Tether says its cryptocurrency is worth $2B–but its audit failed
arstechnica.com
arstechnica.com
In the normal business world it's a very bad sign when your auditor fires you as a customer.
> So it's possible Tether is keeping the identity of its bank secret to avoid attracting scrutiny from local regulators. This could also explain why some of Tether's funds are being held in the personal account of a Tether associate—perhaps the bank would have refused to open the account if it had known it was really for Tether.
When this finally blows up it's going to blow up big. How pervasive is parking money in tether in the crypto world? Is it bitfinex specific? I'm curious how bad the shock waves will be across the industry.
It's like saying government-issued currencies are going to "blow up" because Zimbabwe keeps printing fat stacks. Don't hold Zimbabwe dollars - problem solved!
Traders want something like USDT for the utility it provides. I don't think most traders care about the backing of USDT or it's potential redeemability for USD. I think most people enjoy the utility of a token that is always ~1USD. There are other tokens that promise to bring the same utility to crypto (DAI, etc). If USDT disappears (as NZDT just did, RIP Cryptopia's bank accounts), another stable coin will fill the void.
So even if Tether explodes, and it's actually been running with 0 financial backing this whole time - uh, well, tell me how that's different from any other cryptocurrency that has exploded and imploded in the last few years? It would seem to me that the healthiest thing for crypto right now is to figure out Tether's financial health (so people can decide if they want to safely use it) - but I don't think the marketplace will feel any "shockwaves" from a possible collapse.
Dogecoin isn't used by exchanges as a vehicle to allow dollar-pegged ated trading without handling actual dollars, and Doge:BTC prices aren't treated by cryptocurrency price trackers as if they were, at some fixed multiple, USD:BTC prices.
USDT and Doge don't play a similar role in the ecosystem.
USDT is one of many trading pairs offered by crypto exchanges. It matters no more or less than NZDT, Dogecoin, Litecoin, Bitcoin, Ethereum, or any other common trading pair in the crypto world.
See: binance, liqui.io. These exchanges don't have fiat deposits/withdrawals. BTC is meanwhile taking all alts down with it.
How?
> USDT is one of many trading pairs offered by crypto exchanges.
USDT is not a trading pair, it's a single cryptocurrency. The issues that give it a special role, both tied to it's USD peg, is that:
(1) It is sometimes treated as equivalent to, and commingled with, USD by exchanges (notably, Bitfinex), and
(2) USDT:<X> trading pairs, on exchanges that don't handle USD lat all, are often treated by the community as if they were USD:<X> trading pairs.
(3) The special role USD has in world markets.
Tether has a special place in the cryptocurrency ecosystem that makes it completely unlike Dogecoin. This special place means that the types of sketchy things that Tether is doing could ripple through the entire ecosystem.
To me, this just seems very overblown.
Total liquidity in the market is probably a very small fraction of the market cap. If Tether has been pumping in fake liquidity, in effect creating fake demand, there could be a relative demand crash as that leaves the market, and there would be a relative fall in the (apparent) availability of USD.
That would add to the effect of people desperately trying to flee tether to the comparative safety of real US dollars, which is likely to mean the tether/BTC, tether/ETH tether/whatever rates rocket as people try to get out of positions on tether exchanges. Then a fall in the coin prices as said folks transfer to other exchanges and try to cash out to dollars. And given there are now fewer dollars in circulation than was thought, it could be a bloodbath.
If other exchanges are above board in their dealings, and the coins and cash are where they should be, and withdrawals don't grind to a halt, then that could be as far as it goes. If they aren't, and if they have trouble paying out, it could take exchanges down.
Tether is big enough that it could send similar shockwaves.
- Bitcoin starts dipping.
- Bitfinex/Tether generates millions of USDT out of thin air.
- They use them to buy Bitcoins, sending the price back up.
- Once the price is high enough they can sell a few of these Bitcoins they effectively got "for free" and make a ton of money.
