Posted 18th September 2023

Tether vs. KAU: The Difference Between Fiat Stablecoins and Gold Stablecoins

Find out what Tether’s recent assertation means for its future. Plus, see how Tether fares against Kinesis’ native gold-backed currency: KAU. 

What is Tether?

Tether (USDT), a cryptocurrency stablecoin, was first released on 6th October 2014 and quickly established itself as a key asset in the market. 

Tether is a fiat-backed cryptocurrency, which means that it holds enough cash and cash equivalents to cover the value of all Tether assets in circulation. This backing enables Tether to claim a 1:1 allocation (or “tether”) to the U.S. Dollar and this is what should, in theory, keep Tether’s price stable.

This is in contrast to standard cryptocurrencies like Bitcoin or Litecoin, which have no backing by assets or cash.

Like fiat currencies, the value of Bitcoin or Litecoin comes from the belief its investors have in it and external market factors. 

The price volatility is one of the key factors holding cryptocurrencies back. However, stablecoins can protect investors from crypto’s extreme price volatility. According to Kinesis’ Alex Boast:

“Stablecoins are cryptocurrencies that are designed to prevent price fluctuations and volatility by maintaining a stable value pegged to the value of an underlying asset such as the Dollar or Euro.”

At the time of writing, Tether is the 3rd largest cryptocurrency by market capitalisation, with $83bn Tether tokens in circulation. This makes it the world’s largest stablecoin and one to watch.

How does Tether stay at $1 dollar?

Tether maintains its value of $1 because of its claimed 1:1 peg.

This is, for many, the sole reason why Tether has been so successful. The peg means that each coin that Tether issues is fully collateralized in US dollars against its value.

Traditional banking often operates on a system called fractional reserve banking. This means that banks only need to hold a fraction of their deposit liabilities in cash. They do this under the guidance of central banks.

Tether’s proposition is different. It claims that, for every Tether coin, there’s a corresponding US dollar or other asset backing it. The intention here is to give the currency a consistent value, making it like a stable digital alternative to the US dollar.

However, as with all currencies, its stability also depends on market trust and the actual assets backing it.

graph shows dramatic dip

A Dip in the Market 

Despite Tether’s reputation as a stablecoin, its price has dipped below the value of $1 numerous times in recent years. It has also gone above $1, too.

Tether came under scrutiny in 2019 following an investigation into its trading platform. The investigation, led by the New York Attorney General’s Office, 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. 

The removal of $700m from the Tether account the following day caused further concern. Clients were not told in advance that Tether had moved the cash to affiliated company Bitfinex.

In July 2023, there was renewed skepticism. Tether chose to rely on an assurance opinion from independent accounting firm BDO Italia. This was instead of a full audit of its Q2 financial results. The process was led by Chief Technology Officer Paolo Ardoino.

Assurance opinions can confirm the accuracy of certain financial data but they lack the comprehensive scope of an audit. 

A full Tether audit would have dived deep into the company’s actual financial situation.

The assurance opinion provided detailed insights into Tether’s holdings. It revealed that it has investments in US Treasury Bills, physical gold, Bitcoin, and other assets. 

The decision not to hold an audit did raise questions in the crypto community. It, in fact, actually prompted further speculation about Tether’s financial standing.

This is important because the crypto community places a high value on transparency. There were concerns that choosing an assurance opinion over an audit could set a precedent for others.

Trust in Stablecoins

Despite the controversy surrounding Tether since 2017, traders still believe in the capabilities of Tether. Its market cap has soared in the meantime and now tops $83bn.

This is curious as, when financial controversies around crypto emerge, it can really hit a currency’s value hard. That should be so for a stablecoin but the rise in price and trading volumes show it had no effect.

Worryingly, one previous report from 2021 suggested that Tether’s cash reserves only back the USDT tokens by 2.9%. This is, obviously, way short of the 100% backing promised by the company. 

Following the publication of a report by Tether on their cash reserves, they declined to comment further. However, they did end up paying an $18 million fine as a settlement. They also promised to provide quarterly audits of their reserves for the next two years. 

They made the following assertion on their website at this point:

“Every Tether token is always 100% backed by our reserves, which include traditional currency and cash equivalents. From time to time, may include other assets and receivables from loans made by Tether to third parties. This may include affiliated entities (collectively, “reserves”).”

There have been active discussions since about what Tether holds in its reserves. The main questions have been on the nature of their reserves and consolidated assets. 

The assurance opinion has not allayed these concerns. Many have asked if their reserves are cash in a bank account, short-term debt like money market funds, precious metals, commercial paper, and so on. Some have questioned whether their reserves fully back every USDT coin. Tether claims strongly that they do.

The potential worry for customers is whether they’ll be able to exchange their USDT tokens for physical US dollars. This is because the company does not provide any guarantee of physical redemption. 

In contrast, when Kinesis users redeem their Kinesis gold-backed KAU, they receive the equivalent value. That’s because KAU is always backed 1:1 with physical gold bullion.

Kinesis publishes quarterly audits throughout the year to provide a fair and transparent monetary system for all users on the platform.

graph shows gold appreciating while dollar depreciates in value

A Question of Value 

All money must be a medium of exchange as well as a store of value. That’s true for fiat, crypto, digital assets, or any alternative form of currency.

Tether is a stablecoin but it will continue to be unstable while the dollar is not linked to something with a proven ability to hold its value, such as a stable asset or commodity like precious metals.

Market analysts have shown that gold and the dollar oftentimes have an inverse relationship. When the dollar goes down, gold goes up.

There has been a historic depreciation in the dollar’s value in line with inflation since 1971. That’s when the Bretton Woods Agreement came into effect. Since that time, the value of gold has gone up almost 50 times.

By modeling a system on the steady and stable value of gold, Kinesis offers a true alternative to the ills of the legacy banking system. 

Unlike Tether, Kinesis KAU and KAG currencies enable users to generate a recurring passive monthly yield. You don’t need to do anything more than hold the gold and silver in your Kinesis accounts or wallets. 

In today’s low or even negative-yielding environment, the need for gold-backed stablecoins is clear – and one that protects against inflation, unlike the dollar. To learn more, you can read about the Kinesis yield system

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.