In June 2018, University of Texas researchers shed light on what may be the true reason behind the remarkable bull run of Bitcoin in 2017. The researchers concluded that Bitfinex used Tether, a cryptocurrency, to inflate and stabilize bitcoin prices: “Tether [was] used to provide price support and manipulate cryptocurrency prices.” In times of low demand, Bitfinex used Tether to purchase Bitcoin and artificially inflate prices. While Bitfinex and Tether deny the allegations, many blockchain entrepreneurs are asking what this means for them and the crypto markets.
What is Tether?
Tether is a blockchain-based cryptocurrency meant to be backed one-for-one by the US dollar. Created in 2015, Tether offers “the price stability of the dollar combined with the operational ability of cryptocurrency.” There is around $2 billion in Tether circulating today.
If you are trading on one of the major Bitcoin exchanges, you are likely holding Tethers. As reported by one industry source, “Tether is used by crypto-to-crypto exchanges as it allows them to price crypto assets in USD without having to maintain/own USD-denominated bank accounts.” Using Tether allows exchanges to cut down on transaction costs until the client wants to redeem their funds and exchange Tether for dollars.
Tether Limited is the company that controls and issues Tether tokens. The firm is supposed to hold US dollar reserves to back up any Tethers issued, but there are fears that there are insufficient currency reserves to back the Tethers in circulation. Multiple reports have surfaced questioning Tether printing trends and lack of transparency about practices.
How will this impact crypto markets?
Due to Tether’s central role in many exchanges, problems with Tether could have wide-reaching effects. A collapse in Tether price could cause a collapse in the price of Bitcoin and other crypto assets: Exchanges holding client funds as Tether may have liquidity issues or be forced to seek extra capital if Tether becomes untethered from the dollar. If you have questions about crypto assets, call us at (314) 454-9100 or send a message today.
Scott’s practice is dedicated to assisting entrepreneurs, investors, emerging and established businesses with the unique and often challenging issues they meet throughout the formation and growth process: from entity formation, to the management of founder relationships and economics, to the protection of intellectual property, to the financing of growth and navigating securities law compliance. He assists clients as they continue to grow and develop, whether this involves merger and acquisition activities, international licensing and distribution arrangements or counseling of directors and officers.
Scott is chair of the firm’s Securities practice. His practice is focused on advising a wide range of clients on SEC matters, securities transactions and corporate governance. He represents issuers, investment banks / financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities.
You can reach Scott at slevine@aegislaw.com.
