The Complete Guide to the Tether

• History
• Tether Founders
• How does Pegging Work
• How to Buy
• Bitfinex and Other Controversies
• Transparency and Audits
• Tether Gold
• Legal and Compliance
• Conclusion

In the last decade since the launch of cryptocurrencies, there have been thousands. Each with its own unique characteristic and usability. Bitcoin, Ethereum and many others have gained a lot of value in the subsequent years. Their rise and fall of value has made many traders and people happy, the increasing value leading towards profitability. However, this very volatility in value is also an issue. Value held today in cryptocurrencies today won’t be the same tomorrow.

This uncertainty in worth has always been a major influencer in adoption of cryptocurrencies. Money held in the form of digital tokens and coins would vary too much for anyone to hold and transact in it.

Tether changed all that by introducing a token that was pegged to the US Dollar in a 1:1 ratio. This new breed of cryptocurrency, dubbed stablecoin, changed how people viewed the tokens altogether.

History

Tether’s journey starts in 2012, when J.R. Willet published a whitepaper, then titled, The Second Bitcoin Paper. Willet discussed creating a secondary blockchain layer on top of the existing Bitcoin. Later, the idea was implemented in the cryptocurrency Mastercoin, maintained by the Mastercoin Foundation, which rebranded itself in 2015 as Omni Foundation.

The precursor to Tether, Realcoin was announced in 2014 by Brock Pierce, Reeve Collins and Craig Sellars as co-founders. Realcoin was using the Omni layer to issue the coins that were pegged to the US Dollar. Realcoin was then rebranded as Tether, with initially three tokens, USTether, EuroTether and YenTether, each pegged in a one to one ratio of their fiat equivalent.

The real boom for Tether, however, came in January 2015, when it was listed on the cryptocurrency exchange, BitFinex. Back in that year, alt coins and other cryptocurrencies still had a high level of correlation of movement, making it very difficult for traders to mitigate their losses if cryptocurrencies fell in value. The only option was to liquidate assets into fiat, a time consuming and expensive process. With the US Tether, this meant that users could simply trade in for the stablecoin when cryptos fell and buy back when there was an uptick.

Today, The Tether project has different stablecoins, the USDT, (tethered to the US Dollar), Euro pegged EURT and Chinese Yuan CNHT. Since the tether tokens are blockchain independent in a sense that Tether doesn’t have its own, but leverages other blockchains and second layers, it runs on many chains. The EURT and CNHT are available on the Ethereum chain as ERC20 compliant tokens, while USDT is available on the Bitcoin Omni layer, Ethereum, Liquid network, EOS, Algorand, TRON and even Bitcoin Cash. Tether has also recently announced that USDT will also launch on the Salona network.

There are many stable coins in the market, but by far, the most used is Tether’s USDT, which has a market capitalisation of over $15 billion US.

Tether Founders

The Tether project was founded by three people, Brock Pierce, Reeve Collins and Craig Sellers. Two of these co-founders, Pierce and Sellers, were working with the Mastercoin Foundation (later the Omni Foundation) and had realised that the second layering of Bitcoin was a perfect tool for launching the stablecoin Realcoin (now Tether).

Brock Pierce

Brock Pierce is a fierce proponent of cryptocurrencies. His career is full of him being in dozens of different advisory roles for crypto and blockchain projects. Although an accomplished professional in crypto and other digital ventures, Pierce has no formal education in entrepreneurship, business or the technical field. In fact, his LinkedIn profile only shows him joining a degree program in the University of Southern California but he dropped in the first year and never completed any degree.

