Is USDT a safe investment?

USDT has experienced exponential growth since its debut in 2014, becoming the dominant fiat-backed stablecoin. Its market capitalization surged from $20 billion at the end of 2021 to over $100 billion in 2024, reflecting rising demand for stablecoins. 

This adoption highlights USDT’s critical role in the crypto ecosystem, from providing liquidity to enabling seamless transactions and hedging against volatility.

While USDT’s growth underscores its importance, investors must weigh its benefits against potential risks. 

This article examines the crucial considerations for anyone looking to invest in USDT, offering a balanced view to help you make better informed decisions.

Before diving into how USDT aims to maintains its value, let’s clarify exactly what it is:

• Tether (USDT) is a centralized, real-world asset collateralized stablecoin that is designed to maintain a 1:1 peg with the US dollar. It was first conceived as ‘Realcoin’ before rebranding to Tether, emphasising its digital tie to real-world assets. 
• As a stablecoin, it is a tokenized representation of the US Dollar, which is programmable, can easily be audited and can be used on various blockchains. 
• As with other stablecoins, it’s being increasingly used for cross-border payments, remittances, trade settlement and for generating yield. 

Tether is the company that issues USDT tokens, and takes several steps to try and ensure that they maintain price parity with the US Dollar.

Naturally, if any stablecoin fails to maintain a stable peg with its reference asset it can have dire consequences, including harming investor trust. 

The following list breaks down the main ways in which Tether endeavours to make USDT a secure stablecoin:

1. Managing supply and demand. One way in which Tether (USDT) aims to maintains its value is by ensuring the circulating supply of tokens is adjusted according to demand. For every token in circulation, there should be an equivalent amount of US dollars or cash-equivalent assets held in reserve. This mechanism ensures that Tether (USDT) remains fully collateralized. Tokens are minted when an entity or individual deposits fiat US dollars into Tether’s bank account. For example, if someone wishes to convert $100,000 US dollars into 100,000 Tether (USDT) tokens, the new coins are minted by Tether and added to the circulating supply. These newly minted coins can then be used as desired within the crypto ecosystem. Now consider someone wanting to redeem their Tether stablecoins back into US dollars. They do so by depositing the tokens into their account with Tether. In turn, Tether removes these tokens from circulation by burning them and returns the equivalent amount of fiat currency. This reflexive process ensures that the total supply of Tether (USDT) always matches the value of the reserves. If Tether were to erroneously mint more tokens or fail to burn tokens during redemptions, the number of coins in circulation would exceed the reserves. Such a mismatch could destabilize the peg, potentially causing Tether to be repriced lower to reflect the imbalance. By responsibly maintaining this equilibrium, Tether contributes to the overall stability and security of its stablecoin.
2. Transparent reporting on reserves. When an entity deposits US dollars with Tether, the cash is invested in liquid, yield-bearing assets such as US Treasury Bills, precious metals, corporate bonds, secured loans and even Bitcoin (BTC). Only a relatively small amount of its overall reserves remains in cash and bank deposits. With this in mind, it’s critically important that Tether regularly reports on the status and nature of its reserves with full transparency. It achieves this with the help of an independent third-party, BDO, which generates quarterly “Consolidated Reserves Reports”. These reports provide a snapshot of the reserves—a high level overview, but not the same as an audit which serves to verify financial records and controls. If it ever emerged that Tether is not fully backed as these reports suggest, this may lead people to question the integrity and security of the stablecoin. Tether is currently facing scrutiny (as it has done in the past) from a consumer protection group that has raised concerns about the lack of a full audit. As it stands, the degree to which stablecoin issuers have to be transparent depends on the issuer’s legal form. Currently there is a general lack of clarity over how stablecoins should be treated. However, this may change with the introduction of the The Clarity for Payment Stablecoins Act of 2023.

Stablecoins like USDT provide a variety of advantages over their fiat counterparts, thanks to the blockchain technology that powers these digital assets:

• They allow for fast and cheap global payments, relative to traditional services. 
• Combined with smart contracts, stablecoins are programmable. This significantly broadens their utility, allowing them to act as collateral in DeFi or power decentralized prediction markets.
• Stablecoins are highly interoperable, allowing developers to deploy them across multiple blockchains and seamlessly bridge assets between networks.
• They allow people to self custody their own assets without relying on centralized intermediaries like banks. This is particularly useful for citizens in developing countries where access to reliable financial services is limited. 
• By leveraging distributed ledger technology, auditing stablecoins in circulation is straightforward and highly-efficient. This ensures that the supply and location of stablecoins can be accurately tracked and accounted for.

• USDT allows anyone in the world to save in US dollars by converting their local currency into USDT tokens—something that would ordinarily not be possible. Being the global reserve currency, demand for the dollar is high and stablecoins therefore play an important role in meeting that demand.
• If we examine the Dollar index (DXY), the dollar has performed well relative to other major fiat currencies over the last 10 years. Stablecoins allow anyone with a smartphone the opportunity to gain exposure to the dollar, something that may be particularly important in nations where inflation debases local currencies. One survey of stablecoin users in emerging market economies showed that nearly half of respondents use stablecoins to get access to dollars.

