By Daniel Livingston, Partner and Scott Colvin, Lawyer

The world’s most notorious cryptocurrency, Bitcoin, spiked up to 21% on some trading exchanges last week as uncertainty mounted regarding claims made by alternative cryptocurrency Tether that the Bitcoin-rival was backed by fiat currency.

The jump in Bitcoin prices seemed to be isolated to exchanges offering trading in Tether, with the coin, which was supposedly pegged to the US dollar, simultaneously slumping by as much as an unprecedented 10% over the same time.

Many market commentators and analysts saw this price action as proof of a fire sale of Tether, suggesting that trust in the coin and its claims had dissipated.

Tether was touted as a ‘stable’ coin, due to its being pegged to the US dollar and purported backing 1-for-1 by hard currency, meaning that for every $1 of Tether in circulation, a corresponding $1 was held in reserve.

However, there has long been speculation in the market that this claim isn’t true.

As recently as June, the company behind Tether released a document purportedly from US law firm Freeh, Sporkin & Sullivan LLP attesting to the existence of approximately US$2.5 billion in Tether’s accounts — more than accommodating the number of Tether tokens in circulation.

Despite that report, the mass exodus from Tether and anecdotal evidence that some users had faced difficulties in trading Tether for cash on Tether-related exchange Bitfinex, have sent crypto-market speculation into overdrive.

The news continues a recent trend of coin issuers being alleged to have made representations that are misleading or at times completely false. An ongoing US litigation alleges that two coins purportedly backed by real estate and diamonds were not asset-backed in any way. While here in Australia, cryptocurrency advisor DigitalX is facing a legal action alleging it misrepresented how a coin was to be released to the market and how many coins would be issued.

Corporate lawyers and cryptocurrency experts Daniel Livingston and Scott Colvin of law firm Mills Oakley commented in a statement that “If true, actions like this expose promoters and creators of coins to huge personal risks of class actions, regulatory action and other legal enforcement, whether here in Australia or abroad. Playing loose with the truth also seriously harms investors and diminishes trust in the market generally”.

The rise in Bitcoin price seems to have reversed what has become a prolonged down turn in the market for the cryptocurrency, though many analysts remain of the view that its price will continue to correct downwards.