 
 

 
 

 
 

Tether: Fiat currencies on the Bitcoin blockchain 
 
 

Abstract. A digital token backed by fiat currency provides individuals and organizations with a 
robust and decentralized method of exchanging value while using a familiar accounting unit. The 
innovation of blockchains is an auditable and cryptographically secured global ledger. Assetbacked 
token issuers and other market participants can take advantage of blockchain technology, along 
with embedded consensus systems, to transact in familiar, less volatile currencies and assets. In 
order to maintain accountability and to ensure stability in exchange price, we propose a method to 
maintain a onetoone reserve ratio between a cryptocurrency token, called tethers, and its 
associated realworld asset, fiat currency. This method uses the Bitcoin blockchain, Proof of 
Reserves, and other audit methods to prove that issued tokens are fully backed and reserved at all 
times.  

 

 

 

 

 

 

 

 

 
 
 

 
1 



 
Table of Contents 

Table of Contents 
Introduction 
Technology Stack and Processes 

Tether Technology Stack 
Flow of Funds Process 
Proof of Reserves Process 
Implementation Weaknesses 

Main Applications 
For Exchanges 
For Individuals 
For Merchants 

Future Innovations 
Multisig and Smart Contracts 
Proof of Solvency Innovations 

Conclusion 
Appendix 

Audit Flaws: Exchanges and Wallets 
Limitations of Existing Fiatpegging Systems 
Market Risk Examples 
Legal and Compliance 

Glossary of Terms 
References 

 
 
 
 
 
 
 
 
 
 
 

2 



Introduction 
 
There exists a vast array of assets in the world which people freely choose as a storeofvalue, a 
transactional medium, or an investment. We believe the Bitcoin blockchain is a better technology for 
transacting, storing, and accounting for these assets. Most estimates measure global wealth around 250 
trillion dollars [1] with much of that being held by banks or similar financial institutions. The migration of 
these assets onto the Bitcoin blockchain represents a proportionally large opportunity.  
 
Bitcoin was created as “an electronic payment system based on cryptographic proof instead of trust, 
allowing any two willing parties to transact directly with each other without the need for a trusted third 
party.”[2]. Bitcoin created a new class of digital currency, a decentralized digital currency or cryptocurrency1. 
 
Some of the primary advantages of cryptocurrencies are: low transaction costs, international borderless 
transferability and convertibility, trustless ownership and exchange, pseudoanonymity, realtime 
transparency, and immunity from legacy banking system problems [3]. Common explanations for the current 
limited mainstream use of cryptocurrencies include: volatile price swings, inadequate massmarket 
understanding of the technology, and insufficient easeofuse for nontechnical users.  
 
The idea for assetpegged cryptocurrencies was initially popularized2 in the Bitcoin community by the 
Mastercoin white paper authored by J.R. Willett in January 2012[4]. Today, we’re starting to see these ideas 
built with the likes of BitAssets, Ripple, Omni, Nxt, NuShares/Bits, and others. One should note that all 
Bitcoin exchanges and wallets (like Coinbase, Bitfinex, and Coinapult) which allow you to hold value as a fiat 
currency already provide a similar service in that users can avoid the volatility (or other traits) of a particular 
cryptocurrency by selling them for fiat currency, gold, or another asset. Further, almost all types of existing 
financial institutions, payment providers, etc, which allow you to hold fiat value (or other assets) 
subsequently provide a similar service. In this white paper we focus on applications wherein the fiat value is 
stored and transmitted with software that is opensource, cryptographically secure, and uses distributed 
ledger technology, i.e. a true cryptocurrency. 
 
While the goal of any successful cryptocurrency is to completely eliminate the requirement of trust, each of 
the aforementioned implementations either rely on a trusted third party or have other technical, 
marketbased, or processbased drawbacks and limitations3.  
 

1 For definitions throughout, see Glossary of Terms 
2 But has been discussed since Dr. Szabo’s proposed BitGold [5] 
3 Summarized in the Appendix, here: Limitations of Existing Fiatpegging Systems 

3 



In our solution, fiatpegged cryptocurrencies are called “tethers”. All tethers will initially4 be issued on the 
Bitcoin blockchain via the Omni Layer protocol and so they exist as a cryptocurrency token. Each tether unit 
issued into circulation is backed in a onetoone ratio (i.e. one Tether  USDT is one US dollar) by the 
corresponding fiat currency unit held in deposit by Hong Kong based Tether Limited. Tethers may be 
redeemable/exchangeable for the underlying fiat currency pursuant to Tether Limited’s terms of service or, if 
the holder prefers, the equivalent spot value in Bitcoin. Once a tether has been issued, it can be transferred, 
stored, spent, etc just like bitcoins or any other cryptocurrency. The fiat currency on reserve has gained the 
properties of a cryptocurrency and its price is permanently tethered to the price of the fiat currency.  
 
Our implementation has the following advantages over other fiatpegged cryptocurrencies: 
 

● Tethers exist on the Bitcoin blockchain rather than a less developed/tested “altcoin” blockchain nor 
within closedsource software running on centralized, private databases. 

● Tethers can be used just like bitcoins, i.e. in a p2p, pseudoanonymous, decentralized, 
cryptographically secure environment. 

● Tethers can be integrated with merchants, exchanges, and wallets just as easily as Bitcoin or any 
other cryptocurrencies can be integrated. 

● Tethers inherit the properties of the Omni Layer protocol which include: a decentralized exchange; 
browserbased, opensource, wallet encryption;  Bitcoinbased transparency, accountability, 
multiparty security and reporting functions. 

● Tether Limited employs a simple but effective approach for conducting Proof of Reserves which 
significantly reduces our counterparty risk as the custodian of the reserve assets. 

● Tether issuance or redemption will not face any pricing or liquidity constraints. Users can buy or sell 
as many tethers as they want, quickly, and with very low fees.  

● Tethers will not face any market risks5 such as Black Swan events, liquidity crunches, etc as 
reserves are maintained in a onetoone ratio rather than relying on market forces. 

● Tether’s onetoone backing implementation is easier for nontechnical users to understand as 
opposed to collateralization techniques or derivative strategies.  

 
At any given time the balance of fiat currency held in our reserves will be equal to (or greater than) the 
number of tethers in circulation. This simple configuration most easily supports a reliable Proof of Reserves 
process; a process which is fundamental to maintaining the priceparity between tethers in circulation and 
the underlying fiat currency held in reserves. In this paper we provide evidence6 that shows exchange and 

4 More Bitcoin 2.0 protocols will come soon, like Ripple, Nxt, etc 
5 See Appendix, section: Market Risk Examples 
6 See section: Proof of Solvency Process 

4 



wallet audits (in their current state) are very unreliable (i.e. flaws in Proof of Solvency[6] methods) and 
instead propose that exchanges and wallets outsource the custody of user funds to us via tethers. 
 
Users can purchase tethers from Tether.to (our webwallet) or from supported exchanges such as Bitfinex 
who support tethers as a deposit and withdrawal method. Users can also transact and store tethers with any 
Omni Layer enabled wallet like Ambisafe, Holy Transaction or Omni Wallet. Other exchanges, wallets, and 
merchants are encouraged to reach out to us about integrating tether as a surrogate for traditional fiat 
payment methods. 
 
We recognize that our implementation isn’t perfectly decentralized7 since Tether Limited must act as a 
centralized custodian of reserve assets (albeit tethers in circulation exist as a decentralized digital currency). 
However, we believe this implementation sets the foundation for building future innovations that will 
eliminate these weaknesses, create a robust platform for new products and services, and support the growth 
and utility of the Bitcoin blockchain over the long run. Some of these innovations include: 
 

● Mobile payment facilitation between users and other parties, including other users and merchants 
● Instant or nearinstant fiat value transfer between decentralized parties (such as multiple 

exchanges) 
● Introduction to the use of smart contracts and multisignature capabilities to further improve the 

general security process, Proof of Reserves, and enable new features. 
 

