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Stablecoin battle heats up with class-action lawsuit filed against Tether and Bitfinex

Market-leading stablecoin Tether (USDT) is under renewed pressure after a class action lawsuit was filed against Bitfinex and Tether in the United States District Court this week.

Tether (USDT) was launched in 2014 as the first dollar-pegged stablecoin. Tether has since established itself as the leading stable digital currency for traders who want to remain in crypto but move to cash during times of market volatility.

What is Tether?

Issued by Tether Limited, a sister company of Bitfinex owner iFinex Inc., the digital currency first claimed to be backed one-to-one by US dollars in a bank account. However, many industry experts questioned whether that was really the case as no third-party audits were conducted in the early years of the stablecoin.

In April 2019, following growing market unease, a lawyer for the company confirmed that the stablecoin is not fully collateralized. Instead, only 74% of USDT tokens are backed by cash and cash equivalents. This means the fact that USDT is trading at $1.00 per token is partly based on the trust that it will continue to do so, even without full fiat currency backing.

However, this was not the only controversy surrounding the stablecoin. A 2018 study suggested that the issuance of USDT may have played a key role in the Bitcoin bull market, suggesting it was used to inflate the price of the leading digital currency. Defenders of Tether have pointed out that the suggested correlation between new issuance of Tether leading to an increase in the Bitcoin price is simply the natural function of traders moving from fiat, to Tether, to Bitcoin.

Additionally, the Tether Limited parent company, iFinex, had issues with its banking partner, which has added to the stablecoin’s reputational decline.

Earlier this year it was revealed that $850 million of the Bitfinex reserve had been seized by authorities who targeted Bitfinex payment processor Crypto Capital. To make up the shortfall, Bitfinex took a loan from its sister company Tether, which meant Tether was no longer backed one to one. To make up the shortfall, Bitfinex went on to raise $1 billion through an Initial Exchange Offering (IEO).

Despite the controversy, USDT overtook Bitcoin in daily trading volumes in October 2019 amid market volatility that led traders to flee into USDT for safety.

A $1.4 trillion dollar class action lawsuit

Now a new class action lawsuit has been filed against Tether and Bitfinex by the same lawyers to successfully sue Craig Wright. The plaintiffs claim that Tether’s operators ran a “sophisticated scheme that co-opted a disruptive innovation — cryptocurrency — and used it to defraud investors, manipulate markets, and conceal illicit proceeds.”

Tether responded to the class-action lawsuit in a blog post, calling it “meritless” and “a mercenary lawsuit based on [a] bogus study.”

“Tether is aware of an unpublished and non-peer reviewed paper falsely positing that Tether issuances are responsible for manipulating the cryptocurrency market. Tether vigorously disputes the findings and conclusions claimed by that source. […] We want to make clear our position that any claims based on these insinuations are meritless, reckless and a shameless attempt at a money grab,” the company stated.

Lawsuits of this size and scale can take years to play out and it’s possible that one outcome could be some form of negotiated settlement between the company and the plaintiffs. What is clear, however, is that the lawsuit is another blow to Tether’s reputation. And reputation is vital for a stablecoin.

USD Coin – the new contender

Following Tether, the second-largest stablecoin by market capitalization is USD Coin (USDC).

USD Coin was launched in September 2018 by CENTRE, a consortium led by Circle and Coinbase. Only a year later, the ERC20 token has managed to grow into a digital asset with a market capitalization of around $500 million.

USD Coin is fully collateralized by US dollars held in a regulated financial institution. The issuing entity is also a regulated financial institution. Moreover, leading accounting firm Grant Thornton LLP attests USDC’s dollar reserves every month to ensure full transparency.

The regulated and transparent nature of USDC has been one of the two key driving forces of its high adoption rate.

The other factor driving USDC adoption has been the sheer amount of partnerships CENTRE has managed to engage in with exchanges, wallet providers, and decentralized applications. USDC can currently be traded on over 45 centralized and decentralized exchanges, including Binance, Bitfinex, Kraken, Poloniex, and Uniswap.

USD Coin more than a trading asset

While the number one use case for USDC is as a stable base currency for traders, USD Coin has a range of other uses.

Through its integration with Coinbase Commerce, USDC can be used by online retailers to accept US dollars in tokenized form. In the same way that merchants can accept Bitcoin payments, they can also accept USDC using Coinbase’s merchant payments platform.

USDC is also actively used in the DeFi market as a lending asset. According to the USD Coin Report 2019 published last month, over $40 million in crypto-backed loans have been originated using USDC and around 15 percent of outstanding crypto loans are denominated in the fiat-backed stablecoin. As USDC is an ERC20 token, it has managed to integrate swiftly in the largely Ethereum-powered DeFi market.

The stablecoin contenders

There are currently around 150 stablecoins in the crypto asset markets. Stable digital currencies are pegged against a range of fiat currencies, have different stability mechanisms, market capitalizations, and adoption rates. But, as is often the case in the crypto markets, not all stablecoins are created equal.

While a substantial amount of recently launched stablecoins are yet to make an impact in terms of trading volumes and market adoption, there are five stablecoins in the top 55 crypto assets by market capitalization – Tether (USDT), USD Coin (USDC), Paxos Standard (PAX), TrueUSD (TUSD), and Dai (DAI).

PAX and TUSD have market capitalizations of $250 and $200 million respectively and are also US dollar-backed stablecoins. DAI, which has a market value of $80 million, is a different type of stablecoin. It uses crypto-collateral in the form of ETH to create price stability with the US dollar.

While these three stablecoins are experiencing slower adoption than USD Coin, they could potentially become a threat to Tether in the coming years. For now, however, USD Coin is best positioned to dethrone Tether, which has now has a large court case to try and shake off.


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