Author: Lawyer Liu Honglin
Two days ago, about USDT Tether, "Currency circles please eat melon correctly: Hubei police solved the country's "first virtual currency case", with a turnover of 400 billion! "In ", Lawyer Honglin took everyone together and ate a small melon of USDT with everyone based on the principle of "fewer words, bigger things". From the overwhelming comment area, it can be seen that everyone ate a lot of this melon. I was so happy that many of my friends were shocked.
In fact, this is not surprising at all. Everyone thinks that the virtual currency they play is decentralized, but you must know that there are many well-known institutions in the currency circle that cooperate with the public security.
As a global company, Tether has established an on-chain blacklist mechanism to fulfill its anti-money laundering compliance obligations and has established close and friendly cooperative relations with law enforcement agencies around the world. For activities such as money laundering and terrorist financing, it will restrict relevant addresses. The principle of "freezing" is that USDT, as a smart contract programming product, can restrict EOA's management rights to the token through code. When an address is "AddedBlackList" by the centralized TEDA company, it will no longer be able to transfer the address. USDT tokens in .
As of March 2023, Tether has blacklisted 846 addresses in the Ethereum network, and more than 449 million USDT has been frozen.
Today’s article, as a follow-up to the article on eating melons, would like to share more stories about USDT with you. The article is a bit long and probably has a few parts:
- The birth background and development history of USDT - The technical structure and operating mechanism of USDT - The challenges and risks faced by USDT - The embarrassing situation of USDT in China
Introduction to USDT
USDT, also called Tether, is an encrypted digital currency. Because its value is pegged to the U.S. dollar, each USDT is equivalent to one U.S. dollar, so it is also called a stable currency.
The goal of USDT is to provide a stable value anchor for the digital currency market, allowing users to easily exchange between different digital currencies, or between digital currencies and legal tender.
The issuance of USDT is controlled by Tether, a company affiliated with Hong Kong-based iFinex, which also owns the Bitfinex cryptocurrency exchange.
According to data from the CoinMarketCap website, as of July 4, 2022, USDT has a total circulation of 66,081,540,012.39 coins and a total market value of US$66,081,540,012.39, ranking third among all cryptocurrencies, second only to Bitcoin and Ethereum. USDT’s 24-hour trading volume is $72,038,000,000.00, ranking first among all cryptocurrencies. USDT is traded on over 400 exchanges and platforms worldwide and supports over 10 different blockchain protocols.
The birth and development of USDT
In 2014, when USDT was born, cryptocurrencies such as Bitcoin have attracted widespread attention, but there are also some problems, mainly in the following aspects:
Prices fluctuate wildly. There is no limit on the rise or fall of the cryptocurrency market, and prices often fluctuate significantly, bringing great risks to investors. For example, in November 2013, the price of Bitcoin rose from $200 to $1,200, and then fell to $800 in January 2014; in December 2017, the price of Bitcoin rose from $10,000 to $20,000, and then fell to $20,000 in February 2018. It fell to $6,000 per month.
It is inconvenient to exchange legal currency. Many encrypted digital currencies do not have direct exchange channels with legal tender. They need to be converted into mainstream cryptocurrencies such as Bitcoin first, and then converted into legal tender. Such a process is not only time-consuming and labor-intensive, but also entails exchange rate risks and transaction fees.
Regulation is unclear. Different countries have inconsistent attitudes and policies towards encrypted digital currencies. Some countries prohibit or restrict the use and trading of encrypted digital currencies, while others are more open or acquiesce. This has brought great uncertainty and compliance difficulties to the cryptocurrency market.
In order to solve these problems, Tether launched USDT, a stable currency, trying to build on the advantages of blockchain technology such as decentralization, peer-to-peer, low cost, and high efficiency, while adding the ability to link with legal currency, maintain price stability, and provide Features such as legal currency exchange channels to meet market demand.
In 2014, Tether was established and began planning to issue USDT. At that time, the digital currency market was still in its infancy and lacked a stable trading medium. Tether believes that by issuing a stablecoin pegged to the U.S. dollar, it can solve this problem and bring more liquidity and efficiency to the digital currency market.
