For the next year or so Tether was constantly berated by accusations of fraud, market manipulation, and not being fully backed by dollar reserves. They contracted with Friedman LLP to conduct an audit of Tether reserves, but all that was ever published by the firm before Tether severed the relationship was attestations. The difference between an audit and attestation is an audit would comprehensively look through an entity’s balance sheets including assets, obligations, revenue, etc., to build a comprehensive picture of how those all balance out, where as the attestations simply attested to witnessing proof of holding certain assets or currency in reserve at the time of the attestation. Eventually the relationship ended due to, paraphrasing Tether’s statement on the matter, “the large amount of time and resources being spent on the very simple Tether balance sheet meaning the audit will not be produced in a short enough time frame.” I would like to point out here though, unless this has recently changed in the last year or two, no other stablecoin I am aware of has published an actual full audit of their operations. So the framing back then in the context at the time I feel was a completely disingenuous singling out of Tether and demanding a higher standard of transparency than what was demanded of other stablecoin issuers.
Throughout this whole saga in late 2017/early 2018 both Bitfinex and Tether completely cut ties with U.S. customers. Two other important factors in this story occurred around the same time period, although they were to differing degrees not publicly known until later. One was Tether and Bitfinex beginning a banking relationship with Noble Bank in Puerto Rico, a 100% reserve bank founded by Brock Pierce (an original founder of Tether), and the other was Bitfinex beginning to utilize Crypto Capital for fiat payment processing. This was the entity constantly shuffling money between new bank accounts set up under new corporate entities.
Before getting into the unraveling of one of these stories (regarding the Noble Bank relationship) it’s worth mentioning a short period of time in early 2018 when Bitfinex had a banking relationship with Dutch bank ING. I mean very short. Within a few weeks of Bitfinex publicly acknowledging the relationship, ING closed their banking accounts. Later in 2018 Tether and Bitfinex severed ties with Noble Bank, and the bank was put up for sale. The publicly-given reason was the bank’s lack of profitability as a full reserve bank, but my own speculation is that their own custodial bank New York Mellon was likely pressured by New York regulators to in turn pressure Noble Bank for their relationship with Tether and Bitfinex. See the continuing theme? Banks and regulators constantly ostracizing both companies from banking services is the pattern here. After jumping ship from Noble, Tether began holding reserves with Deltec Bank in the Bahamas.
Now here is where the story gets absurd. In 2019, $850 million dollars of Bitfinex funds held by Crypto Capital were seized by multiple governments, one of which was the United States. The company had been opening bank accounts under shell corporations and claiming to the banks that they were engaged in real estate transactions in order to process deposits and withdrawals on behalf of Bitfinex, Tether, and other cryptocurrency companies using their services. For months the company led Bitfinex on, would not fully explain the issue, and eventually Bitfinex addressed the problem by taking a loan from Tether out of their backing reserves. This is when the New York Attorney General sued Bitfinex and Tether for being short $850 million in Tether reserves. The United States government seized almost a billion dollars, and then sued the companies the money was stolen from for not having that money .
This case dragged on for almost two years until February 2021, when Tether settled with the NYAG for an $18.5 million dollar fine. They were required under the terms of the settlement to issue quarterly reports of exactly what was backing Tether.
Only about 6% is real cash reserves or treasuries under Tether’s direct control (for clarification to readers not familiar with such details, “fiduciary deposits” are effectively bank deposits not directly held by Tether). The balance sheet of reserves is essentially the inverse of what it started as. In the beginning Tether actually did have hard cash on hand for reserves, now the majority of their reserves are simply commercial paper (short-term loans issued by corporations). The risk profile of this versus simply holding physical cash is massive, as the value of all that commercial paper is effectively only as stable as the company that issued it.
That said, why are they in this position in the first place? Because of the years of regulators and banks constantly cutting them off from fiat financial rails and pushing them further and further into a corner. Think about that for a minute. The entire chain of events that led to a much riskier balance sheet profile, which puts anyone holding Tether at a greater risk of losing their value, was caused directly by constant antagonism from banks and regulators. It doesn’t change the risk, but I think it is an important context to provide.
So what lies ahead for Tether?
Given the recently announced El Salvadorian Bitcoin bond, and the fact that Bitfinex will act as the broker and Tether will be accepted as payment, I think the road ahead for Tether is going to be very dangerous in a sense. Simply existing as an alternative fiat settlement system has led to non-stop harassment and scrutiny from governments and banks that have at times pushed both businesses to the point of potential failure and liquidity crises. That was just for passing dollars around between exchanges. They are now, after having already been backed into a corner, literally facilitating the sale of the first sovereign Bitcoin bond in human history. If just moving money between crypto exchanges has elicited the level of regulator and bank ire that Tether and Bitfinex have been subjected to, what will this bond issuance elicit?
I fully believe in response to this, the United States government will be coming for both Bitfinex and Tether in full force. The setting of the stage for that is written all over their recent obsession with stablecoin regulations, USDC’s recent move in response to this wind change of shifting all reserves to short-term treasuries, and in general the entire historical response and antagonism of both companies. The United States has subtly reacted to this ecosystem existing the way an immune system reacts to a virus, and with things evolving to the point of a nation-state issuing a bond backed by bitcoin, that immune response will likely increase.
I have always considered the attacks, and frankly deranged conspiracy theories, surrounding Tether are absurd. But that doesn’t change the fact that attacks against them have continued increasing in intensity while they have been backed further and further into the corner. The more that Tether, and by proxy Bitfinex, facilitate the evolution of this ecosystem financially beyond the control of the existing U.S.-dominated financial system, the more the hammer will be swung at them. Just because prior whacks have missed doesn’t mean all attempts in the future will. To think so is to subject yourself to the gambler’s fallacy . Not to mention the basket of issues commercial paper backing introduces in terms of stability risk tied to general global financial markets, i.e., if the companies who issued that paper do poorly, become insolvent, or can’t make good on the paper then there are no dollars backing that Tether when any of those things happen. That becomes the rock to the government antagonism’s hard place. On one side the traditional banking system and regulators squeezing them into a corner, and on the other the risk of economic misfortune of issuers of the commercial paper effectively deleting that Tether backing if defaulted on.
And to top all of this off, very recently the rebel government of Myanmar in their fight against the military government adopted Tether as a currency.
What do you think the domino effects of that will be? I think they will result in Tether being backed further into a corner, and more frantic swings of the hammer will come. Maybe this is me being a pessimist, but I have always thought if Tether came to an end it would be due to the U.S. government having enough of it. I think they’re about at that point.
This is a guest post by Shinobi. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
