ZoneBitcoin EditorialYou may have heard about Tether and even heard some pretty catastrophic things. The most negative rumor claims that the fall of Tether is imminent and that it could lead to the fall of bitcoin itself.
Why this big rumor (which actually dates back to 2017)? This is precisely what this article is about, my dear friends.
Big rumor I said? Alarmist speech so usual in the world of cryptocurrencies? Um yes…How many times have we predicted the death of bitcoin, huh? He's been there for 11 years, still going strong, and he's survived I don't know how many deaths were announced.
In short, this is the whole purpose of this article to decipher a little the "rumors" around Tether. We will try to understand why and the origin of such assertions. Is Tether really dangerous and how could this impact bitcoin?
It has been several months in fact that concerns about the situation of Tether have intensified. Tether has a very important place in the marketplaces and its capitalization is estimated at more than 2 billion dollars. Yes, just that. It remains a giant. And, this is why, it could disrupt the market with violence…
Tether is criticized (overall and in summary) for not having the reserves it should have...Similarly, accusations of market manipulation are also on the grievance paper.
If these accusations prove true, could this harm bitcoin?
Let's unwind from the beginning to find out more.
First, let's recall the context of these statements...
In fact, many people have had suspicions about Tether for some time now. Yes, it didn't just come out yesterday, even if it has never had such a proportion.
Here, what increased our concern was linked to important events:
- Thunderclap: We learn that American regulators have decided to finally investigate the companies behind the creation of the stablecoin Tether, namely Bitfinex and the company Tether Limited.
When the media announces it, well, the market "panics" and bitcoin falls.
The authority which will launch the investigation is not a small agency but it is the Commodity Futures Trading Commission (CFTC), the American Securities and Exchange Regulatory Agency. It is therefore a first-rate authority. This is why the announcement was taken very seriously.
We learned from Bloomberg on Monday, January 29, 2021, that the CFTC had sent a "subpoena" exactly on December 6, 2020. This subpoena wants to verify the rumor that Tether does not have the foreign exchange reserves on which it is supposed to be indexed (which is problematic in the extreme). This subpoena refers to a thorough investigation to find out whether or not this is a big $2 billion scam....
Well, we have just learned that normally, we should have the documents on January 15, 2021 and that BitFinex has requested a 30-day delay. We will therefore know the outcome of the affair on February 15.
The companies behind Tether deny and have always denied these claims. According to them, they come from and are fueled by detractors.
The fears are all the greater because if Tether falls, it is so present (in terms of volume) on exchange platforms that it could lead to a fall in bitcoin...
Even if it remains a presupposition, this scenario is terrifying. Likewise, this causal relationship is justified by the fact that the last bull run of December 2020 would be due to an increase in Tether liquidity.
The Basics: What is Tether?
To fully understand the Tether problem, you must first understand what it is about.
Tether is a cryptocurrency indexed to the US dollar. It is therefore called a "stablecoin". The idea behind stablecoins is to avoid the usual volatility of other cryptocurrencies. We therefore obtain the stability sought after by national currencies and at the same time the technical flexibility of a cryptocurrency. A perfect combo (or almost). Thus, with Tether, for example, we have a 1:1 ratio. One Tether equals 1 dollar.
Tether appeared in 2014 and was initially called Realcoin.
Since its appearance and due to the craze for stablecoins in general, USDT has quickly gained popularity.
What are the advantages of Tether?
Yes, if Tether was created, it is for a reason. And, an excellent reason, you will see. (That said, in the world of cryptocurrencies, many have been created for no real reason, but hey, let’s move on…). Yes, clearly, Tether had and still has a reason to exist, if I can put it that way.
So, tether was created so that we had the super practical possibility of having a stable cryptocurrency because it is indexed to dollars. Yes, even if the dollar experiences subtle variations in its price, it remains fundamentally and compared to cryptocurrencies, very stable.
Yes, this stability is highly sought after in the world of trading in particular, and it is relatively easy to understand.
The first reason is that it solves a real and frequent problem on exchange platforms. Several platforms did not accept (this is less the case today) dollars for example. This was, for example, the case at the time of Bitfinex because the platform had not obtained an agreement with the banks to have access to currency reserves. Remember that today, even if banks are less cautious with cryptocurrencies, a few years ago, it was difficult (in many cases) to buy bitcoin by bank card.
