Tether's Lack of Fiat Backing Could be Catastrophic for Bitcoin, Analyzing USDT's Troubling Terms of Service

Tether, the market-leading stablecoin in both market capitalization and controversy, made changes to its legal terms of service that indicate that USDT is not fully backed one-to-one by US dollar reserves.

Tether underpins billions of dollars worth of value in the cryptocurrency markets through its widely used stablecoin USDT-and if Tether is providing loans, the amount could be even higher.

Allegedly, the DOJ is focused on potential Bitcoin price manipulation through the use of Tether on Bitfinex.

On Feb. 26th, 2019, Tether made a number of changes to its legal terms of service that call into question USDT's fiat backing.

This is highly concerning for USDT holders because if one of Tether's debtors were to default on a loan, or if Tether itself were to become insolvent, then holders of USDT may only be entitled to illiquid-or even worthless-assets.

Tether's changes to the above passage also raise concerns about the company's issuance criteria for USDT. As defined by Tether, USDT is backed by "Fiat" and other potentially dubious assets.

"Tether assumes no liability or responsibility for and shall have no liability or responsibility for any claim or any and all other commercial losses directly or indirectly arising out of or related to loss of value of Tether Tokens or the Reserves backing such Tether Tokens resulting from failure or insolvency of any bank, depository, custodian, borrower, or payment processor holding or processing the assets backing Tether Tokens, or from the theft of such assets, or from freezes, seizures, or other legal process asserted by a Government."

"The biggest risk Tether poses to the broader crypto currency ecosystem has less to do with its financial insolvency and everything to do with the trust of market participants. Redemption of USDT today is already difficult or near impossible for most retail users. Tether is worth $1 because it's generally agreed upon that it's worth $1, not because it can be redeemed for that dollar. Should that faith vanish, the repercussions would be material, widespread and volatile."

At the moment, Tether underpins, at a minimum, $2 billion in assets in the cryptocurrency markets through USDT. If loans and other instruments are taken into consideration, the amount of crypto market capitalization related to Tether could be even higher.

Simply put, if Tether holders lose faith in the value of USDT it could be catastrophic.