Relationship Between Blockchain, Tether and Bitcoin

Blockchain technology is a protocol like http for the internet and webpages. It controls how the network operates but the code itself is not owned by anyone. This technology is game changing because it is essentially a giant ledger of information that cannot be altered. It can be used to track orders, payments, accounts, production, assets and other things. As a result, something of value can now be sent electronically without a third party institution. Currently, when we make a purchase or move money or assets from one person to another, we use a financial institution. Blockchain potentially removes the need for the financial institution.

Tether, a cryptocurrency developed using blockchain technology, was founded in 2014 and is owned by iFinex. The trading platform for Tether, Bitfinex, is also owned by iFinex. It was designed as a stable coin, meaning one Tether is equal to one US dollar. The tether for dollar promise made the cryptocurrency very popular. Tether accounts for about 80% of the stable coin market. The idea is that you would give them a dollar and they would give you a Tether.

The problem with this is US banks are reluctant to get involved with cryptocurrencies. As a result, Bitfinex ended up placing more than $1 billion in a Panamanian bank. This is where it gets interesting. An ongoing NYS Attorney General investigation claims the company has “no contract or similar written agreement” between the company and the bank. According to NY’s AG, this bank “held all or almost all of Bitfinex’s funds” and “refused to process customer withdrawal requests and refused or was unable to return any funds to Bitfinex.” If this turns out to be true, Tether could be backed by nothing.

So what does this have to do with Bitcoin (another cryptocurrency created using blockchain technology)? About 60% of Bitcoin purchases are made with Tether. At this point, there is no way to know if Bitfinex is a victim of the Panamanian bank or if the money was moved fraudulently. In addition, there is speculation that unbacked Tether is being used to drive up the price of Bitcoin.

Additional investigations are being made by the Commodity Futures Trading Commission and the US Department of Justice. Depending on the outcome of these investigations, the cryptocurrency market could suffer a credibility hit.