What is Tether?
Coins like Tether may be exchanged for fiat money and tangible assets like gold.
Stablecoins are the name given to these types of cryptocurrency. The most well-known stablecoin of Tether is USDT (United States Dollar Tether). Additionally, there are stablecoins tied to the euro (EURT), the yen (CNHT), and gold (GLD) (XAUT).
As a result, Tether maintains a reserve of the corresponding cryptocurrency value. USDT is presently worth about $80 billion, which implies that Tether has the same amount of money in its vaults. Consequently, each USDT is exchangeable for a US dollar owned by the firm.
On cryptocurrency exchanges, stablecoins like Tether are most often utilized. Many of the most popular exchanges have Tether accessible, including Coinbase, Kraken, and Kucoin.
Merchants may also use the company’s solution to accept consumer payments for their goods and services.
Tether may be bought and sold on a number of different blockchains. When it was first launched, it was only available on the Bitcoin blockchain, but it has since grown to include additional blockchains like Ethereum, Tron, and so on.
The Story of Tether
As of 2014, the three cofounders of Tether, Brock Pierce, Reeve Collins, and Craig Sellars, were based in Hong Kong.
Three Wishes, The Mighty Ducks, and Little Big League all feature Pierce as a kid actor. He is the most famous of the three.
In 1997, at the age of seventeen, he chose to give up acting in favor of starting a media firm called Digital Entertainment Network, taking advantage of the dot-com boom (DEN).
Following losing $88 million in venture capital, the firm was forced to shut its doors. Collins-Rector was accused of assaulting a kid, which forced DEN to withdraw its initial public offering (IPO) in late 1999.
Pierce also founded and ran Internet Gaming Entertainment (IGE), a corporation specializing in MMORPG money sales that he formed and ran for several years.Bannon’s former White House Chief Strategist and Breitbart News co-founder Steve Bannon even gave him money in 2006.
When he first came across the Bitcoin whitepaper in the early part of the decade, he decided to invest a considerable sum of money in the cryptocurrency (those investments are now believed to have made him a billionaire).
After making a successful investment in 2012, he founded Blockchain Capital (BCC), a venture capital business specializing in investing in cryptocurrency-related ventures.
With the help of Craig Sellars, he also came up with the concept of a stablecoin at the same time. They then hired Reeve Collins, a former entrepreneur who had founded a number of failed businesses in the past.
They sought venture capital from a range of sources, including Goldman Sachs and Sequoia Capital, in order to get the initiative off the ground. Because of the possible legal repercussions, all of them turned it down at the time.
When it comes to bank rules, the most important one is the need for them to verify the legitimacy of their customers’ identities (known as “Know Your Customer” or “KYC”), although cryptocurrency is frequently seen as a haven for criminals.
Buying a stablecoin from Tether would authenticate your identification, but once the token was out in the open (i.e., sold on other blockchains), you had no way of knowing what the other party’s intentions were.
Pierce and his crew persisted despite the lack of support from the larger community.
After announcing a new cryptocurrency called Realcoin in the summer of 2014, they released it to the public. During the private beta launch in November, the project was rebranded as Tether, and the name was changed to reflect this.
However, adoption was abysmal in the early days. As a result, in 2015, the company’s original founders sold their shares. Pierce subsequently claimed that he had even given away his shares.
The group behind Bitfinex, the bitcoin exchange, owned the company. Former Tether team member Phil Potter was among those who helped get the stablecoin off the ground.
This includes former cosmetic surgeon Giancarlo Devasini, as well as a Dutch citizen residing in Hong Kong named Jean-Louis van der Velde. The three business owners maintain a low profile and shun the media spotlight, so nothing is known about them. Bitfinex was founded by Devasini, who funded it with the money he earned from early Bitcoin investments.
Tether’s growth slowed during the next two years. Bitcoin’s circulation volume peaked at $50 million at the beginning of 2017 when it was integrated into Bitfinex, a leading cryptocurrency exchange.
To keep their bank accounts open in the early days, the three had to resort to a number of (sometimes questionable) workarounds. As trading volume increased, Tether’s financial partners started to doubt the validity of Bitfinex.
As a consequence of the banks’ relationship with Tether and Bitfinex, Wells Fargo shut off its correspondent banking services to the Taiwanese banks in April 2017.
To deal with this, the team decided to ease off on their banking standards. Tether’s deposits were soon accepted by Noble Bank International LLC in Puerto Rico, a FinTech firm.
Tether was able to benefit from 2017’s crypto bull run thanks to the addition of a new banking partner. During the course of the year, the stabelcoin’s circulation increased from $50 million to over $1 billion dollars.
