Tether has been one of the most controversial topics in the cryptocurrency community over the last two years — and things have come to a head over the past few weeks. Tether (USDT) claimed to be backed by the U.S. Dollar at a 1:1 ratio.
For the last two years, industry critics have speculated that Tether did not have the necessary cash reserves in its bank accounts to back the amount of USDT in circulation.
Those claims have finally been validated by Tether itself as a result of an ongoing legal battle involving cryptocurrency exchange Bitfinex — which shares personnel and ownership structures with Tether — and the Office of the New York Attorney General (OAG).
Tether aimed to provide a true stablecoin platform for the crypto community with a utility token that was backed by the U.S. Dollar at a 1:1 ratio, with all the benefits of traditional blockchain technology. This allows anyone to see whenever tether tokens are issued, which has played a big role in the focus on the stablecoin in the past 24 months.
The Bitfinex connection
Tether has had an association with Bitfinex since 2015, when the exchange integrated the cryptocurrency operation into its exchange. Giancarlo Devasini is the chief financial operator of both Tether and Bitfinex.
Critics started raising concerns about Tether and Bitfinex’s connection and operations toward the end of 2017, as bitcoin rallied during its famous bull run.
To allay these fears, Tether employed Friedmann LLP to conduct a short review of its accounts in September 2017.
Tether got Friedmann back on board to conduct a full third-party audit of its accounts this time around. But less than a month into the process, the parties split, with Tether claiming that the auditors were taking too long to carry out the job.
The crypto community never got a third-party audit from Tether, which could have allayed concerns considerably.
Bitfinex accused of using Tether reserves to plug losses
Fast forward to April 2019, an investigation started in 2018 into iFinex, Bitfinex and Tether was revealed by the Office of the New York Attorney General in 2019.
The OAG alleged that Bitfinex had lost $850 million of funds needed for user redemptions and borrowed money from Tether’s cash reserves to plug the gap.
Attorney General Letitia James announced the court filing that alleged that Bitfinex had then used $850 million from Tether’s reserves to cover a shortfall due to funds of its payments processor, Crypto Capital Corp., being seized in several different countries:
“Our investigation has determined that the operators of the ‘Bitfinex’ trading platform, who also control the ‘tether’ virtual currency, have engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds. And we will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies.”
The OAG wants the companies to stop using or spending the U.S. dollars that came from Tether’s reserves.
However, the OAG is also looking to obtain an injunction that will compel Bitfinex and Tether to continue their operations to ensure the stability of the crypto markets and protect its customers.
Tether, Bitfinex hit back
Tether and Bitfinex have not hesitated to tackle the New York OAG and its intended course of action against them.
The companies responded to the allegations brought forward by the OAG last week, claiming court filings were “riddled with false assertions.” They continued:
“The New York Attorney General’s court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million ‘loss’ at Crypto Capital. The legal documents from Tether show that it only has 74% of cash reserves in its bank accounts to back circulating Tether tokens:
“In fact, Tether’s reserves of cash and cash equivalents alone (without the line of credit) would cover approximately 74 percent of the outstanding amount of tether. The markets clearly remain confident in tether, as it currently trades just shy of $1 dollar per U.S. Dollar tether — even after the Attorney General’s highly inflammatory and misleading public application. Any suggestion that tether holders face liquidity risk is unsupported speculation.”
This finally proves that Tether is not fully collateralized by cash equivalents, as it had claimed for an extended period of time. This is at odds with information Cointelegraph was given by Tether two months ago.
In March, Cointelegraph had contacted Tether for comment on a change to its website that indicated that tether tokens were no longer backed by only cash but by “cash equivalents” as well. According to the change, that would “include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, ‘reserves’).”
Stuart Hoegner, general counsel at Tether, told Cointelegraph that it was not running a fractional reserves and that it was able to handle all redemption requests for USDT:
“Tether is not operating a fractional reserve. Tether’s reserves remain, and have always been, 100% backed by its reserves. Tether maintains the ability to honour all redemption requests.”
This week, parent company iFinex filed court papers in an effort to vacate the OAG’s court order. The company claims that the OAG’s injunction is based on “incorrect facts and the wrong legal standard.”
IFinex argues that the OAG did not provide substantial evidence for its claims that tethers qualify as securities or commodities covered by the Martin Act.
The company further argues that the OAG’s injunction is hugely disruptive to both Tether’s and Bitfinex’s operations because it freezes the use of $2 billion of Tether’s reserves, which could be used for further investment.
IFinex believes that Tether was transparent with users and investors about its reserves, and the possibility that those reserves could be loaned out to affiliate businesses like Bitfixex:
“The undisputed facts show that there was no ongoing fraud, and no ‘victims’ in need of the drastic remedy of an injunction to protect them. Specifically, there is no dispute that Tether disclosed that its reserves could consist of loans to affiliates, and did so before the line of credit transaction the Attorney General challenges.”
Despite all of the activity over the last two weeks, Tether is still trading at a 1:1 ratio with the U.S. dollar, with a market capitalization of over $2,7 billion, according to data from CoinMarketCap.
As it stands, both companies seem to be continuing with their operations and the OAG has made it clear that it does not wish to harm investors and customers of Tether and Bitfinex during its investigation.