The Tether Whitepaper and You

Since many Tether defenders are intent on making arguments about the actual promises Tether has committed to (ie; “Tether isn’t a cryptocurrency!” “Tether doesn’t need to be fully backed!”), it felt like the right time to run through as much of the Tether whitepaper as possible. Hopefully, through a long-form analysis of the whitepaper (which hasn’t been updated), we can come to conclusions about what promises Tether has kept, and what promises Tether has broken.

Feel free to play along at home by viewing the whitepaper here.

The Abstract

Readers can see that the Tether whitepaper explicitly states that Tether is backed by one thing and one thing only: real world fiat currencies. This, clearly is no longer the case:

Is this traditional fiat currencies?

They also claim that Tether is decentralized, for some odd reason, which it obviously isn’t:

Could decentralized protocols do that?

Lastly, they quickly mention the fact that they will use “other auditing methods” to prove the reserves. There have been zero proper audits of Tether fiat reserves.

The Introduction

This is just to make it clear how reliant Tether is on their 1–1 backed promise. Already it’s been mentioned three times in the first two pages. They also claim the money is held in deposit by Hong Kong based Tether Limited, but then, what is British Virgin Islands based Tether Holdings Limited? Why was Stu Hoegner responsible for tens of millions being held in a Canadian bank account? Why was $700-$800 million handed over to Bitfinex after Bitfinex lost the money to Crypto Capital Corp without any contract? Does any of that resemble the single Hong Kong entity called Tether Limited?

However, the most important point here is that Tether was initially willing to trade Tethers for the spot value of Bitcoin. Reread that. And then read it once more.

EVEN AT THE BEGINNING, TETHER WAS TRADING TETHERS FOR BITCOINS AND NOT ONLY FIAT CURRENCY.

This will be quick:

• Tethers now exist on Omni, ETH, EOS, Algorand, TRON, BCH, OMG, and Liquid. So much for not being on “less developed altcoins.”
• Tether cannot be used “just like bitcoins.”
• Tether Limited essentially performs no proof of reserves besides updating the blockchain.
• There have already been proven liquidity constraints and redemption issues.
• There have already been black swan events. Side note: I’ve never seen any company ever claim that they would be immune to black swan events.
• Tether’s 1–1 backing claim is easier for non-technical users to understand. Too bad that is no longer the promise.

I have no idea what the former statement is supposed to mean: on one hand they admit that Tether isn’t decentralized, on the other they claim Tethers are decentralized.

Tech Stack and Processes

The illustration above is what Tether uses in the whitepaper to describe the flow of fiat and Tethers in the system. It’s relatively simple and easy to interpret.

First, fiat is wired to Tether, then Tethers are issued to the appropriate address, then Tethers are sent elsewhere and moved within the cryptocurrency system (ie; through exchanges, mixers, and individual wallets), then a Tether user buys back the Tethers (either by trading it for Bitcoin or another cryptocurrency), then they send the Tethers back to Tether Limited for fiat.

That isn’t how it works, though, and we can be sure of that because at least once Tether loaned Bitfinex hundreds of millions of dollars without receiving any fiat. That transaction looked something like this:

Simplified flow process, much less work involved here.

The solvency of Tether entirely relies on an equation where they constantly show users their bank account balances (something they’ve never done), and consistently get professional audits — again, something they’ve never done:

Weaknesses

At first glance, it seems like Tether is relatively honest about the weaknesses around the concept:

But they quickly follow this up with a slew of reasons none of these weaknesses are really weaknesses:

1. The fact that Tether claims all client funds would be safe in the case of bankruptcy is flat out untrue.
2. If the banks were so aware of how Tether was conducting business, they wouldn’t have dropped them.
3. If Tether were in full compliance, $700-$800 million wouldn’t be frozen in a Bitfinex/Crypto Capital Corp bank account and they wouldn’t have to desperately seek out shady banks in the Bahamas.
4. AFAIK, no one knows exactly where JL Van der Velde (CEO) or Giancarlo Devasini (CFO) are currently located. I visited the Finex offices in Hong Kong and found nothing. As for “rigid internal policies,” that’s patently false, considering they loaned their parent company hundreds of millions of dollars without letting the public know.

Main Applications

As far as main applications for Tether is concerned, generally, the Tether whitepaper is quite accurate. Without taking multiple screencaps, the ideas are something like this:

• Exchanges like and utilize Tether because they can avoid the hassles of wire transfers and banking issues. This is very true.
• It is easier to send and receive Tethers quickly than to do so with traditional fiat currency (for exchanges and individuals).
• It’s easier for Tether to reverse a fraudulent transaction than to do so with traditional cryptocurrencies like Bitcoin (where if the Bitcoin is lost, it’s lost forever).
• Tether is less volatile than most cryptocurrencies and is therefore more likely to be used as a payment mechanism.
• No bank account needs to be opened to acquire Tethers, so KYC/AML can be avoided, and if the Tethers can be spent after that, a consumer ensures privacy.
• Easier to price goods in Tether than to constantly change the price of something due to the volatility of alternative and unpegged cryptocurrencies.

Conclusion

• Tether again states it’s backed 1–1. This is brought up over 10 separate times throughout the whitepaper. If this isn’t an important aspect of Tether, what is?
• Tether again claims it receives regular profession audits, of which it has received zero. The conclusion is baseless.

Appendix (Questions)

The Tether whitepaper appendix takes up a full third of the entire whitepaper, so while it may feel like a slew of information for who-knows-who, there’s actually a lot of fantastic information buried in there.

In it, they discuss attack vectors and further weaknesses in the Tether protocol, though they consistently hedge these statements with vague reassurances:

The most fascinating part of the appendix appears in the “Legal & Compliance” section.

Several aspects stick out and seem to have been thrown in at the very end so that people purposely glossed over them (as most ToS’ do).

• Tether admits that Tether Limited is wholly owned by Tether Holdings Limited, a BVI corporation.
• Tether mentions a company called “RenRenBee,” a Hong Kong company, as the KYC/AML enforcer. This company was created around the same time as Tether and ceased to exist after the first renewal fee came up:

This article is so people have a resource available to point others to if they claim Tether doesn’t need audits, doesn’t need to be 1–1 backed, isn’t a cryptocurrency, or other weird statements from the defenders. If you find other interesting points in the whitepaper — either good, bad, or neutral — that I missed, please feel free to reach out so I can add it.

Stay skeptical, friends.