We've previously talked about how cryptocurrency stable coins aren't so stable and have inherit risks. These risks range from the crypto exchange providing the transaction going under, the stable coin losing its value, the exchange being hacked, the risk that the exchange may not be backing the stable coin with one-to-one fiat.
The latter is what happened to Tether in mid-October of this year. Tether is a stable coin backed by USD or Euros. A stable coin provides a mechanism to handle payments in cryptocurrency since it does not have the volatility of non-stable coin cryptocurrencies. However, an investigation by the US Commodity Futures Trading Commission (CFTC) and the New York attorney general found that Tether was not backed 100% by fiat 100% of the time.
While the above is true, Tether told The Verge that its stable coins did have adequate reserves. “As to the Tether reserves, there is no finding that tether tokens were not fully backed at all times — simply that the reserves were not all in cash and all in a bank account titled in Tether’s name, at all times,” Tether’s statement continues. “As Tether represented in the Order, it has always maintained adequate reserves and has never failed to satisfy a redemption request.”
To settle the allegations by the CFTC, Tether was ordered to pay $41 million. This example highlights how unregulated the cryptocurrency space still is. People can earn much higher interest rates by staking their coins on a DiFi platform that uses stable coins. Some of these people likely have a false sense of security that their money is going into a savings account since many DiFi platforms describe it as such. However, there are no FDIC or SiPC protections on these platforms, nor are any major US regulatory bodies monitoring the backing of stable coins.
Specific to the Tether case, the CFTC wants to be clear that it does not regulate the crypto space and doesn't want to instill a false sense of security in DeFi customers.