It may surprise some of you to hear that the dominant cryptocurrency in the market today isn’t named “Bitcoin.”

Tether (USDT), a stablecoin pegged to the US dollar, is the backbone of the entire crypto economy. It is far and away the most widely traded crypto asset around, and responsible for the vast majority of trading volume. Within the last 24 hours, for instance, Bitcoin recorded approximately $51 billion in volume; Tether clocked in $89 billion.

But the market’s most important coin is also its most controversial. Tether’s fiercest critics say that the stablecoin artificially props up the market, believe that the coin is a ticking time bomb, and suggest that its eventual demise will one day collapse the entire cryptocurrency market. Hyperbole? Maybe.

But maybe not.

Critics of USDT argue that the stablecoin isn’t actually backed by real US dollars. They say Tether, much like the villainous Federal Reserve, prints its currency out of thin air. And as soon as people realize this en masse, the value of Tether will drop, irreparably, and market participants will lose all of the money they thought was held in a stable asset.

It’s a doomsday scenario that seems to crop up every time Bitcoin enters a fresh boom or bust cycle. To wit: an anonymous Medium post titled “The Bit Short” that posits precisely this sort of scenario went viral last weekend—just as Bitcoin rises to uncharted heights.

Tether’s supporters, however, say their rivals have got it all wrong: Tether “truthers” simply don’t understand market mechanics, or the complex nature of Tether’s business. And the data, they say, doesn’t support the assertion that Tether is used to manipulate the price of Bitcoin.  

So which is it, and how did we get here?

Tether explained

Tether, which started in 2014 under the name “Realcoin,” is a cryptocurrency pegged to the US dollar. The company that operates it, Tether Inc, claims that the coin is backed by reserves of US dollars deposited by people who want the coin and redeemable at any time. 

According to the stablecoin issuers, this is how it works: Whenever someone deposits a US dollar to Tether’s account, Tether Inc, the company that owns Tether, mints one Tether coin in return. 

But Tether Inc isn’t particularly transparent and, after some probing from the US government as a result of an ongoing fraud investigation in New York, conceded that its coins aren’t entirely backed by US dollars. 

A paucity of audits of its reserves and an unwillingness to hand over data to regulators stokes the fire of concern, leading critics to believe that Tether is minting coins out of thin air.

So the theory goes, Tether would do this to prop up the price of Bitcoin, meaning it could, presumably, sell all of its holdings. Such an argument was thrust by academics John M. Griffin and Amin Shams in a June 2018 study, which postulated that Tether could be printed “regardless of the demand from investors.” The study concluded that its printing schedule was consistent with a coin that was only partially backed by reserves. 

The ruckus, entirely unresolved, now finds itself at the center of a several-years old crypto fraud case. 

Like many other crypto companies, iFinex, the parent company of Tether and cryptocurrency exchange Bitfinex, struggled to find real banks to process their financial transactions and store their money. So it resorted to Crypto Capital, an alleged Panamanian “shadow bank.” 

Crypto Capital was run by (alleged) unscrupulous fellows, who have been charged with, among other things, stealing around $850 million of Tether/Bitfinex’s money—including the money that backed Tether’s stablecoin. Law enforcement has since frozen some of the funds that remain. 

To ensure that Bitfinex could satisfy requests for redemptions, Bitfinex (essentially, itself) took $650 million in real money from Tether’s account and credited Tether’s Crypto Capital account—which didn’t actually contain any money, since it was all stolen or lost—with $650 million from its own inaccessible Crypto Capital account.

Tether critics, among them the New York Attorney General, argue that iFinex essentially used Tether reserves as a slush fund to mask the hole in Bitfinex’s finances, thereby defrauding its clients. That would also mean that Tether’s stablecoins aren’t fully backed by the US dollar. Indeed, Tether later conceded that its stablecoin is only 74% backed by the US dollar.

Tether and the Bitcoin market

So what does any of this have to do with Bitcoin? The issue is that Tether is by far the most popular way to trade Bitcoin. Of the top 11 most liquid markets for Bitcoin, according to CoinMarketCap, seven involve Tether. 

More than that, millions of dollars of Tether get minted each day; often, hundreds of millions of dollars. The market cap of Tether is now $24 billion, a 140% increase since August—before Bitcoin’s current bull run—and a 500% increase since this time last year. Some people think that Tether’s printing all of this money at will to manipulate the price of Bitcoin. 

And if it turns out that Tether can’t be redeemed for real US dollars, the theory is that the whole market will bottom out and people’s holdings will collapse. The bubble will pop. 

“The moment people realise that all crypto prices are quoted in USDTs, not US dollars, and that USDTs can only be converted into US dollars when you don’t need it, the music will stop in a second,” wrote Trolly McTrollface, a pseudonymous Tether critic. 

Why some think the Tether “truthers” are wrong

The critics of these Tether “truthers” think that this is all wrong. Billions of real dollars back Tethers due to an increase in demand. Proof? You can redeem it. “It's sort of funny hearing people claim that you can't create/redeem USDT for $. Like, I don't know what to tell you, you can, and we do,” tweeted Sam Bankman-Fried, CEO of crypto exchange FTX.

And the argument that Tether is printed out of thin air to pump Bitcoin? Bogus, since Tethers are minted after Bitcoin price crashes as well as before Bitcoin rises. A paper from UC Berkeley in April concluded that Tether minting is entirely uncorrelated with Bitcoin’s price.

The reason why Tether doesn’t disclose audits? Some people want Tether to remain anonymous, said Larry Cermak, director of research at The Block, on the On The Brink podcast

They don’t want regulators to know how US dollars turn into Tethers and to whom Tethers are redeemed. That would, in all likelihood, force Tether to disclose its customers. Some market insiders, as well as research from blockchain data firm Chainalysis, suggest that China, whose government banned purchases of Bitcoin but turns a blind eye to Tether, is the driving force behind Tether production.

What Now?

The issue, however, is that Tether isn’t audited. And since Tether hasn’t handed over the information to regulators, it’s impossible to know. 

The New York Attorney General’s investigation into Tether is ongoing, progressing slowly but steadily through the courts. 

FinCen’s proposal to force crypto companies to collect personal information of the owners of unhosted wallets could also prick Tether’s dominance, since it would mean that Tether must collect information about the sources of its Tethers. 

But that could encroach on civil liberties, say privacy advocates. The Electronic Frontier Foundation has said that one consequence of the regulation would be that “the [US] government may have access to a massive amount of data beyond just what the regulation purports to cover.” 

Stuck between a rock and a hard place, the battle rages on.