What is USDT, and why is Tether controversial?

USDT is the ticker symbol for one of the most widely used assets in the entire cryptocurrency ecosystem. It appears on every major exchange, underpins trillions of dollars in annual trading volume, and has become a default tool for anyone moving money through crypto markets. It also carries a controversy that stretches back years and still hasn’t been fully resolved.

USDT is issued by a company called Tether Limited, and it’s a stablecoin. Stablecoins are cryptocurrencies designed to hold a fixed value rather than moving with the market. In Tether’s case, each USDT token is intended to be worth exactly one US dollar at all times. The idea is that you get the benefits of a digital asset without exposure to the price swings that come with Bitcoin or Ethereum.

This makes stablecoins genuinely useful in practice. Traders use USDT to step out of a position without converting back to fiat currency through a bank, staying inside the crypto ecosystem while parked in something stable. For people sending money internationally, a dollar-pegged stablecoin can be faster and cheaper to move than going through traditional payment rails. And for exchanges that don’t hold licences to handle conventional currencies directly, USDT has functioned as a substitute dollar for most of the past decade.

Tether was founded in 2014, making it one of the oldest stablecoins in existence. The company that issues it shares close ownership ties with Bitfinex, one of the larger crypto exchanges. That relationship has been at the heart of the controversy around Tether, and it’s worth understanding in some detail.

The core claim underpinning USDT has always been straightforward: every token in circulation is backed by an equivalent value sitting in reserve. One USDT means one dollar’s worth of assets held somewhere, ready to be redeemed. For a long time, Tether described those reserves as simply cash. That description evolved over time to include cash equivalents, then commercial paper, loans, and other assets that are meaningfully less liquid than a bank deposit. This shift in language was not communicated clearly, and it became the foundation of legal and regulatory action.

The most significant case came from the New York Attorney General’s office. In 2021, Tether Limited and Bitfinex settled with the NYAG after an investigation found that Tether had misrepresented the nature of its reserves. A particular concern was a period during which Tether had lent hundreds of millions of dollars to Bitfinex to cover losses the exchange had incurred, while continuing to claim its tokens were fully backed. The settlement required Tether to pay $18.5 million and submit to periodic reporting obligations. Neither Tether nor Bitfinex admitted wrongdoing as part of the agreement.

That settlement did not resolve the deeper question of whether Tether’s books could withstand genuine scrutiny. Critics pointed out that the reporting Tether published remained in the form of attestation reports, a more limited form of assurance than a full independent audit. An attestation means an accounting firm has confirmed certain figures at a point in time. It does not carry the same scope or rigour as a complete audit of the kind required of public companies. Calls for a full independent audit have persisted for years without one being published.

The concern this raises is not abstract. If Tether’s reserves are insufficient to cover all circulating USDT at face value, a large-scale redemption run could cause the peg to break. The token’s price could fall below one dollar, and anyone holding it at that moment would lose money. In May 2022, when the algorithmic stablecoin TerraUSD collapsed and caused widespread panic in crypto markets, USDT briefly traded below $1 before recovering. It was a short-lived dip, but it showed that even the dominant stablecoin can feel the effects of a crisis in confidence across the sector.

There are legitimate things to say in Tether’s defence. The company has improved its disclosures over time. Quarterly reports now break down the reserve composition in more detail, and the makeup of those reserves has shifted substantially in recent years. The proportion of US Treasury bills, the safest and most liquid short-term assets available, has grown considerably, while the riskier commercial paper holdings have been reduced. Tether has also processed enormous volumes of redemptions without incident, which supporters point to as practical evidence that the system holds up under pressure.

The counter-argument is that improved disclosure is not equivalent to verified disclosure. Better transparency in self-reported documents does not carry the same weight as an independently verified audit. And the structural overlap between Tether Limited and Bitfinex, with shared ownership and a documented history of financial entanglement, creates conflicts of interest that haven’t been eliminated by greater openness.

For UK investors, the regulatory context matters. The Financial Conduct Authority does not regulate Tether as a financial product. Using USDT is not illegal, but there is no investor protection framework covering it. If Tether Limited were to fail or the peg were to collapse in a sustained way, you would have no recourse through the protections that apply to regulated UK financial products. This is different from, say, holding sterling in a bank account covered by the Financial Services Compensation Scheme.

None of this means USDT is too dangerous to touch. It is deeply embedded in how crypto markets function, and many professional traders use it as a matter of routine. Understanding the controversy is simply a prerequisite for using it sensibly. A stablecoin that promises to hold its value only delivers on that promise if the infrastructure behind it is genuinely sound, and with Tether, that question has never been put entirely to rest.

The story of USDT is really a story about trust in a market that was built around the idea of removing the need for trust. Tether made a simple promise, one dollar in for one dollar out, and then operated for years in a way that made it difficult to verify whether that promise was being kept. The situation has improved, the reserves look better than they did, and the legal battles have largely been settled. But the absence of a full audit means that final verification remains, for now, a matter of faith rather than fact.

Disclaimer: Cryptocurrency investments are highly volatile and speculative. Their value can rise and fall sharply, and you could lose all of your investment. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research before making any investment decision.