Tether (USDT) has become one of the most widely used stablecoins in the cryptocurrency market since its launch in 2014. However, over the years, Tether and its issuing company Tether Limited have faced ongoing criticism and controversy related to transparency, reserves, and potential market manipulation.

Background on Tether and How It Works

Tether was created to provide a stable cryptocurrency pegged to the US dollar. It aims to combine the price stability of fiat currency with the operational ability of cryptocurrency.

Tether converts cash into digital currency, so $1 of USDT is backed by $1 of reserves held by Tether Limited. USDT can be redeemed for the underlying fiat currency. This system relies on Tether Limited holding sufficient reserve assets to back all USDT in circulation.

Tether is available on many major blockchains, including Ethereum, Tron, and others. It is one of the most used stablecoins, with a market capitalization of over $65 billion as of September 2023.

Criticisms Related to Transparency of Reserves

One of the most common criticisms of Tether relates to the transparency and adequacy of its dollar reserves.

Given that USDT is pegged to the US dollar, with each Tether meant to be backed 1:1 by dollars held in reserves, Tether Limited has a duty to demonstrate it holds sufficient reserves to back the USDT in circulation. However, there have been ongoing questions about whether Tether has consistently maintained sufficient reserves.

Tether Limited has not regularly produced official audits of its reserves from reputable third party accounting firms. It has primarily relied on attestations from its reserve accountant, which some argue provides less rigorous proof than a full official audit. There have been long periods when reserves were not verified at all via an external review.

This lack of clear transparency into Tether's reserves has fueled suspicions and accusations that Tether's reserves may be inadequate or nonexistent. However, Tether has disputed these claims and maintains its reserves fully back all USDT holders.

Concerns of Potential Market Manipulation

Another common criticism of Tether focuses on whether it has been used for market manipulation in the cryptocurrency ecosystem.

Some analysts have argued that Tether and affiliated crypto exchange Bitfinex have used USDT issuance to artificially inflate Bitcoin and cryptocurrency prices during key periods. By issuing large amounts of new USDT not fully backed by reserves, they speculate Tether and Bitfinex could prop up demand for crypto and drive prices higher.

Critics argue this alleged manipulation distorts true crypto asset prices determined by market forces of supply and demand. It risks inflating bubbles that could eventually burst and harm investors. They view it as unethical market manipulation.

Defenders of Tether counter that USDT issuance responds to legitimate market demand from investors who want to enter cryptocurrency markets without exposure to volatility. Tether maintains all USDT issuances are backed by reserves and it does not engage in manipulation.

But the lack of transparency from Tether on its reserves and issuance practices continues to fuel suspicions of potential manipulation by regulatory agencies and analysts. More transparency could help refute these claims.

The Path Forward - Calls for Greater Transparency and Regulation

Many critics of Tether believe the solution is greater transparency and disclosure from Tether Limited. They argue Tether should undergo regular public audits by reputable accounting firms to verify its reserves fully back all USDT in circulation. Some support requiring Tether to register legally as a money services business and comply with banking regulations.

However, Tether has warned that increased transparency through an audit comes with significant legal and commercial risks. Tether operates in a complex global regulatory environment and aims to protect sensitive information about its reserves and partners.

But following years of criticisms, in May 2021 Tether released a reserves breakdown for the first time. It also revealed plans to undergo periodic assurance opinions on its reserves. This signals a possible shift toward greater transparency.

The debate around reserves and potential manipulation remains heated. But many hope increased regulatory oversight and pressure for transparency will provide clearer insight into Tether's inner workings in the future. Greater transparency could benefit Tether, crypto investors, and the growth of stablecoins as a whole.

Should Tether undergo mandatory regular public audits?

This is a key question at the heart of debates around Tether. Many critics argue Tether Limited should be required to undergo full public audits on a regular schedule, such as quarterly or annually, to prove it has sufficient reserves backing USDT in circulation. They contend this would resolve doubts and provide assurance to investors that rely on USDT's 1:1 dollar peg and redemption promises. However, Tether has resisted mandated regular public audits due to legal risks and the complexities of the crypto-fiat reserve system. While greater transparency could benefit public perception, Tether will likely continue advocating a middle path that balances transparency with security and flexibility around reserves. But public pressure and potential regulatory action may push Tether toward greater disclosures. Striking the right balance around transparency remains an ongoing challenge.

Can stablecoins like Tether be effectively regulated?

Stablecoins like Tether operate in a challenging cross-border environment between digital assets and government-issued fiat currency. However, many argue regulatory oversight is needed as stablecoins grow in economic importance. Potential regulations could include reserve requirements, mandatory audits, registration as money services businesses, and anti-manipulation rules. But complex issues around jurisdiction, compliance costs, and innovation impacts present challenges to regulating global stablecoins. Tether's decentralized nature also makes it more difficult to regulate compared to centralized stablecoins. While the path forward is unclear, the growth of stablecoins may test the agility of financial regulators. Finding balanced regulatory frameworks that protect investors and maintain market integrity without stifling useful innovation will require flexibility and cooperation across borders. But stablecoin transparency and compliance challenges are unlikely to disappear without deeper regulatory involvement.

Conclusion

In summary, Tether faces ongoing criticism about lack of transparency into its reserves backing USDT issuance and accusations of potential market manipulation. Many argue Tether Limited should undergo regular public audits by reputable firms to verify it holds sufficient reserves and is not artificially inflating crypto prices. However, Tether emphasizes legal and commercial sensitivities around reserves disclosures and disputes manipulation claims. Striking an appropriate balance between transparency and security presents a challenge. But persistent doubts and questions around Tether's reserves point to the need for greater transparency and potential oversight through new regulatory frameworks tailored to global stablecoins. While the path forward remains complex, focusing on protections for investors and integrity of the growing crypto-economy will be key priorities.