Yesterday, Bloomberg’s Businessweek published a feature about Tether’s $69 billion stablecoin, or more specifically about its backing assets. A highlight of the piece is the author Zeke Faux’s description of Tether as “a company that seemed to be practically quilted out of red flags”.
One of the things that alarms regulators is its rapid growth. A year ago, there were just $16 billion Tethers in circulation. And there’s always been a question mark over the interpretation of how it’s 100% backed. Following an investigation, the NY Attorney General came to a settlement that included Tether and sister company Bitfinex paying $18 million and banning them from trading or having any activities in the state.
John Betts, the Former CEO of Noble Bank International in Puerto Rico, which provided banking services to Tether, gave a soundbite for the Bloomberg report. “It’s not a stablecoin, it’s a high-risk offshore hedge fund,” said Betts. “Even their own banking partners don’t know the extent of their holdings, or if they exist.”
Betts also stated that “During the time Tether banked with Noble, we held in excess of 98% of their cash reserves and received and validated monthly statements from their other account.” However, he told Bloomberg that a key Tether executive told him they wanted to use the reserves to make investments.
Tether hit back, saying Bloomberg was perpetuating a “false and aging story arc about Tether based on innuendo and misinformation.” It says it fired Betts as its banker and that Betts is the subject of a lawsuit in which he’s accused of “engaging in egregious and wasteful self-dealing.”
A day before the publication of the Bloomberg piece, Brock Pierce, who is credited with founding Tether, published an announcement saying he hadn’t been involved with Tether since 2015, which is made clear in the Bloomberg report.
The backing assets
Meanwhile, $30 billion of Tether’s assets are claimed to be in commercial paper. But Bloomberg canvassed Wall Street traders who had not heard of Tether buying anything. Instead, it’s alleged to have invested in Chinese debt. And in loans to cryptocurrency players, including $1 billion to crypto lender Celsius which is backed by Bitcoin collateral.
Until February 2019, Tether claimed that “Every Tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USDT is always equivalent to 1 USD.”
But it updated the description to say that it includes cash and equivalents and “other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”
The founders of Tether are also behind the Bitfinex cryptocurrency exchange, which notoriously suffered a hack in 2016, resulting in the loss of almost 120,000 Bitcoin worth $69 million at the time and $6.6. billion at today’s prices.
In August 2018, a payment provider failed to hand over $850 million to Bitfinex. Nonetheless, the Tether affiliate managed to stay afloat when most companies would have been considered insolvent. According to the NY Attorney General, that’s because Tether transferred at least $625 million to Bitfinex, despite the claim of holding currency in its reserves. In July, Bloomberg reported that the Department of Justice was investigating Tether executives for a potential criminal case.
Yesterday’s revelations by Bloomberg had no impact on cryptocurrency prices.