It was a simple concept: a cryptocurrency whose units were always and consistently worth exactly one dollar because they were backed by dollars held in a bank. Voila: dollars with the powers of crypto, like the ability to quickly transfer any amount without permission … and, uh, a certain lack of onerous regulations.
Now, there are $ 2.7 billion worth of tethers floating around, and they’re far from easy. (Euro Tether also exist, but they are a rounding error.) Who made Tether? The same people behind BitFinex that Tether shares a CEO, CFO, and (until recently) chief strategy officer. We can be pretty sure of that. But everything else about this money is shrouded in a deep mist of mystery tinged with wrongdoing.
Who will buy Tether? It’s difficult to say; You can trade USD for them on some crypto exchanges, especially Kraken in addition to the BitFinex exchange, but I haven’t been able to find any recent public examples of any person, institution or person actually buying newly issued tethers from Bitfinex. So who will provide the US dollars that supposedly cover all of the newly issued tethers? It is very difficult to say.
Who is checking them to make sure those dollars are in place? Well – actually – nobody, despite the assurances on their website that their reserve stocks “are subject to frequent professional audits” and “our reserve account is checked regularly”. But they “severed” their relationship with their first chartered accountant, Friedman LLP, without ever completing an audit, emphasizing the “Proof of Funds” “Transparency Update” prominent on their homepage that it was “not as the result of “A test should be interpreted.”
Do we have any reason to believe that these dollars actually exist? Oh well. The fact that their “transparency report” is not an audit makes them very limited, questionable evidence in my opinion … but it is some evidence nonetheless. (It’s really something that we’re talking about evidence of the existence of nearly three billion dollars, with a “B,” dollars that theoretically support a very common asset rather than actual testing.) Also, they seem to have banking relationships in Puerto Rico and / or with ING, and the massive growth in total bank deposits in Puerto Rico in the last year or so roughly equals the number of tethers issued during that time.
How do you exchange Tether for US dollars? That’s … hard and easy to answer. I have been following the Tether saga with some interest for a full year, and I have yet to find a public example of Tether actually doing this for anyone. Ever. Their most recent public announcement on the matter late last year stated, “Exchanges and other qualified corporate clients can contact Tether directly to arrange creation and redemption. Unfortunately, we are currently unable to create or redeem a tether for customers based in the USA. “
However! The most interesting thing about Tether is that you don’t have to exchange them for dollars. As long as a cryptocurrency exchange believes a tether is worth a dollar, you can simply use your tether to buy bitcoin or ether or any other coin and then convert that into dollars. It’s this cryptocurrency: tether exchange rates that really matter. As long as these are maintained, it is actually irrelevant to the average user whether or not Tether is actually backed by dollars … which obviously leaves a lot of room for gimmicks to occur.
What kind of taints of wrongdoing I pointed out earlier? I mean. How much time do you have? A passionate reviewer known as Bitfinexed has been writing about this for quite some time; It’s a pretty deep rabbit hole. University of Texas researchers have accused Bitfinex / Tether of manipulating the price of Bitcoin (up). The two companies were allegedly subpoenaed by US regulators. In possibly (but also possibly not – again a fog of mystery) related news, the U.S. Department of Justice has launched a criminal investigation into the price manipulation of cryptocurrencies, which critics say is still ongoing. Comparisons are also drawn with Liberty Reserve, the digital currency service that was shut down five years ago for money laundering:
So what the heck is going on? Good question. On the one hand, people and even companies are innocent until proven guilty, and the lack of transparency of cryptocurrency companies is at least morally compatible with the industry as a whole. A disproportionate number of crypto people are privacy maximalists and / or really hate and fear governments. (I wish the US government didn’t make its stance, “All governments are becoming bloated surveillance police states!”
But on the other hand … yes, one reason for data protection maximalism is that you fear your keys being decrypted by rubber tubing, but another, especially when it comes to anti-government sentiments, is that you fear the financial officer or the regulator. A third could be that you fear what the invisible hand would do to cryptocurrency prices if it had full leeway. And it certainly doesn’t look good if at least one of your claims, e.g. that your unchecked reserves are “subject to frequent professional audits”, is difficult to interpret as a mere lie.
How can we ever find out? I see four plausible answers: 1) a reputable, competent, trustworthy, professional organization actually does a full audit; 2) legal / regulatory / criminal investigation forces Tether to open her books; 3) a whistleblower says it all; 4) We never do. In the meantime, that fog of wrongdoing will continue to cover your entire business … and your users won’t care as long as a tether buys you as much bitcoin as a dollar on every cryptocurrency exchange they support.