Tether has been one of the most controversial topics in the cryptocurrency community for the past two years – and things have come to a head in the past few weeks.
The broader crypto community has been skeptical of the stablecoin and its claims that it is lawfully operating due to concerns about its reserve policy.
Stablecoins are centralized cryptocurrencies that are typically linked to a fiat currency such as the US dollar or valuable commodities such as oil or gold. Tether (USDT) claimed to be backed by the US dollar at a 1: 1 ratio.
For the past two years, industry critics have speculated that Tether did not have the necessary cash reserves in its bank accounts to cover the amount of USDT in circulation.
These claims were ultimately validated by Tether itself as a result of an ongoing legal battle between the Bitfinex cryptocurrency exchange – which shares staff and ownership structures with Tether – and the New York Attorney General (OAG) office.
Story of tether
Tether’s journey began in 2015 with the renaming of Realcoin. It was founded by Brock Pierce, the director of the Bitcoin Foundation, with the help of software engineer Craig Sellars and entrepreneur Reeve Collins.
Tether aimed to provide a true stablecoin platform for the crypto community with a utility token backed 1: 1 by the US dollar, with all the benefits of traditional blockchain technology.
The cryptocurrency was created and operated using an OmnilLayer platform on the Bitcoin protocol. This allows everyone to see when tether tokens are issued, which has played a huge role in focusing on the stablecoin over the past 24 months.
The Bitfinex connection
Tether has been associated with Bitfinex since 2015 when the exchange integrated cryptocurrency operations into its exchange. The two companies are operated by the parent company iFinex.
Tether’s website reveals that the two companies share the same leadership, with JL van der Velde listed as CEO of both companies. Giancarlo Devasini is the main financial operator of Tether and Bitfinex.
Critics began to raise concerns about the Tether and Bitfinex connection and operation in late 2017 when Bitcoin rebounded during its famous bull run.
To allay those fears, Tether Friedmann asked LLP in September 2017 to do a quick review of its accounts. The unofficial review was criticized again by the crypto community and summoned by the Commodity Futures Trading Commission (CFTC) in December 2017. Put pressure on the company.
Tether has brought Friedmann back on board, this time for a full third-party audit of his accounts. But less than a month into the process, the parties split, with Tether claiming the auditors were taking too long to get the job done.
The crypto community has never received a third party review from Tether, which could have significantly allayed the concerns.
Bitfinex is accused of using tether reserves to cover losses
Fast forward to April 2019, a 2018 investigation into iFinex, Bitfinex and Tether was uncovered by the New York Attorney General’s office in 2019.
The OAG claimed Bitfinex lost $ 850 million in funds needed to withdraw users and borrowed money from Tether’s cash reserves to fill the void.
Attorney General Letitia James announced the lawsuit alleging Bitfinex then used $ 850 million from Tether’s reserves to cover a shortfall on funds from its payment processor, Crypto Capital Corp.
“Our investigation has shown that the operators of the trading platform ‘Bitfinex’, who also control the virtual currency ‘Tether’, have carried out a cover-up to hide the apparent loss of $ 850 million in mixed customer and corporate funds. New York State has pioneered the commitment of virtual currency companies to be compliant. And we will continue to stand up for investors and seek justice on their behalf if we are misled or betrayed by any of these companies. “
The OAG wants companies to stop using or spending the US dollars sourced from Tether’s reserves. She also calls on companies to provide documents and information on the ongoing investigation.
However, the OAG is also seeking an injunction that will force Bitfinex and Tether to continue their operations in order to ensure the stability of the crypto markets and protect their customers.
The Martin Act gives the New York Attorney General extensive enforcement powers to investigate securities fraud-related matters and bring criminal charges against those responsible for alleged violations of the law.
Tether, Bitfinex hit back
Tether and Bitfinex have not hesitated to take action against the New York OAG and its intended course of action against them.
The companies responded to the BA’s allegations last week, claiming that the court documents were “peppered with false claims”. They continued:
“The New York Attorney General’s court files were maliciously drafted and full of false claims, including an alleged ‘loss’ of $ 850 million at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not going to be lost, but have actually been confiscated and secured. We are working and have actively worked to exercise our rights and remedies and to free these funds. “
Both parties insist that the BA has crossed the mark and that their court records could ultimately harm their clients.