Brock Pierce’s Professional Experience

• Acting: Pierce was a child actor who started his career at the age of 10. In the next 12 years, from October 1984 to August 1996, he acted in 15 movies and countless commercials.
• PayPal: Pierce was on the Merchant Advisory Board of PayPal from 2004 to 2005.
• ZAM: Pierce has been the founder of multiple startups over the years. One of them, ZAM (October, 2013 to January 2012- eight years and four months) was a gaming community platform which was later acquired by Tancent.
• KNCminer: As the Chairman of KNCminer.cn, Pierce’s firm was the exclusive distributor of ASIC miners in China from July 2013 to October 2014 (one year and four months).
• Blockchain Capital: Initially named as Crypto Currency Partners, the first ever crypto dedicated venture firm was established and run by Pierce from January 2014 to November the same year.
• Tether: Pierce set up Tether along with Reeve Collins and Craig Sellers as the first crypto token that was pegged to a fiat. He was one of the co-founders and advised the project from July 2014 to July 2015, a total of one year and one month.
• Bitcoin Decentral: A Canadian setup, Pierce was a mentor to the project, helping it accelerate Bitcoin and cryptocurrency related ventures. Pierce mentored the firm from March 2014 till March of 2016 (two years and one month in total).
• GoCoin: Helping merchants and buyers adopt cryptocurrencies, GoCoin is one of the leading crypto payment processors. Pierce co-founded the firm, had been the Chairman and then later on a Board Observer. He started GoCoin in August 2013 and has been on the board since (Seven years and counting).
• Advisory Roles: Pierce has been an advisor to a number of notable crypto startups, such as BlockStreet, Unicorn Ventures, DNA.fund, Shyft Network, Metronome Token, Bloq and Paybook.
• EOS Foundation: A co-founder and board member of one of the largest decentralised blockchain networks in the world, Pierce has been involved with EOS since its inception.
• Bitcoin Foundation: A board member since September 2013 and Chairman of the Board from Jun 2014, Pierce was instrumental in pushing the adoption of the Omni secondary layer for Tether.

Presidential Candidate: Brock Pierce announced his run for the presidency of the United States for the 2020 elections. A president who is fiercely loyal to the concept of decentralisation and cryptocurrency would mean a boom for industry globally.

Reeve Collins

Reeve Collins is a serial entrepreneur, with more than ten different start ups under his belt. He is one of the pioneers of digital marketing and blockchain applications. A degree in Marketing and Finance from Washington State University set the foundation of Collins in the fields.

Reeve Collins’ Professional Experience

• Razorfish: One of the first ten employees of the firm, Collins worked there for three years, from 1997 to 2000. Razorfish is one of the biggest digital marketing firms, helping clients establish their names and brands through combining traditional marketing and the digital realm.
• Traffic Marketplace: A co-founder, Collins’ firm catered for its clients by building an online direct to audience ad network which employed multiple channels
• FusionDirect: Collins founded the direct to video equivalent of marketing through Direct Response Television firm. The firm was a success, with its largest sale being a series of DVDs that generated $7 billion USD in revenue within the first year. Collins exited the firm in 2005, after three years.
• Tether: Three more successful startups later, Collins joined hands with Pierce and Sellers to co-found Tether in 2013. He remained the CEO for the next two years.
• BLOCKv: Using blockchain in unique ways, BLOCKv worked across advertising, experiential industry and art. Collins co-founded the company in August of 2015 and was CEO till December 2018 for three years and five months.
• Vatom Labs: A high impact digital media platform, Vatom Labs uses smart media objects that are modular and can be used across a variety of marketing campaigns. Collins co-founded Vatom Labs in January 2019 and is still associated with the firm.
• SmartMedia Technologies: A merging of digital marketing and blockchain, SmartMedia Technologies allows quick turn around for designing, development and distribution of digital assets than can engage and create loyalty in customers. SmartMedia Technologies is also the parent company of Vatom Labs. Co founding it at the same time as Vatom, Collins has also been involved with SmarMedia ever since.

Craig Sellers

Completing the triangle of co-founders of Tether, Craig Sellers is a person who has the ability to see how technologies are changing and can adapt to suit a variety of needs not thought of before. Sellers has a BS in Computer Sciences from Georgia Institute of Technology, graduating in 2002. Next year, he pursued further education through an MBA in International Entrepreneurship but in 2004 he discontinued his studies since his professional life demanded his full time.

Craig Sellers’ Professional Experience

• uDecker Consulting: Building a firm around the experiences of a user on the internet and web, Sellers helped different firms adapt to the online world to capture an audience and increase users. He founded uDecker Consulting in 1995 and after 10 years, left it at the end of 2004.
• Netconx D&C Wireless: Co-founder of the firm, Sellers developed large scale wireless communication network systems for communities, both municipal and residential in nature, from June 2002 to October 2005, a total of three years and five months.
• O2 Secure Wireless: Sellers gave up his MBA to concentrate full time as CEO of O2 Secure Wireless. The small company offered wireless internet and was able to compete with large corporations. Sellers led the wireless company from November 2004 to April 2009.
• Bitfinex: Sellers was the Chief Technical Officer of one of the largest crypto exchanges in the world, Bitfinex, from January 2015 to May 2016. A total of one year and five months, his connection with Bitfinex and Tether was a source of controversy.
• Advisory Roles: A computer scientist, Sellers understood blockchain intimately and his advisory roles to different blockchain projects, suc as Factom, Synereo, Using and Block.one. Advisory time ranges from three and a half years to more than six.
• BLOCKv: A co-founder along with Collins, Sellers is the main person behind the whole blockchain ecosystem development of BLOCKv since August 2017.
• Omni Foundation: The firm behind the second layer development of Bitcoin that Tether users for its stablecoins issued on the Bitcoin blockchain, Sellers was the CTO form February 2014 to December 2015 and now is a Member of the Board.
• Tether: The third co-founder of Tether, the pioneer in stablecoins, Sellers remained the CTO from founding in April 2014 to May of 2016 (two years and two months). After stepping down, Sellers is still connected to the project as an advisor.

