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USDT Is Not That Reliable. How To Avoid USDT Risks?

September 2, 2022
min. read

USDT or Tether (by the name of the issuing company) is the most popular and capitalized stablecoin. As of the end of March 2022, USDT confidently holds the third position in terms of market cap, slightly exceeding $80 billion. Initially, USDT appeared in the bitcoin blockchain (Omni layer protocol), then on the ERC-20 protocol in the Ethereum blockchain, TRC-20 in the Tron blockchain, and then in the EOS, Algorand, Bitcoin Cash (Simple Ledger Protocol) blockchains and on the Liquid Network. It is fair to call Tether a tokenized dollar that’s traded on most cryptocurrency exchanges, with an exchange rate that is really always close to one US dollar.

A stablecoin is a token typically pegged to some real currency in a ratio of 1 to 1. First of all, it is a convenient tool to avoid the risks of the cryptocurrency market. For example, if you close cryptocurrency positions in time before the fall and exit in USDT, it's equivalent to cashing out to sit out a turbulent time, and then re-entering the market at the bottom. USDT allows you not to withdraw funds to fiat, leaving them on exchanges or in wallets when the market situation is favorable for cryptocurrencies.

The history of Tether began in 2012, but its name appeared as a result of rebranding only in 2014. Tether replaced Realcoin, which in turn replaced Mastercoin. In early 2015, Tether was listed on the Bitfinex exchange, but it soon became clear that Tether Holdings Limited, which was behind Tether, was founded by Bitfinex employees. The project’s affiliation had an extremely negative impact on the reputation of USDT and led to several lawsuits. In particular, in 2019, Bitfinex was charged that, having suffered $850-million losses, it concealed them by using Tether collaterals to cover the damage. In 2021, as part of the settlement, the companies entered into an agreement with the New York State Prosecutor General's Office to pay $18.5 million to the state.

Nevertheless, the issue of full USDT collateral remained relevant. In May 2019, the chief lawyer of Tether Limited, Stuart Hoegner admitted that USDT is backed by reserves by 74%.

In 2021, the US Futures Trading Commission (CFTC) imposed a fine of about $40 million on the company «for making untrue or misleading statements and omissions of material fact in connection with the U.S. dollar tether token (USDT) stablecoin».

The claims against Tether and Bitfinex totaled about $1.4 trillion, some of which were rejected by the court.

In August 2021, Tether published a report by the audit firm Moore Cayman, which confirmed that USDT is fully backed by assets. However, the share of cash and bank deposits in reserves was 10%, and 49% of them comprised commercial securities.

The Hindenburg Research research firm questioned the reliability of information about Tether's reserves and offered a $1 million reward for disclosing previously unknown information about them.

In turn, Bloomberg found that USDT was backed specifically by short-term loans to large Chinese companies and loans to crypto landing platforms.

However, for all its importance, the issue of full USDT collaterals is secondary. The main danger of the USDT is the SEC’s uncertainty about the general viability of stablecoins  alongside CBDC, the state-issued digital currency. The head of the US Federal Reserve System Jerome Powell questioned the need for stablecoins after the dollar’s digital version appeared. He also pointed out the lack of a regulatory framework for stablecoins and expressed doubts about the viability of their integration into the financial system.

All of the above makes it obvious that USDT risks are very significant, and though it’s difficult to imagine an instant disappearance of Tether, under unfavorable circumstances certain losses in USDT are much more likely than, for example, losses in bitcoin or other traditional cryptocurrencies. Сonsequently, the strategy of long-term USDT ownership looks quite risky.

The Minto project has implemented one of the ways to avoid the risks of stablecoins, offering to convert USDT into tokenized bitcoin hashrate. Owning Minto’s BTCMT tokens is equivalent to owning mining hardware of the respective Bitcoin mining power in the ratio 100 BTCMT = 1 TH/s. Unlike classic stablecoins, BTCMT is backed by mining infrastructure, rather than financial assets, which allows their holders to receive daily bitcoin rewards.

By buying BTCMT tokens for USDT, users first save and supplement cryptocurrency reserves, since as of Q1 2022, BTCMT tokens gave their holders an APR (payback per year) of about 60%. Secondly, they significantly limit USDT loss risks: dubious collaterals and the distrust of the American regulator.

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