Technology Stack and Processes 
 
Each tether issued into circulation will be backed in a onetoone ratio with the equivalent amount of 
corresponding fiat currency held in reserves by Hong Kong based Tether Limited. As the custodian of the 
backing asset we are acting as a trusted third party responsible for that asset. This risk is mitigated by a 
simple implementation that collectively reduces the complexity of conducting both fiat and crypto audits 
while increasing the security, provability, and transparency of these audits.  
 

Tether Technology Stack 
 
The stack has 3 layers, and numerous features, best understood via a diagram 
 

7 See section: Implementation Weaknesses 

5 



 
 
Here is a review of each layer. 
 

1) The first layer is the Bitcoin blockchain. The Tether transactional ledger is embedded in the Bitcoin 
blockchain as metadata via the embedded consensus system, Omni. 

 
2) The second layer is the Omni Layer protocol. Omni is a foundational technology that can: 

a) Grant (create) and revoke (destroy) digital tokens represented as metadata embedded in 
the Bitcoin blockchain; in this case, fiatpegged digital tokens, tethers.  

b) Track and report the circulation of tethers via Omnichest.info (Omni asset ID #31, for 
example, represents TetherUSD) and Omnicore API.  

c) Enable users to transact and store tethers and other assets/tokens in a:  
i) p2p, pseudoanonymous, cryptographically secure environment. 
ii) opensource, browserbased, encrypted webwallet: Omni Wallet. 
iii) multisignature and offline cold storagesupporting system 

 
3) The third layer is Tether Limited, our business entity primarily responsible for:  

a) Accepting fiat deposits and issuing the corresponding tethers  
b) Sending fiat withdrawals and revoking the corresponding tethers 
c) Custody of the fiat reserves that back all tethers in circulation 

6 



d) Publicly reporting Proof of Reserves and other audit results 
e) Initiating and managing integrations with existing Bitcoin/blockchain wallets, exchanges, 

and merchants 
f) Operating Tether.to, a webwallet which allows users to send, receive, store, and convert 

tethers conveniently. 
 

Flow of Funds Process 
 
There are five steps in the lifecycle of a tether, best understood via a diagram.  

 
 
 
Step 1  User deposits fiat currency into Tether Limited's bank account. 
 
Step 2  Tether Limited generates and credits the user's tether account. Tethers enter circulation. Amount of 
fiat currency deposited by user = amount of tethers issued to user (i.e. 10k USD deposited = 10k tetherUSD 
issued). 
  

7 



Step 3  Users transact with tethers8. The user can transfer, exchange, and store tethers via a p2p 
opensource, pseudoanonymous, Bitcoinbased platform.  
 
Step 4  The user deposits tethers with Tether Limited for redemption into fiat currency. 
 
Step 5  Tether Limited destroys the tethers and sends fiat currency to the user’s bank account.  
 
Users can obtain tethers outside of the aforementioned process via an exchange or another individual. Once 
a tether enters circulation it can be traded freely between any business or individual. For example, users can 
purchase tethers from Bitfinex, with more exchanges to follow soon.  
 
The main concept to be conveyed by the Flow of Funds diagram is that Tether Limited is the only party who 
can issue tethers into circulation (create them) or take them out of circulation (destroy them). This is the 
main process by which the system solvency is maintained. 
 

Proof of Reserves Process 
 
Proof of Solvency, Proof of Reserves, RealTime Transparency, and other similar phrases have been 
growing and resonating across the cryptocurrency industry.  
 
Exchange and wallets audits, in their current form, are very unreliable. Insolvency has occurred numerous 
times in the Bitcoin ecosystem, either via hacks, mismanagement, or outright fraud. Users must be diligent 
with their exchange selection and vigilant in their use of exchanges. Even then, a savvy user will not be able 
to fully eliminate the risks. Further, there are exchange users like traders and businesses who must keep 
nontrivial fiat balances in exchanges at all times. In financial language, this is known as the “counterparty 
risk” of storing value with a third party.  
 
We believe it’s safe to conclude that exchange and wallet audits in their current form are not very reliable. 
These processes do not guarantee users that a custodian or exchange is solvent. Although there have been 
great contributions to improving the exchange audit processes, like the Merkle tree approach[6], major flaws
9 still remain.  
 
Tether’s Proof of Reserves configuration is novel because it simplifies the process of proving that the total 
number of tethers in circulation (liabilities) are always fully backed by an equal amount of fiat currency held 

8 See benefits of using tethers in the section: Main Applications 
9 See section: Audit Flaws: Exchanges and Wallets 

8 



in reserve (assets). In our configuration, each tetherUSD in circulation represents one US dollar held in our 
reserves (i.e. a onetoone ratio) which means the system is fully reserved when the sum of all tethers in 
existence (at any point in time) is exactly equal to the balance of USD held in our reserve. Since tethers live 
on the Bitcoin blockchain, the provability and accounting of tethers at any given point in time is trivial. 
Conversely, the corresponding total amount of USD held in our reserves is proved by publishing the bank 
balance and undergoing periodic audits by professionals. Find this implementation further detailed below: 
 

● Tether Limited issues all tethers via the Omni Layer protocol. Omni operates on top of the Bitcoin 
blockchain and therefore all issued, redeemed, and existing tethers, including transactional history, 
are publicly auditable via the tools provided at Omnichest.info. 

○ The Omnichest.info asset ID for tetherUSD is #31. 
■ Here is a link: http://omnichest.info/lookupsp.aspx?sp=31  

○ Let the total number of tethers issued under this asset ID be denoted as TUSDissue 
○ Let the total number of tethers redeemed under this asset ID be denoted as TUSDredeem 
○ Let the total number of tethers in circulation at any time be denoted as TUSD 

■ TUSD = TUSDissue  TUSDredeem 
■ TUSD = “Total Property Tokens” @ http://omnichest.info/lookupsp.aspx?sp=31  

   
● Tether Limited has a bank account which will receive and send fiat currency to users who 

purchase/redeem tethers directly with us. 
○ Let the total amount deposited into this account be denoted as DUSDdepo   
○ Let the total amount withdrawn from this account be denoted as DUSDwithd 
○ Let the dollar balance of this bank account be denoted as DUSD 

■ DUSD = DUSDdepo  DUSDwithd 
 

● Each tether issued will be backed by the equivalent amount of currency unit (one tetherUSD equals 
one dollar). By combining the above crypto and fiat accounting processes, we conclude the 
“Solvency Equation” for the Tether System. 

○ The Solvency Equation is simply TUSD = DUSD. 
○ Every tether issued or redeemed, as publicly recorded by the Bitcoin blockchain will 

correspond to a deposit or withdrawal of funds from the bank account. 
○ The provability of TUSD relies on the Bitcoin blockchain as discussed previously. 
○ The provability of DUSD will rely on several processes: 

■ We publish the bank account balance on our website’s Transparency page. 
■ Professional auditors will regularly verify, sign, and publish our underlying bank 

balance and financial transfer statement. 
 

9 



Users will be able to view this information from our Transparency Page, which will look like: 
 

 
 
For clarity, we’d like to acknowledge that the Tether System10 is different than the Tether.to webwallet in 
terms of Proof of Reserves. In this paper, we mostly focus on Proof of Reserves for the Tether System; i.e. 
all tethers in circulation at any point in time. The Tether.to wallet is a consumer facing webwallet operating 
on closedsource code and centralized servers. Conducting a Proof of Reserves for this wallet is 
fundamentally different than what we’ve outlined for the Tether System.  
 
We’re planning the deployment of a PoRbased transparency solution for the Tether.to wallet. We believe it 
will be the most advanced PoR system in existence today. It overcomes almost all of the challenges outlined 
in the appendix11 on this topic.  Mind you, users can always secure tethers through managing the private 
keys themselves or through Omni Wallet. 
 