A big proponent of this theory is "Bitfinex'ed": https://medium.com/@bitfinexed
2 billion of new demand (almost a billion in January alone) is a hge deal.
Now, bitfinex looks super solvent though, so its not like the exchange can dissolve like mtgox.
Similarly they can probably afford to actually exchange the USDT for USD up to a certain limit, the question is how deep their pockets are. Do they actually have the full amount in their accounts? $1 billion? 100 millions? 10 millions?
We'll know that for sure when there's an actual audit or when there's a bank run and they collapse because they don't have the money to pay for the USDTs.
Kraken is however about the only place you can actually trade USDT for real USD. Or indeed short the things.
[1] >[people] have attempted to visit the company’s registered address in Hong Kong only to find an accounting company which served as a registration agent for the company
>most of the executive team is distributed across the globe.https://medium.com/@cadammitchell/bitfinex-has-a-true-workin...
Yes, this time it may be different. But even the classic Nigerian scam is based on the premise that you cannot verify the claims – you cannot involve the government, the police or any other third-party, you just have to trust the relative of the disgraced kleptocrat to receive your millions.
But when traders continue to buy and sell within 1% of parity, that's a signal that maybe there's more going on here.
I don't buy the concept that Bitfinex can somehow rig the price on other exchanges. If traders are all selling Tether, while simultaneously new Tethers are getting printed, then the price should tank.
When the price doesn't tank, that should tell us there's more to the story.
It's not really rigging the price in a bad way - it's kind of how the thing is supposed to work.
In this theory, the regulatory suppression of their banking relationships forced them to hold the crypto assets they were taking in return for USDT, and they have made out like bandits -- on paper, for now -- from the crazy demand for cryptocurrency over the last 6 months.
If that's the case, it might be possible to estimate how far the current crash would have to go for them to hit insolvency, from the history of USDT releases.
On the other hand, hopefully they've been diversifying the holdings they're prevented from liquidating into other price-stable commodities like gold and oil, via in- kind trades.
If any of this is true, I can see how it would make them shy about an audit. It's very precarious, even if there's no theft intended by it.
That said, the consensus I've heard from my audit colleagues (I work in public accounting) is that no one has the slightest freaking clue how to audit crypto. So I could see the audit taking exceptionally long, causing friction in the relationship which eventually blew up into a full on breakdown. If that's the case, Tether's leadership probably had a poor understanding of the complexities involved. Sometimes that's the client's fault, but sometimes it's the accounting firm making too aggressive of a pitch to sell the work.
But the bank account issue makes me think bad faith. That shows a willingness to disregard rules and mislead fiduciary business partners, which is pretty much an auditor's nightmare client.
This is a fair statement. Auditor resignations are a red flag, not a conviction. Given the background scumminess of the cryptocurrency space [1], Bitfinex/Tether's management's evasiveness and structure's murkiness [2] and the $2 billion with a "b" figure, heightened skepticism is warranted. In that light, the Tether spokesperson blaming the "excruciatingly detailed procedures Friedman was undertaking" for the auditor's resignation, with no corroborating statement from the auditor, is unsettling.
[1] https://www.reuters.com/article/us-ico-ernst-young/more-than...
[2] https://www.bloomberg.com/news/articles/2017-12-05/mystery-s...
Shouldn't the crypto part be trivial for Tether? You'd just need to check how many Tethers were issued on the blockchain. The hard part ensuring that those Tethers are backed by real Dollars - and that should be a regular accounting task that doesn't have anything to do with crypto.
Though that could be for reasons other than the money being missing - maybe when Tether couldn't open an account directly they opened one through a shell company and don't want the bankers to know or something along those lines. My guess is that when they couldn't hold usd they held btc instead and then tried to prop that up.
The whole purpose of Tether is to trade USD after Bitfinex lost USD banking relationships.
No naturally, if banking relationships were public, they would be at risk.
More likely, these aren't traditional bank accounts at all. These are probably dollars pledged by corporations and hedge funds but held in bank accounts of those corporations and hedge funds, not in Bitfinex's name.