Unfortunately, the problems just kept piling up. A hacker stole almost $31 million worth of USDT from Tether’s treasury wallet in November of 2017. There was also growing doubt regarding the company’s dollar reserves at the time. Several crypto influencers and news outlets began requesting that the corporation produce audited data on its holdings and reserves.
Devasini, van der Velde, and Potter’s involvement with Tether was made public in The Paradise Papers. This heightened public dissatisfaction with the corporation. It was previously unavailable to the general public, which sparked speculation about who was behind the firm (since the original founders had already left it two years ago).
A few weeks after the incident, Tether announced a major overhaul of its platform. In November 2018, Tether officially enabled clients to withdraw funds directly from the corporation once again.
When Tether stated that it had broken up its collaboration with audit firm Friedman LLP at the end of January 2018, the uncertainty around the company only became worse. As part of their duties, the auditor had been compiling a report on the company’s assets.
On December 6th, 2017, the US Commodity Futures Trading Commission issued a subpoena for Tether’s records, according to several media sites. The value of all cryptocurrencies fell by close to $30 billion within an hour of the news surfacing.
Internal tensions were also rising. Tether’s bank reserves were reportedly loaned out to other exchanges by Noble, and Devasini and van der Velde wished to end their partnership with him. On the other hand, Potter insisted that they keep their romance going.
By purchasing Potter for $300 million in June 2018 and severing their ties with Noble, Devasini and van der Velde ended their involvement with the company, which was forced to close soon after.
By employing Leonard Real, a former Bank of Montreal anti-money laundering (AML) expert, Devasini and van der Velde made many visible attempts to pacify the public, for example. During the summer, it burned roughly $300 million in USDT tokens as an indication of a more responsible “printing” procedure than previous ones had.
Despite these efforts, the company’s critics persisted in their attacks. CoinDesk claimed in October that Bitfinex was inflating the amount of Tether transaction data it published with CoinMarketCap.
Tether also announced in November that Deltec Bank & Trust has become its new financial partner. Tether’s chairman even stated in a public statement that the required dollar equivalent was really stored in the company’s reserves.
Tether was nevertheless able to sign up a number of new partners despite all of these problems. For example, Kraken, Ledger, and Huobi Global were able to incorporate its stablecoin.
The corporation was once again the subject of a public inquiry in March 2019. According to the media, Tether has altered its website and taken down the “100% supported” claim. Now it claimed Tether was backed by other assets, such as gold and silver.
In addition to conventional currencies and cash equivalents, Tether’s reserves may at times include assets and receivables from loans it has provided to other parties, including connected businesses. Each tether is fully guaranteed at all times by our reserves.
That eventually led to a motion from New York Attorney General Letitia James (AG), who requested an investigation into Bitfinex and its connection to Tether. To cover up losses in customer money, New York’s Attorney General’s Office stated that Bitfinex misappropriated $850 million from Tether. After entrusting Panamanian money transfer firm Crypto Capital Corp. with some of its cash, Bitfinex suffered damage.
It was because of this that the team had to borrow $850 million from Tether’s coffers to partly back the stablecoin (Bitfinex would have gone bankrupt if it hadn’t received that money).
It was determined that Bitfinex would launch an initial exchange offering (IEO) at the beginning of May 2019 to address this problem. As a result of the IEO, it raised $1 billion in new funds. While this was going on, a Tether spokesperson claimed that the USDT was only supported by 74% of its fiat counterparts.
Even though Bitfinex’s and Tether’s attorneys promptly moved to dismiss the lawsuit (arguing that the New York Supreme Court (NYSC) does not have jurisdiction over the alleged misbehavior), the public harm had already been done.
In spite of the fact that Bitfinex was able to pay back the initial $100 million in early July, the company’s reputation was tarnished. On July 10th, Metropolitan Commercial Bank in New York City shut down all Tether accounts.
A typographical error by one of Tether’s developers resulted in an unintended printing of $5 billion in USDT four days later.
It was also around this period that Tether’s crew were working hard to grow its network. In September, it revealed a Chinese yuan-backed stablecoin and debuted on the Algorand blockchain and Blockstream’s Liquid Network.
Several victories in court were also hailed by the management team. Tether won a motion on September 24th, which would have allowed them to avoid having to hand over papers related to their connection.
It turns out, however, that the New York AG wasn’t the only one who had problems with the business. Several disgruntled traders and consumers launched numerous class-action lawsuits against the firm in late 2019, saying that it misappropriated their cash without their consent and utilized USDT to influence the Bitcoin market using USDT.
Even though Tether was in hot water, the demand for stablecoins continued to rise thanks to it. Early in 2020, Tether’s market value topped $2 billion, making it the most sought-after stablecoin in the industry. After Ripple (XRP) in May 2020, it will be the third-biggest cryptocurrency in the world by that time.