Implementation Weaknesses 
 
We understand that our implementation doesn’t immediately create a fully trustless cryptocurrency system. 
Mainly because users must trust Tether Limited and our corresponding legacy banking institution to be the 
custodian of the reserve assets. However, almost all exchanges and wallets (assuming they hold USD/fiats) 
are subject to the same weaknesses. Users of these services are already subject to these risks. Here is a 
summary of the weaknesses in our approach:  
 

● We could go bankrupt 
● Our bank could go insolvent 
● Our bank could freeze or confiscate the funds 
● We could abscond with the reserve funds 

10 See Glossary of Terms 
11 See Audit Flaws: Exchanges and Wallets 

10 



● Recentralized of risk to a single point of failure 
 
Observe that almost all digital currency exchanges and wallets (assuming they hold USD/fiat) already face 
many of these challenges. Therefore, users of these services are already subject to these risks. Below we 
describe how each of these concerns are being addressed. 
 
We could go bankrupt  In this case, the business entity Tether Limited would go bankrupt but client funds 
would be safe, and subsequently, all tethers will remain redeemable. Most security breaches on Bitcoin 
businesses have targeted cryptocurrencies rather than bank accounts. Since all tethers exist on the Bitcoin 
blockchain they can be stored by individuals directly through securing their own private keys.   
 
Our bank could go insolvent  This is a risk faced by all users of the legacy financial system and by all 
exchange operators. Tether Limited currently has accounts with Cathay United Bank and Hwatai Bank in 
Taiwan, both of whom are aware and confident that Tether’s business model is acceptable.  Additional 
banking partners are being established in other jurisdictions to further mitigate this concern. 
 
Our bank could freeze or confiscate the funds   Our banks are aware of the nature of Bitcoin and are 
accepting of Bitcoin businesses. They also provide banking services to some of the largest Bitcoin 
exchanges globally. The KYC/AML processes we follow are also used by the other digital currency 
exchanges they currently bank. They have assured us we are in full compliance12. 
 
We could abscond with the reserve assets  The corporate charter is public13 as well as the business 
owners names, locations, and reputations. Ownership of the account is legally bound to the corporate 
charter. Any transfers in or out of the bank account will have the associated traces and are bound by rigid 
internal policies.   
 
Recentralization of risk to a single point of failure  We have some ideas on how to overcome this and we’ll 
be sharing them in upcoming blog and product updates. There are many ways to tackle this problem. For 
now, this initial implementation gets us on the right track to realize these innovations in following versions. 
By leveraging the platforms we have chosen, we have reduced the centralization risk to one singular 
responsibility: the creation and redemption of tokens.  All other aspects of the system are decentralized. 
 

12 See section on Legal and Compliance for more information 
13 Same as footnote #10 

11 



 

Main Applications 
 
In this section we’ll summarize and discuss the main applications of tethers across the Bitcoin/blockchain 
ecosystem and for other consumers globally. We break up the beneficiaries into three user groups: 
Exchanges, Individuals, and Merchants. 
 
The main benefits, applicable to all groups: 

● Properties of Bitcoin bestowed upon other asset classes 
● Less volatile, familiar unit of account 
● World’s assets migrate to the Bitcoin blockchain 

For Exchanges  
 
Exchange operators understand that accepting fiat deposits and withdrawals using legacy financial systems 
can be complicated, risky, slow, and expensive. Some of these issues include:  
 

● Identifying the right payment providers for your exchange  
○ irreversible transactions, fraud protection, lowest fees, etc  

● Integrating the platform with banks who have no APIs  
● Liaising with these banks to coordinate compliance, security, and to build trust 
● Prohibitive costs for small value transfers 
● 37 days for international wire transfers to clear 
● Poor and unfavorable currency conversion fees 

 
By offering tethers, an exchange can relieve themselves of the above complications and gain additional 
benefits, such as: 
 

● Accept cryptofiats as deposit/withdrawal/storage method rather than using a legacy bank or 
payment provider  

○ Allows users to move fiat in and out of exchange more freely, quickly, cheaply 
● Outsource fiat custodial risk to Tether Limited  just manage cryptos 
● Easily add other tethered fiat currencies as trading pairs to the platform 
● Secure customer assets purely through accepted cryptoprocesses  

○ Multisignature security, cold and hot wallets, HD wallets, etc 

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○ Conduct audits easier and more securely in a purely crypto environment 
● Anything one can do with Bitcoin as an exchange can be done with tethers 

 
Exchange users know how risky it can be to hold fiat currencies on an exchange. With the growing number 
of insolvency events it can be quite dangerous. As mentioned previously, we believe that using tethers 
exposes exchange users to less counterparty risk than continually holding fiat on exchanges. Additionally, 
there are other benefits to holding tethers, explained in the next section.  

For Individuals 
 
There are many types of individual Bitcoin users in the world today. From traders looking to earn profits 
daily; to long term investors looking to store their Bitcoins securely; to techsavvy shoppers looking to avoid 
credit card fees or maintain their privacy; to philosophical users looking to change the world; to those looking 
to remit payments globally more effectively; to those in third world countries looking for access to financial 
services for the first time; to developers looking to create new technologies; to all those who have found 
many uses for Bitcoin.  For each of these individuals, we believe tethers are useful in similar ways, like: 
 

● Transact in USD/fiat value, pseudoanonymously, without any middlemen/intermediaries 
● Cold store USD/fiat value by securing one’s own private keys 
● Avoid the risk of storing fiat on exchanges  move cryptofiat in and out of exchanges easily 
● Avoid having to open a fiat bank account to store fiat value 
● Easily enhance applications that work with bitcoin to also support tether 
● Anything one can do with Bitcoin as an individual one can also do with tether 

For Merchants 
 
Merchants want to focus on their business, not on payments. The lack of global, inexpensive, ubiquitous 
payment solutions continue to plague merchants around the world both large and small. Merchants deserve 
more. Here are some of the ways tether can help them: 
 

● Price goods in USD/fiat value rather than Bitcoin (no moving conversion rates/purchase windows) 
● Avoid conversion from Bitcoin to USD/fiat and associated fees and processes 
● Prevent chargebacks, reduce fees, and gain greater privacy 
● Provide novel services because of fiatcrypto features 

○ Microtipping, gift cards, more 
● Anything one can do with Bitcoin as a merchant one can also do with tether 

 

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Future Innovations 

Multisig and Smart Contracts 

Proof of Solvency Innovations 
 

Conclusion 
 
Tether constitutes the first Bitcoinbased fiatpegged cryptocurrencies in existence today. Tether is based on 
the Bitcoin blockchain, the most secure and welltested blockchain and public ledger in existence. Tethers 
are fully reserved in a onetoone ratio, completely independent of market forces, pricing, or liquidity 
constraints. Tether has a simple and reliable Proof of Reserves implementation and undergoes regular 
professional audits. Our underlying banking relationships, compliance, and legal structure provide a secure 
foundation for us to be the custodian of reserve assets and issuer of tethers. Our team is composed of 
experienced and respected entrepreneurs from the Bitcoin ecosystem and beyond. 
 
We are focused on arranging integrations with existing businesses in the cryptocurrency space. Business 
like exchanges, wallets, merchants, and others. We’re already integrated with Bitfinex, HolyTransaction, 
Omni Wallet, Poloniex, CCEX, and more to come. Please reach out to us to find out more. 

 
Appendix  
 

Audit Flaws: Exchanges and Wallets 
 
Here is a summary of the current flaws found in technologybased14 exchange and wallet audits. 
 
In the Merkle tree[6] approach users must manually report that their balances (user’s leaf) have been 
correctly incorporated in the liability declaration of the exchange (the Merkle hash of the exchange’s 
database of user balances). This proposed solution works if enough users verify that their account was 
included in the tree, and in a case where their account is not included this instance would be reported. One 
potential risk is that an exchange database owner could produce a hash that is not the true representation of 

14 As opposed to hiring a professional auditor 

14 



the database at all; it hashes an incomplete database which would reduce its apparent liabilities to 
customers, making them appear solvent to a verifying party. Here are some scenarios where a fraudulent 
exchange would exclude accounts and : 
 

○ “Bitdust” Accounts: Inactive or low activity accounts would lower the chance that an 
uninterested user would check or report inconsistencies. In some cases these longtail 
accounts could represent a significant percentage of the exchange’s liabilities. 