In short, it turns out that for platforms like Bitfinex, the best alternative was to accept Tether in the absence of being able to accept dollars, as a means of payment.
This is also what contributed to the great success of Tether.
It is a success which was all the more rapid because its practical aspect is sought after by many crypto-holders.
We can have parities that are easier to control and we can have capital on a platform already ready to be invested (without having to buy crypto, which can take time, even with a bank card). We therefore already have funds on which we know the absolute value. Basically, this allows traders to have a reference asset, which is not negligible when trading (cryptos or other assets).
Likewise, it is certainly useful for traders and it makes a wonderful bridge between the classic stock market and the world of cryptocurrencies. Certainly, but stability is also interesting and sought after for all people who want cryptocurrencies. For example, a trader who does not want to risk market volatility might prefer to be paid in USDT rather than in Bitcoin for example.
This way, it benefits from the advantages of cryptocurrency as such (reduced fees, speed of execution, etc.) while having the ultimate advantage of Fiat currencies (i.e. stability).
For Tether to have real value, the principle is very clear: For each Tether created, there corresponds a real American dollar. So if there are 2000 USDT on the platform, there must be (IN PRINCIPLE) exactly 2000 USD in the bank vaults of the Tether company.
In fact, there is no clearer or more logical principle.
For all these reasons that we have just mentioned, Tether was created and its success comes from its usefulness and its practicality to use.
Who is behind Tether?
First of all, you should know that on the official website, you cannot find an official address. That's already an annoying point, you might say.
Spartan information…
The co-founders of Realcoin (future Tether) are Brock Pierce, Reeve Colins and Craig Sellars. The startup was originally based in Santa Monica in 2014.
On November 20, 2014, Reevs Colins from the Realcoin team made a press release in which he announced that the name of the new project was Tether. And they therefore announce their desire to create stablecoins for the dollars, the euro and even the Japanese Yen.
For the Tether project, the team is moving to Honk Kong and has new offices in Switzerland, without giving too much detail again.
As of January 2015, Bitfinex (a crypto trading platform) integrates Tether into its platforms. Bitfinex is quickly becoming one of the largest exchange platforms in terms of trading volume.
So far, nothing special.
The only thing you must have remembered (to better understand the tragedy of history) is that it was (and even today, in absolute terms) a superb cryptocurrency, practical, sought-after and useful. You really have to keep that in mind.
The “fall” will be all the more juicy.
Because yes….soon, the first signs of discomfort appeared….
The first signs of weakness...
It is exactly August 3, 2016, and here the BitFinex platform is being hacked 119 BTC .
I will condense here the history of this saga and show you only the major episodes.
The first big doubts appeared in 2017. It was a dark year for them…(2017…Hm, It is also the year of the previous ultimate ATH of bitcoin which had on December 17 which had almost reached 20,000 dollars…)
You'll see that a whole lot of fishy things happened to the company throughout the year.
It starts in April 2017, when the Tether company publishes a press release in which they announce that they no longer collaborate with their Taiwanese banks. This meant that at that time, there was a general suspension of deposits and withdrawals on the platform.
Well, already, the customers are uncomfortable, you think so. And, some are starting to warm up…
But above all, where things started to talk, it was that during the same month, while the company announced its break with the bank, well, we saw an upstream of Tether suddenly appear on the platform.
From there, we began to ask questions about the legitimacy of this cryptocurrency.
The first doubts arose when the creators of Tether began to create them by the millions. Yes, yes, by the millions. Days when suddenly 100 million Tether appeared.
You know, we must not forget that it is a crypto indexed on the dollars that they have in reserve. So, creating Tether "as if it were raining", it had to follow at the reserve level.
Today, there is a supply of more than 27 billion Tether in circulation, it has to keep up with the banks... It's hard to believe...
By the way, the expression "as if it were raining" comes from one of the first "whistleblowers" if we can call him that. His name on Twitter is "Not Tether Printed" where he mocks the fact that Tether "prints" fake USDT...
The company denies the accusations and wants to justify everything
And, so, with such incredible Tether emissions on the market, and in a desire for transparency, the company decides to do an audit. It's September 2017.
