto trading. For example, in China, investors can pay cash for Tethers without many questions asked, and trade them for Bitcoin or other cryptocurrencies, per Bloomberg.
Thaddeus Dryja, a research scientist at the Massachusetts Institute of Technology, says that many people aren’t even aware that they are trading Tether. Since many crypto exchanges still lack access to traditional financial services, they often don’t have bank accounts where they can hold dollars on behalf of their customers. Instead, they use Tether coins.
“I don’t think people actually trust Tether -- I think people use Tether without realizing that they are using it, and instead think they have actual dollars in a bank account somewhere,” said Dryja. He added that many exchanges intentionally mislead their customers, leading them to believe that they are holding dollars instead of Tether.
There remain other murky conditions surrounding Tether. For one, it is managed and governed by a private company based in Hong Kong, which also owns the Bitfinex crypto exchange. While many tout the transparency and lack of central ownership with Bitcoin, much about Tether remains unknown.
Some are skeptical over the mechanism to which Tether’s supply is increased and decreased, and how much is covered by fiat reserves. While previously, Tether said that 100% of Tethers were covered by cash and short-term securities, it disclosed in April that just 74% of Tethers were. The fact that Tether is not independently audited is also a cause of concern.
University of Texas at Austin professor John Griffin attributes half of Bitcoin’s record rally in 2017 to market manipulation caused by Tether. This concern is what prompted the U.S. Justice Department to investigate the role of Tether in this circumstance, per Bloomberg.
“Being controlled by centralized parties defeats the entire original purpose of blockchain and decentralized cryptocurrencies,” stated Griffin. “By avoiding government powers, stablecoins place trust instead in the hands of big tech companies, who have mixed accountability. So while the idea is great in theory, in practice it is risky, open to abuse, and plagued by similar problems to traditional fiat currencies.”
According to the Blockchain Transparency Institute, 64% of all Tether trading activity was used for fake trading and to deliberately sway crypto markets, per Bitcoinist.