Tether (USDT): Meaning and Uses for Tethering Crypto Explained

Tether (USDT)

Investopedia / Daniel Fishel

What Is Tether (USDT)?

Tether (USDT) is a cryptocurrency stablecoin pegged to the U.S. dollar and backed "100% by Tether's reserves," according its website. Tether is owned by iFinex, the Hong Kong-registered company that also owns the crypto exchange BitFinex.

Tether was launched as RealCoin in July 2014 and was rebranded as Tether in November 2014. It started trading in February 2015. Originally based on the Bitcoin blockchain, Tether now supports Bitcoin's Omni and Liquid protocols as well as the Ethereum, TRON, EOS, Algorand, Solana, OMG Network, and Bitcoin Cash (SLP) blockchains.

As of May 2022, Tether was the third-largest cryptocurrency after Bitcoin (BTC) and Ethereum (ETH), and the largest stablecoin with a market capitalization of nearly $83 billion. In April 2022, Tether's USDT accounted for two-thirds of exchanges out of Bitcoin by value.

Key Takeaways

  • Tether (USDT) is a stablecoin, a type of cryptocurrency pursuing a steady valuation.
  • Tether is used by investors who want to avoid the volatility typical of cryptocurrencies while holding funds within the crypto system.
  • Tether's parent paid nearly $60 million in fines in 2021 to settle two regulatory probes alleging it mishandled and misrepresented its reserves.

Understanding Tether

Tether belongs to a fast-growing breed of cryptocurrencies called stablecoins, which aim to keep the price of their tokens stable, most commonly by tying it to the price of a traditional currency like the U.S. dollar. (Tether also issues tokens pegged to the euro, the offshore Chinese yuan, and gold, none with more than a small fraction of the market cap of its U.S. dollar-pegged USDT tokens.)

The peg to a traditional currency, often backed by collateral reserves made up entirely or mostly of the pegged currency, is meant to ensure stablecoins aren't subject to the same price volatility as more speculative cryptocurrencies like Bitcoin.

Tether updates a breakdown of its reserves holdings daily on its website. As of May 12, 2022, it was reporting assets of $81.3 billion for USDT. As of the same date, Tether reported holding 83.74% of its reserves in cash, cash equivalents, short-term deposits and commercial paper, 4.61% in corporate bonds, 5.27% in secured loans to unaffiliated entities, and 6.38% in other investments including digital tokens.

A stable value promotes the use of stablecoins as a medium of exchange like conventional money. As noted above, in practical terms, stablecoins have made it easier to speculate in cryptocurrency markets. Their rapid growth in popularity is also the result of stablecoins' use as collateral by decentralized finance (DeFi) lending and staking protocols.

In May 2022, Tether's price briefly fell to as little $0.96 following the collapse in the value of a different stablecoin, TerraUSD (UST), from an issuer not affiliated with Tether or BitFinex. The price of Tether tokens quickly rebounded to more than $0.99 and Tether said it was continuing to honor redemption requests that reached 2 billion tokens on May 12 at a 1-to-1 ratio to the U.S. dollar.

Controversy

In November 2017, Tether reported the electronic theft of $31 million in USDT tokens, after which a hard fork was performed. By then, the company was already dealing with critics questioning the adequacy of its reserves and, as subsequent investigations would show, having trouble accessing banking services.

In January 2018, Tether dismissed an accounting firm it had hired to perform an audit, citing "the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether."

In April 2019, New York Attorney General Letitia James obtained a court order enjoining Tether and BitFinex parent iFinex from further violations of New York law, after determining that BitFinex had borrowed at least $700 million from Tether's reserves to offset BitFinex corporate and client funds frozen and ultimately seized from its Panamanian banking partner Crypto Capital Corp. in a money-laundering probe.

In February 2021 Tether and BitFinex settled the case by agreeing to pay a fine of $18.5 million, discontinue trading with any New York state residents or entities, and to furnish information about its reserves to the New York Attorney General's office for the next two years. By then, BitFinex had repaid the borrowings from Tether's reserve after raising an additional $1 billion in funding in May 2019.

In October 2021, the U.S. Commodity Futures Trading Commission (CFTC) announced that Tether agreed to pay a $41 million fine "over claims that Tether stablecoin was fully backed by U.S. dollars." In fact, "Tether held sufficient fiat reserves in its accounts to back USDT tether tokens in circulation for only 27.6% of the days in a 26-month sample time period from 2016 through 2018," according to CFTC. Bitfinex agreed to pay a $1.5 million fine to settle separate CFTC allegations as part of the settlement.

How Is Tether Useful?

Tether helps investors move funds between cryptocurrency markets and the traditional financial system, minimizing volatility as a result of its 1-for-1 peg to the U.S. dollar. 

How Do I Buy USDT?

Tether tokens can be bought and sold on cryptocurrency exchanges including Binance, CoinSpot, Bitfinex, and Kraken.

Is Tether a Stablecoin?

Yes, Tether is the first and best-known stablecoin in the crypto world. Other stablecoins include True USD (TUSD), Paxos Standard (PAX), and USD Coin (USDC).

How Does Tether Stay at $1?

While Tether has dropped below $1 before (and risen above its peg) on occasion, it can remain near that price so long as it continues to redeem USDT tokens for $1 each, and as long as investors continue to believe issuance proceeds are fully reserved with liquid collateral assets.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own cryptocurrency.

Article Sources
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  1. Tether. "Transparency."

  2. Yahoo Finance. "Warning Signs? A Timeline of Tether and Bitfinex Events."

  3. Medium. "A Brief History of the Top Ten Stablecoins."

  4. Tether. "Why Use Tether?"

  5. CoinMarketCap. "Today's Cryptocurrency Prices by Market Cap."

  6. CryptoCompare. "Exchange Review April 2022," Page 9.

  7. Tether. "FAQs."

  8. CoinDesk. "Why Stablecoin Interest Rates Are So Damn High."

  9. CoinDesk. "Tether Loses $1 Peg, Bitcoin Drops to 2020 Levels of Near $24K."

  10. Tether. "Tether Continues to Honour All Redemptions From Verified Customers During Market Volatility, on Track to Process 2bn Today."

  11. Tether. "Tether Critical Announcement."

  12. Attorney General of the State of New York. "Settlement Agreement," Page 3.

  13. CoinDesk. "Tether Confirms Its Relationship With Auditor Has 'Dissolved'."

  14. New York Attorney General. "Attorney General James Announces Court Order Against “Crypto” Currency Company Under Investigation For Fraud."

  15. Attorney General of the State of New York. "Settlement Agreement."

  16. Bloomberg. "Crypto Market Relieved as $1 Billion Bitfinex Sale Calms Nerves."

  17. U.S. Commodity Futures Trading Commission. "CFTC Orders Tether and Bitfinex to Pay Fines Totaling $42.5 Million."

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