This is willful money laundering. If true, everyone who ever beneficially owned USDT would be subject to federal money laundering charges. AML law doesn't care about intent or knowledge, just actions.
> if banking relationships were public, they would be at risk
Any bank which holds electronic U.S. dollars reports, directly or indirectly, to American regulators. Large deposits owned by foreign institutions with possible connections to Americans trigger FATCA filings. American financial regulators are somewhat forgiving when it comes to mistakes; less so when those "mistakes" are willful. If a bank is hiding its direct or indirect relationship to Bitfinex, they are betting the bank on Bitfinex. At that point, laundering drug money is probably a better reward for the risk being taken. (Disclaimer: None of this is legal advice. Do not launder money.)
> These are probably dollars pledged by corporations and hedge funds but held in bank accounts of those corporations and hedge funds, not in Bitfinex's name
This is plausible, trivial to demonstrate (repo and overnight wholesale financing aren't novel concepts), and a different risk model if true (for the lenders as well as Tether). It would also fly in the face of the Tether spokesperson's claim that Tether has a "relatively simple balance sheet."
> This is willful money laundering
Money laundering is the concealment of the origins of illegally obtained money. If the money was legally obtained then it can't be money laundering.
Just creating an alternate way to move clean money isn't prima facie a crime.
> If a bank is hiding its direct or indirect relationship to Bitfinex, they are betting the bank on Bitfinex
Banks probably don't even know about Bitfinex.
If Fuckwit Capital Partners has $100m on deposit with Wells Fargo and pledges 10% of it to buy Ethereum, those dollars stay in FCP's account and the bank has no idea that the funds are pledged.
Upon receipt of the promissory note from FCP, 10m new Tethers get created with the Ethereum as collateral.
> claim that Tether has a "relatively simple balance sheet."
The balance sheet could be very simple, but devilishly difficult to audit.
ASSETS
Accounts Receivable from Investors, $2.4 billion
LIABILITIES
Tethers Payable to Traders, $2.4 billion
If Friedman LLP wanted to prove all the pledged USD to back up the receivables, that could be an expensive and invasive audit of counterparties who don't want their banks get wind of their cryptocurrency activities.
At the least I can describe with certainty that Tether is the exact opposite of Bitcoin: centralized, opaque, and trust-based. Ironic.
In my mind, this paragraph is the article's money shot. If I was a legitimate business person issuing a security meant to fill Tether's place, I would pray that my auditor was excruciatingly detailed.
And frankly, there is no way in hell that a security like Tether could have a 'relatively simple balance sheet' in light of their problems receiving US currency combined with rapidly issuing more tokens.
This is bad...and the fact that a PR person said that means things are bad beyond belief.
American regulators default to permissiveness, particularly in the face of new financial technologies. Their laissez faire comment-and-wait approach to Bitcoin, ICOs and related events is not particularly jarring. But India's regulators are of the shoot-first-ask-questions-later variety [1]. Cryptocurrencies are a unique global phenomenon of immense regulatory restraint, not zeal. (This is probably explained by cryptocurrency's technical complexity, growth and metastasisation as well as some regulators having been won over by the pitch.)
No audit = run away fast.
My wife is a professional auditor and she said that this would only happen if the client was pushing for the auditor to certify something that the auditor wasn't comfortable with. Of course she has no direct knowledge of this case. She said it was a really bad sign and she almost never sees this happen.
No. The Federal Reserve was created by Congress in 1913 [1]. Part of its complexity arises from its need to integrate public monetary policy with private capital markets.
Which, to be clear, is a good thing otherwise politics would start to win over sound economic policy...
https://www.monetary.org/wp-content/uploads/2016/03/money-cr...
There's a lot of money in convincing people this is true but I have my doubts.
You deposit $100 and they lend it out to 10 different people (or more, depends on the legislation limits), effectively creating $900 extra dollars while those 10 loans remain open.
I remember vividly seeing Mt. Gox users warned to leave. They didn't. Somehow, they discounted or ignored every warning. Then they became angry when their money was stolen. Then they claimed Mt. Gox was responsible for their loss.