How does Pegging Work

Cryptocurrencies offer the most freedom in the form or censorship and meddle free transaction and trading. Their value is purely derived from the supply and demand of the tokens. Where this gives the coins and tokens a truly open financial system, it also means that there’s volatility in price and the prices can skyrocket with no apparent ceiling or bottom out completely.

Tether uses a very unique way to ensure that its stablecoins are always equivalent to their fiat counterpart. One USDT will always be equal to $1 USD.

Backed Tokens

First of all, all tokens issued that were initially issued by the Tether Treasury were claimed to be backed by equivalent amounts of fiat. However, in the coming years, this was challenged as in 2017, Tether was unable to pay fiat for all withdrawal demands done on its platform. This raised suspicions that Tether was not being truthful about its Dollar reserves. A number of failed audits and souring relationships with auditor firms meant that users of the stablecoin were intentionally kept in the dark.

As of June 2018, there’s a report published on Tether by a law firm FSS that declares Tether tokens are fully backed. However, the report is in itself controversial as the law firm has since announced that it isn’t an accounting firm and the report follows no rules or standards to be declared an audit.

Tether has also changed its stance on the stablecoin backing. It now says that tokens aren’t backed by equivalent fiat, but a collection of 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.”

Mitigating Price Fluctuation

Even though Tether claims to have all of its tokens backed by a basket of assets and investments, the laws of supply and demand still affect the stablecoins. The crypto exchange Bitfinex offers a USDT/USD trading pair, where it guarantees that traders will always get one USDT for every USD and vice versa.

This creates a self regulating environment. If the demand for USDT falls, the price also reduces. On any other market, this means that USDT will be sold for less than a Dollar. Bitfinex, however, will still pay out a whole USD. This creates an opportunity is notfor accredited traders on the exchange, as they can sell their lower value stablecoin and gain profit. For example, if USDT falls to $0.98 USD, a trader will make two cents per USDT. This not only offers profitability to the accredited traders, but also means that the supply of USDT in the market is shortened, balancing out against the demand and leading to a return to the Dollar parity.

The same holds true if the USDT demand rises and crosses $1 USD value. The accredited traders holding USDT will immediately sell it to gain profits and result in flooding the market till the pegged value is returned.

How to Buy

USDT and other stablecoins issued by Tether represent an enormous step towards adoption of blockchain. It allows traders to hedge against reducing crypto prices in trading, offer easy and swift transfer of stable value across the globe and the promise of redemption against the pegged fiat.

Yet, for many people, getting the stablecoins is the first hurdle. Basically. There are three different ways to acquire tokens issued by Tether:

Crypto to Stablecoin Trade

Many exchanges worldwide have a crypto to USDT pairing. A user can trade in their crypto holdings for the stablecoin. This is now pretty normal. From a small peer to peer escrow trading platform Remitano to the instant swapping Changelly to the largest exchanges such as Coinbase and Bitforex offer this ability. Binance even lets its users decide which chain they would like their tokens to be on when depositing or withdrawing (OMNI, Ethereum or TRON).

Unfortunately for other Tether stablecoin holders, there aren’t many exchanges that offer EURT or CNYT trading pairs.

Fiat to Stablecoin Trade

Some exchanges that offer fiat support in the form of letting users deposit fiat directly or use credit cards, giving their users the option to buy USDT. This move allows users to convert their cash into the digital tokens and wait for the perfect opportunity to buy their preferred crypto. Some exchanges even let users cash out their USDT for USD.

Since this option is also available on crypto exchanges, this same limitation of mostly USDT token available applies here too.

Directly From Tether

Stablecoins can be bought and sold from the Tether platform directly. The Tether platform, however, only offers this to large volume buyers. Currently a user needs to deposit a minimum of $100,000 USD to buy stablecoins.

Tether also charges a one time $150 USD fee for new users. According to the information given on the website, this is a non refundable verification fee. The fee serves a dual purpose:

• Only users who are serious buyers and willing to spend the large amount sign up.
• To allow Tether cover costs associated with the user verification process.

