The rise of crypto doom and gloom has come after a whopping decline in prices. Ever since Chinese regulators started cracking down on crypto and Tesla stopped accepting Bitcoin, citing environmental concerns — not the protection of Musk’s enormous ego, the crypto market has lost roughly half its market cap, now sitting at around $1.4 trillion.
This “dip” has prompted the leading bears of the crypto boom to rise into mainstream circles, claiming Bitcoin’s historic rally has not been fueled by reckless state policies causing a mass dash into inflation assets, but by bad actors committing fraud and manipulating markets. The level of “FUD”, contemporary slang for things that undermine the prevailing crypto hype, has reached all-time highs.
At the center of the controversy lies Tether Ltd. and its popular stablecoin, or “un-stablecoin” as George Gammon calls it, Tether. Its website describes itself as a digital token, built on a variety of blockchain technologies, that maintains a 1-to-1 peg with the U.S. Dollar ($1 = $1USDT). For every 1 $USDT in circulation, Tether has one George Washington to back it up.
Or so they say.
Over the course of the crypto boom, people from multiple disciplines have started to wonder if Tether is what its creators and backers claim it is. Fraud hounds, legal experts, even YouTube detectives have come out against Tether Ltd., alleging its stablecoin is an elaborate swindle, a Ponzi scheme “backed by squirrels and confetti,” as journalist David Gerard called it.
“Tether recklessly and unlawfully covered up massive financial losses to keep their scheme going and protect their bottom lines,” New York State’s Attorney General, Letitia James, said. “Claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.”...
Much FUD. Much anger. Why? As it turns out, there’s more than a compelling case to suggest that Tether is a Ponzi scheme, not the beloved stablecoin that’s fueled the bulk of this crypto bull market.
The track records of its founders, and its child company Bitfinex, don’t exactly radiate the confidence and trust you’d want from a currency issuer....
Over the next few years, Tether’s executives fail multiple times to get an audit that proves tethers are 100% backed by U.S. dollars. In November 2018, they provide yet another attestation with their latest custodian, Deltec, a shadow bank based in the Bahamas. In December 2018, a Bloomberg journalist claims to have seen an audited bank statement, but again, this turns out to be another useless attestation.
In February 2019, Tether says its finally come clean about its reserves, but they make things worse. The company not only fails to provide an audit but they admit to using a fractional reserve system, not cash-based reserves.
On its website, Tether changes the definition of its 1-to-1 backing, from this:
“Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD.”
…to this…
“Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.”
Shortly after, on April 24, 2019, the NYAG reveals it has been investigating iFinex, the parent company of Bitfinex and Tether, and accuses the company of commingling $850 million of client and corporate funds.
As Bitfinex had failed to find a reputable bank to work with, they chose to deposit $850 million in client funds with Crypto Capital Corp, yet another shadow bank, this time, in Panama.
When Crypto Capital had its funds seized by legal authorities, Bitfinex lost access to its client's funds. But instead of accepting defeat, Bitfinex took $700 million out of Tether’s reserves to meet customer demands and remain solvent.
During NYAG’s investigation, in an affidavit, General Counsel Stuart Hoegner admits Tether is only 74% backed.
Roughly two years later, on February 23, 2021,Tether and Bitfinex settle with NYAG. The two companies must pay $18.5 million and are banned from trading in New York State. As further punishment, they must now provide quarterly statements demonstrating they have not violated the settlement.
Next month, Tether releases its first post-settlement attestation, claiming it has $35 billion in “assets” to back up the 35 billion tethers in circulation. But this is still not an audit and fails to show what assets make up the $35 billion.
Now, it’s June 2021. Tether still has yet to complete or release anything that proves tethers have solid 1-to-1 backing, you know, the supposed “sound money” benefit of stablecoins.
Welcome to the Tether circus...
Tether has become the crypto market’s primary source of liquidity. The crypto ecosystem’s backbone is now the dodgiest stablecoin on the market. As Coinlib shows, most of Bitcoin and other coin’s daily inflows come from Tether, with USDT facilitating 50 to 60% of Bitcoin transactions since 2019. Its total circulation has surged from $5 billion in February 2020 to $56 billion in May 2020 to almost $63 billion in the last few weeks — and shows no signs of stopping.
Since Tether’s money printer has effectively fueled crypto-mania, a loss of confidence in its stablecoin will likely create the largest crypto crash in history. We’ll witness the Bitcoin equivalent of a bank run, a crypto-style rerun of the 2008 subprime collapse.
