USDT: What is it, and why are some accusing it of a Ponzi Scam?
USDT (Tether, the abbreviation of Tether USD) is a stablecoin digital currency linked to the U.S. dollar. Tether claims to have $1 in cash or cash equivalents backing each USDT Tether token. It is a relatively stable digital currency, commonly known as a stablecoin. Tether is "tethered" to the stable value currency U.S. dollar (USD), 1USDT=1 USD, and users can use USDT to exchange 1:1 with USD at any time.
It strictly adheres to the 1:1 reserve guarantee. As a capital guarantee, 1 USD gets deposited for every issued USDT token. Users can check the details of funds on the Tether platform at any time to ensure openness and transparency.
Since the establishment of Tether, the community has had questions about a potential Tether collapse. USDT has been identified as a possible "Ponzi scheme," long discussed in the encryption community. There are three main points:
Lack of transparency in so-called reserve assets backing USDT 1:1
Its ties to Bitfinex and unregulated offshore exchange
Worldwide shadow banking organizations linked to Tether transactions
Tether has always claimed that an equal dollar reserve backs each USDT. But no financial institution has ever been able to confirm this, and Tether has never conducted a public and independent audit by a reputable accounting firm.
Why is Tether so popular?
Tether is a "stablecoin" in the financial world because each Tether (USDT) is supposed to be backed by a $1 reserve. But stablecoins like Tether are more like a bank. The company that issued the currency, Tether Holdings Ltd., receives dollars from those who want to trade cryptocurrency. In return, the company will credit an equal amount of Tether to their digital wallets. Once Tether is purchased, one can use Tether on cryptocurrency exchanges to buy, trade, and bet on the price of various digital assets. USDT has trading pairs for Bitcoin, ETH, and thousands of other cryptocurrencies.
Theoretically, Tether Holdings holds dollar reserves so that the company can return dollars to anyone who wants to redeem their Tether for dollars. This complex mechanism is popular because traditional banks don't want to do business with cryptocurrency companies, especially foreign ones.
Why has Tether always been a controversial presence?
The mechanism behind backing Tether tokens and confirmation of backing has always been a mystery. For years, critics have argued that the company does not have enough assets to maintain a 1:1 exchange rate. Despite assurances from Tether Holdings, the amount of Tether it issues is essentially a fraud. However, joke coins based on dog avatars can reach market caps in the billions of dollars in the crypto ecosystem. Scammers regularly make money with ridiculous-sounding schemes, and Tether seems like another wonder.
Tether's lack of transparency is mainly due to its dealings with various ecosystem companies. Financial Times has disclosed that Tether lent $1 billion to Celsius Network. Celsius has come under scrutiny by regulators across the United States for offering some unregulated financial products, primarily high-yield products.
In 2021, Tether Holdings issued large quantities of the Tether digital currency. There is 69 billion Tether (USDT) in circulation as of July 2021. Forty-eight billion Tether issued in 2021 alone. The company should hold $69 billion in cash or cash equivalents backing the Tether tokens. This figure would make the company a U.S. bank rather than an unregulated offshore company, as it ranks among the 50 largest banks in the United States.
Everyone began asking why Tether minted so many coins on Twitter, on business television, and on the trading floors of hedge funds and investment banks. They also asked whether the company had what it claimed was a reserve of funds. Shortly after, an anonymous anti-Tether blog titled "The Bit Short: Inside Crypto's Doomsday Machine," claiming that $25 billion is missing from the Tether balance sheet, went viral.
If Tether crashes, will it destroy the entire cryptocurrency ecosystem?
As far as regulators are concerned, the dollar reserve assets needed to back Tether are too large. It is still dangerous even if the company has enough U.S. dollar reserve assets. That's because if enough traders demanded immediate redemption of their dollars, the company could have to liquidate its assets at a loss. The liquidation would trigger a "bank run" on the non-bank institution. Those losses could flood the regulated financial system, causing a collapse in credit markets. If these dissenting voices against Tether are right, Tether is a Ponzi scheme that would be bigger than Bernie Madoff's. Madoff is the initiator behind the most significant "Ponzi scheme" in world financial history, with tens of thousands of victims and $65 billion in fraud.
If we look back at the history of Tether, we need to mention Tether's connection to Bitfinex.
The Tether Controversy
Stablecoins remain pegged to a stable value, such as a commodity, crypto, or fiat currency. The value of Tether corresponds to the U.S. dollar. Meaning the token requires complete cash-backing for each of its issuances.
In 2021, the company issued 48 billion Tether tokens, with a $1 value. Despite the company persistently assuring with reports, the complete picture remained unclear. Do Tether holdings have adequate financial backing to support all tokens issued? What happens if all individuals liquidate their investments on the same day? The firm has no clear, pointed answer.
Tether claimed that the dollar fully backs its USDT tokens. It responded to this "tired