A Commentary on Tether – Chainalysis

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Last month, Chainalysis, published a report titled “What is Driving Tether’s Growth and What Financial Institutions Could Learn From It.” The report theorizes that Tether’s growth is due to its “bank-like properties,” playing a fundamental role in providing liquidity and accessibility within the cryptocurrency ecosystem. Specifically, the report discusses how Tether:

  • provides a mechanism for digital asset advocates to store their funds in a stable and safe manner on-chain and across 30 exchanges;
  • provides users with stable, low-cost, widely integrated and instantaneous transactions within the ecosystem; and,
  • boosts industry-wide liquidity by providing a platform of support for exchanges, traders and innovative projects in the space.

These benefits represent fundamental needs that are not otherwise satisfied by any fiat or digital currency, and that are otherwise woefully neglected by other financial institutions.

Being anchored, or ‘tethered,’ to real-world currency, Tether provides users with protection from the volatility of digital tokens and offers a low-friction way of facilitating inter-exchange arbitrage. As the first blockchain-enabled platform to facilitate the digital use of traditional currencies through a familiar, stable accounting unit, Tether has democratized cross-border transactions across the blockchain. Tether allows market participants to take advantage of blockchain technology, along with embedded consensus systems, to transact in familiar, less volatile currencies and assets than otherwise permitted.  

 

The Evolution of Tether

Launched in 2014, Tether was the first blockchain-enabled platform to allow traditional currencies to be tokenized, allowing users to transact with fiat currencies across exchanges without the volatility associated with digital currencies. Tether holds 1:1 reserves for all Tethers authorized, issued, and sold. Each Tether is backed by its corresponding currency, e.g., USD backing USDT. A total list of balances supporting all Tethers can be viewed, verified, and checked against the on-chain deployments of Tethers by any interested party.

Tether is disrupting the legacy financial system by offering a more modern approach to money. By introducing a fiat currency gateway to the Bitcoin and Ethereum blockchains, Tether makes a significant contribution to a more connected ecosystem by providing instant global transactions and price stability.

Tether trading volumes have increased over the past 12 months. Specifically, volumes have gone up 15x between October 2017 and March 2018 and in a manner that is incomparable to any other cryptocurrency or digital asset. Tether’s trading volume regularly exceeds $1B across a high number of digital currency exchanges.

“Tether on-chain transaction volumes spiked during the week of January 21st of 2018 topping $1.5 billion, shortly after the cryptocurrency boom that pushed Bitcoin prices up to nearly $20,000. But unlike other cryptocurrencies these volumes have continued to rise through late May. On May 1st the number of transactions being sent on the network reached all time highs, nearing 50,000 transactions.”

Tether plays a fundamental role in the success of numerous exchanges around the world, all of which have experienced immense growth in user numbers and trading volumes. It is this monumental economic activity that drives demand for Tether, not the other way around. Suggesting that imaginary, unbacked Tethers are printed and pushed onto these exchangesand their usersto subsequently play a key role in millions of daily trades, facilitating the immense user growth of these exchanges while lacking an organic demand, simply doesn’t add up. This is a misunderstanding of Tether and its wider impact on the crypto community. It is the users of Tether (the token)—and not Bitfinex or Tether (the company)that drive the demand for new Tethers.

It is irresponsible to suggest that Tether enables illicit activity due to its efficiency and wide-scale applicability within the cryptocurrency ecosystem. Tether does not enable illicit price manipulation of low cap assets or pump and dumps any more than any other asset, digital or otherwise. Tether’s association with volatile assets comes from its efficiency in what it does; it’s a low cost, instant digital asset, which explains its growing use case. Pump and dumps have been pervasive throughout legacy financial markets, cryptocurrency markets, and anything else with value that fluctuates. To make claims that Tether is a vehicle that enables pump and dump schemes to exist overlooks the history of such schemes.

It is important to note that trading on Bitfinex is not done through Tether-denominated trading pairs. Unlike a number of other exchanges, trading pairs on Bitfinex are fiat-based, with USDT representing a transport mechanism.

 

Tether as a Central Bank

“Transacting between the fiat world and the cryptocurrency world is currently not easy. Users incur a significant lag time and pay high fees when moving money from fiat currencies to the cryptocurrency space. The explosive growth of Tether reveals how financial institutions are not meeting the banking needs of the cryptocurrency world.”

The analysis of Tether as exhibiting “bank-like features” seems to have been somewhat misunderstood, with some instead directly comparing Tether to that of a central bank. Tether does not purport to be a central bank, and it is false to suggest that Tether is like a central bank for a number of reasons:

  • Tether does not represent a country or oversee a banking system;
  • the USDT supply is dictated by consumer demand (all issued USDT has been bought by a consumer at a 1:1 ratio);
  • Tether does not set or manage any interest rates anywhere;
  • Tether does not oversee—and is not responsible fora banking or exchange sector, does not claim to do so, and no serious person is under the impression that we do so.

Given the above points, it is unnecessary for Tether to conduct itself as a central bank, or to be treated as such. Tether is a private company that promotes and enforces a culture that is wholly compliant with applicable laws and regulations and is working towards setting the industry standard in AML, CFT, and sanctions enforcement.

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The Chainalysis report can be found in its entirety here. The report makes clear the importance of Tether in facilitating growth, coordination, and collaboration within a space that has the potential to significantly disrupt current systems. Tether is a key piece of the decentralised asset space, mitigating dependency (of individuals, projects, exchanges, and more) on legacy financial institutions.

Tether has been the key driver of the growth experienced within the cryptocurrency space. The rumours and false narratives about Tether are as suspicious and outdated as the legacy financial system that it is in the process of disrupting.

In conclusion, we thank Chainalysis for producing an insightful and objective report based on hard data. Their knowledge of the cryptocurrency landscape is evident and a breath of fresh air.