A Bit of Context ❓
Today we are tackling a theme under tension. Although it goes against the general euphoria of the market, it is an unavoidable and systemic subject that could potentially have serious repercussions over the crypto market as a whole and even contaminate CeFi; this court case is currently being handled by the American justice.
Tether is no longer to be presented, it is a stablecoin [backed by US dollars] whose total capitalization exceeds $32 billion USD, its closest competitor, ‘USDC’ (Circle & Coinbase’s official stablecoin) having a capitalization of “only” $7 billion USD.
As you may know, the volumes brewed by Tether are out of all proportion to its competitors.
Tether argues that each USDT can always be exchanged for 1 USD, and this is precisely what is being criticized by the American justice system.
When Things Get Tough 🥵
Indeed, even if Tether value is (in theory) dollar-indexed, this parity is under the spotlight: Tether’s “treasury” is not only made up of dollars but is composed of a multitude of assets BUT NOTE that Tether’s last transparency report dates back to June 1, 2018.
Even more frightening, this report by FSS, a famous Washington-based law firm, noted that Tether had the equivalent of $2 billion USD into their bank accounts in 2018 while there are currently 16x more tokens in circulation (34 billion USDT) on February 21st 2021.
More importantly, USDTs are not insured and Tether is not a bank, so there would be no refund in the event of bankruptcy.
For every USDT being issued, Tether is supposed to have one dollar. The parity must be one for one. This is the promise which is currently under study by the American justice system.
The case should be concluded this year [after 3 years of proceedings] and if it is proven that Tether has fraudulently issued a part of the USDTs supply, this would be characteristic of a fraud and the issuers are at great risk and could be indirectly accused of having artificially inflated the prices of cryptos, the main one being BTC.
Everything remains to be proven, but let’s face it, that’s as explosive as scary. If the regulators had to confiscate Tether, that’s all holders’ earnings that would be literally lost.
A Knock-On Effect in Sight? 😅
Why this comparison with Lehman Brothers? Quite simply because the losses would not be limited to USDT holders alone, it would be a veritable tidal wave of bloodshed on the market.
Traditional markets would also be affected to a lesser extent because the main transmission belt between cryptos and traditional markets are the big institutional ones (where we find investment funds such as Blackrock, Vanguard, etc.) which have heavily invested into BTC. Moreover those funds are the major ETF providers, managing the retirement savings of Americans.
Now imagine them selling their ETFs to compensate for their losses in crypto, the entire shares market would suffer.
The domino effect would be such that probably similar to the Lehman affair of 2008, even if you were not a trader or you did not have shares listed on the stock exchanges, the subprime crisis has affected you.
According to The Block, a well-known crypto media,Tether has agreed to pay a fine of more than $18 million USD to the U.S. court, pending new evidence that may exculpate Bitfinex, Tether’s parent company.
In Conclusion 📖
The fact is that we were all lehmanized in 2008 as we are all tethered today.
The good news would obviously be Tether to be cleared of all suspicion but we must say that this case represents a major risk and that a lot of shadow still surrounds it.
Let’s just hope that the American justice system will solve this case and that the outcome will be favorable to us.
N.B. Thanks to MTX33 for helping us write this article.