There is a settlement in the case between stablecoin issuer Tether and the Commodity Futures Trading Commission (CFTC): Tether will pay a $41 million fine. The conclusion of the case also brings to light some findings that are anything but confidence-building for Tether.
The Commodity Futures Trading Commission (CFTC) and Tether settle on a $41 million fine. The issuer of the eponymous stablecon, the CFTC announces, falsely claimed that the Tether dollars were fully backed by US dollars. At the same time, the Bitfinex exchange, which is sister company to Tether, agrees to a fine of 1.5 million dollars for “illegal transactions”.
Basically, the settlement is about two parallel but closely interwoven cases: Investigations into the Bitfinex exchange and into stablecoin issuer Tether. The CFTC has been pushing these investigations for several years. With the settlement and penalty now reached, they are coming to a (provisional) conclusion.
The case against Tether in particular is of enormous importance. The company issues the Tether Dollar (USDT), a stablecoin that has become a mainstay of the entire ecosystem with a volume of 68 billion dollars. It has been suspected for years of not being fully backed or backed at all, and of manipulating the bitcoin price upwards through “clown dollars”. This accusation is so far-reaching that it splits the community in two. Some, overstated, don’t want to hear about it because Bitcoin is great and the high price is fun – and others, equally overstated, are losing faith in crypto and Bitcoin as a whole because of the tether suspicion.
“False or misleading claims and misappropriations of material facts … “
The CFTC’s final order now brings a bit more certainty to what’s going on behind the scenes at Tether. And while the $41 million fine should be a no-brainer for Tether – even if the CFTC is unlikely to accept USDT – what’s in the document could permanently shake confidence in Tether. And that could have serious consequences not only for the company itself, but for the entire ecosystem.
The Commission censures Tether for “false or misleading claims and misappropriation of material facts in connection with the US dollar Tether Token Stablecoin (USDT)”. Tether had claimed since the launch of the stablecoin in 2014 that the tokens were 100 per cent backed by fiat currencies such as dollars or euros. But now it emerges “that Tether made false claims from no later than 1 June 2016 until 25 February 2019”. This is because Tether was mostly not fully covered during this period.
More specifically, over the 26-month window examined, Tether only fully covered stablecoins in 27.6 per cent of all days. Coverage was thus the exception, not the norm. Moreover, Tether did not hold reserves entirely in dollars, as claimed, but “built on unregulated entities and various third parties that held the balances that made up the reserves; commingled the reserves with Bitfinex’s operational and customer balances; and held reserves in other financial products.” Among the numerous third parties engaged, at least 29 were not documented by official contracts, it said.
These misrepresentations about reserves are primarily what the CFTC charged Tether with. With the order, the company agrees to stop repeating these and other offences and pay the $41 million penalty.
Bitfinex, on the other hand, is primarily concerned that despite a 2016 settlement with the CFTC, the exchange allowed US residents to trade derivatives on the exchange and supported derivatives trading through P2P loans.
“Even worse than feared. “
For Tether critics, of course, the injunction is a feast. One of them, Benett Tomlin, has taken a close look at the document and explains on his website which findings it merely confirms or repeats, and which it reveals anew.
In the case of Bitfinex, according to Tomlin, it is largely the same allegations as since 2016: the unauthorised offering of derivatives to US Americans. Only a few insights are interesting here, which once again showed that Bitfinex was a “bad actor”: “First, it appears that Bitfinex instructed its employees to ensure that US citizens were not entered in the spreadsheets through which they documented verification requests. Second, it appears Bitfinex actively encouraged its customers to use VPNs, and also let them know that doing so would allow them to evade KYC procedures.”
Both, Tomlin concludes, show that Bitfinex had no intention of complying with the 2016 order. He doubts it will be any different in the future.
What he finds more interesting, of course, is what is in the Tether settlement. After all, Tether is the Moby Dick of all Bitcoin critics and scam hunters. The ruling, Tomlin says, shows that Tether dollars “have been unfunded for significantly longer than we already knew. It seems to have been the exception rather than the norm for Tether to hold the assets they claimed to hold between 2016 and 2018.” The same is true of the commercial papers – Tether had invested in such papers much earlier than was already known, he said. Lying and misleading, he said, was the habitus at Tether.
In addition, there are a few icing on the cake: For example, that Tether also used assets as reserves that the company did not own, but only assumed it would receive. Or that third parties held funds from the reserve without a formal contract existing. This shows that Tether is even worse off than assumed. The same goes for how unprofessionally Tether reconciled reserves with circulating tokens: “Tether did not accurately calculate reserves at all times during the relevant time period,” the document says. Prior to 2018, it said, the company did not have an automated method to match reserves with issued Tether tokens in real time. Instead, Tether used a simple spreadsheet in which employees manually entered information about fiat money in bank accounts and so on.
In other words, the creator of a multi-billion dollar virtual currency used Excel to document its funding.
According to Tether’s critics, the whole thing goes beyond everything that was feared. Admittedly, this is an exaggeration, since the Tether critics had actually assumed zero coverage. It is nevertheless dramatic, and in no way likely to maintain confidence in the stablecoin, and the critics are absolutely right to note that only a fraction of the Tethers in existence today have been scooped up by early 2019. Has the flood of Tether dollars since then exacerbated the problems? If it is so difficult to manage $6-10 billion in reserves, how difficult is it to manage nearly $70 billion?
“No problems in the current operation “
Tether, by its very nature, sees it all very differently. In a terse memo, this time devoid of Tether’s typical brash belligerence, the company says the CFTC found “no problems in Tether’s current operations” (presumably because they didn’t look). “In fact, the order refers to various disclosures about reserves more than 2.5 years ago. As the injunction explains, these issues were fully resolved when the exploitation conditions were updated in February 2019.”
Contrary to what is commonly understood, the CFTC did not find that the tokens were not fully backed, he said. “But simply that the reserves were not fully and at all times in cash in a bank account in Tether’s name”. Tether had at all times held “adequate reserves” and “never failed to honour a withdrawal request.” Tether had agreed to end the proceedings in order to move forward.
So it all depends on how you phrase it.