History seems to be repeating itself here. Tether holders somehow don't see, can't see, or refuse to see the writing on the wall.
I believe they did market manipulation, and that they are committing fraud with tether, but I'm not convinced tether is not solvent.
So was mtGox.
Yes, precisely the sort of information an audit would reveal. Curious, then, that despite their repeated pledges for robust auditing they first declared they'd engaged a firm to do those audits that didn't actually do audits, then terminated their relationship with the second, legitimate auditor.
Plus, they made most of the money on the play itself.
1: https://www.reddit.com/r/Bitcoin/comments/1po4gq/mtgox_slow_...
I can't tell you how many /r/bitcoin posts I saw in the months leading up to the final closure of BTC withdrawal that went something like: "why is the BTC price so high on Mt. Gox compared to other exchanges?"
This post gives you an idea. Note the first response and how difficult it is for users to actually see the dead canary:
https://www.reddit.com/r/Bitcoin/comments/1w6qxm/mt_gox_arbi...
Mt. Gox would accept USD deposits, but not withdrawals. You could move your bitcoin out, but not your USD. There were also shenanigans with trading bots.
The post you linked to applies to USD withdrawals only. BTC withdrawals continued for some time, but many users decided to ignore to the dead canary and let the Bank of Gox hold "their" money for them. One of them was a well-known Bitcoin Core developer.
http://omniexplorer.info/lookuptx.aspx?txid=24db40680654b8b5...
Specifically, its transaction type is 56. https://github.com/OmniLayer/spec#field-transaction-type
I don't think this is a strong evidence, but if Tether is issued out of thin air, it is somewhat strange to make revocation. Does someone have a good explanation?
It's strange to issue a revocation, but then it's also strange to get subpoena'd by CTFC, and to print 850 million tethers in the same month you fail to get an audit through...
A revocation of about 1.5% is just another confounding factor at this point.
The point of Tether is that for each USDT there is a corresponding USD in an account belonging to Tether. If Tether were printing USDT to keep 1 USDT valued at 1 USD then they would be violating what Tether is publicly stated to be.
The whitepaper can be found here: https://tether.to/wp-content/uploads/2016/06/TetherWhitePape...
And on the flip side, if Tether redeems any Tetherbuck for $1USD, on demand and quickly and without solvency concerns, why and how could the value of a Tetherbuck ever drop below $1USD?
Any deviation from $1USD value means the market disbelieves one of the above things.
https://www.coindesk.com/tether-claims-30-million-stable-tok...
It seems likely that the tether company is a fraud, given the size of their January print runs. It seems likely that not only has tether been used by its owners as a way to prop up crypto-currency prices, but to acquire bitcoin and other coins under false pretences.
There's no proof either way, but the lack of audit is very, very fishy.
Further, I watched the USDT/USD market on kraken on Friday.All morning there was downward pressure, buy-walls of millions of dollars were eaten into and destroyed over the course of a few hours, until there was no bid volume at all down to about 90 cents.
All of a sudden, in the course of about two minutes, a rapid cascade of very small trades (a few tens to a few hundreds of dollars) propelled it back to ~98.5 cents. It looked really dodgy.
What's dodgy about that? I think everyone here would love to buy a virtual dollar for 90 cents. Especially given the behavior of the market the past month.
However multiple trades of very similar amounts in under a second, after a long, massive slide in much larger amounts in the morning, looks very dodgy to me. Especially when these trades appear at the last possible moment, when all market resistance to freefall has just disappeared.
But sure, whatever. Could be legit.
For reference the current market cap of tether is (allegedly) around $2.2B, which at the overnight rate would generate around $30 million a year in interest.
In general the idea of fractional reserve is that you, the customer, deposit dollars in a bank account, the bank lends out those dollars to borrowers, but still allows you to come and get your dollars back at any time you like. This takes advantage of something like statistical multiplexing -- it is unlikely that everyone will want his dollars back at the same time. And in modern times it is backed up by various government schemes which will provide liquidity in the case of a run on the bank.
