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There is substantial controversy surrounding Tether, a cryptocurrency that claims to be pegged to the U.S. dollar. According to Tether, each Tether token is backed by one U.S. dollar, held in the full reserve of Tether. But the existence of the U.S. dollars pegging Tether has been called into question. Moreover, worries exist that Bitfinex has been using Tether to the prop up the price of Bitcoin.

Research into Tether shows that misconceptions exist regarding how Tether functions. These misconceptions, in turn, may be contributing in part to the existing controversies. By better understanding how Tether functions, it may be possible to provide some clarity. Analysis of how Tether functions, for example, shows that it is not possible to prop up the price of Bitcoin on Bitfinex through Tether — regardless of whether or not these tokens are backed.

Tether and Bitfinex

Whereas most cryptocurrencies have a finite supply of tokens, Tether does not. According to Tether’s white paper, new Tether tokens can be issued when customers buy tokens by depositing the underlying fiat currency — U.S. dollars or Euros — in Tether’s bank account. However, it is not currently possible to register at Tether; in fact, registrations have been closed since December 2017. During this time, the amount of Tether tokens more than doubled, peaking at 2.5 billion tokens at the time of writing.

For Tether to function as a so-called stablecoin, each Tether token — trading under the ticker USDT — has to be backed by one U.S. dollar. Tether, therefore, needs to hold the underlying fiat of all Tether tokens in their reserve. In their white paper, Tether promised to deliver regular audits to show Tether holds the necessary funds in reserve, but the company has not delivered a complete audit since March 2017. Tether published an audit in September 2017, but the document is an internal memo issued by Friedman LLP, their auditor at the time. No further audit is expected anytime soon as the relationship with Friedman LLP was dissolved in

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