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Guest Post | Jul 21, 2022
Stablecoins are an extremely interesting type of cryptocurrency which is backed up by a reserve asset like the USD was before on August 15, 1971, when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus completely abandoning the gold standard.
Buckle up, this is about to get difficult and complex. However, here is a more easy to read digestible and in-depth article about how the entire market can collapse because of Tether any moment.
So stablecoins are like the old USD-backed gold? Well yes and no, Stablecoins are mainly backed by fiat currency, which is decipetable to inflation. If stablecoins were only backed up by gold which is something limited in supply, then, we would have the “old” USD back. So, every dollar you buy USDT with is a virtual dollar lent to you but over there in their office they still hold your dollar until you sell the USDT again. Now we’ve all seen what can happen with extreme liquidity crunches in bear market cycles which forced crypto juggernauts Voyageur and Celsius into bankruptcy.
Has Tether learned its lesson and is it risking the same fate? USDT is founded by a Dutchman (Jan Ludovicus van der Velde) and the company behind it run by a vast team in which the executives are reportedly being currently investigated by the Department of Justice over a criminal probe into bank fraud.
Legally, a stablecoin can back up your virtual dollar with a debt loan to another company or back up your virtual dollar by things like gold. They are legally allowed to do that. But what if Tether is not actually backing up every dollar in their office? Well, this is where three-party audits come in. Every quarter, the company behind any stable coin needs to let an external audit professional verify if every single dollar lent out virtually is really backed up.
See: CFTC fines Tether US$41M for misleading claims about currency backing
However, some reports in the past showed us that Tether only had 70% of their stablecoin backed up. Right now, audit reports show us that 100% of all assets are nicely backed up in a 1:1 ratio, but also the report shows that only a mere 10% of their entire supply of Tether is backed up by actual Fiat money or currency. Over 50% of their “backing” are short-term loans they lent out to companies in China which are getting into more and more debt without the hope of recovering anytime soon. Stablecoins like USDC or DAI carry out monthly transparent audits. These stablecoins are founded by the company “Circle” and the exchange “Coinbase.” More and more people are turning to these more trustworthy stablecoins amidst the controversy surrounding USDT.
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