Two days ago, "People in the currency circle please eat melons correctly" about USDT TEDA currency: Hubei police cracked the "first case of virtual currency" in the country, with a turnover of 400 billion! In ", lawyer Honglin took everyone together, and ate a small melon of USDT with everyone in line with the principle of "the less words, the bigger the matter". From the comments section of Zhafantian, we can see that everyone was very happy to eat this melon, and many friends were shocked.

In fact, this is not surprising at all. Everyone thinks that the virtual currency they play is decentralized, but you must know that there are many well-known institutions in the currency circle that cooperate with the public security.

As a global company, Tether has established an on-chain blacklist mechanism in order to fulfill its anti-money laundering compliance obligations and has established close and friendly cooperative relations with law enforcement agencies around the world. Whenever law enforcement agencies request that funds be suspected of fraud, money laundering, terrorist financing, etc., it will restrict the relevant addresses. The principle of "freezing" is that USDT, as a smart contract programming product, can restrict EOA's management authority on the token through codes. When an address is "AddedBlackList" by the centralized TEDA company, it will no longer be able to transfer the USDT token in the address.

As of March 2023, Tether has blacklisted 846 addresses in the Ethereum network, and more than 449 million USDT have been frozen.

In today's article, as a follow-up to the article on eating melons, I would like to share more stories about USDT with you. The content of the article is a little long, and there are probably several parts:

- The birth background and development history of USDT

- Technical architecture and operating mechanism of USDT

- Challenges and risks faced by USDT

- The embarrassing situation of USDT in China

0****1 USDT Tether Introduction

USDT, also known as Tether, is an encrypted digital currency. Because its value is linked to the US dollar, each USDT is equivalent to one US dollar, so it is also called a stable currency.

The goal of USDT is to provide a stable value anchor for the digital currency market, allowing users to easily exchange between different digital currencies, or between digital currencies and fiat currencies.

The issuance of USDT is controlled by Tether, a company affiliated with Hong Kong-based iFinex, which also owns the Bitfinex cryptocurrency exchange.

According to the data from the CoinMarketCap website, as of July 4, 2022, the total circulation of USDT is 66,081,540,012.39 pieces, and the total market value is 66,081,540,012.39 US dollars, ranking third among all encrypted digital currencies, second only to Bitcoin and Ethereum. The 24-hour trading volume of USDT is $72,038,000,000.00, ranking first among all cryptocurrencies. USDT is traded on more than 400 exchanges and platforms around the world, and supports more than 10 different blockchain protocols.

0****2 USDT's birth background and development history

In 2014 when USDT was born, encrypted digital currencies such as Bitcoin have attracted widespread attention, but there are still some problems, mainly in the following aspects:

• **Prices fluctuate wildly. **The encrypted digital currency market has no price limit, and the price often fluctuates sharply, which brings great risks to investors. For example, in November 2013, the bitcoin price rose from $200 to $1,200, and then fell to $800 in January 2014; in December 2017, the bitcoin price rose from $10,000 to $20,000, and then fell to $6,000 in February 2018.
• **Fiat currency exchange is inconvenient. **Many encrypted digital currencies do not have a direct exchange channel with legal currency. They need to be converted into mainstream encrypted currencies such as Bitcoin first, and then converted into legal currency. Such a process is not only time-consuming and labor-intensive, but also bears exchange rate risk and transaction costs.
• **Regulation is unclear. **Different countries have inconsistent attitudes and policies towards encrypted digital currency. Some countries prohibit or restrict the use and transaction of encrypted digital currency, while others are more open or acquiescent. This has brought great uncertainty and compliance challenges to the encrypted digital currency market.

In order to solve these problems, Tether launched USDT, a stable currency, trying to add features such as linking with legal tender, maintaining price stability, and providing legal currency exchange channels on the basis of the advantages of blockchain technology such as decentralization, peer-to-peer, low cost, and high efficiency, to meet market demand.