In 2015, Tether officially launched USDT and traded it on several mainstream digital currency trading platforms. At the time, USDT primarily used the Omni protocol on the Bitcoin network for transfers and verification. Each USDT is considered a token on the Bitcoin network and can take advantage of the security and decentralized nature of the Bitcoin network.
In 2017, with the explosive growth of the digital currency market, USDT also ushered in a large amount of demand and use. Tether began to expand the issuance of USDT and issue different versions of USDT on multiple blockchain networks, such as Ethereum, Tron, EOS, etc. The purpose of this is to improve the usability and flexibility of USDT, allowing users to choose different networks for transfers and transactions.
In 2018, Tether encountered a series of doubts and controversies. First, some people question whether Tether really has enough U.S. dollar reserves to support the value of USDT, because Tether has never disclosed proof of its reserves or received third-party audits. Secondly, there are accusations that Tether has an interest relationship with the Bitfinex exchange and is suspected of manipulating the digital currency market. Finally, it was discovered that Tether had modified its terms of service on its website, changing the commitment to peg USDT to the U.S. dollar to "best effort," causing users to worry about the stability of USDT's value.
In 2019, Tether faced investigations and lawsuits from the U.S. New York State Attorney’s Office (NYAG). NYAG alleges that Tether and Bitfinex violated New York state law in late 2018 by concealing the fact that $850 million in funds was frozen or lost due to Bitfinex’s cooperation with a payment processor called Crypto Capital and the use of Tether The company has $850 million in USDT under its control to make up for the funding gap of the Bitfinex exchange. This incident raised doubts in the market about whether USDT really had sufficient U.S. dollar reserves, resulting in certain fluctuations in the price of USDT.
In 2020, while responding to legal proceedings, Tether has also continued to expand the issuance and coverage of USDT. Tether has issued USDT on multiple emerging blockchain networks, such as Algorand, Solana, Tron, etc., and has cooperated with multiple digital currency service providers and institutions to promote the use scenarios and value of USDT. Tether has also begun to issue stablecoins linked to other legal currencies, such as the euro, the renminbi, the yen, etc., to meet the needs of different regions and markets.
In 2021, Tether reached a settlement agreement with NYAG, ending more than two years of litigation. Under the agreement, Tether agreed to pay a fine of $18.5 million to NYAG and submit its reserve reports and related documents to NYAG on a quarterly basis. Tether also agreed to no longer provide services to users or institutions in New York State. In addition, Tether has also begun to regularly announce the composition and proportion of its reserves, and hired an audit agency called Moore Cayman to conduct audits of its reserves.
In 2022, Tether continues to maintain USDT's leading position in the stablecoin market and has innovated and improved in many aspects. For example, Tether has launched a new version called Liquid USDT, which utilizes Liquid sidechain technology on the Bitcoin network to enable faster and more private transfers. Tether has also cooperated with multiple central bank digital currency (CBDC) projects to explore how to use USDT to promote the cross-border circulation and interoperability of CBDC.
USDT’s technical architecture and operating mechanism
USDT was originally issued based on the Omni Layer protocol on the Bitcoin blockchain. The Omni Layer protocol is a second-layer protocol that implements smart contract functions on the Bitcoin blockchain and allows the creation of new tokens on the Bitcoin blockchain. Tether uses the Omni Layer protocol to convert fiat currencies such as U.S. dollars into digital currencies. For every USDT issued, it will store one U.S. dollar of cash in its bank account as a reserve. The issuance and circulation process of USDT can be divided into the following steps: - Users deposit US dollars into Tether's bank account; - Tether creates their own Tether account for users and puts the number corresponding to the US dollar they deposit into the account. Currency; - Users can trade USDT through exchanges or over-the-counter markets, or use USDT to purchase other encrypted digital currencies; - Users can exchange equal amounts of US dollar cash with Tether at any time, and Tether will destroy the corresponding amount of USDT. Tether claims that its legal reserve account is regularly audited to confirm that its reserve account can actually support the value of USDT in circulation. Tether also claims that all its transactions are recorded on the public blockchain, and anyone can view its issuance and circulation. In addition to USDT based on the Omni Layer protocol, Tether has also issued USDT on other blockchains, including Ethereum, TRON, EOS, Algorand, etc. USDT on these blockchains are all pegged to the US dollar, but use different technical standards and protocols.
