76 Finance & economics The EconomistOctober 12th 2019
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aunched as realcoin in July 2014,
Tether aimed to become a more reliable
alternative to Bitcoin, the best-known
cryptocurrency. With a $4.1bn market capi-
talisation, it is now the fifth-largest virtual
currency. But its efforts to gain investors’
trust have fallen short. On October 6th a
group filed a class-action lawsuit in New
York, accusing Tether of being “part-fraud,
part-pump-and-dump, and part-money
laundering”. They call for truly startling
damages: more than $1.4trn.
In response to The Economist’s queries,
Tether’s general counsel said that “the law-
suit is meritless and the plaintiffs’ com-
plaint is rife with errors.” The firm “has not
used Tethers to manipulate any market”, he
added, and operates in “full conformity
with applicable laws”.
In 2014 Tether adopted its current mon-
iker, which made its selling point explicit.
With dollar reserves that it said matched
Tethers one-to-one, it was one of the first
“stablecoins”—digital currencies that seek
to avoid price swings by pegging their value
to the greenback. That made it a useful unit
of exchange. Many crypto-trading plat-
forms struggle to secure banking services,
and thus dollars, because lenders worry
about shady transactions. Punters find it
easier and quicker to trade Bitcoins in Teth-
er, and it is the most popular crypto curren-
cy pair (see chart).
But Tether is also opaque. When and
why it mints coins is unclear. Its general
counsel says: “We issue Tethers when cus-
tomers want them, full stop.” In China,
where crypto-exchanges are illegal, buyers
can swap wads of cash for Tethers, says
Philip Gradwell of Chainalysis, a block-
chain-analysis firm. Tether’s reserves have
not been independently audited. It hired
Friedman, an accountancy firm, in 2017. In
2018 the firms parted ways. Later that year
Tether’s general counsel told Bloomberg
that an audit “cannot be obtained”, citing
risk aversion among potential auditors.
And yet its influence on crypto-markets
is large. TokenAnalyst, a data-provider,
says that Bitcoin prices track issuances of
Tethers. On days when new Tethers are
minted, the price of Bitcoin, which can be
bought with them, rises 70% of the time.
The class action alleges that Tether and
Bitfinex, a crypto-exchange that shares the
same managers and owners, manipulated
markets and raked in profits. In 2017 and
2018, it claims, Tether issued “extraordi-nary amounts” of unbacked coins to flood
Bitfinex, propping up demand for Bitcoin
and creating “the largest bubble in human
history”. Bitcoin prices rose 19-fold be-
tween January 1st and December 17th 2017,
to more than $19,000 a coin, before falling
below $4,000 at the end of 2018. The boom-
and-bust, the complaint alleges, destroyed
some $265bn in Bitcoin wealth.
Tether’s general counsel is adamant
that the currency is fully backed. For years,
when the firm said reserves it meant hard
cash. Yet in March, under criminal probes
by America’s Department of Justice, its fu-
tures-market watchdog and New York’s at-
torney-general, it said that reserves “from
time to time may include other assets”. A
month later its lawyer said in court that
Tether was then only 74% backed by cash
and cash equivalents.
None of this seems to deter crypto-trad-
ers. That may be because Tether is the main
provider of liquidity to crypto-markets, ac-
counting for 96% of trading volume in
stablecoins. It would be hard to replace.
Since April Tether’s market capitalisation
has more than doubled. In September it
launched a new stablecoin—pegged to the
offshore Chinese yuan. 7The issuer of a star cryptocurrency is
being sued for $1.4trnTether’s travailsBitfinessed
Bit playersSources:Chainalysis;
Kaiko*On 50 largest exchanges
†StablecoinsMost-traded currencies against Bitcoin*
Jan 1st-Sep 26th2019,Bitcoins,m
0 5 10 15 20
Tether†
US dollar
South Korean won
Euro
Japanese yen
Paxos Standard†
USD Coin†
HUSD†J
ust under$1.1trn of revolving consumer
debt—bills racked up on credit cards—
was outstanding in America at the end of
August. It is a dangerous type of debt. High
interest rates and low minimum repay-
ments mean balances can quickly balloon.
But a group of fintech firms are growing
fast by offering consumers an alternative.
Affirm, based in San Francisco, was
founded in 2012 by Max Levchin, a serial
entrepreneur who co-founded PayPal.
Rather than offer a line of credit to be used
at will, like a credit card, it gives loans of up
to $15,000 for specific purchases, to be re-
paid in pre-agreed instalments. When a
shopper makes an online purchase with
one of its retail partners, for example Pelo-
ton, a seller of fancy exercise bikes, Affirm
appears as a payment option at checkout. It
does a roaring trade in financing for en-
gagement rings and laptops.
Affirm makes some of its money from
interchange fees of 3-6% paid by these mer-
chants. On a three-month loan that works
out at about as much as if the item had been
bought with a credit card and paid off over
the same period. That allows it to offer
short-term loans at zero interest. On long-
er-term loans the cost is fixed when the
loan is taken out and does not accrue as
with cred it cards, even if a payment is late.
The model for such firms was Klarna,
which was founded in Stockholm in 2005
and became a bank in 2017. Like Affirm, it
offers medum-term loans repaid monthly.
But it also allows consumers to split small
purchases, like clothing, into three to four
fortnightly zero-interest payments. After-
pay, founded in Melbourne in 2014, also
splits payments into four. Both charge late
fees, but cap the total. Smaller rivals have
sprung up, such as Sezzle, based in Minne-
apolis and founded in 2016, and Quadpay,
based in New York and founded a year later.
Affirm made $2bn-worth of loans last
year, says Mr Levchin. Klarna financed pur-
chases worth $29bn in 2018, up by a third
from 2017. In the year to June 30th the value
of sales financed by Afterpay more than
doubled, to $5.2bn. Such speedy growth is
reflected in their valuations. Affirm is
worth $2.9bn. Klarna raised $460m in fi-
nancing at a valuation of $5.5bn in August.
Afterpay, which went public at a valuation
of $1.6bn in 2017, is worth $8.8bn.
They are a particular hit with younger
customers, who tell pollsters that they fear
credit cards. Affirm says half of its custom-SAN FRANCISCO
Young people’s fear of credit-card debt
is a boon for innovative fintechsInstalment loansCreditworthy