Tether was once the stablecoin king. Now its dominance is threatened by newcomers and legal uncertainty.

Getty ImagesRegulators are focusing their attention on tether, one of the largest dollar-pegged cryptocurrency known as stablecoins.However, despite tether's legal problems ratcheting up, stablecoin already has a declining market share.The central focus of the story is now on what tether does behind-the scenes.Subscribe to our daily newsletter 10 Things Before The Opening Bell.Insider was told by Jeff Bezos in 2018 that innovative people "have to be open to being misunderstood." Stuart Hoegner was the top lawyer at Tether and wrote an angry blog post citing Bezos in May. It suggested that he saw his product, which he unfairly referred to as the bleeding edge of crypto revolution.Others aren’t so certain. Regulators are focusing their attention on tether, also known as stablecoins and the largest of the dollar-pegged cryptocurrency cryptocurrencies.Reports circulated Monday that the DOJ was looking into a criminal bank fraud investigation against tether executives' conduct many years ago. Further reports emerged the next day indicating that a presidential committee headed by Treasury Secretary Janet Yellen was looking into tether. They compared it to an unregulated money market fund - which is what caused financial turmoil in 2008 and again during COVID-19.However, even though tether's legal problems reach their apex the stabilitycoin has in some way become less relevant.According to data from The Block, tether's share in the total stablecoin supply has fallen from 75% down to 57% so far this year. New challengers are behind the decline, including Circle's USD Coin and Binance USD, Gemini and DeFi-focused Dai.Tether's problem is that there aren't many technological barriers to its stablecoin business.Insider was told by Denelle Dixon, CEO, Stellar Development Foundation that all the US-dollar-backed stablecoins are "not that different in terms what they're representing". Stellar hosts USD Coin on their network.She added, "But those token-supporting companies and their work behind the scenes are really important."What tether does behind-the scenes has been a focal point. Tether has been plagued by past problems with its parent company, which led to New York's ban on trading.There are also two complaints about the stability coin itself: transparency and the quality of its reserves.First, regulators are concerned that the tethers reserves, which should in principle back each tether with a dollar, could be of questionable quality. JPMorgan released this year's reserves breakdown and estimated that tether would be one of the largest investors in the asset with $30 billion worth of commercial paper. This is a cash-like form of corporate debt.Tether, however, does not reveal the exact make-up of its holdings like other large commercial paper holders. Hoegner revealed to CNBC that his company holds international paper, leading anchor Jim Cramer speculate that tether might be a "ticking bomb" holding Chinese paper. Recent academic research suggested that tether could face bank runs if it is not able to pay a wave off its redemptions.Some secondly believe that tether's disclosures are inadequate, even though they have been improved. Although Hoegner stated to CNBC that tether has yet to produce an independent audit, he said it was still months away and not years. However, it has produced an independent "attestation", which is basically verification that tether assets are as stated.Tether has denied or disputed the allegations against it. Tether claims that its commercial paper holdings are highly rated and it has ample cash to cover redemptions. It also says that it is setting a new industry standard for transparency.Insider was told by Sadie Raney (CEO of Strix Leviathan), that "it's a classic entrepreneurial's dilemma." She said that firms operating in unregulated areas, such as tether, have to decide whether they want to go ahead and risk blowback, or if they want to slow down and lose market share.Raney also co-founded Makara, a crypto robo-advisor Makara that was approved by the SEC. She believes using tether to be too risky for her business, which relies on government approval.Raney said that if a stablecoin is used, we don't use tether even though we did in the past." His company uses Gemini. "The regulatory uncertainty surrounding tether is what stopped us from using it."However, not everyone is discouraged. Steven McClurg, Valkyrie CIO, told Insider that the public attestation of tether helped to soothe his fears and that its publication has been "really great for the industry."He said, "I don’t believe there are really any worries anymore."