Over the years since Tether (USDT) has grown in popularity, it has also grown in controversy. From the question of its use and innovation in the crypto space, all the way to whether it actually has the funds to account for the Tether in circulation.
In order to be a legitimate pair, USDT needs to be able to prove that their issuance is parallel to their funds set aside for this project at a 1:1 ratio. This would normally be done through auditing services, but the USDT attracted controversy after rumors they were not backing their coin at a 1:1 ratio.
These rumors gained more steam when their contracted auditing service Friedman LLP backed away from them, leaving the community with a lot of questions.
Current documentation reveals as of November 1, 2018, Tether is storing $1.8B(US) with Deltec Bank & Trust Limited located in the Bahamas. This document has not settled many minds in the crypto community, as many on Twitter have taken to mocking its validity, since the document is obscurely signed with no typed name beneath it. A confirmation note by the bank chairman in response to a request by CoinDesk nearly a week later may have put some minds at ease.
Another criticism is that though this document reveals funds right now, it doesn’t indicate funds from the past or even that these funds will remain in the account.
With time and controversy pulling the thread of USDT, this opened the door for others to enter the narrow space and create competitive stablecoins. Circle and Coinbase created the most recent and most prominent competitor to the highly skeptical USDT with its U.S. Dollar Coin (USDC).
USDC launched on Poloniex, which highlights the use case of stablecoins specific to exchanges without a USD pair.
It is also interesting that the USDC is available for purchase on Coinbase, and has a BTC/USDC pair with a current exchange volume of 14 BTC. Coinbase Pro is not the first exchange to have both USD to crypto and stablecoin to crypto pairs. Bittrex also has both, and it raises questions as to the use case of a stablecoin backed by the USD, when one can just exchange with the USD.
A “stablecoin” is a cryptocurrency whose value is tied to another asset. There are two types of stablecoins: algorithmic-backed and collateral-backed. An algorithmic-backed stablecoin’s value is upheld by supply control, similar to the way the Federal Reserve increases or decreases the monetary supply to keep the dollar value relatively stable. In contrast, a collateral-backed stablecoin’s value is upheld by a real-world asset like gold, fiat, or even other cryptocurrencies.
The innovation is debatable with a specific use case for traders trading on exchanges that do not offer crypto fiat pairs. A good example of an exchange with this use case is Bitfinex. Since it is not compliant with anti-money laundering (AML) and know your client (KYC) standards in the United States, this exchange operates outside of U.S. laws and therefore cannot have a USD pair. Traders who use this exchange often need something with less of the known volatility in the crypto markets to hide from downside price action.
Stablecoins increase volatility in price of Bitcoin and altcoins by creating easier entry and exit from a trade to a stablecoin.
The price volatility in crypto markets has a lot to do with the space being overwhelmingly driven by speculative technologies in the altcoin space, speculation of Bitcoin becoming an adopted global currency, and the assumption that there are a lot of amateur investors entering the space to make money. Less seasoned investors are likely to make more panicked than technical decisions.
If the latter is true, then easy entry and exit on a trade with a stablecoin will keep money moving in and out of some of these scarce assets, and can definitely play a large part in the volatile shifts the crypto space is so familiar with.