Today we’re talking about Tether (or USDT, they’re used interchangeably). They’re presently the fifth largest cryptocurrency by market cap and the first among stablecoins by dint of being the oldest, but not necessarily the best.
We will probably never see another stablecoin rise to take its place, and if we do it’ll be dirtier than Tether. No clean stablecoin, like Circle’s USDC, will be able to challenge it, because they actually have what they say they have in storage, and can’t just print (or mint) new coins whenever they feel like it.
Naturally, when anyone asks me why I refuse to buy Tether – I usually tell them because the coin is run by a garbage company that’s either incompetent, evil or both. My vote is for both. But maybe we’re getting ahead of ourselves here.
Let’s answer some simple questions first.
What is Tether?
The short answer is Tether is a stablecoin. We’ll get into what that means in a bit. The long answer is that Tether is the solution posed to cryptocurrency’s volatility problem.
Tether originated with the company Tether Limited, itself iFinex, which also owns the Bitfinex exchange. The original idea started with a white paper published online early in 2012 that described the possibility of building new currencies on top of the Bitcoin protocol. The idea had many names over the years, starting with Mastercoin, and then Omni and RealCoin, before landing on Tether. The first tokens were minted in October 6, 2014, on top of the Bitcoin blockchain, using something called the Omni Layer Protocol.
In January 2015, Bitfinex, one of the largest crypto-exchanges in the world, listed Tether on their platform. Ifinex swore up and down at the time that Tether and Bitfinex were separate, but the Paradise Papers leaked in November 2017 pointed directly at iFinex bigwigs Philip Potter and Giancarlo Devasinni as being responsible for setting up Tether Holdings Limited in the British Virgin Islands.
In its infancy, Tether processed US dollar transactions through banks in Taiwan, which sent the money internationally through Wells Fargo. These were blocked in April of 2017, and Tether and Bitfinex launched a suit against Wells Fargo in the U.S. District Court for the Northern District of California, before withdrawing it a week later.
Before we get well into the weeds on this one—let’s explain something.
What is a Stablecoin?
A stablecoin is a cryptocurrency wherein the value of the coin is tied directly to an external source of wealth, be it precious metals, a basket of international currencies, the Canadian dollar (like QCAD) or the United States dollar like Tether or USDC. Tether was arguably the first stablecoin, but it’s since been followed by a plethora of known and unknown stables, with the most popular being USDC, and the most infamous being Facebook (or Meta or whatever the hell they’re called now) Diem, whenever the hell that thing comes out.
It’s generally the coin of choice for those looking for a safe digital space to store their wealth, and coins like USDT (and increasingly USDC) are starting to be looked at by more retailers as an acceptable form of payment. And not just crypto-specific companies, but big name retailers with names like Amazon, Time (magazine) and oddly enough, Pornhub.
Protip: Plenty of crypto types use stablecoins as a hedge against Bitcoin’s weird volatility when it’s crapping out. For example, when Bitcoin dipped to 40K this year, one of my besties exchanged it in for Canadian dollar stablecoin QCAD and engaged in the crazymaking practice of trying to time the market. He did it to within a week’s worth of rebound, bought back in (while dollar cost averaging. Yes. He tells me way too much about his crypto behaviours) and is presently causing me a heavy cast of FOMO because I wish I’d thought of it.
Price Manipulation Schemes
Tether’s been involved (but not necessarily implicated) in price manipulation schemes involving Bitcoin and Ethereum.
Between January 2017 and September 2018, the amount of tethers floating around in the market jumped from $10 million to about $2.8 billion. By early 2018 Tether made up about 10% of the trading volume of bitcoin, which jumped to more than 80% by the summer. Independent research suggests that there may have been some price manipulation going on surrounding tether, which apparently accounted for half of Bitcoin’s price increase in late 2017. Also, more than $500 million of Tether were issued in August 2018.
This time last year it was, once again, a regular occurrence for Tether to mint (not mine) new coins by the millions. Not a week would go by without Tether firing up the crypto-machine like they were the United States federal reserve trying to finance the next big war. Then when the money was out, the rise in Tether would correlate heavily with the price trajectory for Bitcoin or Ethereum, suggesting of course, the location for the printed funds.
Here’s the summary of a report issued on Tether’s activities:
- Summary
- Author’s opinion – it is highly unlikely that Tether is growing through any organic business process, rather that they are printing in response to market conditions.
- Tether printing moves the market appreciably; 48.8% of BTC’s price rise in the period studied occurred in the two-hour periods following the arrival of 91 different Tether grants to the Bitfinex wallet.
- Bitfinex withdrawal/deposit statistics are unusual and would give rise to further scrutiny in a typical accounting environment.
- If there is questionable activity, the author believes a 30-80% reduction in BTC price could be forecast.
The Bad Boy of Crypto
Technically, the bad boy of crypto is still Monero, given how often it shows up in digital raids of the deep and dark webs, but Tether comes in a close second (if not actually first). It’s been used for drug trafficking, gambling, human trafficking. You name it.
Why it’s the new bad boy of crypto is because the folks at iFinex, the company behind Bitfinex (and therefore, Tether Limited) have proven themselves consistently to be liars. We covered earlier how they tried to hide the relationship between Bitfinex and Tether, which is really lie number one. The second is that they claimed once upon a time that every coin presently in circulation is backed up 1:1 with a US dollar from their vault.
Their market capitalization is $72,254,767,368. That’s $72 billion dollars that nobody has ever seen, because it’s never been audited by a third party. Tether Limited’s lawyer claimed that each tether was backed up by $0.74 in cash and cash equivalents. Later Tether published a report showing that only 2.9% of Tether was backed by cash with over 65% backed by commercial paper.
In recent years the company has come under judicial scrutiny from the New York Attorney General, and has been slapped with a $41 million fine from The Commodity Futures Trading Commission (CFTC) for being full of shit.
Now they’re singing a modified tune.
‘Every tether is always 100 per cent backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by tether to third parties, which may include affiliated entities.’
Sure.
In response, New York-based financial research firm (and short seller), Hindenburg Research, is offering a $1 million bounty to anyone, investors or otherwise, who can offer some definitive information on just what Tether is holding in their wallets.
How Tether lost $850 million and covered it up
What originally put Tether on New York Attorney General Letitia James’ radar was their dealings with a little company called Crypto Capital.
In April 2019, James filed a suit accusing Bitfinex of using Tether’s reserves to cover up a gaping loss of $850 million. Bitfinex was having a hard time finding a normal banking arrangement courtesy of the banks being all confused and hostile about cryptocurrency (they still very much are) so they deposited $1 billion with a payment processor called Crypto Capital based out of Panama.
The funds were a mingled collection of corporate and client deposits and no contract had ever been signed. James claimed Bitfinex and Tether either knew or at least suspected the Crypto Capital disappeared with the money in what sounds like one of the biggest exit scams in history, and purposely decided not to tell investors about the loss. The settlement? $18.5 million in February of 2021. Pocket change for losing $850 million of investors money.
The only person indicted in connection with the theft was named Reggie Fowler. He was indicted for running an unlicensed money transmitting business for virtual currency traders. Naturally, he hasn’t returned the $850 million, and investigators took $14,000 in counterfeit currency from his office.
Tether is honestly one of the key reasons why this industry is going to be heavily regulated in a few years, because if a high profile coin run by a high profile company is this dirty and incompetent, then you have to wonder what else there is to be uncovered.
—Joseph Morton
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