Once a user is verified, the individual or the corporation can deposit fiat and redeem the tokens. This can be either USDT, EURT and CNHT, with the option to select the preferred network if the stablecoins can be run on more than one chain. Users can also deposit or withdraw fiat and the stablecoins as the user account is in itself, a wallet.

For deposits and withdrawals in Tether’s stablecoins, there are no fee or charges associated, but fiat deposits and withdrawals are charged a certain amount. A 0.1% commission is charged for all deposits in fiat and either 0.1% or $1,000 USD (whichever is greater) is charged for fiat withdrawals.

Bitfinex and Other Controversies

Regulators and many other people have been at odds over the relationship between Bitfinex and Tether. Both are sister companies and are owned by iFinex Inc. Initially, both Tether and Bitfinex claimed that they are separate entities. This was proven to be false when a collection of financial documents was revealed to the public by a German duo of reporters. In the documents, Giancarlo Devasini and Philip Potter, two high ranking Bitifinex officials were identified as the ones who had registered Tether Holdings Limited in British Virgin Islands. Since then, an official statement by the firms have said that both firms have a single CEO, Jan Ludovicus van der Velde.

Tether was also subject to a hack in November 2017 that resulted in the hackers taking away 31 million USDT. Tether was forced to shut down its network as it contemplated on how to deal with the breach and loss of assets. The platform had no option but to execute a hard fork of its own token, rendering the stolen tokens useless.

In June 2018, John Griffin, a Professor at the University of Texas published a 66 page document that detailed how USDT was used to manipulate the price of Bitcoin in 2017. The professor is a well respected member of the financial community and at that time had a decade long track record of detecting financial frauds.

His research revealed that large buy orders would be placed in Bitfinex when there was a fall in value of BTC. In itself, the buy orders were not suspicious at all. Using the transparent characteristic of blockchain, the professor pointed out that slightly before Bitcoin price would fall, Tether would issue large amounts of USDT. The sudden issuance raised the question of whether Tether really had enough funds to back the large amount of USDT minted. The huge buy orders would help stabilise the falling price of BTC and USDT was even used to pump the value of Bitcoin itself.

On 15th October, 2018, USDT lost its parity with the US Dollar and fell down to $0.88 per token. This caused a BTC buying surge as traders holding the stablecoin got scared that USDT was going to fall more. The sudden surge in demand raised the BTC value by 10%. Although USDT has gained more popularity and use, many traders remain cautious that the parity will be broken again.

Bitfinex and Tether’s relationship was again highlighted in 2019 when Attorney General of New York filed a lawsuit where the crypto exchange was accused of tapping into the reserves of Tether to cover for a loss to the tune of $850 million USD. Bitfinex had always faced troubles when it came to establishing proper banking relationships. The exchange has kept its trading and financial dealings under wraps and for traditional financial institutions, this meant KYC and AML regulations could not be done.

To give its users the ability to have a proper banking channel to deposit and withdraw fiat, Bitfinex ended up making a deal with a Panama based crypto and fiat payment processor, Crypto Capital Corp. The exchange had deposited $1 billion, which were actually consisting of traders and investors’ deposits on the exchange. The whole deal was done without any paperwork. Crypto Capital Corp took advantage and made a scam exit, taking away the money. Suddenly, without capital and money, the exchange was in a fix. Tether was used to bring in $850 million USD to cover for the losses, while the investors of both firms were kept in the dark.

Transparency and Audits

Tether had initially claimed that all of its tokens were backed by equivalent amounts of fiat. However, the platform has always remained tight lipped and has never been able to prove its holdings. Even when it was proven by others that there’s no equivalent cash backing, the platform simply changed its stance to say that money, gold and other assets were used to back the tokens minted.

A memorandum from a public firm was shown by Tether in September 2017, claiming that the report showed that its assets were fully backed by USD. A report by the New York Times, contradicted and pointed out that the wordings in the report were carefully used to make people believe there was full backing, but actually that was not the case. Further analysis showed that the firm that wrote the document meant it only for Tether and was not for any other party or purpose.

In the start of 2018, Tether announced that it had severed its relationship with its then auditing firm. This washed away any chance of a proper audit of Tether’s holdings.

Repeated demands of audits by other parties was largely ignored by Tether, but it finally published an audit report in June 2018. The report is from a law firm Freeh, Sporkin & Sullivan LLP. The audit report also said that Tether was fully backed by USD. In its existence, Tether had for the first time, able to prove its claim of full backing.