So, everyone is pretty reassured. The managers play the game, so we expect the audit to reassure us. Even for the company, it's "all profit" because it can, with this audit, contradict the accusations and give itself new legitimacy in the world of cryptocurrencies. Yes, know that an audited company is a guarantee of seriousness, and especially in the world of cryptocurrencies.
3 months later, in January 2018, we had a first super weird twist. The audit procedure is simply abandoned.
Yes, abandoned.
Why?
It would be too “complex” and the procedure would be too complicated in Tether’s own words.
Serious error on the part of the leaders...Big strategic error, even!
Because, there, you can imagine what is happening, right?
Doubts turn into assertions and attacks. In fact, even those who did not have "suspicions" begin to doubt.
If they really had nothing to hide, we would have had the audit. If there were no problems, the procedure would not be "complicated" and complex.
Suspicions and anonymous investigators lead the investigation…
As I told you above, this announcement of a break with the audit did a lot of harm to the company.
However, they still wanted to do things well...They published the memorandum drawn up by the cabinet of consultant Friedman LLP which can be freely consulted here. This document published at the end of September proves that they do have a balance of 440 million USD in support of their USDT created on the platform…
The problem is that it does not justify all the USDT created despite everything…
Document which further aggravated the case…
How? The document in question does not show the service contracts or even the names of the institutions that are attached to their funds. Critics say it's not even a real audit.
In short, a very opaque document, precisely where we expect transparency, like never before. Especially since in April, he was able to be transparent by clearly indicating the names of Taiwanese banks...
Faced with so much opacity, they have piqued the curiosity of some... Logical, you might say.
But wait, it's not over yet. As incredible as it may seem, there was yet another dark event...
The Bitfinex hack…
In November, they suffered a hack of 30 million USDT which they were able to “freeze” on the network.
There were people who wanted to dig into the subject and carry out their investigation.
There are two people in particular who have done investigative work on the issue.
First, there is an anonymous blogger who used to write articles on Medium, under the pseudonym Bitfinex'ed. Moreover, the man behind the Tweeter account "Not Tether Printer" had already mentioned him, telling his community to follow him and listen to him.
Well, this BitFinexed is indeed at the origin of the first big investigation into Tether.
As you can see in his profile description, he explains that he was the first to expose the shady deal and ambiguous Tether/Bitfinex relationship.
We also learn that this research was taken up by journalists from the New York Tomes, Bloomberg and the Wall Street Journal.
In short, understand that he wants to say that his research work is not to be taken lightly. If big names in journalism are interested in him, it is because what he says is not to be taken lightly.
Well, it was not taken lightly.
Well, you should know that it is especially him, the first who explained the flaws of Tether. It was he who nourished him by explaining the why and how of his doubts. He has particularly published on the Medium platform.
The author accuses the two companies of having common interests and of practicing wash trading and order spoofing on the platform. The two key market manipulation techniques.
If you like drama, hang in there, you're in for a treat.
When the authoritative newspapers get involved…
You know, until then, the affair was mainly known on the networks, among enthusiasts and ultimately by a small circle of insiders.
But when the newspapers got involved, that's when things started to blow up.
The first big article that came out and caused a sensation was written by Nathanial Popper. He published a paper version in 2017 with the first title "Warning Signs Shadow Bitfinex, a Bitcoin Exchange With a Dodgy Record".
The article will be published online with the less explicit title " Warning Signs About Another Giant Bitcoin Exchanges » (Warning signs on another giant bitcoin exchange).
And, Nathanial Popper, the journalist behind this article, goes out of his way to also denounce the practices considered questionable on the site.
And what does the article actually say?
Well, it actually takes all the accusations against Tether and shows how these accusations would potentially be dangerous for bitcoin.
We also learned that director Phil Potter is a person who likes money (to put it simply). See what the journalist writes:
And the translation: " The most frequent face of Bitfinex is its chief strategy officer, Phil Potter. Mr. Potter worked for Morgan Stanley in New York in the 1990s, but lost his job after boasting at length in the New York Times about his $3 Rolex, of his opulent lifestyle and aggressive money-making tactics"
Nothing to reassure us.
