Tether (USDT): A Giant With Feet of Clay?

Tether (USDT): A Giant With Feet of Clay?

The world’s biggest stablecoin, Tether (USDT), ranks third in the Pantheon of Crypto with over $65.5 billion market value. But while its status shines bright, the reputation of Tether lurks in the murky waters.

For years, Tether Limited, the company behind the world’s most widely used stablecoin, failed to prove whether it has sufficient reserves to fully back each of its coins. 

Lack of financial audit, shady partners, compromised holders. These multiple signs raise warnings that the stablecoin giant is standing on feet of clay. If it falls, the wreck could devastate the whole world of crypto.

So, is Tether a ticking bomb? Let’s take a closer look at the giant.

The Birth of a Giant: Bitfinex Ties

Tether as we know it now officially emerged at the end of 2014 when its initial founders sold the ownership rights to Phil Potter and ex-plastic surgeon Giancarlo Devasini. Both men were top executives of the crypto exchange Bitfinex.

Until then, Tether operated under the name of Realcoin and was one of the world’s first stablecoins, founded on July 8th, 2014. A blockchain-based coin had to remain stable in value, thus making the crypto market less volatile and more attractive to investors. 

It was pegged 1:1 to the United States dollar to stabilize the price. Every new USDT was created only when the company received an equivalent of $1 as collateral. The company’s dollar reserves were stated to be kept in various bank accounts.

But in 2014, the interaction between crypto entities and financial institutions like banks was extremely harsh. None of the traditional banks were willing to operate with crypto assets. Banks refused to open accounts for crypto-related companies because of illicit transactions and money laundering risks. 

Inability to act under such circumstances was the critical reason Realcoin founders Brock Pierce, programmer Craig Sellars and recruited CEO Reeve Collins sold the company to the senior Bitfinex figures.

Registered in the British Virgin Islands and based in Hong Kong, Bitfinex appeared to be one of the first professional platforms for crypto traders back in 2014. 

The Rise

Months after acquiring Tether, Bitfinex exchange introduced fiat-to-crypto operations, opening the gates for myriads of new players to enter the cryptocurrency market. 

This worked as a trampoline for Tether: the higher number of traders increased the usage of USDT. The stablecoin offered the ability to enter and exit crypto trades without selling cryptos to fiat each time. The number of exchanges supporting Tether increased accordingly.  

Stablecoins transfers require no middlemen. They offered fast and cheap cross-border transactions and established a reputation as an “alternative to the physical dollar.”

Since early 2016 the market capitalization of Tether has run rampant, shooting up 945% by the end of the year. 

2017 brought the wildest growth of all time; the value of USDT broke all records as its annual growth surpassed 14,874%. The USDT market value sat close to $1.5 billion in the last days of the historic year for the whole crypto market.

Tether usdt market cap

However, for Tether, the year marked not only unprecedented growth but also severe accusations of market manipulations.

The Crack: Bitcoin Price Manipulation

In 2017, a finance professor with years of financial fraud investigation experience, John Griffin, and his student Amin Shams discovered that Tether was used to artificially inflate Bitcoin’s price during the famous 2017 cryptocurrency market rally.

Their study “Is Bitcoin Really Un-Tethered?” revealed that a single large entity used large amounts of USDT to revive Bitcoin demand at precise points when its price drop seemed imminent. Furthermore, solid USDT inflows occurred in the “period following the printing of Tether.” 

At the end of 2017, Tether issued USDT stablecoins rapidly, including 50 million within a week. The process only intensified after the hack. $30.95 million USDT was stolen from the company’s treasury wallet on November 19th, 2017.

Finally, all the large USDT inflows into Bitcoin solely occurred on the Bitfinex platform. Nothing similar has been observed on other crypto exchanges during the Bitcoin boom, said the researchers.

Leader of Stablecoins

In the following years, the wild growth of 2017 was not repeated. But the market value of Tether continued to grow steadily, and so did the number of users.

From the start of 2019, tens of billions of US dollars replenished the company’s reserves, reaching the highest point of $83.16 billion in May 2022. 

The trend changed with the collapse of Terra (LUNA), pushing USDT’s market value down by 20% in two months. Half a year later, the crash of Sam Bankman-Fried’s FTX triggered another wave of decline. The market value of Tether slumped to $65.32 billion, the lowest level since the uptrend reversed.   

tether usdt market cap drop 2022

Although its closest competitor, USD Coin (USDC), surpassed Tether in terms of max total supply on the Ethereum blockchain in 2022, Tether kept winning in value transfers. The dominant stablecoin accounts for more that 65% of the total daily transaction volume of the cryptocurrency market.

By the end of 2022, Tether is still the biggest stablecoin in the cryptocurrency market, with more than 25.6 million total addresses. Rival USD Coin (USDC) has registered 2.75 times fewer (or 9.3 million) user wallets. 