 
○ “Colluding Whales” Attack: There is evidence that large Bitcoin traders are operating on 

various exchanges and moving markets significantly. Such traders need to have capital 
reserves at the largest exchanges to quickly execute orders. Often, traders choose 
exchanges that they “trust”. In this way they can be assured that should a hack or liquidity 
issue arise, they have priority to get their money out. In this case, the exchange and trader 
could collude to remove the whales account balance from the database before it’s hashed. 

 
○ Key Rental Attack: To pass the audit, a malicious exchange could rent the private keys to 

bitcoins they do not own. This would make them appear solvent by increasing their assets 
without any acknowledgment that those funds were loaned to them. Likewise, they could 
“borrow” fiat currency to do the same. 

 
○ There are more attacks not discussed here. 

 
Reaching Statistical Significance (reporting completeness): Even outside of these three attack vectors, a 
database that has been manipulated may never be detected if a sufficient number of users are not validating 
balances. The probability of getting 100% of the users to verify balances is likely zero, even with proper 
incentivization structure for users to verify their balances. Therefore, auditors would need statistical tools to 
make statements about the validity of an exchange’s database based on sampling frequency, size, and 
other properties.  
 
Currently users have no way to receive compensation by legal means in case something goes wrong with 
the exchange. For example, when Mt.Gox closed operations, many users might not have independently 
recorded their account balances (prints screens, signed messages to themselves, etc) in a way that could 
conclusively prove to law enforcement that this exchange’s I.O.U’s actually existed. Such users are at the 
mercy of the exchange to somehow publish a record of that hash tree or original database.  
  
The proposed structure in which these audits would be performed still contains some subtle but important 
flaws. In particular, the data reporting (hash tree) on the institution’s website gives no guarantee at all to 

15 



users, as a malicious exchange could publish different states/balances to different groups of users, or 
retroactively change the state. Thus it is fundamental to publish this data through a secure broadcast 
channel, e.g. the Bitcoin blockchain.   
  
Privacy is a barrier to entry for the adoption of an automated/open auditing system. While some progress 
has been made towards better privacy there is no perfect solution yet. Further, to build up an accurate user 
verified liability space, these users will have to report account balances with the exchange and Bitcoin 
addresses. Some users likely would not report this information regardless of the incentive, therefore 
providing cryptographically secure privacy whilst obtaining the reporting goal is paramount. 
 
Time Series: the Merkle tree hash is a single snapshot of the database at a single point in time. Not having a 
somewhat continuous time series of the database opens significant attack vectors. Additionally, a time 
series of user reported information would also be required for piecing together the history of any reported 
incidents of fraud. 
 
Trusted Third Parties: All of the current exchange audits have relied on some “reputable” trusted third party 
to make some type of verification. In the Coinbase audit [7], that was Andreas Antonopoulos, in the Kraken 
audit [8], that was Stefan Thomas. If we absolutely must rely on a trusted third party then some audit 
standards and procedures should ensure this weaknesses is fortified.  
 

Limitations of Existing Fiatpegging Systems 
 
Here’s a list of some of the common drawbacks and limitations of existing fiatpegging systems. 
 

● The systems are based on closedsource software, running on private, centralized databases, 
fundamentally no different than Paypal or any other existing massmarket retail/institutional asset 
trading/transfer/storage system. 

 
● Decentralized systems that rely on altcoin blockchains which haven’t been stresstested, developed, 

or reviewed as closely as other blockchains, like Bitcoin. 
 

● Pegging processes that rely on hedging derivative metaassets, efficient market theory, or 
collateralization of the underlying asset, wherein liquidity, transferability, security, and other issues 
can exist. 

 

16 



● Lack of transparency and audits for the custodian, either crypto, fiat, or relating to their own internal 
ledgers (same as closed source and centralised databases). 

 
● Reliance on legacy banking systems and trusted third parties (bank account owners) as a transfer 

and settlement mechanism for reserve assets. 
 

Market Risk Examples 
 
In the collateralization method, market risk exists because the price of the asset being used as collateral can 
move in an adverse direction to the price of the asset it’s backing/pegging. This would cause the total value 
of the collateral to become less than the total value of the issued asset and make the system insolvent. This 
risk is mitigated by the custodian closing the position before this happens; that is, when the collateral price 
equals the pegged asset price then the collateral is liquidated (sold on the open market) and the position is 
closed. A great approach, with merit, and used in many liquid markets across the traditional banking and 
financial markets. However, as we saw from the global financial crisis, situations can arise in which the 
acceleration of such events causes a “liquidity crunch” and thus the collateral is unable to be liquidated fast 
enough to meet trading obligations, subsequently creating losses. With the cryptocurrency markets being so 
small and volatile, this type of event is much more likely. Additionally, the overall approach suffers from other 
liquidity and pricing constraints since there must be a sufficient supply of users posting collateral for the 
creation of the peggedassets to exist in the first place.  

 
In the derivatives approach, the price of the asset is pegged through entering one of several derivatives 
strategies, such as: swap strategies, covered and naked options strategies, various futures and forwards 
strategies. Each strategy has their own strengths and weaknesses, the discussion of which we won’t engage 
in here. To summarize, each of these pegging processes themselves have similar “market risk” 
characteristics as the aforementioned collateralization method. It should be noted that the two methods are 
not mutually exclusive and often paired in a specific trading, hedging, or risk management function at legacy 
system financial institutions. 
 
Finally, understand that we believe some combination of the above approaches may become a secure, 
reliable, and generally riskfree process for backing/pegging assets; however, at this point in time, this is not 
a direction we feel is feasible to take to ensure liquidity and price stability. Further, we believe that a 
reservebased approach will always be in existence and complement these other approaches as the entire 
industry grows.  As advances in technology continue, we will evaluate and incorporate any benefits available 
while maintaining the guarantee of 100% redeemability. 
 

17 



Legal and Compliance 
 
Tether Limited (“Tether”) is a limited company incorporated pursuant to the Hong Kong Companies 
Ordinance. It is wholly owned by Tether Holdings Limited, a BVI business company incorporated pursuant to 
the BVI Business Companies Act, 2004. 
  
Tether is registered as a Money Services Business with the Financial Crimes Enforcement Network of the 
U.S. Department of the Treasury (MSB Registration Number 31000058542968). Tether is establishing a 
relationship with a U.S. financial institution for purposes of better servicing Tether users in the United States. 
  
Tether is concluding a principal–agency agreement with RenRenBee Limited (“RenRenBee”). RenRenBee is 
licensed as a Money Services Operator by the Hong Kong Customs and Excise Department (Licence No. 
130901265). Pursuant to the agreement, RenRenBee will provide antimoney laundering compliance work 
and customer due diligence procedures as agent for Tether as principal. 
  
Through these and other measures, Tether is undertaking customer due diligence, recordkeeping, and 
reporting procedures consistent with U.S. law and with the Hong Kong AntiMoney Laundering and 
CounterTerrorist Financing (Financial Institutions) Ordinance. 
 
Tether Limited currently has accounts with Cathay Bank and Hwatai Bank in Taiwan, both of whom are 
aware and confident that Tether’s business model is acceptable. 
 
These banks are satisfied with our processes and also satisfied that our business operates in accordance 
with Taiwan offshore banking regulations, as all of the banks had been requested to check this with their 
own legal, compliance and headoffice before opening accounts (also at our own request).  It was our goal 
from the beginning to have a compliant operation and to provide the maximum level of comfort to our 
banking partners here.  In addition these banks have and are working with other Bitcoin based businesses.   
 

 
   

18 



Glossary of Terms 
 
Digital currency: As defined by http://en.wikipedia.org/wiki/Digital_currency  
 
Cryptocurrency or decentralized digital currency: any type of cryptocurrency that is opensource, 
cryptographically secure, and uses a distributed ledger. See: http://en.wikipedia.org/wiki/Cryptocurrency  
 
Realworld currency, or fiat currency, or national/sovereign currency: all types of currency that are 
not cryptocurrencies as defined above. 
 
Cryptocurrency system: A collection of software and processes primarily created to enable the existence 
of a cryptocurrency. 
 
Legacy financial system: any financial system that is not a cryptocurrency system. 
 
Utilitybacked digital tokens, a.k.a Dapps: A decentralized digital token whose value is derived from the 
usefulness of its application rather than just being a value transfer system. 
 