The claim was short lived though. Immediately, the law firm FFS denied that it had done any kind of an audit. All the law firm had was access to the bank accounts and USDT holdings of Tether. The law firm had released a report of the assets held for a single day only, which was equal to the tokens in circulation at that specific day only.

Tether Gold

As Tether expanded its stablecoins to represent digital versions of other currencies such as EURT and CNYT that are pegged against Euro and Chinese Yuan, Tether also ventured into the digital commodity market.

XAUT is a token by Tether that’s backed by gold (XAU being the international code for gold). A single XAUT token is backed by one troy ounce of gold. The gold held by Tether is in the shape of gold bars, each bar uniquely identifiable with a serial number. The serial number holds information on the blockchain on the purity and weight of the bar. This means that only a limited number of tokens can be issued against a gold bar, making sure that duplication can’t occur.

Tether is more transparent when it comes to the gold backed token. Using the Gold Allocation Lookup feature, holders of the XAUT token can enter their wallet address in it and Tether will give them details on how much the wallet tokens are representing exactly which gold bar.

Holders of Tether’s stablecoins can cash out their tokens and Tether sends the fiat to their bank account. In the case of XAUT, sending physical gold to another part of the world can be expensive and difficult. To counter this, Tether gives XAUT holders two options if they wish to redeem their tokens:

• The gold can be physically delivered to any address in Switzerland. This is subject to the token holder completing Tether Gold Commodities verification requirements.
• The XAUT can be redeemed against the cash value of the backed gold and receive it in their bank account.

For any kind of redemption, token holders should have ownership of at least one full gold bar or at least 430 tokens.

To make it easier for XAUT holders, Tether Gold gives them the option of getting their tokens on either the Ethereum chain as ERC20 tokens or on TRON as TRC20 ones.

Legal and Compliance

Tether has been playing smart from the beginning. The Tether tokens have always been controversial and yet, their popularity is on the rise. Though there has never been a proper audit of the firm, it has a strong legal and policy network in place to prevent misuse of its assets.

Terms of Service

The Terms of Service have a clear distinction on what is a US resident or a person who is using the US soil or services. For these people, Tether uses its TLTD firm, while for the rest, it uses TIL.

The ToS describe in length on people who aren’t allowed to use USDT due to the nature of their nationality, any FATF or other legal organization classifying the individuals as dangerous. The list goes on to include countries such as Democratic People’s Republic of Korea (North Korea), Ethiopia, Iran, Iraq, Serbia, Sri Lanka, Syria, Trinidad & Tobago, Tunisia, Vanuatu and Yemen.

However, the point to note here is that even with all these warnings, Tether tokens are on the blockchain and blockchain is censorship free. Banned users can still gain access to the stablecoins, especially when trading in for other cryptocurrencies. Many peer to peer exchanges allow users to connect with local buyers and sellers and sell out their tokens for direct cash, which can either be deposited by the buyer in their banks directly or even to physically meet and pay in fiat.

Privacy Policy and Law Enforcement Requests

Tether extensively talks about how different information about USDT users registered on the site is collected. The Privacy Policy also states the purpose of collecting the data, confidentiality, disclosures, transfer of the data and user rights.

The Privacy Policy links to their Law Enforcement Requests, where it states that when there’s a legal request for information on its users, carried out properly with warrants and other legal documentation, it will share data of its users, but in a manner that will narrow down the exposure of the user data itself.

Conclusion

Tether’s novel use of creating a cryptocurrency that’s purely digital and has all of the security and safety characteristics, but isn’t volatile and has a stable value has set it apart. Today, there are a number of stable coins, most notably USDC, TUSD and even Binance’s own BUSD.

Tether is also a lot controversial. The company has never been able to show the public any kind of an audit to prove that its reserve’s are enough to cover the amount of stablecoins it has issued. The firm has taken very clever steps to show that it does, but those are easily detectable by a sharp eye. First, it said that all of its tokens were fully backed by its USD reserves. Later on, when it couldn’t prove it, the stance very quietly changed to the tokens being backed by a basket of assets that included other fiat and gold.

Secondly, it still has a report published by a law firm that shows Tether has adequate reserves. The firm that made the report itself says that the data was from a single day’s balance of Tether bank accounts and its report was never meant to be an audit.

The truth is that with all the controversies and lack of transparency, Tether is still going strong. It is the most used stablecoin in the market, with nearly every large exchange offering it as a base pair in trading.

The popularity doesn’t seem to wane over time people from all over the world apparently are accepting the risk of the stablecoin’s parity being broken at any time.