However, Tether’s appeal has revealed a fact that has long been feared by critics. Tether’s legal documents show that it only has 74% of its cash reserves in its bank accounts to support Tether tokens in circulation:
“In fact, Tether’s cash reserves alone (excluding the credit line) would cover about 74 percent of Tether’s outstanding amount. This type of “fractional” reservation arrangement is similar to how commercial banks work. No bank holds more than a small percentage of depositors’ money in cash. The funds are invested. Markets clearly remain confident on 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 owners are exposed to liquidity risk is unsupported speculation. “
Ultimately, this proves that Tether is not fully collateralised by cash equivalents as has been claimed for a long period of time.
Their lawyers also compared their functioning directly with the “fractional” reserve rule that is common in commercial banks. This is at odds with the information Cointelegraph gave from Tether two months ago.
In March, Cointelegraph had asked Tether for a comment on a change to its website that indicated that Tether tokens were no longer backed only by cash, but also by “cash equivalents.” According to the amendment, this would include “other loan assets and receivables that Tether grants to third parties, which may include affiliated companies (collectively,” reserves “).
Stuart Hoegner, General Counsel at Tether, told Cointelegraph that it has no partial reserves and is able to process all redemption requests for USDT:
“Tether does not operate a breakage reserve. It does not have a banking business that lends reserve amounts to retail customers. Tether’s reserves remain and have always been 100% covered by its reserves. Tether retains the ability to fulfill all redemption requests. “
This week, parent company iFinex filed court papers to overturn the BA’s court order. The company claims that the BA’s injunction is based on “false facts and the wrong legal standard”.
IFinex argues that the OAG has not provided material evidence to support its claim that holding ropes are considered securities or commodities covered by the Martin Act. In addition, the company is of the opinion that the Federal Public Prosecutor cannot prove the appropriateness of an injunction.
The company further argues that the OAG’s injunction is hugely disruptive to both Tether and Bitfinex’s operations as it freezes the use of $ 2 billion of Tether’s reserves that could be used for further investment.
IFinex believes that Tether has been transparent to users and investors about its reserves and the possibility that those reserves could be loaned to affiliates such as Bitfixex:
“The undisputed facts show that there was no ongoing fraud and that no ‘victims’ needed drastic relief from an injunction to protect them. In particular, it is undisputed that Tether disclosed that its reserves could consist of loans to affiliated companies, and did so prior to the line of credit transaction that the Attorney General is contesting. “
Despite all the activity in the past two weeks, Tether is still trading 1: 1 to the US dollar with a market capitalization of over 2.7 billion US dollars, according to CoinMarketCap.
It should be noted that on May 6th, CoinMarketCap excluded Bitfinex trading data for its global average Bitcoin price due to the $ 300 premium the cryptocurrency has on its exchange.
Bitfinex considering launching native tokens?
While both companies are controversial, Bitfinex is reportedly on the verge of launching its own native token in an ambitious start.
Bitfinex shareholder Zhao Dong has announced details of a $ 1 billion initial listing (IEO) offering to launch the native token, according to initial reports. This was followed by the posting of a promotional document by Dong on Twitter outlining plans for the IEO.
It is reported that the IEO will encompass a total of 1 billion tokens – called LEO. The price of tokens is $ 1 each, but investors must make a minimum purchase of $ 1 million.
It is understood that investors have already expressed an interest in tokens worth $ 500 million. Only qualified foreign investors are reportedly allowed to invest and sign up to the IEO until May 5th.
Potential investors are given the opportunity to review the token’s whitepaper before either confirming or canceling their soft commitment. If they wish to continue their engagement, a 10% deposit is required.
According to marketing material posted by Dong on Twitter, U.S. citizens and a number of other jurisdictions listed by the Financial Action Task Force will not be able to participate in the token sale.
LEO token holders will reportedly benefit from reduced crypto-to-crypto trading fees on Bitfinex’s exchange as well as iFinex’s decentralized exchange, EOSfinex.
The token is compared to Binance’s native BNB token.
Cointelegraph has reached out to Tether’s General Counsel, Stuart Hoegner, for comment on the ongoing disputes between these parties and the OAG.
As things stand, both companies appear to be continuing their operations and the OAG has made it clear that it does not want to harm investors and customers of Tether and Bitfinex during its investigation.
With an in-depth investigation ongoing, there may be few details, but this story will be kept an eye on for the coming weeks and months.