123
11 November 2021: Over the past few years, there have been multiple investigations and claims of foul play directed at the stablecoin Tether (USDT). Recently, critics have suggested that Tether has been artificially pumping the prices of cryptocurrency assets, most notably Bitcoin, through the printing of new Tethers that aren't backed by any collateral or held in reserves. This article will provide a synthesis of the issue and offer insight into what it means for the cryptocurrency market.
The Tether (USDT) Controversy
Tether was originally established to provide a stable asset in the cryptocurrency space - hence stablecoin - that investors could use to avoid the volatility of other coins. It was set up as a 1 to 1 exchange meaning that each Tether was represented by 1 USD. The protocol is run and operated by Tether Holdings Ltd.
For years, many have claimed that Tether Holdings has been defrauding its investors because it does not have the assets on hand to honor the 1 to 1 exchange. Additionally, further claims - like that of Twitter's CryptoWhale - have suggested that not only is Tether not fully backed, but it is minting coins backed by nothing to inflate the price of assets like Bitcoin.
For clarity, these are the two major claims against Tether:
- Tether Holdings does not have the reserves to back outstanding Tethers
- Tether is being minted to artificially pump other coins in the market
The implications of such claims are monumental for the cryptocurrency space. Tether is currently the 4th largest coin by market cap at nearly $75 billion and sees a daily volume routinely near $100 billion. For perspective, this trading volume is more than the eight largest coins COMBINED (including Bitcoin & Ethereum).
Tether Holdings Lied About Its Reserves
Following a settlement with the state of New York, it was revealed that Tether Holdings lied outright about its reserves. It did not have enough money in USD to actually claim the protocol was fully a 1 to 1 exchange. Since then, Tether has updated its website to say the following:
Every Tether token is always 100% 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 (collectively, “reserves”). Every Tether token is also 1-to-1 pegged to the dollar, so 1 USD? Token is always valued by Tether at 1 USD.
In other words, Tether is actively lending out its reserves to third parties like a bank. However, the claim that 100% of outstanding Tethers is completely unverifiable as they refuse to disclose where the money is or if it all truly exists. What Tether Holdings is claiming however is that $30 billion of its reserves come in the form of commercial paper or loans to other companies just like a bank would.
Per the recent Bloomberg report, this would make Tether the 7th largest holder of corporate debt "right up there with Charles Schwab and Vanguard Group" ,per Zeke Faux. However, Faux has reported that industry insiders in the United States have not seen any indication that Tether has been buying or holding such debt. Notably, it has been discovered that Tether has made such loans to large Chinese companies, which will be touched on later.
Because they refuse routine audits from reputable firms, Tether's claims are impossible to verify.
The main takeaway here is that Tether Holdings literally lied publically about their reserves. This was verified by the New York Attorney General after the state sued them.
The Bitfinex Solvency Crisis
The NYAG report has also revealed that Bitfinex - the cryptocurrency exchange closely tied with top Tether executive Giancarlo Devasini & Tether Holdings - had originally entrusted $850 million to Crypto Capital Corp. In 2018, Crypto Capital refused to give the money back to Bitfinex which created an immediate solvency crisis for the exchange.
It was eventually revealed that prosecutors has seized all of Crypto Capital's assets due to alleged ties of money laundering to groups like Columbian cartels, per Faux. The hole in Bitfinex capital was filled with Tether reserves. This was a nearly $1 billion loss. Bitfinex was eventually bailed out by a pool of crypto investors to pay back the Tether Holdings loans.
This entire loss and near disaster was originally intended to be hidden from the public.
Short Term Loans to Chinese Companies & Crypto Exchanges
It has been revealed in reports that Tether is issuing loans worth billions of dollars to "large Chinese companies", per Faux. While Tether Holdings has denied holding any of Evergrande debt - one of the largest property developers in China & the world that has recently defaulted - it has been stated that Tether's lawyer refused to deny or acknowledge that Tether is holding other Chinese commercial loans.