All stablecoins come with some degree of risk. Prospective buyers should think carefully about the specific pros and cons of each project before investing any capital. 

While Tether is currently the number one stablecoin in terms of market cap, investors may feel that it’s not their first choice for a few reasons.

A recently published assessment on stablecoin stability by S&P Global gave Tether a rating of 4 (where 1 is very strong and 5 is weak) in part due to a lack of operational transparency.

The report highlights a few key areas that contributed to the rating, which raise a few interesting questions:

• The rating “...reflects a lack of information on the creditworthiness of USDT’s reserve custodians, counterparties, or bank account providers”, as well as “...exposure to higher risk assets with limited disclosures.”
• Further, the reports highlight the “...limited transparency on reserve management and risk appetite, lack of a regulatory framework, no asset segregation to protect against the issuer's insolvency, and limitations to USDT's primary redeemability.”
• S&P Global go on to state that if the issuance of USDT were to be regulated and supervised by an authoritative body, this could result in a more favourable assessment in future.

Beyond this assessment, another key risk associated with holding USDT is the potential loss of capital due to a depegging event, which is any event where a stablecoin loses its peg. 

It’s fairly common for a stablecoin to lose its peg for a brief period before quickly returning back to parity, and depegging events vary significantly in terms of magnitude. Throughout its history, Tether has experienced several noteworthy depegging events which prospective buyers should be aware of.

While depegging events are generally temporary, there is always a chance that a stablecoin never recovers, potentially leading to a total loss of capital for investors. Historically, Tether’s peg has always been restored, but the risk remains.

Another important consideration with Tether (USDT) is the possibility that it lacks sufficient reserves to back every token in circulation. It’s hard to quantify exactly how much of a risk this is, given that there's never been a comprehensive financial audit of Tether’s reserves. 

Such an audit would involve a thorough examination of Tether's financial statements and internal controls, providing a more detailed evaluation of its financial health.

If an audit were to reveal that Tether (USDT) is not fully collateralized, this would likely threaten the peg. The New York District Attorney General’s investigation into Tether in 2018 raised concerns over the transparency of Tether’s reserves, causing the token’s parity with the US Dollar to slide.

Potential Tether investors must also consider that there is currently no regulation of the reserve assets—it’s squarely up to Tether to decide how to invest the US Dollars they receive. Further, unlike other financial services which attract FDIC deposit insurance, there is no government assurance for USDT should widespread losses occur. That means that if Tether (USDT) does fail and investors lose capital, these losses may not be recoverable via government intervention. 

If a stablecoin issuer were to be found guilty of breaking any applicable laws, this could have far reaching consequences impacting on investor trust and sentiment. 

Tether complies with regulators in a variety of ways. It has obtained licenses to operate as a Money Service Business in multiple U.S. states, adhering to strict anti-money laundering (AML) and consumer protection regulations. It’s also registered in the Isle of Man, which has its own auditing and reporting requirements. Further, Tether is trying to create new stablecoins that adhere to European regulations, specifically the Markets in Crypto-Assets Regulation (MiCA), which institutes uniform EU market rules for crypto-assets. 

In the past, Tether has collaborated with law enforcement agencies to freeze assets associated with criminal activities. 

These actions demonstrate Tether's commitment to supporting lawful operations and maintaining the integrity of its platform. Such proactive measures may provide investors with some confidence that Tether is taking steps to comply with regulations and operate responsibly.

While this question cannot be definitely answered here, investors have to take stock of all the important variables and decide whether Tether is secure or not. 

What is clear is that Tether has several features that make it an attractive option compared to its competitors:

• Tether is the largest stablecoin by market cap, with widespread adoption across hundreds of platforms and is the dominant stablecoin for margined futures contracts.
• While the issuing company, Tether, has run into trouble on a few occasions and continues to attract regulatory scrutiny, USDT is one of the oldest stablecoins in operation with trillions of dollars of settlement since 2015.
• While Tether is yet to publish a full audit, the quarterly reports do offer significant detail about the nature of its reserves. Investors have to decide for themselves whether the lack of an audit by an independent accounting firm is meaningful or not. 
• Tether is trusted by millions of stablecoins users globally, and is chosen in part because of liquidity and track record.

There are two primary ways to purchase USDT tokens.

The first option likely applies to most traders and involves simply swapping other crypto assets like Bitcoin (BTC) or XRP (XRP) for USDT at a centralized or decentralized trading platform. 

By depositing your fiat or crypto into a centralized exchange that provides stablecoin markets (check in advance), it should then be relatively straightforward to complete the exchange and use your USDT as you see fit.

As the leading stablecoin in terms of adoption, Tether (USDT) is used by millions to interact with the crypto ecosystem, save in dollars and send payments. 

With that being said, with regards to its reserves and overall transparency, there remains some degree of uncertainty which is evidenced by ongoing investigations and unfavourable ratings. 

Investors seeking to understand how safe USDT is as an investment vehicle have to carefully consider all of the above factors before proceeding. 

Now that you have a better understanding of USDT, why not explore this and other stablecoin assets on Kraken?

Kraken lets you buy, sell and trade over 200+ cryptocurrencies, including top stablecoins.

Start your crypto journey today!