Tether tries once again to prove it’s not being used by criminals

Tether, the company behind the world’s most popular stablecoin, is doing its best to assure us that it is legitimate—and that nobody is using tethers for any kind of funny business. 

Blockchain forensic company Chainalysis today announced that Tether is now using its AML compliance solution dubbed “Know Your Transaction Token.” The solution monitors the full lifecycle of a token from issuance to redemption, the company said.

This is interesting, because we have yet to learn of one person who has actually redeemed their tethers for cash, but let’s put that aside for now. 

According to the press release, through integration with Chainalysis KYT via an API, Tether will be able to monitor large volumes of activity and identify high-risk transactions on an ongoing basis. Chainalysis told Modern Consensus via email that its software is built to support any token, and a number of stablecoins, including Paxos, are already using it.

The company also told us that its solution only works on Ethereum and Omni blockchains. That leaves a bit of a gap, since Tether also issues its stablecoin on Tron, EOS, Liquid Network, and Algorand. 

Nevertheless, Tether hopes regulators will take notice.

“This solution allows us to ensure a secure compliance program that fosters trust with regulators, law enforcement agencies and users,” Paolo Ardoino, Tether’s chief technology officer, said in the release. He added that users’ ID information is only kept on Tether’s servers.  

Tether: banking the unbanked exchanges

Since January 2019, Tether’s market cap rocketed from $1.8 billion to about $4.6 billion where it stands today. And nobody, including the New York Attorney General, who is suing Tether and sister company Bitfinex for fraud, really knows what is backing all of those tethers.

The virtual coin pegged to the U.S. dollar is the essential source of liquidity in crypto trading markets. But critics argue that similar to Liberty Reserve, a centralized digital currency system that was shut down in 2013, Tether is being used to bypass the traditional banking system. 

It is literally the reserve currency of choice for unbanked exchanges, Nicolas Weaver, a researcher at the International Computer Science Institute, argued in a 2018 post in Lawfare. Many of these off-shore-registered cryptocurrency exchanges don’t follow regulations on money laundering and other financial laws. If they did, they would be able to access legitimate banking resources, he said.  

Tether’s plan to use the Chainalysis KYT tool comes at a time when regulators around the globe are moving to enforce stricter cryptocurrency money laundering policies. Recently, Switzerland’s financial watchdog announced it was proposing a new rule to lower the reporting threshold for cryptocurrency transactions, following updated guidance set by the Financial Action Task Force in mid-2019.