In fact, this is where the matter takes on its full scope.
You'll find out why... The suspense can't last any longer, can it?
When the “Paradise Papers” get involved… One revelation too many?
But, in 2017, the "Paradise Papers" affair revealed that the Bitfinex executives (Phillip Potter and Giancarlo Devasino) also created Tether Holdings Limited in the British Virgin Islands in 2014. A tax haven, then. It was therefore the famous Appleby firm (an offshore law firm) that helped Mr. Potter and Mr. Devasini, the Bitfinex operators, to install Tether in the British Virgin Islands at the end of 2014.
A spokesperson even stated that the general director of Bitfinex and Tether Holding was a man named Jan Ludovicus van Velde (Dutch speaking according to some sources).
Following the Paradise Papers affair, the company said that Tether Limited, which is based in Hong Kong, is a subsidiary of Tether Holdings Limited, which is based in the British Virgin Islands.
So, what we understand is that a large part of the Bitfinex staff are also those of Tether Limited. Specifically, Jan Ludovicus van der Velde is the CEO of both Bitfinex and Tether. And Philipp Potter is responsible for strategy for both companies.
The companies are therefore surprisingly linked and you will see for the rest of the mini-survey how important it is.
How serious are the accusations against Tether (for bitcoin)?
Beyond the accusations of creating tokens that do not correspond to the reserve available to the company, it is above all the impact that this has on bitcoin that poses a problem.
There is an anonymous investor who did some detailed work and who showed in an anonymous post the link between Tether emissions and the price of bitcoin. His post contains accurate sources as well as detailed price charts.
It shows that - since Bitfinex was the largest exchange platform - transactions on it have a huge impact on the price of cryptocurrencies.
And even more, it shows us that each time a large number of Tether is created, this results in an increase in the value of bitcoin.
Do you see the gravity of such a scenario? This would mean that the recent rises in bitcoin are based on the sidelines, on a cryptocurrency that is stirring up wind (and not real greenbacks). It would be dramatic, seriously dramatic if that were the case.
And so, there, suspicions turn into even more precise speculations.
And, what if in the end, it was by Van der Velde and the clique who did not ultimately buy bitcoins with Tether to artificially inflate its price?
"In 2018, research by John M. Griffin and Amin Shams in 2018 shows that transactions associated with increases in the amount of Tether (coupled with trading on Bitfinex) account for about half of the bitcoin price increase of late 2017." You can read the paper here.
And, finally, in 2019, it is the year when serious investigations begin:
The Attorney General of the State of New York, Letitia james filed a lawsuit accusing Bitfinex of using Tether reserves to cover a colossal $850 million loss. Bitfinex failed to obtain a normal banking relationship, according to the lawsuit. The company then allegedly deposited more than $XNUMX billion with a Panamanian payment processor, Crypto Capital Corp. The funds were allegedly mixed up with company and client deposits and no contract was signed with Crypto Capital.”
And, we're pretty much there, we're waiting for the results of the investigation...
So what's the problem?
But why are people afraid?
The fact that the managers work in both companies at the same time is already a problem in itself. We can imagine and assume that exchanges take place without any other supervision.
And that's precisely where the rumors started to gain momentum. You will understand why.
I remind you that when we say that a crypto is indexed to a currency. This means, in the case of Tether, for example, that it is supposed to have dollar reserves equivalent to all Tether issued. Tether cannot be created like that, ex nihilo.
Each Tether corresponds to a real dollar. A bit like the Federal Reserve supporting the dollar with gold. . Banks hold gold as an equivalent to currency.
Well, there you have it, the first accusation is this; Part of the crypto community has expressed doubts that Tether does not hold sufficient USD currency reserves to support all Tether in circulation.
This doubt is ever stronger as the company is not transparent about where they hold these funds or even how many reserve locations they have.
You know, when we're not transparent, we're hiding something. This is why doubt has always grown among the community.
BitFinex hacks
In May 2015, 1500 bitcoins were stolen in a hack. That was the first hack.
Then, in 2016, about $73 million more was stolen from its customers' accounts.
In June 2016, the United States Commodity Futures Trading Commission ordered Bitfinex to pay a $75 fine for offering off-exchange funded commodity trades. The order also found that Bitfinex violated the Commodity Exchange Act by failing to register as a Futures Commission trader.