Assetbacked/pegged cryptocurrency: Any cryptocurrency whose price is pegged to a realworld asset, 
i.e. its not a “utilitybacked” cryptocurrency. 
 
Tether(s): a single unit (or multiple units) of fiatpegged cryptocurrency issued by Tether Limited 
 
TetherUSD or tUSD: a single unit of cryptoUSD issued by Tether Limited 
 
TUSD: collective amount of tUSD in circulation at any point in time. 
 
Tether System: collectively refers to all process and technologies that enable tethers to exist 
 
Proof of Reserves: The process by which the issuer of any assetbacked decentralized digital token, 
cryptographically/mathematically proves that all tokens that have been issued are fully reserved and backed 
by the underlying asset. 
 

 
   

19 



References 
 
[1] https://www.thefinancialist.com/wpcontent/uploads/2012/10/2012GlobalWealthReport.pdf 
[2] https://bitcoin.org/bitcoin.pdf 
[3]http://www.deloitte.com/assets/DcomUnitedStates/Local%20Assets/Documents/FSI/us_fsi_BitcointheNe
wGoldRush_031814.pdf 
[4] https://github.com/mastercoinMSC/spec 
[5] http://unenumerated.blogspot.com/2005/12/bitgold.html 
[6] https://iwilcox.me.uk/2014/provingbitcoinreserves 
[7] http://antonopoulos.com/2014/02/25/coinbasereview/ 
[8] http://www.coindesk.com/krakensauditprovesholds100bitcoinsreserve/ 

