Tether's bounceback after allegations of wrongdoing is because it is central to the cryptocurrency ecosystem. But other signs suggest something is amiss
allegations of misuse of customer money against Tether rocked the cryptocurrency world, the shock wave has temporarily subsided. The four-year-old currency, which fell to 97 cents last week, has returned to parity with the American dollar. And after a 10% fall, to $4,953, the price of a single Bitcoin, its best-known peer, has steadied at around $5,400. But cryptocurrency-watchers remain wary. Beneath the surface, trouble may be brewing.
Doubts had long swirled about the bona fides of Tether, which has more than $2.8bn-worth in circulation, and Bitfinex, the exchange it is traded on. On April 25th New York’s attorney-general, Letitia James, accused both of a cover-up intended to hide a loss of $850m in client and corporate funds. That hit the value of other cryptocurrencies because of Tether’s unique status. Cryptocurrencies stem from libertarian attempts to create a currency resistant to central control.
Tether’s bounceback since the accusations became public is because of its centrality to the cryptocurrency ecosystem. It is not the only “stablecoin”, as cryptocurrencies designed to hold a steady price are called. But it is vastly dominant among them, representing 96% of daily trading volumes in that category. Some 80% of Bitcoin trades ostensibly involving dollars are in fact executed using Tether, which acts as an intermediate staging post.
But other signs suggest something is amiss. Bitcoin currently trades at a price on Bitfinex that is roughly 6% higher than on other exchanges. This may be because investors trading on Bitfinex are anxiously converting their Tethers into Bitcoin—thereby buoying Bitcoin’s price on that exchange—in order to escape the platform. So far Tether’s market capitalisation has not fallen significantly since Ms James’s announcement, but rival stablecoins have recorded some inflows .
Murky exchanges could suffer a harder fate. Unnerved by a lengthening string of scandals, regulators are starting to clamp down. The Securities and Exchange Commission, an American watchdog, brought nine enforcement actions last year alone. “Bitcoin itself is a software program. It cannot be shut down,” says Bitfinex’ed, a vocal online Tether critic who declines to disclose his real name. “But exchanges can.
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