As a stable currency, USDT plays an important role in the digital currency market, mainly in the following aspects:
Avoid market risks. When the digital currency market falls, investors can exchange other cryptocurrencies into USDT to protect their assets from price fluctuations. When the market picks up, investors can exchange USDT for other encrypted digital currencies and participate in transactions.
Provide transaction intermediary. Since many encrypted digital currencies do not have direct exchange channels with legal tender, investors need to use USDT as an intermediary to achieve conversion between legal tender and other encrypted digital currencies. This saves time and costs and also avoids exchange rate risks.
Support payment settlement. Since USDT has the same value as the US dollar and uses blockchain technology to achieve fast, low-cost, safe, and transparent value transfer, it can be used in scenarios such as cross-border remittances and payment settlements.
Challenges facing USDT
Although USDT has wide application and influence in the digital currency market, there are also some challenges and risks, mainly in the following aspects:
First of all, the issuer of USDT is Tether, which has not publicly and transparently disclosed its reserves of USDT. That said, we don’t know if they actually have enough USD to support the value of USDT. If they don't, then USDT may experience a credit crisis, leading to a decrease in users' trust in it and even triggering panic selling. This has happened several times. For example, in October 2018, the price of USDT fell below $1, causing market shocks.
Secondly, USDT has also come under some legal and regulatory pressure. Previously, Tether and Bitcoin trading platform Bitfinex were sued by New York prosecutors, accusing them of covering up an $850 million funding gap in 2018 and misleading investors. Although the two parties finally reached a settlement agreement of US$185 million, it also had a negative impact on USDT. In addition, some countries and regions have also restricted or banned stablecoins, such as China and India.
Finally, USDT also faces challenges from competitors. With the development and innovation of blockchain technology, more and more stable coins have appeared on the market, such as USDC, DAI, BUSD, etc. These stablecoins have their own advantages and characteristics, such as higher security, better compliance, more application scenarios, etc. They may attract some USDT users, thereby affecting the market share and status of USDT.
USDT is embarrassed in China
According to my country's latest policy, virtual currency does not have the same legal status as legal tender, that is, it cannot be used as a payment and settlement tool. Business activities related to virtual currencies are illegal financial activities, including issuance, trading, agency, custody, etc. If any organization or individual invests in virtual currency and related derivatives and violates public order and good customs, the relevant civil legal actions will be invalid.
This means that if you buy or sell USDT, you may face the following risks:
The counterparty of the transaction may be a criminal, using USDT to conduct illegal activities such as gambling and smuggling. Once discovered by the judicial authorities and marked as a black U, you may be suspected of money laundering or other crimes.
The trading platform may be illegal, and there are risks such as escaping, being seized, and being hacked, resulting in your funds being unable to be withdrawn or lost.
Transaction disputes may not be able to protect rights, because buying and selling virtual currencies is an invalid civil act and is not protected by law. If the counterparty defaults or commits fraud, you may not be able to recover losses through normal channels.
So, how to reduce the legal risks of USDT? As lawyers, the advice we give is: try to avoid buying and selling USDT + try to avoid allocating too much USDT as your digital assets.
If you insist on buying and selling USDT, then you must at least do the following:
Choose a formal and legal trading platform and stay away from pheasant platforms.
Check the identity information and credit rating of the counterparty to avoid transactions with suspicious or dishonest people.
Keep transaction vouchers and evidence, including transfer records, chat records, contract agreements, etc.
Comply with relevant national laws and regulations and do not participate in any illegal activities or speculation.
Summarize
USDT is a stablecoin pegged to the U.S. dollar issued by Tether. It plays an important role in the digital currency market, providing users with a stable value anchor and trading medium.
USDT has been issued since 2015 and has experienced many changes and challenges. It is still one of the largest and most widely used stable coins. USDT has different versions on different blockchain networks, and cooperates with multiple digital currency service providers and institutions to expand its usage scenarios and value. USDT also faces some doubts and disputes, mainly involving its reserve certificates, legal compliance compliance, market influence, etc.
As a kind of virtual currency, it faces strict supervision and restrictions in our country. As users, we should look at the value and risks of USDT rationally and not blindly follow the trend or risk hoarding coins.