20

Tether: Fiat currencies on the Bitcoin blockchain Abstract. A digital token backed by fiat currency provides individuals and organizations with a robust and decentralized method of exchanging value while using a familiar accounting unit. The innovation of blockchains is an auditable and cryptographically secured global ledger. Assetbacked token issuers and other market participants can take advantage of blockchain technology, along with embedded consensus systems, to transact in familiar, less volatile currencies and assets. In order to maintain accountability and to ensure stability in exchange price, we propose a method to maintain a onetoone reserve ratio between a cryptocurrency token, called tethers, and its associated realworld asset, fiat currency. This method uses the Bitcoin blockchain, Proof of Reserves, and other audit methods to prove that issued tokens are fully backed and reserved at all times. 1 Table of Contents Table of Contents Introduction Technology Stack and Processes Tether Technology Stack Flow of Funds Process Proof of Reserves Process Implementation Weaknesses Main Applications For Exchanges For Individuals For Merchants Future Innovations Multisig and Smart Contracts Proof of Solvency Innovations Conclusion Appendix Audit Flaws: Exchanges and Wallets Limitations of Existing Fiatpegging Systems Market Risk Examples Legal and Compliance Glossary of Terms References 2 Introduction There exists a vast array of assets in the world which people freely choose as a storeofvalue, a transactional medium, or an investment. We believe the Bitcoin blockchain is a better technology for transacting, storing, and accounting for these assets. Most estimates measure global wealth around 250 trillion dollars [1] with much of that being held by banks or similar financial institutions. The migration of these assets onto the Bitcoin blockchain represents a proportionally large opportunity. Bitcoin was created as “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”[2]. Bitcoin created a new class of digital currency, a decentralized digital currency or cryptocurrency1. Some of the primary advantages of cryptocurrencies are: low transaction costs, international borderless transferability and convertibility, trustless ownership and exchange, pseudoanonymity, realtime transparency, and immunity from legacy banking system problems [3]. Common explanations for the current limited mainstream use of cryptocurrencies include: volatile price swings, inadequate massmarket understanding of the technology, and insufficient easeofuse for nontechnical users. The idea for assetpegged cryptocurrencies was initially popularized2 in the Bitcoin community by the Mastercoin white paper authored by J.R. Willett in January 2012[4]. Today, we’re starting to see these ideas built with the likes of BitAssets, Ripple, Omni, Nxt, NuShares/Bits, and others. One should note that all Bitcoin exchanges and wallets (like Coinbase, Bitfinex, and Coinapult) which allow you to hold value as a fiat currency already provide a similar service in that users can avoid the volatility (or other traits) of a particular cryptocurrency by selling them for fiat currency, gold, or another asset. Further, almost all types of existing financial institutions, payment providers, etc, which allow you to hold fiat value (or other assets) subsequently provide a similar service. In this white paper we focus on applications wherein the fiat value is stored and transmitted with software that is opensource, cryptographically secure, and uses distributed ledger technology, i.e. a true cryptocurrency. While the goal of any successful cryptocurrency is to completely eliminate the requirement of trust, each of the aforementioned implementations either rely on a trusted third party or have other technical, marketbased, or processbased drawbacks and limitations3. 1 For definitions throughout, see Glossary of Terms 2 But has been discussed since Dr. Szabo’s proposed BitGold [5] 3 Summarized in the Appendix, here: Limitations of Existing Fiatpegging Systems 3 In our solution, fiatpegged cryptocurrencies are called “tethers”. All tethers will initially4 be issued on the Bitcoin blockchain via the Omni Layer protocol and so they exist as a cryptocurrency token. Each tether unit issued into circulation is backed in a onetoone ratio (i.e. one Tether USDT is one US dollar) by the corresponding fiat currency unit held in deposit by Hong Kong based Tether Limited. Tethers may be redeemable/exchangeable for the underlying fiat currency pursuant to Tether Limited’s terms of service or, if the holder prefers, the equivalent spot value in Bitcoin. Once a tether has been issued, it can be transferred, stored, spent, etc just like bitcoins or any other cryptocurrency. The fiat currency on reserve has gained the properties of a cryptocurrency and its price is permanently tethered to the price of the fiat currency. Our implementation has the following advantages over other fiatpegged cryptocurrencies: ● Tethers exist on the Bitcoin blockchain rather than a less developed/tested “altcoin” blockchain nor within closedsource software running on centralized, private databases. ● Tethers can be used just like bitcoins, i.e. in a p2p, pseudoanonymous, decentralized, cryptographically secure environment. ● Tethers can be integrated with merchants, exchanges, and wallets just as easily as Bitcoin or any other cryptocurrencies can be integrated. ● Tethers inherit the properties of the Omni Layer protocol which include: a decentralized exchange; browserbased, opensource, wallet encryption; Bitcoinbased transparency, accountability, multiparty security and reporting functions. ● Tether Limited employs a simple but effective approach for conducting Proof of Reserves which significantly reduces our counterparty risk as the custodian of the reserve assets. ● Tether issuance or redemption will not face any pricing or liquidity constraints. Users can buy or sell as many tethers as they want, quickly, and with very low fees. ● Tethers will not face any market risks5 such as Black Swan events, liquidity crunches, etc as reserves are maintained in a onetoone ratio rather than relying on market forces. ● Tether’s onetoone backing implementation is easier for nontechnical users to understand as opposed to collateralization techniques or derivative strategies. At any given time the balance of fiat currency held in our reserves will be equal to (or greater than) the number of tethers in circulation. This simple configuration most easily supports a reliable Proof of Reserves process; a process which is fundamental to maintaining the priceparity between tethers in circulation and the underlying fiat currency held in reserves. In this paper we provide evidence6 that shows exchange and 4 More Bitcoin 2.0 protocols will come soon, like Ripple, Nxt, etc 5 See Appendix, section: Market Risk Examples 6 See section: Proof of Solvency Process 4 wallet audits (in their current state) are very unreliable (i.e. flaws in Proof of Solvency[6] methods) and instead propose that exchanges and wallets outsource the custody of user funds to us via tethers. Users can purchase tethers from Tether.to (our webwallet) or from supported exchanges such as Bitfinex who support tethers as a deposit and withdrawal method. Users can also transact and store tethers with any Omni Layer enabled wallet like Ambisafe, Holy Transaction or Omni Wallet. Other exchanges, wallets, and merchants are encouraged to reach out to us about integrating tether as a surrogate for traditional fiat payment methods. We recognize that our implementation isn’t perfectly decentralized7 since Tether Limited must act as a centralized custodian of reserve assets (albeit tethers in circulation exist as a decentralized digital currency). However, we believe this implementation sets the foundation for building future innovations that will eliminate these weaknesses, create a robust platform for new products and services, and support the growth and utility of the Bitcoin blockchain over the long run. Some of these innovations include: ● Mobile payment facilitation between users and other parties, including other users and merchants ● Instant or nearinstant fiat value transfer between decentralized parties (such as multiple exchanges) ● Introduction to the use of smart contracts and multisignature capabilities to further improve the general security process, Proof of Reserves, and enable new features. Technology Stack and Processes Each tether issued into circulation will be backed in a onetoone ratio with the equivalent amount of corresponding fiat currency held in reserves by Hong Kong based Tether Limited. As the custodian of the backing asset we are acting as a trusted third party responsible for that asset. This risk is mitigated by a simple implementation that collectively reduces the complexity of conducting both fiat and crypto audits while increasing the security, provability, and transparency of these audits. Tether Technology Stack The stack has 3 layers, and numerous features, best understood via a diagram 7 See section: Implementation Weaknesses 5 Here is a review of each layer. 1) The first layer is the Bitcoin blockchain. The Tether transactional ledger is embedded in the Bitcoin blockchain as metadata via the embedded consensus system, Omni. 2) The second layer is the Omni Layer protocol. Omni is a foundational technology that can: a) Grant (create) and revoke (destroy) digital tokens represented as metadata embedded in the Bitcoin blockchain; in this case, fiatpegged digital tokens, tethers. b) Track and report the circulation of tethers via Omnichest.info (Omni asset ID #31, for example, represents TetherUSD) and Omnicore API. c) Enable users to transact and store tethers and other assets/tokens in a: i) p2p, pseudoanonymous, cryptographically secure environment. ii) opensource, browserbased, encrypted webwallet: Omni Wallet. iii) multisignature and offline cold storagesupporting system 3) The third layer is Tether Limited, our business entity primarily responsible for: a) Accepting fiat deposits and issuing the corresponding tethers b) Sending fiat withdrawals and revoking the corresponding tethers c) Custody of the fiat reserves that back all tethers in circulation 6 d) Publicly reporting Proof of Reserves and other audit results e) Initiating and managing integrations with existing Bitcoin/blockchain wallets, exchanges, and merchants f) Operating Tether.to, a webwallet which allows users to send, receive, store, and convert tethers conveniently. Flow of Funds Process There are five steps in the lifecycle of a tether, best understood via a diagram. Step 1 User deposits fiat currency into Tether Limited's bank account. Step 2 Tether Limited generates and credits the user's tether account. Tethers enter circulation. Amount of fiat currency deposited by user = amount of tethers issued to user (i.e. 10k USD deposited = 10k tetherUSD issued). 