Today, the price of Tether's stablecoin (USDT) dipped lower than it has been in over a year, threatening to drop to an all-time low. According to CoinMarketCap, the digital currency, which is supposedly backed 1-to-1 by the US dollar, was being traded at just above 92 cents. As of press, the price has risen to almost 98 cents.
What could be the reason for the price drop? Could this signal that investors have lost faith in USDT because of Tether's lack of transparency or its connection to Bitfinex?
Relationship with Bitfinex
The dramatic fall in price of USDT could have to do with rumors surrounding the relationship between Tether and the embattled cryptocurrency exchange Bitfinex. Tether and Bitfinex share a CEO, Jean-Louis van der Velde, as well as some of the same management team.
Users on the Bitfinex platform have apparently been experiencing issues with fiat withdrawals and deposits. Last Thursday, October 11, Bitfinex temporarily paused fiat deposits for some accounts due to "processing complications." However, the exchange denies any issue with withdrawals.
In an update released today, Bitfinex stated:
"1. All cryptocurrency and fiat withdrawals are, and have been, processing as usual without the slightest interference;
2. All fiat (USD, GBP, JPY, EUR) withdrawals are processing, and have been, as usual;
3. Fiat deposits have been temporarily paused for certain user groups."
Not the First Bad News About Bitfinex
This isn't the first bout of bad news for Bitfinex this month. Earlier, rumors arose that Bitfinex was insolvent and without banking services due to the fact that Noble Bank International, the Puerto Rican institution that counted Bitfinex and Tether among its clients, was looking for a buyer.
Bitfinex was quick to respond to these allegations, stating in a blog post:
"Bitfinex is not insolvent, and a constant stream of Medium articles claiming otherwise is not going to change this."
Reporting by crypto news outlet The Block corroborates the claims by Bitfinex that the exchange does have banking services, apparently through HSBC Bank. Not that this quelled people's concerns – many were quick to argue that HSBC's history of money laundering makes the two a "very good fit."
It's also worth noting that bad news for Bitfinex has not historically led to an immediate drop in Tether's price.
As reported by ETHNews, in June of this year, a research paper published by scholars at the University of Texas at Austin suggested that Tether was being used to increase the prices of digital currency on the Bitfinex exchange. The authors of the paper claimed:
"By mapping the blockchains of Bitcoin and Tether, we are able to establish that entities associated with the Bitfinex exchange use Tether to purchase Bitcoin when prices are falling. Such price supporting activities are successful, as Bitcoin prices rise following the periods of intervention."
In other words, it seems as if someone at Bitfinex is using Tether to buy bitcoin in an effort to counteract price declines in bitcoin. However, the release of, and reporting around, the scholars' paper did not lead to a drop in Tether's price.
Lack of Transparency
At the heart of this, perhaps, is a lack of transparency. Tether claims to be backed 1-to-1 by the US dollar, which is where the scrutiny began. In January of this year, Tether announced it had engaged the auditing services of Friedman LLP in hopes to "provide an interim analysis of [Tether's] cash position and our issued and outstanding tokens, as part of ongoing efforts to further professionalize the transparency mechanisms of Tether Limited."
However, this audit, which could have gone a long way to proving the validity of Tether's stablecoin, was canceled. Ties between Friedman LLP and Tether were dissolved, only furthering the skepticism surrounding USDT.
According to Tether, the audit was canceled because Friedman LLP was taking too long, its procedures were too detailed, and it would be impossible to complete the audit in the desired timeframe. Since that time, Tether has still not been audited. Whether this is due to auditor resistance or Tether seems up for debate, but regardless, the situation has only fanned the flames of investor uncertainty.
Perhaps in an effort to put the fears of investors to rest, in June, Tether released a transparency report written by Washington, DC-based law firm Freeh Sporkin & Sullivan LLP (FSS) as a way to prove that USDT was tied to the US dollar and that the company did, in fact, possess reserves to back up its claims.
Consequently, because the FSS failed to complete an actual audit (which must be done in adherence to the Generally Accepted Accounting Principles or Generally Accepted Auditing Standards), the document did little to alleviate industry concerns.
Tim Swanson, founder of tech advisory firm Post Oak Labs, tweeted that the reason a stablecoin, which is supposed to be backed 1-to-1 by the US dollar, is trading below $1 "is because someone (Bitfinex, owner of Tether Ltd) is having bank account / liquidity problems."
Whether or not Tether has 1-to-1 fiat reserves is unverifiable due to issues with auditing. This – combined with complications with withdrawals and deposits on the cryptocurrency's sister exchange, Bitfinex, plus rumors of banking issues – could provide an explanation for Tether's price drop. Then again, Tether's price appears to have stabilized, so who knows?