UnTethering the Cryptocurrency Market

Last week, the New York Attorney General (NYAG) launched an investigation into Tether, arguably the most controversial stablecoin in the crypto space, over an alleged $850 million fraud. Tether’s legal counsel have since admitted that the stablecoin is now only 74% backed by it’s asset reserves.

Tether (USDT) is a cryptocurrency that can be categorized under the term, ‘stablecoin’. A stablecoin is a token that attempts to exhibit stability, in this case 1:1 dollar parity with every Tether token backed by fiat-reserves. The primary use cases of a stablecoin is to allow users to access an appropriate unit of account, store of value, and medium of exchange for the turbulent crypto markets which can exhibit large swings in volatility. From its inception, Tether aggressively defended its first mover advantage – building scale, creating a global footprint, and establishing barriers to entry by amassing market share and ferociously protecting its foothold. At the start of 2018, Tether had an extremely strong hold on the stablecoin space, owning 94% of the market’s total supply.

Between this controversy and the emergence of alternatives, is Tether’s dominance over the stablecoin market coming to a close? Once an industry forms, it moves through a clear lifecycle — single start-up, fragmentation, and, finally, consolidation into larger economies. Cryptocurrency markets are at the fragmentation stages, and Tether could potentially be losing its grip.

Since Tether’s launch in 2015, the token has repeatedly featured in a series of news headlines calling into question the 1:1 dollar parity and reserves-backing. When pressed, time and time again, Tether’s leadership have refused to provide legitimate, independent audits of assets backing the token, showing a blatant lack of transparency.

Tether’s modus operandi has a familiar and unsettling feeling about it. It brings to mind some of the opacities from the traditional banking system, methods we are trying to move away from. In these initial stages, especially, this lack of transparency seemed to have few if any damaging impacts.

However, by November last year, Tether’s dominance in market supply experienced a sharp drop to 74%, with at least 8 new challengers entering the space. This was still a significant share but the drop was indicative of the market moving into a state of fragmentation.

An increasing number of reputable players have been offering stablecoins with similar functionality to USDT, breaking down reliance on Tether. Unlike Tether, the companies behind these coins are disclosing their banking relationships, submitting their reserves to regular attestations, or facilitating on-chain audits. These include Gemini (Gemini Dollar), Paxos (PAX Standard), Circle (USD Coin), Neutral Dollar (NUSD). This fragmentation of the market is predeterminer of the next stage, consolidation.

We have yet to witness a complete consolidation stage of the life cycle in cryptocurrency markets in a successful manner. Tether itself does not present an umbrella solution to serve as the standard for what stablecoins can exhibit, which other stablecoins are looking to capitalize upon. Given the current allegations levied at it, Tether is ideally looking less likely to play a systemic role within crypto.

Its continued market status is evidence of investors continuing to somehow place trust in the token. But how much should investors, and the industry, really trust Tether? I would estimate that we should trust them 74%.