Find out what Tether’s recent audit investigation means for its future and how Tether fares against Kinesis native gold-backed currency: KAU.
What is Tether?
Tether (USDT) made its stance on the crypto scene when its trading started in 2015. It quickly established itself as a fiat-backed alternative to standard cryptocurrencies like Bitcoin or Litecoin, which experience extreme market volatility.
As the name suggests, Tether is a cryptocurrency that is 1:1 allocated – or tethered – to the equivalent amount in traditional fiat currency, specifically the US dollar (USD).
Today, it ranks 5th among the leading world cryptocurrencies, according to its coin market capitalization, certainly making it one to watch.
How does Tether stay at $1 dollar?
Since one Tether coin is pegged 1:1 to the US dollar, it is not surprising that its valuation should rest comfortably at a pricing of $1 for a coin.
This single fact can be attributed to Tether’s success, as a cryptocurrency with a proposition to ensure the collateralized, fully allocated value of each coin.
Since fiat currency has traditionally operated with fractional reserve banking and is managed by central banking institutions, Tether exists as an alternative that claims to have a pegged, stable value to every single coin. This provides the basis for a more stable option to holding fiat currency in a traditional bank account, where only a proportion of fiat is held in its physical form (cash reserves).
A Dip in the Market
Despite Tether’s reputation as a stablecoin, its price has dipped below the value of $1 a number of times in recent years.
Tether sparked controversy in 2019, causing an alarming debate about the integrity of the cryptocurrency when an investigation into Tether’s trading platform revealed that it was not fully backed by the dollar. In fact, the landmark investigation by New York Attorney General, Letitia James, found that Tether was in fact only 74% backed by the dollar at the time.
A few months before in November 2018, Tether Ltd. published an audit report of their cash reserve at Deltec Bank & Trust Ltd. but at least $700 million was removed from Tether’s account the following day. Without user awareness, it was revealed that this sum was moved from Tether’s account to Bitifinex’s – one of their affiliated companies.
Trust in Stablecoin
Since the scandalous revelations about Tether unfolded, users continued to trade the cryptocurrency, as evidenced by its trade volume which has almost doubled since late 2018.
However, when scandals like this one are publicised, general trust for crypto, especially a currency that claimed to be a stablecoin, can be severely dented.
After Tether published the report on their dubiously audited cash reserves, Tether denied further commentary on the investigation but conceded to pay an $18 million fine as settlement, promising to provide quarterly audits of their reserves for the next two years.
To avoid future penalisation, Tether clarified their claim of being 100% backed, making the following addition on their website:
“Every Tether token is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”).”
Tether’s reserves, revealed as being diversified across unnamed third parties and affiliates, was a public response from the company that left participants questioning the security of it as a digital asset.
One damning report even suggests that Tether’s cash reserves only back the USDT tokens by 2.9% as opposed to the 100% backing initially promised by the company.
Clearly, this presents a problem for customers who want to exchange their USDT tokens for physical US dollars, as the company does not provide any guarantee of physical redemption.
In contrast, when Kinesis users redeem the value of the Kinesis gold-backed KAU, they receive its equivalent value, since KAU is always backed 1:1 with physical gold bullion.
With biannual audits published twice a year, Kinesis seeks to provide a fair and transparent monetary system for all users on the platform.
Find our most recent audit here.
A Question of Value
With fiat, crypto or alternative forms of currencies, it is clear that money cannot just be a medium of exchange but must also function as a store of value. Hence, the instability of Tether as a supposedly stablecoin will continue as long as the dollar is not linked to a stable asset or commodity backing its value, such as precious metals.
Market analysts have shown that gold and the dollar oftentimes have an inverse relationship, so while the dollar has depreciated, gold has appreciated in value over time. The dollar has historically depreciated in value, in line with inflation, since its value was separated from gold after the fall of the Bretton Woods Agreement in 1971. However, gold has appreciated in value almost 50 times over since this date, making it the asset of enduring value.
By modelling a system on the steady and stable value of gold, Kinesis offers a true alternative to the ills of the byzantine banking system. In comparison to Tether, Kinesis KAU and KAG currencies enable users to generate a recurring passive monthly yield simply for holding the gold and silver in their Kinesis accounts or wallets.
In today’s low or even negative-yielding environment, the need for gold-backed stablecoins is clear, in addition to a currency that ensures protection against inflation, which fiat currencies do not.
Find out more about the Kinesis Money yield system here.