Crypto Market Risk Rises as Tether Migrates to More Blockchains

(Bloomberg) -- One of the murkier corners of the cryptocurrency market is becoming even less transparent.

Tether, the controversial token that serves as a conduit for trading coins on many of the world's largest crypto exchanges, is becoming the means for conducting transactions on a spate of new blockchains, the distributed digital ledgers that underpin the digital assets.

The migration from the dominant Bitcoin and Ethereum platforms risks making it more difficult for investors to track transactions, going against one of the key tenets championed by crypto advocates since the advent of the self-styled alternatives to money a decade ago.

“Tether has historically enjoyed obfuscation,” said Edwin Ong, co-founder of San Francisco-based digital assets analytics provider Blockspur. “With them being on different blockchains, it's harder to figure out what's going on.”

Tether is what's refereed to as a stablecoin. They're used as a type of liquidity pool because lingering concerns about money laundering and other illegal uses have made it difficult for exchanges to establish banking services. Tether has claimed that each coin is backed one-to-one by currencies such as the dollar or euro, though the Hong Kong-based company that controls the coin and the Bitfinex exchange said in a court filing earlier this year that the alleged reserve equals only about 75% of the outstanding tokens.

That hasn't curbed Tether's popularity. On July 29, it joined the Liquid Network, a sidechain to Bitcoin that is used by exchanges and market makers to settle transactions. The token was added to Tron in March, and in May, it said it would debut on EOS -- networks that many existing analytics companies don't yet track. It is also jumping on Algorand blockchain.

Some blockchain privacy features could make it harder to independently analyze Tether's movements. Liquid's confidentiality features, for example, mask the type of coins sent, so it won't be possible to tell if the coin is Tether or Bitcoin.

Tether was used in 40% and 80% of all transactions on the world's two top exchanges, Binance and Huobi, respectively, according to cryptocurrency data provider Coin Metrics. The stablecoin has also served as a barometer for Bitcoin price moves, with speculators tracking the creation of new Tethers, which the company says happens after large investors place orders.

Tether didn't return multiple requests seeking comments.

Meanwhile, more chains with Tether on them could be forthcoming.

“I'd imagine Tether is hedging its bets on what networks take off in the future,” Eric Turner, director of research at Messari, said in an email. “The marginal cost of launching on a new chain isn't that high and Tether has the chance to become the stablecoin of choice on these platforms by getting an early mover advantage.”

John Griffin, a finance professor at the University of Texas at Austin, who alleged that half of Bitcoin's surge in 2017 was the result of market manipulation using Tether, said the stablecoin remains an enigma.

“It does make it more difficult to track when one has crypto on different blockchains,” Griffin said. “I can't say for sure why Tether is doing this. It could be both for increased transaction speed and for more difficulty in tracking.”

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Rita Nazareth

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