Hi hieusupper89, this question has come up at different times, Lykke does not carry or list USDT (Tether) so in that sense it's not a Tether compatible exchange.

Regarding colored coins here is a good sum up on Lykke colored coins and fiat deposits: https://www.reddit.com/r/lykke/comments/6bzehz/what_does_it_really_mean_the_1usd_in_my_lykke/dhs0ub6/

Also a related question was recently answered here: https://www.lykke.com/city/blog/2018-04-qna-exchange

Q: Are fiat assets stored in Lykke wallet protected by European Deposit Guarantee Scheme? If not, what do you have in place?
Richard Olsen: They are not protected by the European Protection Guarantee Scheme, which applies to banks. In the new world of crypto, customers of Lykke can convert any fiat assets into BTC, ETH or cryptos as moment's notice. Users do not have to wait for 2 business days to transfer their funds to another broker or bank as is typical for the traditional banking system. This reduces risk. Medium-term, we want to explore how we can provide insurance coverage.

I will try to put it into simple terms, many (if not most) crypto exchanges work like this, as exchanges, and keeping a tight balance sheet and segregated funds are the tools in place to avoid any mismanagement. Lykke also presents annual audit reports. I won't personally get into speculation about how Tether operates since there are many articles but I can say it's still not quite clear on how exactly are backed (Lykke colored coins are only redeemable on Lykke Exchange so that's a less complex operation).

As regulation moves forward, demands are higher but also a clear landscape appears too on what is required by law or needed to protect consumers. Sadly some regions move faster than others and many alternatives would need to co-exist.