It has also been revealed that Tether Holdings has loaned the cryptocurrency exchange Celsius Network $1 billion. The collateral for this loan? Bitcoin at an interest rate of 5 - 6%.
This is a significant finding. Giancarlo Devasini was the one who had initially pushed Tether to become more like a cryptocurrency bank, with even small return providing Tether Holdings and their limited employees with hundreds of millions in annual profit. All the risk of these investments is put directly on the investors.
With reserves tied up in corporate debt in China, if even a small percentage of those loans fail it would push Tether to under its pegged $1 mark. This could immediately incentivize a bank run - of which Tether does not have the reserves to support.
Addressing the Claim that Tether Pumps the Market
The biggest claim being pushed by major critics of Tether is that it allegedly pumps the market, specifically Bitcoin, by minting fresh Tethers and flooding exchanges with this liquidity. A report out of UC Berkeley has suggested that no correlations exist between the price of Bitcoin and the minting of new Tethers.
The problem is, a direct correlation does not need to exist. Reports have found that 70% of all Bitcoin is purchased and exchanged with Tether. It is also common for $100 billion in Tether to be exchanged daily as was stated earlier.
This is a truly significant portion of daily volume within the cryptocurrency market. It should also be noted that an unprecedented amount of Tether has been minted - upwards of $50 billion worth just in 2021 alone.
The UC Berkeley report has found that regardless of Bitcoin price action, Tethers are being minted. The thing is, all that liquidity is still being pumped into and between exchanges every single day. With Tether Holdings still refusing reputable, professional audits every quarter as the NYAG requested, it is literally impossible to verify what is backing those new Tethers - if they are even backed at all.
The Real Problem with Tether - What All of This Means for Crypto
Tether Holdings is far from the reputable company they claim to be. That much is true. The history of Tether is plagued in controversy and has flashed numerous red flags throughout its history.
There are a number of key takeaways right now that are now widely accepted:
- Tether outrighted lied about its reserves to the public
- Tether & Bitfinex experienced a massive, near-$1 billion loss and narrowly avoided a major crisis
- Tether lends its reserves out and holds the commercial paper of large Chinese companies
- Tether refuses to post routine audits, leaving its reserves - regardless of what they claim - as a mystery
When it comes down to it, the major question here needs to be addressed - is Tether artificially pumping Bitcoin and other assets?
In short - it is impossible to know and that is not necessarily a good thing. If Tether wishes to operate as a bank, they need to be transparent with what their holdings are and where their reserves are situated as it directly affects major assets within the cryptocurrency market. This is especially true with Bitcoin being utilized directly as collateral.
The real major problem here is that Tether holds commercial paper. The growing solvency crisis in China could spell an absolute disaster for the entirety of the cryptocurrency market directly due to Tether. If the loans that Tether is holding go bad due to the growing solvency crisis, this means that Tether takes a huge loss and is no longer able to support the outstanding Tethers that exist regardless if they are 100% backed or not.
This would create a multi-billion dollar bubble in the cryptocurrency market that could effectively sink it entirely. It should be noted that Evergrande has officially defaulted and are not expected to be the only one within the Chinese economy.
When it comes down to it, it does not necessarily matter how much of the minted Tethers are actually backed as, because of their actions, any crisis within the broader global market will immediately spill into the cryptocurrency space as well.
With that in mind, we simply do not have enough information to claim the allegations are 100% true. However, the claims against Tether - due to the available evidence from reports like the NYAG and Tether's controversal history - should at least be taken seriously by investors within the space.
As major supporters of the development happening within the emerging cryptocurrency economy, we at RekTimes want to see sound, stable development free from fraud and controversy.
Regardless of your opinions on the Tether controversy, we hope you found this article informative. Additional sources and reading material are available in the sources below.
If you enjoyed this article, check out our other content, send a tip/donation, and follow our social media through CoinTr.ee! Be sure to follow this page to be notified of our weekly postings.
Enjoy our content? Support us through CoinTr.ee
