Tether collapse inevitable? Today on CTP, we will be discussing whether or not a Tether collapse is on the horizon – everytime we examine Tether more closely, new information is brought to light. It’s usually not good news for Tether.
For example, up until 2017, Tether and Bitfinex had always insisted that there wasn’t a relationship between the two companies, with Bitfinex CEO Phil Potter denying it outright – pointing to the mutually utilized bank as the only conjecturable coincidence between the two. We know this to be false – the parent company of both is iFinex.
We know this because when the Paradise Papers leaked in 2017, we discovered that Potter, the CEO of Bitfinex, also happened to be a director at Tether. That’s when the PR engine started rolling and Tether attempted to play coy and pretend that it was never a secret that the two companies are run by the same people.
Another bold-faced statement that Tether has tried to pass off to crypto users was to state that each Tether (USDT) is backed 1:1 with the US Dollar – a positioned they stood fast upon until they conceded, via a sworn affidavit, that at best, each USDT was backed at a rate of 74% and not even necessarily by US dollars.
Each time a lawsuit or investigation delves deeper into Tether’s background, the crypto world’s understanding of the machinations of Tether changes dramatically. Tether, to their credit, seems adept and at ease with these setbacks, revising past claims and statements and offering new statements or platitudes that they think will continue the lie.
Tether can run for only so long before it must face the music. They find themselves in the middle of a fraud investigation by the New York Attorney General’s office, while multiple lawsuits have been consolidated into one behemoth class action alleging market manipulation and fraud by Tether and Bitfinex.
At the heart of Tether lays a comforting thought – USDT, up until recently, was proclaimed to have been backed, 1:1 with the US Dollar. Tether marketed themselves as a stable coin. Up until February 26th, 2019, Tether’s front page still claimed 1:1 backing with the US Dollar.
For crypto users, it was a wonderful idea – enjoy the convenience of a digital asset without dealing with the, admittedly, often-violent volatility that’s associated with cryptocurrency as a whole.
But how do we know, and how have we been assuaged that USDT is backed 1:1 with the US Dollar? That’s always been a mystery for crypto users and Tether users. It does not help that Tether meets demands for verification with outright deceit and trickery.
In 2017, Tether retained Friedman LLP to do an “audit” of Tether’s balance sheet – they came to the conclusion via their report that the amount of USD owned by Tether matched the number of USDT in circulation*. The asterisk is an important caveat – the firm did not evaluate the terms of any of Tether’s bank accounts, whether or not Tether could access those funds, and whether or not those funds were appropriated for USDT backing.
This obviously was not enough.
The audit did not sate our desire to know, definitively, whether or not Tether could be trusted or not. So Tether changed their tune. They changed the language on their website and now claim that Tether is not backed 1:1 with currency at all – rather, 1:1 with their reserves. What constitutes their reserves? “Other assets and receivables from loans made by Tether to third parties…”
This change did not happen until Tether’s General Counsel Stuart Hoegner signed a sworn affidavit in the NYAG’s investigation where he admits that Tether has reserves to back 74% of its stablecoin in issuance. They only admitted to and changed their tune when it was clear they had no other avenue or recourse to pursue. There isn’t much one can do when the NYAG is what you see when you look over your shoulder.
To be clear, at issue is not whether or not USDT is backed 1:1 by USD or not – what’s at issue is Tether’s longtime insistence that it WAS backed 1:1 by USD. They only changed their story when they had no room to maneuver.
Tether’s claim that USDT was backed 1:1 with the USD is just one piece of Tether’s legal nightmare. They are also contending with the potential of having committed securities and commodities fraud when they failed to notify investors when they lost $850 million dollars worth of client and corporate funds which were co-mingled together.
The money disappeared when Bitfinex apparently handed over the hundreds of millions to a Panamanian payment processing company called Crypto Capital Corp – outsourcing their fund storage and withdrawals/deposits with CCC. According to the NYAG, this was done without a contract between Bitfinex and Crypto Capital. The funds are also gone, without clear reasons.
The CEO of Crypto Capital was indicted in 2019 on fraud charges, and the president of Crypto Capital was extradited to Poland on drug and money laundering charges.
Bitfinex had until January 15th, 2021 to present documents relevant to the investigation, including loan documents concerning the massive movements of cash between the two entities. Assuming this doesn’t get pushed back like it has in the past, we may get an insight as to how solvent Bitfinex and Tether are as a whole.
Tether has another issue to deal with entirely – whether or not USDT is used to manipulate the Bitcoin market. In November 2019, research from the University of Texas showed massive amounts of Tether moving from Bitfinex to Poloniex and Bittrex to be used to trade for Bitcoin. The research linked this type of activity to the Bitcoin bull run of 2017.
At the heart of the lawsuits that Tether and Bitfinex (as well as others) are facing is that they are accused of colluding to manipulate the price of BTC by printing unbacked Tether leading to artificially inflating its price.
Bitcoin’s price would rise because the assumption was made that Tether was backed 1:1 with USD. We now know that this is false. With the addition of Poloniex and Bittrex as defendants in June 2020 for their role as facilitators of the alleged manipulation, the suit alleges that all parties were aware of what was happening.
If and when we learn, through the NYAG, that tether is nothing more than a long con, what happens to BTC when investors and traders have a come-to-Jesus moment and realize that the price of BTC has been propped up by a literal currency printing machine?
There is a reason for Crypto’s moniker of the Wild West – con artists continue to plague our industry despite regulators and prosecutors reining them in. We need regulation and enforcement to protect investors, both institutional and mom-and-pop investors.
Bubbles pop. Tulips did, and BTC did post 2017. When they do, regulators crack down hard by introducing sweeping reform and heavy enforcement. This is just another step that Crypto must take to evolve.
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