In August 2016, Bitfinex announced that it had suffered a security breach. In it, $72 million in bitcoin was stolen from the company's customer accounts. Immediately afterwards, the price of bitcoin fell by 20%.
In this hack, the second largest breach of a Bitcoin exchange platform, 119 units of bitcoin, which was worth around $756 million at the time, were stolen.
Bitcoin was taken from users' separate wallets and Bitfinex said it was investigating the hack. Exchange customers, even those whose accounts had not been robbed, had their account balance reduced by 36% and received BFX tokens in proportion to their losses.
In April 2017, Bitfinex announced that it was experiencing delays processing USD withdrawals after Wells Fargo cut off [16] its wire transfers. Shortly after the Wells Fargo cut, Bitfinex said all international cables had been cut by its Taiwanese bank.
Since then, Bitfinex has moved between a series of banks in other countries, without revealing to customers where the money is kept. Noble Bank International of San Juan, Puerto Rico, reportedly processed dollar banking transactions for the exchange in 2017 or 2018. The banking relationship reportedly ended in September 2018 as Nobel Bank encountered financial difficulties.
The accountants at Friedman LLP prepared this document and fully audited Tether's books, but News emerged earlier this week that the relationship had been "dissolved." This further fueled concerns.
What could this mean for the crypto market?
If there is a problem with Tether, it could have larger implications for the cryptocurrency market as a whole due to its central role in many exchanges.
“The problem is that volumes against Tether have been increasing lately,” Greenspan said. “They’ve been above 10% of total bitcoin volumes for a few weeks now.”
“If there are not enough US dollar reserves, Tether's price should not be pegged to the US dollar and the market will simply decide.”
The fear is that Tether's price collapse could also cause a collapse in the price of bitcoin and other crypto assets that people have traded in USDT.
The Daily Express has predicted a price drop of up to 80%, calling it a "bloodbath." Bitcoin fell modestly on the announcement, Tuesday, January 30, that the CFTC had subpoenaed Tether and Bitfinex.
If Tether is no longer pegged to the dollar, it will also pose problems for exchanges that use it as a proxy for customer funds. This could potentially create liquidity problems and, in the worst case scenario, force them to seek additional capital. Wired wrote this week: “If traders lose confidence, they could end up triggering the crypto version of a bank run.”
What does the company say behind it?
Tether Limited has strongly denied all accusations against it, insisting that it has the dollar reserves to insure all Tether in circulation and saying that it uses its funds properly.
The company has declared in a press release in December that she was aware of "questions and doubts in the community" but that she "could not reveal much about the ongoing investigations" related to the November hack.
Tether stated that accusations that she does not hold money to back up her cryptocurrency are “ill-informed and unfounded,” but admitted that it “cannot create or redeem tethers for U.S.-based customers at this time.” The company has hired a law firm to take legal action against the person behind the anonymous Bitfinex’ed Twitter account.
Tether told Business Insider this week in an email response to questions regarding its verification:
“We confirm that the relationship with Friedman is dissolved. With the extremely detailed procedures that Friedman was undertaking for Tether’s relatively simple balance sheet, it became clear that an audit would be impossible to achieve in a reasonable timeframe. As Tether is the first company in the industry to go through this process and pursue this level of transparency, there is no precedent to guide the process, nor any benchmark to measure its success.”
“We remain committed to the process and, as we always have, will continue to provide material updates at the appropriate time.”
The company told Bloomberg in an email response to the CFTC subpoena: “We regularly receive legal process from law enforcement agents and regulators conducting investigations.”
Finally, can Tether really “destroy” bitcoin?
What we often say and what we often read, in an alarmist approach (or not, for that matter), is that given the enormous market cap of Tether, this could destroy or destabilize the bitcoin.
There are several scenarios as you can imagine. Some are shouting about the imminent fall of bitcoin while others say that this will only be a short-term phenomenon...
The only thing we can be sure of is that all these stories about Tether contribute to giving it a bad image.
We can already see that many people are abandoning USDT in favor of USDC, for example...Yes, don't forget that there are plenty of other stablecoins indexed to Fiat currencies…
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