Picture: 123RF/STANISLAV SHAHURIN
Picture: 123RF/STANISLAV SHAHURIN

Portland — What is the world’s most widely used cryptocurrency? If you think it is bitcoin, which accounts for about 70% of all the digital-asset world’s market value, you’re probably wrong.

While concrete figures on trading volumes are hard to come by in this often murky corner of finance, data from CoinMarketCap.com show that the token with the highest daily and monthly trading volume is Tether, whose market capitalisation is more than 30 times smaller.

Tether’s volume surpassed that of bitcoin’s for the first time in April and has consistently exceeded it since early August at about $21bn a day, the data provider says.

With Tether’s monthly trading volume about 18% higher than that of bitcoin, it is arguably the most important coin in the crypto ecosystem. Tether is also one of the main reasons why regulators regard cryptocurrencies with a wary eye, and have put the breaks on crypto exchange-traded funds amid concern of market manipulation.

“If there is no Tether, we lose a massive amount of daily volume — around $1bn or more depending on the data source,” said Lex Sokolin, global financial technology co-head at ConsenSys, which offers blockchain technology. “Some of the concerning potential patterns of trading in the market may start to fall away.”

Tether is the world’s most used stablecoin, a category of tokens that seek to avoid price fluctuations, often through pegs or reserves. It’s also a pathway for most of the world’s active traders into the crypto market. In countries like China, where crypto exchanges are banned, people can pay cash over the counter to get tethers with few questions asked, according to Sokolin. From there, they can trade tethers for bitcoin and other cryptocurrencies, he said.

“For many people in Asia, they like the idea that it’s this offshore, opaque thing out of reach of the US government,” said Jeremy Allaire, CEO of Circle, which supports a rival stablecoin called USD Coin. “It’s a feature, not a problem.”

Tether, which is being sued by New York for allegedly commingling funds including reserves, says using a know-your-customer form and approval process is required to issue and redeem the coin.

Asian traders account for about 70% of all crypto trading volume, according to Allaire, and Tether was used in 40% and 80% of all transactions on two of the world’s top exchanges, Binance and Huobi, respectively, Coin Metrics said earlier in 2018.

Many people don’t even know they use Tether, said Thaddeus Dryja, a research scientist at the Massachusetts Institute of Technology. Because traditional financial institutions worry that they do not sniff out criminals and money launderers well enough, most crypto exchanges still do not have bank accounts and cannot hold dollars on behalf of customers. So they use Tether as a substitute, Dryja said.

“I don’t think people actually trust Tether — I think people use Tether without realising that they are using it, and instead think they have actual dollars in a bank account somewhere,” Dryja said. Some exchanges mislabel their pages, to convey the impression that customers are holding dollars instead of Tethers, he said.

The way Tether is managed and governed makes it a black box. While bitcoin belongs to no-one, Tether is issued by a Hong Kong-based private company whose proprietors also own the Bitfinex crypto exchange. The exact mechanism by which Tether’s supply is increased and decreased is unclear. Exactly how much of the supply is covered by fiat reserves is in question, too, as Tether is not independently audited. In April, Tether disclosed that 74% of the tethers are covered by cash and short-term securities, while it previously said it had a 100% reserve.

The disclosure was a part of an investigation into Tether by the New York attorney-general, which accused the companies behind the coin of a cover-up to hide the loss of $850m of commingled client and corporate funds.

John Griffin, a finance professor at the University of Texas at Austin, said half of bitcoin’s run-up in 2017 was the result of market manipulation using Tether. In 2018 Bloomberg reported that the US justice department was investigating Tether’s role in this market manipulation.

Convenience versus risk

“Being controlled by centralised parties defeats the entire original purpose of blockchain and decentralised cryptocurrencies,” Griffin said. “By avoiding government powers, stablecoins place trust instead in the hands of big tech companies, who have mixed accountability. So while the idea is great in theory, in practice it is risky, open to abuse, and plagued by similar problems to traditional fiat currencies.”

On the other hand, because Tether is key to their growth, many crypto exchanges would likely be willing to bail it out if needed, said Dan Raykhman, who is developing a platform for issuing digital assets and used to be head of trading technologies for Galaxy Digital.

“There’s this implicit support from all these exchanges to help Tether stay afloat,” he said.

While dozens of stablecoins have come out in the past year, many of them independently audited and regulated, Tether remains the favourite, by far.

“Tether has been around since 2014 — ancient antecedents in crypto — and has retained its value,” said Aaron Brown, an investor and a writer for Bloomberg Opinion. “I don’t say it’s perfect, but its convenience outweighs its risk for many people.”

Bloomberg