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.Assetbacked
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onetoonereserveratiobetweenacryptocurrencytoken,calledtethers,andits
associatedrealworld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.
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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
MultisigandSmartContracts
ProofofSolvencyInnovations
Conclusion
Appendix
AuditFlaws:ExchangesandWallets
LimitationsofExistingFiatpegging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storeofvalue,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cryptocurrency .
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Someoftheprimaryadvantagesofcryptocurrenciesare:lowtransactioncosts,internationalborderless
transferabilityandconvertibility,trustlessownershipandexchange,pseudoanonymity,realtime
transparency,andimmunityfromlegacybankingsystemproblems[3].Commonexplanationsforthecurrent
limitedmainstreamuseofcryptocurrenciesinclude:volatilepriceswings,inadequatemassmarket
understandingofthetechnology,andinsufficienteaseofusefornontechnicalusers.
Theideaforassetpeggedcryptocurrencieswasinitiallypopularized intheBitcoincommunitybythe
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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opensource,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,
marketbased,orprocessbaseddrawbacksandlimitations .
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1
Fordefinitionsthroughout,seeGlossaryofTerms
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ButhasbeendiscussedsinceDr.Szabo’sproposedBitGold[5]
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SummarizedintheAppendix,here:LimitationsofExistingFiatpeggingSystems
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Inoursolution,fiatpeggedcryptocurrenciesarecalled“tethers”.Alltetherswillinitially beissuedonthe
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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onetooneratio(i.e.onetetherUSDisoneUSdollar)bythe
correspondingfiatcurrencyunitheldindepositbyHongKongbasedTetherLimited.Tethersarefully
redeemable/exchangeableatanytimefortheunderlyingfiatcurrency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fiatpeggedcryptocurrencies:
● TethersexistontheBitcoinblockchainratherthanalessdeveloped/tested“altcoin”blockchainnor
withinclosedsourcesoftwarerunningoncentralized,privatedatabases.
● Tetherscanbeusedjustlikebitcoins,i.e.inap2p,pseudoanonymous,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;
browserbased,opensource,walletencryption;Bitcoinbasedtransparency,accountability,
multiparty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risks suchasBlackSwanevents,liquiditycrunches,etcas
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reservesaremaintainedinaonetooneratioratherthanrelyingonmarketforces.
● Tether’sonetoonebackingimplementationiseasierfornontechnical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priceparitybetweentethersincirculationand
theunderlyingfiatcurrencyheldinreserves.Inthispaperweprovideevidence thatshowsexchangeand
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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webwallet)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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decentralized sinceTetherLimitedmustactasa
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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nearinstantfiatvaluetransferbetweendecentralizedparties(suchasmultiple
exchanges)
● Introductiontotheuseofsmartcontractsandmultisignature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onetoone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
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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metadata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metadataembeddedin
theBitcoinblockchain;inthiscase,fiatpegged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,pseudoanonymous,cryptographicallysecureenvironment.
ii) opensource,browserbased,encryptedwebwallet:OmniWallet.
iii) multisignatureandofflinecoldstoragesupporting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webwallet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).

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Step3Userstransactwithtethers .Theusercantransfer,exchange,andstoretethersviaap2p
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opensource,pseudoanonymous,Bitcoinbased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,RealTime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
nontrivial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
stillremain.
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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onetoone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System isdifferentthantheTether.towebwalletin
10
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webwalletoperating
onclosedsource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PoRbased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appendix onthistopic.Mindyou,userscanalwayssecuretethersthroughmanagingtheprivate
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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
● Recentralized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compliance .
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WecouldabscondwiththereserveassetsThecorporatecharterispublic aswellasthebusinessowners
13
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.
Recentralization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
● 37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cryptofiats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cryptoprocesses
○ Multisignature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techsavvy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,pseudoanonymously,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cryptofiat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fiatcryptofeatures
○ Microtipping,giftcards,more
● AnythingonecandowithBitcoinasamerchantonecanalsodowithtether
13
FutureInnovations
MultisigandSmartContracts
ProofofSolvencyInnovations
Conclusion
TetherconstitutesthefirstBitcoinbasedfiatpeggedcryptocurrenciesinexistencetoday.Tetherisbasedon
theBitcoinblockchain,themostsecureandwelltestedblockchainandpublicledgerinexistence.Tethers
arefullyreservedinaonetoone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,CCEX,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technologybased exchangeandwalletaudits.
14
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longtail
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FiatpeggingSystems
Here’salistofsomeofthecommondrawbacksandlimitationsofexistingfiatpeggingsystems.
● Thesystemsarebasedonclosedsourcesoftware,runningonprivate,centralizeddatabases,
fundamentallynodifferentthanPaypaloranyotherexistingmassmarketretail/institutionalasset
trading/transfer/storagesystem.
● Decentralizedsystemsthatrelyonaltcoinblockchainswhichhaven’tbeenstresstested,developed,
orreviewedascloselyasotherblockchains,likeBitcoin.
● Peggingprocessesthatrelyonhedgingderivativemetaassets,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peggedassets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riskfree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
reservebased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.
130901265).Pursuanttotheagreement,RenRenBeewillprovideantimoney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,recordkeeping,and
reportingproceduresconsistentwithU.S.lawandwiththeHongKongAntiMoneyLaunderingand
CounterTerrorist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offshorebankingregulations,asallofthebankshadbeenrequestedtocheckthiswiththeir
ownlegal,complianceandheadoffice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opensource,
cryptographicallysecure,andusesadistributedledger.See:http://en.wikipedia.org/wiki/Cryptocurrency
Realworld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.
Utilitybacked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.
Assetbacked/peggedcryptocurrency:Anycryptocurrencywhosepriceispeggedtoarealworldasset,
i.e.itsnota“utilitybacked”cryptocurrency.
Tether(s):asingleunit(ormultipleunits)offiatpeggedcryptocurrencyissuedbyTetherLimited
TetherUSDortUSD:asingleunitofcryptoUSD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assetbacked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/wpcontent/uploads/2012/10/2012GlobalWealthReport.pdf
[2]https://bitcoin.org/bitcoin.pdf
[3]http://www.deloitte.com/assets/DcomUnitedStates/Local%20Assets/Documents/FSI/us_fsi_BitcointheNe
wGoldRush_031814.pdf
[4]https://github.com/mastercoinMSC/spec
[5]http://unenumerated.blogspot.com/2005/12/bitgold.html
[6]https://iwilcox.me.uk/2014/provingbitcoinreserves
[7]http://antonopoulos.com/2014/02/25/coinbasereview/
[8]http://www.coindesk.com/krakensauditprovesholds100bitcoinsreserve/
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