Rapid Increase in Tether Supply Raises Concerns of Manipulation, Creative Accounting
Tether supply increases rapidly in just two weeks, leading to concerns about validity of the token’s dollar peg.
Tether has always been a controversial token - claimed to be redeemable for fiat currencies but shunned by the fiat banking system. However, the rapid expansion in Tether supply has raised concerns about whether this could be one of the reasons for the overall cryptocurrency boom.
What is Tether?
According to the Company's website, Tether is a cryptocurrency whose value is anchored or 'tethered' to the value of national currencies like the US dollar. Tether.to claims to have combined the best of both worlds - a stable currency value and benefits of Blockchain technology. Each tether in circulation is supposed to be backed by a dollar held by the Company in reserve.
Supply: +10,000% in one year, +43% in November
The overall supply of tether has rapidly increased in 2017. Since the price of each tether is pegged to fiat (dollar or euro), the overall market capitalization reflects the underlying supply of tethers. The total market cap of tether has shot up from $6.9 mln in November 2016 to $645 mln currently. That is 100x increase in supply in the last year.
A significant portion of the increase has occurred in the 15 days of November 2017 - the supply / market cap has increased by $200 mln in that time. Since each tether is supposed to be backed by a reserve of fiat currency, questions are being raised about how Tether (the company) has managed to expand its balance sheet so much in the last year.
Transparency page not so transparent
Tether.to has a transparency page which it claims represents the balance sheet of the Company in near real time. It also claims that the Company's reserves are subject to regular audits. After lots of criticism, Tether.to published a memo from Friedman LLP, who were hired as consultants to make limited findings (not audit) of the cash held by the Company as of 15-Sep-17. However, since the supply of tethers has increased substantially post Sep-17, concerns have again been raised on the assets held by Tether.to.
Willy and Markus bots redux?
Using non-existent money to trade can result in the price skyrocketing. It is alleged that the rapid bull run in 2013 was caused by 2 bots - Willy and Markus who bought Bitcoins at regular intervals, without spending real money. The resultant collapse of Mt. Gox and crash in Bitcoin's price took years to overcome. Helicopter money has a documented effect of fuelling inflation.
The value of increase in Tether's supply ($200 mln) in the last month pales in comparison to Bitcoin's trading volume ($5 bln), but any fear about the currency pegs of tether would affect the entire cryptocurrency ecosystem. It could lead to people trying to redeem their tethers or dump them on exchanges. Social media is abuzz with doubts about the stability of Tether, with one user going so far as to offer a bounty if somebody could prove that Tether held sufficient cash in its bank accounts.
Required - transparency and audits
What Tether.to needs to do is reassure the cryptocurrency community about the soundness of their balance sheet. This can be established through a full audit done by a reputed agency. They also need to be transparent about their assets - where exactly are their cash balances held and who are their bankers. Lastly, the Company's legal terms and conditions must not disown all responsibility for redeeming tethers
There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money.
People believe that one tether can be redeemed for one dollar, and that is what gives it value. The Company would do well to affirm that, especially if its customers are able to demonstrate compliance with all know your customer / anti money laundering regulations.