However, despite its imposing stature, red flags and concerns keep mounting around Tether. The question whether the stablecoin giant will keep its balance is more relevant than ever. 

Failing to Prove Its Reserves

Since Bitfinex acquired Tether Ltd., the company repeatedly promised but struggled to provide a thorough audit of whether it has sufficient capital to back each of its stablecoins. 

According to the United States Commodity Futures Trading Commission (CFTC), Tether held “sufficient fiat reserves in its accounts to back USDT tokens in circulation for only 27.6% of the days in a 26-month sample time period from 2016 through 2018.” 

Over the same time, Tether issued millions of new USDT tokens and was subpoenaed by the CFTC. 

tether usdt 300 million

Financial regulators and law enforcement agencies started investigations into Tether. They revealed that USDT was not backed 1:1 to the US dollar as stated but instead with a combination of riskier assets like corporate debt. 

Moreover, the court document showed that Bitfinex lost $850 million of client and corporate funds and took a similar amount from Tether’s reserves to fill the gap. Tether never informed its investors about this loan for Bitfinex. 

In 2019 various entities invested $1 billion into Bitfinex, which used funds to pay back the loan to its sister company, Tether. 

Tether and Bitfinex admitted wrongdoing and agreed to pay an $18.5 million fine in 2021. Both companies were obliged by the New York Attorney General’s Office to release quarterly reports that guarantee its financial holdings’ accuracy.

A year later, a New York court ordered Tether to provide all documents of every crypto and cash transaction, balance sheets, income, and profit and loss statements to verify its reserves and capability to fully back every USDT stablecoin.

As of September 2022, Tether reported slightly over $68 billion in consolidated total assets and around $67.8 billion in liabilities. The majority (85.45%) were in cash and its equivalents, short-term deposits, and commercial papers; 9.02% secured loans; 4.69% corporate funds, bonds, and precious metals; and 3.85% in other investments, including cryptocurrencies.

tether usdt reserves

Source: Tether.to

Partner Banks in Tax Havens

Despite the uncertainty about Tether’s capital reserves, another elephant in the room was the question of where those reserves are. 

Tether Limited has struggled to place its holdings in registered traditional banks since its first days. None of the financial institutions wanted to deal with crypto-related businesses. Illicit finances, money laundering: the reputation of crypto was highly questionable more than half a decade ago. Perhaps little has changed since.

The only entities that dared to collaborate were off-shore companies in tax havens. In Tether’s case, Noble Bank International in Puerto Rico and Deltec Bank & Trust in the Bahamas agreed to park the company’s reserve and issue financial statements. The statements, however, were never backed by thorough financial audits.

Reserves in Celsius Network

As stated in Tether’s financial reports of the past few years, the company holds a central part of its reserves in cash, short-term deposits, and commercial papers. These are explained as unsecured, short-term debt instruments issued by corporations.

Part of these reserves in commercial papers, thus billions of funds, were invested into short-term loans to Chinese real estate companies and Bitcoin-backed loans to crypto lending companies, including Celsius Network (CEL). This is according to Bloomberg’s report of 2021. The total amount Tether lent to the now-bankrupt Celsius Network could be $ 1 billion. 

Tether later denied rumors of its commercial paper portfolio being 85% backed by Chinese commercial papers. The company stated that it liquidated its positions in Celsius “with no losses to Tether.” 

Alameda Research: The Biggest Donor

Over 66% of all USDT, issued over multiple years, are in the hands of two major companies. They are Alameda Research and Cumberland Global, as revealed by crypto outlet Protos. 

Both entities acted as the major liquidity providers to cryptocurrency markets until the notorious FTX crash of November 2022. According to data, Alameda Research and Cumberland Global owned around $60 billion worth of distributed USDTs by the end of 2021.

tether usdt distrubution

Source: Protos.com

The research suggests that Cumberland Global, a subsidiary company of American trading firm DRW, is among the key primary buyers of USDT. DRW is one of the biggest traders in financial markets. It is also one of the most extensive liquidity providers on the world’s largest futures exchanges. 

According to Protos, Cumberland Global is one of the key liquidity providers for Binance. It has acted on the crypto exchange since 2019. By the end of 2021, Cumberland Global reportedly held $23.7 billion in USDT.

Meanwhile, the parent company of Sam Bankman-Fried’s now-bankrupt FTX, Alameda Research, accounted for around $36.7 billion in USDT. Its appetite for Tether might be one of the reasons why the issuance of new USDT stablecoins significantly increased after FTX was established in May 2019.


The largest stablecoin, Tether (USDT), accounts for one of the largest daily transaction volumes in the cryptocurrency market. It is almost everywhere. Every cryptocurrency user has dealt with USDT or at least heard of it.

The giant is so big that if it loses liquidity, its collapse could seriously damage the whole crypto world and spill panic into other financial markets.

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