Fractional Reserve Stablecoin Tether is only 74% backed by fiat currency, lawyers say

The company behind the USD stablecoin Tether (USDT) only has enough cash to cover three-quarters of its growing supply, its lawyers confirmed in documents released April 30.

As part of an ongoing lawsuit involving the New York attorney general, Zoe Phillips of the Morgan Lewis law firm said that at the time of writing, 74% of Tether’s reserves had USD and related support.

The number falls short of previous promises made by Tether executives, particularly that every USDT token had full fiat support, which a bank statement appeared to confirm last December.

“In fact, Tether’s reserves of cash and cash equivalents (excluding the credit line) would cover approximately 74 percent of Tether’s outstanding balance,” Phillips wrote.

The litigation stems from allegations that cryptocurrency exchange Bitfinex, which shares its CEO with Tether, used reserves to fill in loopholes resulting from a troubled outsourcing agreement in early 2018.

The claims that both Bitfinex and Tether are currently disproving mark the latest in a series of problems both companies have faced regarding the transparency of their business.

Bitfinex, for example, previously faced allegations of default, which it publicly denied.

While Phillips sees no problems with Tether’s current reserve rate, their language stands in sharp contrast to a project that previously marketed itself as the antithesis of fiat-based fractional reserve banking.

“This type of ‘fractional’ reservation arrangement is similar to the way commercial banks work. No bank holds more cash than a small percentage of depositors’ money, ”she continued. Phillips added:

“The funds are invested. Markets clearly remain optimistic about Tether as it is now trading just under $ 1 per US Dollar Tether – even after the Attorney General’s highly inflammatory and misleading public application. Any indication that Tether holders are exposed to liquidity risk is unsupported speculation. “

Stuart Hoegner, General Counsel of Tether and Bitfinex, confirmed the 74% support figure, according to an affidavit from cryptocurrency messaging service CoinDesk.

As Cointelegraph reported, Bitfinex is allegedly considering an Initial Exchange Offering (IEO) to raise funds.

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