7 Step 3 Users transact with tethers8. The user can transfer, exchange, and store tethers via a p2p opensource, pseudoanonymous, Bitcoinbased platform. Step 4 The user deposits tethers with Tether Limited for redemption into fiat currency. Step 5 Tether Limited destroys the tethers and sends fiat currency to the user’s bank account. Users can obtain tethers outside of the aforementioned process via an exchange or another individual. Once a tether enters circulation it can be traded freely between any business or individual. For example, users can purchase tethers from Bitfinex, with more exchanges to follow soon. The main concept to be conveyed by the Flow of Funds diagram is that Tether Limited is the only party who can issue tethers into circulation (create them) or take them out of circulation (destroy them). This is the main process by which the system solvency is maintained. Proof of Reserves Process Proof of Solvency, Proof of Reserves, RealTime Transparency, and other similar phrases have been growing and resonating across the cryptocurrency industry. Exchange and wallets audits, in their current form, are very unreliable. Insolvency has occurred numerous times in the Bitcoin ecosystem, either via hacks, mismanagement, or outright fraud. Users must be diligent with their exchange selection and vigilant in their use of exchanges. Even then, a savvy user will not be able to fully eliminate the risks. Further, there are exchange users like traders and businesses who must keep nontrivial fiat balances in exchanges at all times. In financial language, this is known as the “counterparty risk” of storing value with a third party. We believe it’s safe to conclude that exchange and wallet audits in their current form are not very reliable. These processes do not guarantee users that a custodian or exchange is solvent. Although there have been great contributions to improving the exchange audit processes, like the Merkle tree approach[6], major flaws 9 still remain. Tether’s Proof of Reserves configuration is novel because it simplifies the process of proving that the total number of tethers in circulation (liabilities) are always fully backed by an equal amount of fiat currency held 8 See benefits of using tethers in the section: Main Applications 9 See section: Audit Flaws: Exchanges and Wallets 8 in reserve (assets). In our configuration, each tetherUSD in circulation represents one US dollar held in our reserves (i.e. a onetoone ratio) which means the system is fully reserved when the sum of all tethers in existence (at any point in time) is exactly equal to the balance of USD held in our reserve. Since tethers live on the Bitcoin blockchain, the provability and accounting of tethers at any given point in time is trivial. Conversely, the corresponding total amount of USD held in our reserves is proved by publishing the bank balance and undergoing periodic audits by professionals. Find this implementation further detailed below: ● Tether Limited issues all tethers via the Omni Layer protocol. Omni operates on top of the Bitcoin blockchain and therefore all issued, redeemed, and existing tethers, including transactional history, are publicly auditable via the tools provided at Omnichest.info. ○ The Omnichest.info asset ID for tetherUSD is #31. ■ Here is a link: http://omnichest.info/lookupsp.aspx?sp=31 ○ Let the total number of tethers issued under this asset ID be denoted as TUSDissue ○ Let the total number of tethers redeemed under this asset ID be denoted as TUSDredeem ○ Let the total number of tethers in circulation at any time be denoted as TUSD ■ TUSD = TUSDissue TUSDredeem ■ TUSD = “Total Property Tokens” @ http://omnichest.info/lookupsp.aspx?sp=31 ● Tether Limited has a bank account which will receive and send fiat currency to users who purchase/redeem tethers directly with us. ○ Let the total amount deposited into this account be denoted as DUSDdepo ○ Let the total amount withdrawn from this account be denoted as DUSDwithd ○ Let the dollar balance of this bank account be denoted as DUSD ■ DUSD = DUSDdepo DUSDwithd ● Each tether issued will be backed by the equivalent amount of currency unit (one tetherUSD equals one dollar). By combining the above crypto and fiat accounting processes, we conclude the “Solvency Equation” for the Tether System. ○ The Solvency Equation is simply TUSD = DUSD. ○ Every tether issued or redeemed, as publicly recorded by the Bitcoin blockchain will correspond to a deposit or withdrawal of funds from the bank account. ○ The provability of TUSD relies on the Bitcoin blockchain as discussed previously. ○ The provability of DUSD will rely on several processes: ■ We publish the bank account balance on our website’s Transparency page. ■ Professional auditors will regularly verify, sign, and publish our underlying bank balance and financial transfer statement. 9 Users will be able to view this information from our Transparency Page, which will look like: For clarity, we’d like to acknowledge that the Tether System10 is different than the Tether.to webwallet in terms of Proof of Reserves. In this paper, we mostly focus on Proof of Reserves for the Tether System; i.e. all tethers in circulation at any point in time. The Tether.to wallet is a consumer facing webwallet operating on closedsource code and centralized servers. Conducting a Proof of Reserves for this wallet is fundamentally different than what we’ve outlined for the Tether System. We’re planning the deployment of a PoRbased transparency solution for the Tether.to wallet. We believe it will be the most advanced PoR system in existence today. It overcomes almost all of the challenges outlined in the appendix11 on this topic. Mind you, users can always secure tethers through managing the private keys themselves or through Omni Wallet. Implementation Weaknesses We understand that our implementation doesn’t immediately create a fully trustless cryptocurrency system. Mainly because users must trust Tether Limited and our corresponding legacy banking institution to be the custodian of the reserve assets. However, almost all exchanges and wallets (assuming they hold USD/fiats) are subject to the same weaknesses. Users of these services are already subject to these risks. Here is a summary of the weaknesses in our approach: ● We could go bankrupt ● Our bank could go insolvent ● Our bank could freeze or confiscate the funds ● We could abscond with the reserve funds 10 See Glossary of Terms 11 See Audit Flaws: Exchanges and Wallets 10 ● Recentralized of risk to a single point of failure Observe that almost all digital currency exchanges and wallets (assuming they hold USD/fiat) already face many of these challenges. Therefore, users of these services are already subject to these risks. Below we describe how each of these concerns are being addressed. We could go bankrupt In this case, the business entity Tether Limited would go bankrupt but client funds would be safe, and subsequently, all tethers will remain redeemable. Most security breaches on Bitcoin businesses have targeted cryptocurrencies rather than bank accounts. Since all tethers exist on the Bitcoin blockchain they can be stored by individuals directly through securing their own private keys. Our bank could go insolvent This is a risk faced by all users of the legacy financial system and by all exchange operators. Tether Limited currently has accounts with Cathay United Bank and Hwatai Bank in Taiwan, both of whom are aware and confident that Tether’s business model is acceptable. Additional banking partners are being established in other jurisdictions to further mitigate this concern. Our bank could freeze or confiscate the funds Our banks are aware of the nature of Bitcoin and are accepting of Bitcoin businesses. They also provide banking services to some of the largest Bitcoin exchanges globally. The KYC/AML processes we follow are also used by the other digital currency exchanges they currently bank. They have assured us we are in full compliance12. We could abscond with the reserve assets The corporate charter is public13 as well as the business owners names, locations, and reputations. Ownership of the account is legally bound to the corporate charter. Any transfers in or out of the bank account will have the associated traces and are bound by rigid internal policies. Recentralization of risk to a single point of failure We have some ideas on how to overcome this and we’ll be sharing them in upcoming blog and product updates. There are many ways to tackle this problem. For now, this initial implementation gets us on the right track to realize these innovations in following versions. By leveraging the platforms we have chosen, we have reduced the centralization risk to one singular responsibility: the creation and redemption of tokens. All other aspects of the system are decentralized. 12 See section on Legal and Compliance for more information 13 Same as footnote #10 11 Main Applications In this section we’ll summarize and discuss the main applications of tethers across the Bitcoin/blockchain ecosystem and for other consumers globally. We break up the beneficiaries into three user groups: Exchanges, Individuals, and Merchants. The main benefits, applicable to all groups: ● Properties of Bitcoin bestowed upon other asset classes ● Less volatile, familiar unit of account ● World’s assets migrate to the Bitcoin blockchain For Exchanges Exchange operators understand that accepting fiat deposits and withdrawals using legacy financial systems can be complicated, risky, slow, and expensive. Some of these issues include: ● Identifying the right payment providers for your exchange ○ irreversible transactions, fraud protection, lowest fees, etc ● Integrating the platform with banks who have no APIs ● Liaising with these banks to coordinate compliance, security, and to build trust ● Prohibitive costs for small value transfers ● 37 days for international wire transfers to clear ● Poor and unfavorable currency conversion fees By offering tethers, an exchange can relieve themselves of the above complications and gain additional benefits, such as: ● Accept cryptofiats as deposit/withdrawal/storage method rather than using a legacy bank or payment provider ○ Allows users to move fiat in and out of exchange more freely, quickly, cheaply ● Outsource fiat custodial risk to Tether Limited just manage cryptos ● Easily add other tethered fiat currencies as trading pairs to the platform ● Secure customer assets purely through accepted cryptoprocesses ○ Multisignature security, cold and hot wallets, HD wallets, etc 12 ○ Conduct audits easier and more securely in a purely crypto environment ● Anything one can do with Bitcoin as an exchange can be done with tethers Exchange users know how risky it can be to hold fiat currencies on an exchange. With the growing number of insolvency events it can be quite dangerous. As mentioned previously, we believe that using tethers exposes exchange users to less counterparty risk than continually holding fiat on exchanges. Additionally, there are other benefits to holding tethers, explained in the next section. For Individuals There are many types of individual Bitcoin users in the world today. From traders looking to earn profits daily; to long term investors looking to store their Bitcoins securely; to techsavvy shoppers looking to avoid credit card fees or maintain their privacy; to philosophical users looking to change the world; to those looking to remit payments globally more effectively; to those in third world countries looking for access to financial services for the first time; to developers looking to create new technologies; to all those who have found many uses for Bitcoin. For each of these individuals, we believe tethers are useful in similar ways, like: ● Transact in USD/fiat value, pseudoanonymously, without any middlemen/intermediaries ● Cold store USD/fiat value by securing one’s own private keys ● Avoid the risk of storing fiat on exchanges move cryptofiat in and out of exchanges easily ● Avoid having to open a fiat bank account to store fiat value ● Easily enhance applications that work with bitcoin to also support tether ● Anything one can do with Bitcoin as an individual one can also do with tether For Merchants Merchants want to focus on their business, not on payments. The lack of global, inexpensive, ubiquitous payment solutions continue to plague merchants around the world both large and small. Merchants deserve more. Here are some of the ways tether can help them: ● Price goods in USD/fiat value rather than Bitcoin (no moving conversion rates/purchase windows) ● Avoid conversion from Bitcoin to USD/fiat and associated fees and processes ● Prevent chargebacks, reduce fees, and gain greater privacy ● Provide novel services because of fiatcrypto features ○ Microtipping, gift cards, more ● Anything one can do with Bitcoin as a merchant one can also do with tether 13 Future Innovations Multisig and Smart Contracts Proof of Solvency Innovations Conclusion Tether constitutes the first Bitcoinbased fiatpegged cryptocurrencies in existence today. Tether is based on the Bitcoin blockchain, the most secure and welltested blockchain and public ledger in existence. Tethers are fully reserved in a onetoone ratio, completely independent of market forces, pricing, or liquidity constraints. Tether has a simple and reliable Proof of Reserves implementation and undergoes regular professional audits. Our underlying banking relationships, compliance, and legal structure provide a secure foundation for us to be the custodian of reserve assets and issuer of tethers. Our team is composed of experienced and respected entrepreneurs from the Bitcoin ecosystem and beyond. We are focused on arranging integrations with existing businesses in the cryptocurrency space. Business like exchanges, wallets, merchants, and others. We’re already integrated with