Published: July 25th, 2020
What’s the world’s favourite form of crypto? Most people would reflexively answer Bitcoin. After all, it accounts for ca. 70 per cent of market value for the world’s combined digital assets.
But look more closely at the numbers, and that first guess seems less certain.
Agreement on accurate figures about crypto trading volumes is hard to come by, but data from respected analytics tracker CoinMarketCap says Tether has frequently posted the highest monthly and daily trading volumes. On the surface, it seems wrong – Tether's market cap is 30 times less than Bitcoin’s. But the latest figures suggest its volume pushed past Bitcoin’s in April 2019, and, bar a few blips, has consistently exceeded it since.
If Tether’s monthly trading volume is beating Bitcoin, that makes it a contender for ‘most important coin’ in the crypto ecosystem. And if you don’t buy that idea, one thing that is for sure is its place amongst stablecoins. Earlier this month Tether’s market capitalisation surged close to $10 billion.
On 2nd July data provider, Coinmarketcap had Tether trading at $1, giving it a market capitalisation of $9.8 billion. That means it's bigger than XRP, whose market cap compares at ca. $7.8 billion.
On the downside, Tether is one of the reasons regulators look at cryptocurrencies with suspicion, causing them to put the brakes placed on crypto exchange-traded funds because of concerns about potential market manipulation.
Tether rules the stable coin category, which describes tokens designed to resist price volatility, often through reserves or pegs. It also acts as a gateway crypto for some of the world’s most active traders. In jurisdictions where crypto exchanges are banned – notably China – people can use cash to purchase Tethers with little to no official oversight. Once obtained, Tethers can be traded for Bitcoin and other digital currencies. While regulators recoil at the lack of transparency Tether brings to counterparty relationships, many crypto investors are attracted to the idea of an opaque, offshore trading mechanism that’s out of reach of US or Chinese authorities.
Tether currently faces a lawsuit in New York for alleged improper commingling of funds including reserves. The company has said it now requires buyers to complete know-your-customer disclosures, and a new approval process has to be passed in order to issue or redeem the coin.
April figures from Coin Metrics say Tether has been used in 40 per cent and 80 per cent (respectively) of transactions on the world’s two top crypto exchanges, Binance and Huobi, this year.
One of the reasons for Tether’s hidden popularity could be that many people don’t even know they’re using it. Since traditional financial institutions worry that crypto exchanges can’t address regulatory demands for uncovering money laundering and organised crime, most don’t have proper bank accounts. That means they can’t hold dollars on behalf of customers, so they substitute it with Tether.
That means tryst in Tether might not be high enough to make it legitimately the ‘most popular’ even if it is ‘most used’. It could be that some exchanges have tweaked how they label their pages to give clients the impression they have dollars in their accounts when, in reality, they have Tethers.
Tether’s governance also makes its operations too murky for most regulators. While Bitcoin belongs to ‘’everyone and no one, Tether is issued by a private company based in Hong Kong. That company’s owner also owns Bitfinex, another popular crypto exchange.
The mechanisms used to manage Tether’s supply is opaque, and how much of it is unpinned by fiat reserves at any given time is also open to interpretations, since Tether doesn’t allow its business to be independently audited. Last year the company said three-quarters of Tethers are covered by short-term securities and cash. In previous statements, it said it held a 100 per cent reserve.
Even that top-line level of disclosure surfaced as part of the ongoing investigation (and now lawsuit) into Tether by New York’s Office of the Attorney General. It’s alleged that the companies behind Tether have taken part in a coverup to mask losses of some $850 million in comingled company and client funds.
Researchers at the University of Texas at Austin have suggested that half of Bitcoin’s impressive 2017 rise could have been down to market manipulation using Tether. The U.S. Justice Department is investigating whether Tether may have played a role.
Stablecoins place trust in the hands of big tech companies rather than governments or central banks. But those companies can have competing priorities. While the concept of an alternative to state control over money supply is theoretically advantageous, in practice, it could be open to abuse and all the problems traditional fiat currencies are accused of.
But exchanges could be the factor that weighs in their favour. If Tether is as vital to their growth as analysts and researchers say, it's foreseeable that many of them would be willing to bail Tether out of difficulty if the situation demanded it. There’s an implicit promise of support built into the system.
For those who worry about ‘sustainable’ stability, dozens of new stablecoins have been launched in the last 18 months, and many of them are independently regulated and audited. But Tether remains the odds-on favourite, by a long shot.
And despite concerns by lawmakers, Tether is no fly-by-night operation. Its been around since 2014 — ancient in crypto terms — and has held onto its value. For many people, it's staying power, and pure convenience outweigh the risks.