• In 2014, Tether was established and began planning to issue USDT. At that time, the digital currency market was still in its infancy and lacked a stable medium of exchange. Tether believes that by issuing a stablecoin pegged to the U.S. dollar, it can solve this problem and bring more liquidity and efficiency to the digital currency market.
• In 2015, Tether officially launched USDT and traded on several mainstream digital currency trading platforms. At that time, USDT mainly used the Omni protocol on the Bitcoin network for transfer and verification. Each USDT is considered a token on the Bitcoin network and can take advantage of the security and decentralization of the Bitcoin network.
• In 2017, with the explosive growth of the digital currency market, USDT also ushered in a large amount of demand and usage. Tether began to expand the issuance of USDT and issued different versions of USDT on multiple blockchain networks, such as Ethereum, Tron, EOS, etc. The purpose of this is to improve the usability and flexibility of USDT, so that users can choose different networks for transfers and transactions.
• In 2018, Tether encountered a series of doubts and controversies. First of all, some people question whether Tether really has enough U.S. dollar reserves to support the value of USDT, because Tether has never disclosed its reserve certificates or accepted third-party audits. Secondly, some people accused Tether of having an interest relationship with the Bitfinex exchange and allegedly manipulating the digital currency market. Finally, it was discovered that Tether had revised its terms of service on its website, changing the promise of pegging USDT to the U.S. dollar to "do its best", which caused users to worry about the stability of USDT's value.
• In 2019, Tether faced investigations and lawsuits from the New York State Attorney's Office (NYAG). The NYAG accused Tether and Bitfinex of violating New York State law at the end of 2018 by concealing the fact that Bitfinex had frozen or lost $850 million in funds because it cooperated with a payment processor called Crypto Capital, and used $850 million of USDT under the control of Tether to make up for the funding gap in Bitfinex. This incident caused the market to doubt whether USDT really has enough U.S. dollar reserves, resulting in certain fluctuations in the price of USDT.
• In 2020, while Tether is responding to legal proceedings, it is also continuously expanding the issuance and coverage of USDT. Tether issued USDT on multiple emerging blockchain networks, such as Algorand, Solana, Tron, etc., and cooperated with multiple digital currency service providers and institutions to promote the usage scenarios and value of USDT. Tether has also begun to issue stablecoins linked to other fiat currencies, such as Euro, Renminbi, and Japanese Yen, to meet the needs of different regions and markets.
• In 2021, Tether reached a settlement agreement with the NYAG, ending more than two years of litigation. Under the agreement, Tether Corporation agreed to pay the NYAG a fine of $18.5 million and submit its reserve reports and related documents to the NYAG on a quarterly basis. Tether also agreed to no longer serve users or institutions in New York State. In addition, Tether has also begun to regularly announce the composition and proportion of its reserves, and hired an auditor named Moore Cayman to conduct audits of its reserves.
• In 2022, Tether will continue to maintain USDT's leading position in the stablecoin market, and will innovate and improve in many aspects. Tether, for example, has launched a new version called Liquid USDT that leverages the Liquid sidechain technology on the Bitcoin network to enable faster and more private transfers. Tether has also cooperated with several central bank digital currency (CBDC) projects to explore how to use USDT to promote the cross-border circulation and interoperability of CBDC.

0****3 USDT technical architecture and operating mechanism

USDT was originally issued based on the Omni Layer protocol on the Bitcoin blockchain. The Omni Layer protocol is a two-layer protocol that implements smart contract functions on the Bitcoin blockchain and allows new tokens to be created on the Bitcoin blockchain. Tether uses the Omni Layer protocol to convert legal currencies such as US dollars into digital currencies. For every USDT issued, it will store one dollar of cash in its bank account as a reserve. The issuance and circulation process of USDT can be divided into the following steps:

1. The user deposits USD into Tether’s bank account;

2. Tether Company creates their own Tether accounts for users, and puts the digital currency corresponding to the USD deposited in the accounts;

3. Users can trade USDT through exchanges or over-the-counter markets, or use USDT to buy other encrypted digital currencies;

4. Users can exchange the equivalent amount of USD cash to Tether at any time, and Tether will destroy the corresponding amount of USDT.

Tether claims that its statutory reserve account is regularly audited to confirm that its reserve account can actually support the USDT value in circulation. The Tether company also claims that all its transactions are recorded on the public blockchain, and anyone can view its issuance and circulation. In addition to USDT based on the Omni Layer protocol, Tether has also issued USDT on other blockchains, including Ethereum, TRON, EOS, Algorand, etc. USDT on these blockchains are all pegged to the U.S. dollar, but use different technical standards and protocols.