Bitfinex, HolyTransaction, Omni Wallet, Poloniex, CCEX, and more to come. Please reach out to us to find out more. Appendix Audit Flaws: Exchanges and Wallets Here is a summary of the current flaws found in technologybased14 exchange and wallet audits. In the Merkle tree[6] approach users must manually report that their balances (user’s leaf) have been correctly incorporated in the liability declaration of the exchange (the Merkle hash of the exchange’s database of user balances). This proposed solution works if enough users verify that their account was included in the tree, and in a case where their account is not included this instance would be reported. One potential risk is that an exchange database owner could produce a hash that is not the true representation of 14 As opposed to hiring a professional auditor 14 the database at all; it hashes an incomplete database which would reduce its apparent liabilities to customers, making them appear solvent to a verifying party. Here are some scenarios where a fraudulent exchange would exclude accounts and : ○ “Bitdust” Accounts: Inactive or low activity accounts would lower the chance that an uninterested user would check or report inconsistencies. In some cases these longtail accounts could represent a significant percentage of the exchange’s liabilities. ○ “Colluding Whales” Attack: There is evidence that large Bitcoin traders are operating on various exchanges and moving markets significantly. Such traders need to have capital reserves at the largest exchanges to quickly execute orders. Often, traders choose exchanges that they “trust”. In this way they can be assured that should a hack or liquidity issue arise, they have priority to get their money out. In this case, the exchange and trader could collude to remove the whales account balance from the database before it’s hashed. ○ Key Rental Attack: To pass the audit, a malicious exchange could rent the private keys to bitcoins they do not own. This would make them appear solvent by increasing their assets without any acknowledgment that those funds were loaned to them. Likewise, they could “borrow” fiat currency to do the same. ○ There are more attacks not discussed here. Reaching Statistical Significance (reporting completeness): Even outside of these three attack vectors, a database that has been manipulated may never be detected if a sufficient number of users are not validating balances. The probability of getting 100% of the users to verify balances is likely zero, even with proper incentivization structure for users to verify their balances. Therefore, auditors would need statistical tools to make statements about the validity of an exchange’s database based on sampling frequency, size, and other properties. Currently users have no way to receive compensation by legal means in case something goes wrong with the exchange. For example, when Mt.Gox closed operations, many users might not have independently recorded their account balances (prints screens, signed messages to themselves, etc) in a way that could conclusively prove to law enforcement that this exchange’s I.O.U’s actually existed. Such users are at the mercy of the exchange to somehow publish a record of that hash tree or original database. The proposed structure in which these audits would be performed still contains some subtle but important flaws. In particular, the data reporting (hash tree) on the institution’s website gives no guarantee at all to 15 users, as a malicious exchange could publish different states/balances to different groups of users, or retroactively change the state. Thus it is fundamental to publish this data through a secure broadcast channel, e.g. the Bitcoin blockchain. Privacy is a barrier to entry for the adoption of an automated/open auditing system. While some progress has been made towards better privacy there is no perfect solution yet. Further, to build up an accurate user verified liability space, these users will have to report account balances with the exchange and Bitcoin addresses. Some users likely would not report this information regardless of the incentive, therefore providing cryptographically secure privacy whilst obtaining the reporting goal is paramount. Time Series: the Merkle tree hash is a single snapshot of the database at a single point in time. Not having a somewhat continuous time series of the database opens significant attack vectors. Additionally, a time series of user reported information would also be required for piecing together the history of any reported incidents of fraud. Trusted Third Parties: All of the current exchange audits have relied on some “reputable” trusted third party to make some type of verification. In the Coinbase audit [7], that was Andreas Antonopoulos, in the Kraken audit [8], that was Stefan Thomas. If we absolutely must rely on a trusted third party then some audit standards and procedures should ensure this weaknesses is fortified. Limitations of Existing Fiatpegging Systems Here’s a list of some of the common drawbacks and limitations of existing fiatpegging systems. ● The systems are based on closedsource software, running on private, centralized databases, fundamentally no different than Paypal or any other existing massmarket retail/institutional asset trading/transfer/storage system. ● Decentralized systems that rely on altcoin blockchains which haven’t been stresstested, developed, or reviewed as closely as other blockchains, like Bitcoin. ● Pegging processes that rely on hedging derivative metaassets, efficient market theory, or collateralization of the underlying asset, wherein liquidity, transferability, security, and other issues can exist. 16 ● Lack of transparency and audits for the custodian, either crypto, fiat, or relating to their own internal ledgers (same as closed source and centralised databases). ● Reliance on legacy banking systems and trusted third parties (bank account owners) as a transfer and settlement mechanism for reserve assets. Market Risk Examples In the collateralization method, market risk exists because the price of the asset being used as collateral can move in an adverse direction to the price of the asset it’s backing/pegging. This would cause the total value of the collateral to become less than the total value of the issued asset and make the system insolvent. This risk is mitigated by the custodian closing the position before this happens; that is, when the collateral price equals the pegged asset price then the collateral is liquidated (sold on the open market) and the position is closed. A great approach, with merit, and used in many liquid markets across the traditional banking and financial markets. However, as we saw from the global financial crisis, situations can arise in which the acceleration of such events causes a “liquidity crunch” and thus the collateral is unable to be liquidated fast enough to meet trading obligations, subsequently creating losses. With the cryptocurrency markets being so small and volatile, this type of event is much more likely. Additionally, the overall approach suffers from other liquidity and pricing constraints since there must be a sufficient supply of users posting collateral for the creation of the peggedassets to exist in the first place. In the derivatives approach, the price of the asset is pegged through entering one of several derivatives strategies, such as: swap strategies, covered and naked options strategies, various futures and forwards strategies. Each strategy has their own strengths and weaknesses, the discussion of which we won’t engage in here. To summarize, each of these pegging processes themselves have similar “market risk” characteristics as the aforementioned collateralization method. It should be noted that the two methods are not mutually exclusive and often paired in a specific trading, hedging, or risk management function at legacy system financial institutions. Finally, understand that we believe some combination of the above approaches may become a secure, reliable, and generally riskfree process for backing/pegging assets; however, at this point in time, this is not a direction we feel is feasible to take to ensure liquidity and price stability. Further, we believe that a reservebased approach will always be in existence and complement these other approaches as the entire industry grows. As advances in technology continue, we will evaluate and incorporate any benefits available while maintaining the guarantee of 100% redeemability. 17 Legal and Compliance Tether Limited (“Tether”) is a limited company incorporated pursuant to the Hong Kong Companies Ordinance. It is wholly owned by Tether Holdings Limited, a BVI business company incorporated pursuant to the BVI Business Companies Act, 2004. Tether is registered as a Money Services Business with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (MSB Registration Number 31000058542968). Tether is establishing a relationship with a U.S. financial institution for purposes of better servicing Tether users in the United States. Tether is concluding a principal–agency agreement with RenRenBee Limited (“RenRenBee”). RenRenBee is licensed as a Money Services Operator by the Hong Kong Customs and Excise Department (Licence No. 130901265). Pursuant to the agreement, RenRenBee will provide antimoney laundering compliance work and customer due diligence procedures as agent for Tether as principal. Through these and other measures, Tether is undertaking customer due diligence, recordkeeping, and reporting procedures consistent with U.S. law and with the Hong Kong AntiMoney Laundering and CounterTerrorist Financing (Financial Institutions) Ordinance. Tether Limited currently has accounts with Cathay Bank and Hwatai Bank in Taiwan, both of whom are aware and confident that Tether’s business model is acceptable. These banks are satisfied with our processes and also satisfied that our business operates in accordance with Taiwan offshore banking regulations, as all of the banks had been requested to check this with their own legal, compliance and headoffice before opening accounts (also at our own request). It was our goal from the beginning to have a compliant operation and to provide the maximum level of comfort to our banking partners here. In addition these banks have and are working with other Bitcoin based businesses. 18 Glossary of Terms Digital currency: As defined by http://en.wikipedia.org/wiki/Digital_currency Cryptocurrency or decentralized digital currency: any type of cryptocurrency that is opensource, cryptographically secure, and uses a distributed ledger. See: http://en.wikipedia.org/wiki/Cryptocurrency Realworld currency, or fiat currency, or national/sovereign currency: all types of currency that are not cryptocurrencies as defined above. Cryptocurrency system: A collection of software and processes primarily created to enable the existence of a cryptocurrency. Legacy financial system: any financial system that is not a cryptocurrency system. Utilitybacked digital tokens, a.k.a Dapps: A decentralized digital token whose value is derived from the usefulness of its application rather than just being a value transfer system. Assetbacked/pegged cryptocurrency: Any cryptocurrency whose price is pegged to a realworld asset, i.e. its not a “utilitybacked” cryptocurrency. Tether(s): a single unit (or multiple units) of fiatpegged cryptocurrency issued by Tether Limited TetherUSD or tUSD: a single unit of cryptoUSD issued by Tether Limited TUSD: collective amount of tUSD in circulation at any point in time. Tether System: collectively refers to all process and technologies that enable tethers to exist Proof of Reserves: The process by which the issuer of any assetbacked decentralized digital token, cryptographically/mathematically proves that all tokens that have been issued are fully reserved and backed by the underlying asset. 19 References [1] https://www.thefinancialist.com/wpcontent/uploads/2012/10/2012GlobalWealthReport.pdf [2] https://bitcoin.org/bitcoin.pdf [3]http://www.deloitte.com/assets/DcomUnitedStates/Local%20Assets/Documents/FSI/us_fsi_BitcointheNe wGoldRush_031814.pdf [4] https://github.com/mastercoinMSC/spec [5] http://unenumerated.blogspot.com/2005/12/bitgold.html [6] https://iwilcox.me.uk/2014/provingbitcoinreserves [7] http://antonopoulos.com/2014/02/25/coinbasereview/ [8] http://www.coindesk.com/krakensauditprovesholds100bitcoinsreserve/ 20