TO CRITICS, predicting cryptocurrencies’ value is like flipping a coin. Volatility is so high, they say, that a buyer might as well place a wager at a casino. Others see a more direct cause for daily price movements of virtual money: changes in the supply of tokens. And when the company that makes those tokens is suspected of fraud, the casino itself trembles.



Rumours have long swirled about the bona fides of Tether, a four-year-old cryptocurrency with more than $2.8bn in circulation, and of Bitfinex, the exchange on which it is traded. On April 25th New York’s attorney-general, Letitia James, accused both of a cover-up intended to hide a $850m loss in client and corporate funds. Tether slid just 1.4% against the dollar on the news, but according to CoinMarketCap.com, a website, virtual currencies at large suffered more, with some $10bn wiped off their collective value within an hour of the attorney-general’s statement. Bitcoin, the most famous, fell from $5,499 for a single Bitcoin to a low of $4,953, before paring back some of the losses (though it remains choppy).



The shockwave is caused by Tether’s unique status. Its issuer, also called Tether, is the “central bank of the crypto world,” says David Gerard of Attack of the 50 Foot Blockchain, a website that tracks the sector. Many cryptocurrency exchanges struggle to obtain bank accounts, because the market’s opacity makes it hard to keep tabs on flows of funds or to detect money-laundering. That makes lenders nervous. For those exchanges, Tether acts as a dollar substitute. Like fiat, as cryptocurrency buffs call government-issued money, it is pegged to hard currency, which is meant to insulate it from the worst of the volatility experienced by its anchorless peers. Traders use it as a common currency. Unhindered by regulation and the slowness of bank clearing, Tether flows quickly and easily between exchanges.



It is not the only “stablecoin”, as cryptocurrencies designed to hold a steady price are called. But it is vastly dominant, representing 96% of daily trading volumes in that category. Some 80% of cryptocurrency trades ostensibly made in dollars are in fact executed in Tether. The currency’s wide acceptance is its strength—and a worry for everyone else. “For years, people have treated Tether as the biggest systemic risk in cryptocurrency,” says Mr Gerard. “Tether supplies most of the liquidity.” To justify its peg, Tether has repeatedly said that every coin issued is backed by a real dollar in a real bank account. But the company has provided no audit of these hard-currency holdings.



The allegations will provide doubters some relief—and more reasons to worry. Because Bitfinex was having trouble getting accounts at banks, the exchange operator used a Panamanian firm, Crypto Capital, as an intermediary to wire dollars to traders, Ms James says. She claims that last year Bitfinex entrusted over $1bn to Crypto Capital, “without any written contract or assurance”. When $850m of that went missing, Bitfinex sought to cover up the problem through “a series of conflicted corporate transactions”—giving itself access to up to $900m from a Tether account which the currency issuer had told investors “backed the tether virtual currency 1-to-1”. (Tether and Bitfinex share the same managers and owners).



In other words, the attorney-general concluded that the stash of cash supposed to back Tether did exist—but that it could easily be used for other purposes without customers knowing. Bitfinex has issued a statement saying that the attorney-general’s “court filings were written in bad faith and are riddled with false assertions”.



The accusations would have been much more severe just a few years ago. Now, however, they are likely to cause no more than “a short-term blip,” says Eric Turner of Messari, a data-provider that tracks cryptocurrencies. Some 30 stablecoins are under development, he notes, with a handful operational. Many submit to know-your-customer and money-laundering checks by national regulators. TrueUSD, another dollar-pegged stablecoin, holds collateral funds in an external trust; Eidoo, whose stablecoin is backed by gold, lets customers monitor the precious metal via webcam in the vaults where it is stored. Rivals’ “whole market proposition is that they are not Tether”, says Mr Gerard. Even as Tether fell after the allegations became public, peers such as TrueUSD and Paxos Standard jumped by about 2%, according to Messari’s index of stablecoins.



Investors will welcome more transparency. And tailwinds behind alternatives will have a positive side effect. Bitcoin prices closely track fresh issuance of Tether, which creates volatility and makes it easy to manipulate markets. The stablecoin pioneer’s fall from grace will probably make the cryptocurrency market more stable, not less.