As a stable currency, USDT plays an important role in the digital currency market, mainly in the following aspects:

• ** Avoid market risk. **When the digital currency market falls, investors can convert other encrypted digital currencies into USDT to protect their assets from price fluctuations. When the market picks up, investors can exchange USDT into other encrypted digital currencies to participate in transactions.
• **Provide transaction intermediary. **Because many encrypted digital currencies do not have a direct exchange channel with legal currency, investors need to use USDT as an intermediary to realize the conversion between legal currency and other encrypted digital currencies. This saves time and cost, and also avoids exchange rate risk.
• **Support payment and settlement. **Since USDT has the same value as the U.S. dollar, and uses blockchain technology to achieve fast, low-cost, safe, and transparent value transfer, it can be used in scenarios such as cross-border remittance and payment settlement.

0****4 USDT Challenges

Although USDT has a wide range of applications and influence in the digital currency market, there are still some challenges and risks, mainly in the following aspects:

First of all, the issuer of **USDT is Tether, which has not publicly and transparently disclosed the USDT reserves. **That said, we don't know if they actually have enough USD to back the value of USDT. If they don't, then USDT may experience a credit crisis, leading to a decline in users' trust in it, and even triggering panic selling. This has happened several times. For example, in October 2018, the price of USDT once fell below $1, causing market shocks.

Second, **USDT has also come under some legal and regulatory pressure. ** Previously, Tether and Bitcoin trading platform Bitfinex were indicted by New York prosecutors, accusing them of covering up a $850 million funding gap in 2018 and misleading investors. Although the two parties reached a settlement agreement of 185 million US dollars in the end, this also had a negative impact on USDT. In addition, some countries and regions have also restricted or banned stablecoins, such as China and India.

Finally, **USDT is also facing challenges from competitors. ** With the development and innovation of blockchain technology, more and more stable coins have appeared on the market, such as USDC, DAI, BUSD, etc. These stablecoins have their own advantages and characteristics, such as higher security, better compliance, and more application scenarios. They may attract some USDT users, thereby affecting USDT's market share and status.

0****5 USDT is embarrassing in China

According to my country's latest policy, virtual currency does not have the same legal status as legal tender, that is, it cannot be used as a tool for payment and settlement. Business activities related to virtual currency are illegal financial activities, including issuance, trading, agency, custody, etc. If any organization or individual invests in virtual currency and related derivatives, which violates public order and good customs, the relevant civil legal acts are invalid.

This means that if you buy or sell USDT, you may face the following risks:

• **The counterparty of the transaction may be a criminal. **Using USDT for gambling, smuggling and other illegal activities, once discovered by the judicial authorities and marked as a black U, you may be suspected of money laundering or other crimes.
• **The trading platform may be illegal, and there are risks such as running away, being seized, hacked, etc., resulting in the inability to withdraw or lose your funds.
• Transaction disputes may not be able to protect rights, because buying and selling virtual currency is an invalid civil act and is not protected by law. If the counterparty defaults or commits fraud, you may not be able to recover losses through normal means.

**So, how to reduce the legal risk of USDT? **As a lawyer, our advice is: try to avoid buying and selling USDT + try to avoid allocating too much USDT as your digital assets.

If you insist on buying and selling USDT, then you must at least do the following:

• **Choose a regular and legal trading platform and stay away from the pheasant platform. **
• **Check the identity information and reputation evaluation of the counterparty to avoid transactions with suspicious or dishonest people. **
• **Keep transaction vouchers and evidence, including transfer records, chat records, contract agreements, etc. **
• **Comply with relevant national laws and regulations, and do not participate in any illegal activities or speculation. **

0****5 Summary

• USDT is a USD-pegged stablecoin issued by Tether, which plays an important role in the digital currency market, providing users with a stable value anchor and trading medium. *USDT has been issued since 2015 and has gone through many changes and challenges. It is still one of the largest and most widely used stablecoins. USDT has different versions on different blockchain networks, and cooperates with multiple digital currency service providers and institutions to expand its usage scenarios and value. USDT also faces some doubts and disputes, mainly involving its reserve certificate, legal compliance, market influence, etc.
• As a virtual currency, it faces strict supervision and restrictions in our country. **As users, we should look at the value and risks of USDT rationally, and don't blindly follow the trend or risk hoarding coins. **