What Is Tether (USDT)?

Tether (USDT) is a cryptocurrency stablecoin pegged to the U.S. dollar and backed "100% by Tether's reserves," according to 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. Originally based on the Bitcoin blockchain, Tether now supports Bitcoin's Omni and Liquid protocols as well as the Ethereum, TRON, EOS, Algorand, Solana, and Bitcoin Cash (SLP) blockchains.

As of January 2023, Tether was the third-largest cryptocurrency after Bitcoin (BTC) and Ethereum (ETH) and the largest stablecoin with a market capitalization of nearly $68 billion. In 2022, Tether's USDT accounted for most of the exchanges out of Bitcoin by value.

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, the Mexican peso, and gold, none with more than a small fraction of the market cap of its U.S. dollar-pegged USDT tokens.

Pegged Defined

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

Transparency

Tether updates a breakdown of its reserves holdings daily on its website. As of Jan. 29, 2023, it reported assets of $67.8 billion for USDT. As of the same date, Tether reported holding 82.45% of its reserves in cash, cash equivalents, short-term deposits, and commercial paper; 4.69% in corporate bonds; 9.02% in secured loans to unaffiliated entities; and 3.85% in other investments, including digital tokens.

Stabilization

A stable value promotes using 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.

Tether History

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.

2019

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.

2021

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 furnish information about its reserves to the New York Attorney General's office for the next two years.

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.

2022

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 at a 1-to-1 ratio to the U.S. dollar.

Tether also launched MXNT, a stablecoin backed by the Mexican peso following earlier expansions into Europe (EURT) and China (CNHT).

The Bottom Line

Tether is a cryptocurrency that attempts to maintain a value peg to an underlying currency such as the dollar or euro. It does this by keeping enough actual currency in reserves that the cryptocurrency holds the same value as the fiat currency.

Tether is primarily used to convert cryptocurrencies to fiat to prevent slippage, or a decrease in value between transaction initiation and execution. However, there are times when it isn't exactly pegged to the fiat currency it is supposed to be tracking. For instance, when the exchange FTX collapsed in November 2022, Tether plummeted to nearly $0.995 but rebounded quickly, at times seeing much more than a 1-to-1 peg through January 2023.

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