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Tag #Tether

Friday Inferno market update

It’s happened. Finally. And it’s still happening. Hold onto your trousers, people.

 

And thus did it come to pass, that the shadowy demon known as Bitfinex did purloin the reserves of its Evil Twin, Tether. And USDT did become unTethered and traded at prices somewhat different to the $1 claimed by Tether, which was hardly unsurprising given that $850 million had gone walkabouts from their coffers.

 

And their acolytes did get the hell out of Dodge and sell their stinky Tethers pronto, and all the crypto traders in the land did bail out of bitcoin and alts, and all coins did slide most rapidly towards the Abyss.

 

What the markets say

So far, the slide has been no more than a modest 9% or so, which isn’t really so bad when you consider what bitcoin is capable of. The four-hourly candle late last night registers a $500 drop, before a bounce. We’re going to assume for the moment that it’s the kind of bounce a dead cat performs when dropped from a great height, because this round of FUD is definitely not over.

 

So what happened?

For background, take a look at this article from Fortune. The short version seems to be that Bitfinex’s payment processor, Crypto Capital, was taking a very long time to process withdrawals, meaning that a large amount of money was locked up with them. Very large.

 

To cover the shortfall, Bitfinex raided the Tether account of $850+ million, ‘backing’ those dollars with a line of credit.

 

So what next?

All of this has been a long time coming. Here at Inferno we have constantly warned that Bitfinex and Tether’s opaque approach to their reserves and the fact that the two companies are essentially the same represents a fundamental conflict of interests, and may be masking serious fraud.

 

Now, the cat is out of the bag. The New York Attorney General’s filing states that Bitfinex used Tether funds to pay customers who needed withdrawals, and never disclosed the $850 million problem to their users.

 

Well, all bets are off, really. We don’t know how systemically serious this might be, and so what the end result might be in fundamental terms. We also know that crypto markets can be highly emotional, capable of overdoing both the selling and the buying. But we also know they tend to shrug off news they don’t want to hear.

 

In short, this could be as bad as it gets. Or it could get a lot worse. Hedge accordingly.

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Tether issuance back to all-time high

$2.8 billion worth of USDT is now available, after the company released tokens taken out of circulation back in October – and just printing an additional 300 million.

 

Tether. It’s the dirty secret of the crypto space. The question mark over its reputation. The locked closet potentially filled with skeletons. Towards the end of last year, as the questions over Tether increased and bitcoin plummeted, Tether pulled around 800 million USDT from circulation. There was rejoicing; with new stablecoin competitors like TUSD and Gemini dollars, the crypto world assumed that Tether would be going out of fashion.

 

They didn’t stay free of controversy, though. A month ago, Tether slyly changed its website to suggest they might now be running a fractional reserve. Plenty of people were already worried that all those USDT weren’t backed by real dollars in a real bank account. Now, Tether all but admitted it was using other collateral of varying quality. But USDT remained popular. And, it seems, it’s not going out of fashion any time soon.

 

As confidence returns to the crypto markets, Tether has been putting USDT back into circulation. The market cap now stands at over $2.8 billion, back to what it was at the start of October 2018.

 

Just a few hours ago, another 300 million USDT were issued. In the past, critics have noted that new USDT issued seems to correspond with price pumps. Were they printing fake money and using it to buy real BTC? What’s going on now, and what’s about to happen? Does the new USDT reflect new demand in the market, or is Tether playing games?

 

We may never know the full truth about Tether. But they are, once again, active and printing new tokens. Tether may have been partly responsible for the bubble to $20,000. A lot of people hoped that they wouldn’t be a feature of the next market cycle. But the crypto space hasn’t evolved fast enough. Tether is still here. It’s still the most popular stablecoin.

 

And now, it looks like the shady folk at Tether are going to start right back where they left off.

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What are Tether doing now?

The company behind USDT essentially admits to running a fractional reserve, and potentially issuing money backed by broken or failing assets.

 

As we mentioned yesterday in our market update, Tether have been up to their shenanigans again. Very quietly, without trying to draw attention it it, the company have changed some text on their website. Instead of claiming that every USDT is backed 1:1 by dollar reserves – something that was always in doubt because they won’t allow a proper audit – Tether now state:

 

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”).

 

We have always been skeptical about Tether. It’s been a while since we last posted about them and their shady practices, but what is abundantly clear is that Tether have not been playing above board for years. You can read what we suspect has been going on, and how the company made some serious profits through manipulating the markets and their currency, in this article: Tether could be guilty of perpetrating a huge fraud, just not the one we think.

 

So now, Tether has actually admitted that they may not back their USDT 1:1. ‘From time to time’ Tethers are backed by other assets – including debt. A debt owed to Tether is an asset, from their perspective, and so if they are owed $1 million by another company or individual, they can mint 1 million USDT against that asset.

 

Now, it doesn’t take much to see how this could be abused.

 

Remember that little episode that happened ten years ago? It was called the ‘Global Financial Crisis’. Basically, banks issued enormous loans but didn’t know how risky they were. Then they parcelled them together and mixed them up and sold them around in circles to each other, until no one really knew who was holding the bad loans, assuming they even knew the loans were bad in the first place.

 

So let’s say that one of the loans against which Tether issues USDT never gets repaid. What happens then? Is it:

  1. Tether publicly updates the community and makes up the difference from its reserves
  2. Tether comes clean and allows USDT to trade at a discount that reflects the problem until they can cover the bad debt
  3. Tether says nothing to anyone and lets the party continue.

 

Right. Because this is not a company that is famous for its transparency.

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Deltec Bank provides utterly convincing and professional letter to prove Tether reserves exist

Ok, so we know we talk a lot about Tether and Bitfinex. We don’t much like them. For the record, we don’t think they’re quite as shady as some have made out, but there’s plenty wrong with them.

 

And that’s why we felt the need to laugh at the letter that Tether’s new bank has provided to ‘prove’ the company has the US dollar reserves to back their USDT tokens. You can find a copy of the document here: https://tether.to/wp-content/uploads/2018/11/Tether-Letter.pdf

 

A cursory look at this letter will raise a number of questions for anyone who has ever received a letter from their own bank. Now, we don’t know how it works in the world of High Finance, but there are a couple of red flags here.

 

  • Banks use your actual name. A generic ‘Sirs’, as we see here, is unusual, to say the least. They would perhaps use the company name, or more likely the name of the CEO or CFO. ‘Sirs’ reads like a crypto scammer has written it (they’re always polite to begin with). Tether presumably want to protect the identities of their people, but their CEO’s name isn’t exactly a secret. (And just to confirm, the CEO’s name isn’t ‘Sirs’.)
  • That signature. It’s kind of, well, squiggly, isn’t it? Like, illegible. Of course, a lot of people’s signatures are. That’s why you also write your name underneath, so the recipient knows who the letter is from. A list of the people you might expect to have signed the letter can be found in this doc.

 

So here we have a letter, written from one unknown person to another unknown person, stating that Deltec hold a lot of money on behalf of Tether.

 

We’re not suggesting it’s fake. Only that both Tether (and Deltec) could do a lot better in their efforts to improve transparency and confidence in their business. And that we understand anyone who casts doubt on its provenance. They just make it so easy.

 

Ok, we’ll stop laughing at Tether now. Honest.

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