If the bank issued you a cryptocurrency at a rate of $1/coin then it would be same thing as giving you your dollars back. It would reduce the banks reserves.
I guess your scheme would make more sense on the other side of the bank. That is, the bank could lend out coins rather than dollars. But in that case there isn't a multiplier for coins, because the reserves would still be in dollars.
Why would it reduce their reserves? The bank would still be holding your USD, and they only have to give it back when you trade the coin back to them for cash.
On their books they have a liability of $100 (the repurchase obligation) and they have $100 in cash. You're right that it doesn't affect their reserves, but it also doesn't act as a multiplier. The liabilities and assets balance. In order for there to be a multiplier the bank would have to issue coins and still allow the customer to access the cash as a deposit. Thus the coins would be being lent as opposed to sold.
Only difference with using coins this way is that rather than the $100 being tied to you as an individual, it'd instead be tied to the coin itself. (So whoever possesses $100 worth of the bank's coin can get that same amount back in USD.)
Banks have to know their customers (KYC) [1]. This requirement is multifarious; banks have KYC obligations to the justice system, the U.S. Treasury, systemic financial regulators (e.g. the Fed), specific financial regulators (e.g. FINRA, the FDIC), et cetera.
In the olden days, a discerning gentleman might request an anonymous, numbered Swiss bank account [2]. Over time, it became clear these "discerning gentlemen" were politicians hiding graft money or arms and drug runners storing profits. Anonymous accounts were globally banned and KYC laws were born.
This is the fundamental flaw of all "stablecoins". They're an overly-complex instantiation of anonymous (and illegal) bank accounts. Needless to say, over-complicating something doesn't make it go away.
[1]: https://www.tdsecurities.com/tds/pdfs/Manulife_Bank.pdf
Bearer instruments are, while prevalent, in decline [4]. It is an active area of global financial regulation [5] where even institutions like the Bank of England have to work to get their notes issued and treated properly.
TL; DR A reputable offshore bank might be able to issue a bearer token redeemable for one British pound or Canadian dollar provided they go to great extents to ensure they don't end up in the hands of Americans or anyone in the United States. It would be an uphill battle, however, which in turn necessitates a heavy issuance premium.
[1] https://en.wikipedia.org/wiki/Bearer_bond
[2] https://www.tdsecurities.com/tds/pdfs/Manulife_Bank.pdf
[3] https://www.investopedia.com/articles/bonds/08/bearer-bond.a...
[4] https://ftalphaville.ft.com/2016/04/04/2158236/so-you-though...
[5] http://www.fatf-gafi.org/media/fatf/documents/reports/ML%20a...
Bitcoin down 10% this morning.
Other people have paid more for crytocurrency than they might have had to because this fraud would have pushed up prices.
You're begging us to let criminal activity carry on.
I'm sorry for people who were caught by this - they've been scammed. Pretending they haven't isn't going to help in the long term but make it worse and for more people.
You probably want to start looking into market theory. My understanding of it is imperfect but...
What you're effectively asking is for a market to be protected from bad news because investors who invested in good faith stand to lose out. In this case the bad news is news about (potential) fraud and large-scale fake liquidity. The consequences, outside of the morality of the continual diversion of a large amount of honest money to bad actors, is that price discovery is destroyed and the asset is no longer really tied to any underlying value or sentiment. Such a market could collapse at any moment - if the bad actor stops funneling fake fluidity into the market, for instance, then if that's not replaced with new 'real' money the price will still collapse because the support for the price was a fiction.
In a well regulated system the restitution for the (apparent) criminal activity would be by the state - the perps would get charged with fraud, their assets confiscated, and the state and/or market authorities would endeavour to make good the innocents, either by unwinding trades or paying out from insurance or something. In the cryptocoin space... well yeah, regulation bad, insider trading good.
Markets function well when there is transparency and honesty. Without it they distort and bad actors find ways to capture the profits.