Tether’s market value jumped from $2 billion at the beginning of the year to more than $20 billion at the end of the year because of the growing demand for decentralized finance (DeFi). One of the first companies to declare plans to go public using the USDT was Stax, an Australian company.
Bitfinex’s announcement on February 5, 2021, that it had returned the $850 million it borrowed from Tether further boosted sentiment. Bitfinex and Tether eventually reached a settlement with New York Attorney General Letitia James on February 23rd.
It was part of the agreement that Tether and its affiliated organizations would not trade in New York. Apart from paying $18.5 million in penalties, the corporation has also agreed to submit quarterly financial reports to the government. However, as part of the settlement, Tether acknowledged no wrongdoing.
Tether’s staff was able to go back to work after resolving their legal difficulties. In March 2021, it was announced that Tether would be included on the Solana blockchain as its 8th network partner on the backbone of surpassing $40 billion in market value.
Afterward, it published its first report, detailing that the company’s total assets were $35 billion (against a similar amount of liabilities). Tether’s cooperation with Polkadot (their ninth blockchain) and Coinbase will continue to grow in the coming months.
In spite of the enhanced openness provided by Tether, authorities have continued to look into the firm. Tether’s reserves, which included not only cash but also secured loans and business bonds, were investigated by US financial authorities.Treasury Secretary Yellen was the driving force behind this investigation.
Tether also halted the production of more tokens, which it restarted in late August as a result of those concerns. Over $65 billion was the company’s market value at the time. For now, a Southern District of New York court has granted Tether petitions to dismiss most of the accusations it faced in a class-action case brought there in late 2019.
Not all of its legal challenges, however, were successful. The CFTC penalized Tether and Bitfinex more than $42 million on October 15th for making misleading representations regarding the securitization of their stablecoins.
Short-seller Hindenburg Research was reported to be offering $1 million to anybody who might assist them in unearthing further information concerning Tether’s reserves a few days later. As a result of Tether’s problems, its rivals were able to make up ground. In January 2022, Tether’s entire quantity on the Ethereum network was overtaken by Circle’s USD Coin supply. (Its overall volume, however, remains significantly smaller.)
How Does Tether Make Money?
Fees, loans to other institutions, and investments all contribute to Tether’s bottom line.
Below, we’ll take a deeper look at how each of these sources of income works.
Deposit and withdrawal fees, as well as account verification fees, are a source of income for Tether.
All customers must pay $150 for verification of accounts at this point. Tether deposits and withdrawals are subject to verification.
Besides the authentication cost, Tether also charges fees for deposits and withdrawals. Tether only allows direct transactions if a user deposits at least $100,000.
Tether charges a fee of 0.1 percent on all deposits.Withdrawals are subject to the same charge structure. It’s also worth noting that there is a $1,000 minimum withdrawal cost.
A consumer who withdraws $200,000 (the theoretical equivalent of a $200 charge) will still pay $1,000 in fees.
Tether, in contrast to banks and other financial organizations, does not impose fees, for example, for moving money between accounts.
Instead, the exchanges, such as Coinbase or FTX, which it works with, charge the costs for the service. Users must also pay the gas costs for the blockchain they utilize to conduct transactions.
In addition, Tether generates money by lending money to other companies and organizations, which then pay interest on the money they borrowed.
Tether, a cryptocurrency lender, gave Celsius Network $1 billion in October 2021.
Celsius’ CEO, Alex Mashinsky, said that the company will pay between 5% and 6% interest per year a few days later. Simply put, the deal would bring in $50-$60 million in annual revenue for Tether.
Following revelations in September 2021 that Tether had also loaned billions of dollars to huge Chinese corporations, which money-market institutions normally shun due to the increased risk involved, Tether came under pressure.
Many people consider Tether’s biggest danger to be lending out money to firms who are unable to pay back their debts. If a substantial number of Tether holders wish to cash out their stablecoins at some time, then Tether has to have sufficient reserves to meet those requests.
The corporation may not be able to satisfy these withdrawal demands if more of its debtors fail.
Finally, a tiny fraction of Tether’s income comes from investments in and participation in the development of other companies.
Exordium, a blockchain game development firm, received a $1 million investment from the company in January 2021. Exordium’s investment entitles it to a 20% stake in the company’s profits.
Other exchanges, like Binance and Coinbase, often utilize the approach of investing in the cryptocurrency ecosystem.
Tether earns money from these investments in one of two ways: either by sharing in the company’s revenues or by reselling its shares at a profit.
However, this, too, might pose a danger to the corporation and its clients alike, much like its lending programs. As a result, Tether’s tokens would lose all their value if too many of the company’s investments were to fail.