Consumers who invest in cryptoassets “should be prepared to lose all their money,” the U.K’s Financial Conduct Authority warned cryptocurrency investors on Monday. That message came amid an 11 percent decline in the price of Bitcoin, the industry’s premier asset, whose value had tripled in the last three months. But it’s a warning that might also apply to holders of a cryptocurrency that’s supposed to be one of the pillars of this innovative financial system.
Tether, the third-most widely held coin by value (Ethereum is second), is unique among its peers. In a market built largely on speculation, Tether is a stablecoin, pegged to the dollar at a 1-to-1 ratio. Tethers help provide liquidity and offer a widely recognized token that can facilitate transactions between various cryptocurrencies. In the world of crypto markets, they essentially act as a digital dollar, and they’re everywhere. On some days, Tether’s trading volume exceeds that of Bitcoin.
But the question that hounds Tether—and is the subject of an investigation by the New York attorney general’s office—is whether its most attractive quality is really just to artificially inflate the value of Bitcoin. In other words, is Tether actually a tool for cryptocurrency insiders to get rich on the market’s hottest—and highly manipulable—commodity?
Tether, which was founded under the brand name Realcoin in 2014, isn’t decentralized like Bitcoin or many other cryptocurrencies: One company owns, mints, and manages the Tether supply, which means it’s also not transparent. And Tether isn’t scarce; unlike currencies that are “mined,” its production isn’t bound by math and code that titrate the supply. Tether Limited, the company behind the eponymous coin, can mint as many coins as it wants. From there, it can use its own currency—and its relationship with Bitfinex, a cryptocurrency exchange also managed by Tether Limited’s executives—to buy other cryptocurrencies, conduct unregulated trading, and even potentially launder money.
While Tether claims that it mints new coins in response to need—for example, I give Tether $100,000, and it, in return, gives me 100,000 USDT, as Tethers are called—its most pointed critics argue otherwise. High-powered lawyers, jaundiced traders, rogue economists, industry whistleblowers, crypto gadflies, and several U.S. law enforcement agencies claim that Tether is part of an elaborate scam that essentially boils down to using the company’s in-house currency to buy Bitcoin, which has the intended side effect of juicing the price of Bitcoin, and to otherwise manipulate cryptocurrency markets. As a document from one lawsuit warns, “control of an exchange and the opportunity to trade with non-existent money can allow a single individual or entity to dramatically influence cryptocommodity prices.”
If you believe New York Attorney General Letitia James’s court filings, there’s a great deal of support for the accusations, and we may soon find out more. Bitfinex and Tether face a January 15 deadline to transfer millions of pages of documents to James’s office. Tether is also facing a major class-action lawsuit accusing it of contributing to “the largest bubble in human history”: In 2017, Tether printed a flurry of its currency in patterns that appeared to be linked to rises in Bitcoin, as an influential scholarly paper later found. The bubble popped, with Bitcoin losing 45 percent of its value across five days in December 2017. Billions of dollars of value disappeared almost overnight, with the decline continuing through 2018.
Tether’s importance, and its value to the overall crypto economy, has vastly increased since then, when only a few billion Tethers were in circulation. Now there are more than 24 billion Tethers out there. In the first week of January, Tether printed more than 2 billion USDT. (It’s worth noting that it’s exceedingly hard to redeem USDT from Tether Limited for U.S. dollars; Tether requires a $100,000 minimum per transaction, along with a 0.1 percent fee.)
The manic production of Tethers has become a joke online. Posts from accounts that monitor large cryptocurrency transactions, such as @glassnodealerts and @whale_alert, attract sardonic replies from people accusing the company of running a Ponzi scheme and rocket ship emojis from traders who want to see the company pump the Bitcoin market even more. A popular meme shows a photo of a speeding armored truck bedecked in the Tether logo, its doors flung open, money flying into the air.
The jokes about manipulating the market and Tether’s seeming print-at-will attitude have gotten so loud that Paolo Ardoino, the CTO of Bitfinex and Tether, will respond to a @whale_alert message to explain why, for instance, Tether is printing $400 million worth of its currency at 8 a.m. on a Saturday.
Whatever the investigation in New York turns up, Tether’s short history is already replete with strange criminal characters, unsolved hacks, sudden switches between overseas banks, and huge, unexplained losses. There’s likely more to come.
As a connective tool for the larger crypto economy, the potential of Tether was clear. The class-action lawsuit puts it simply: “Tether’s promises were the foundation of USDT’s value. If Tether were telling the truth, a USDT would combine the best aspects of fiat currency and crypto-assets: It would be stable and safe like the U.S. dollar but also, like other crypto-assets, easily transferable across different crypto-exchanges, and free from many government regulations.”
That perception of stability was always a myth. In 2016, someone hacked into Bitfinex and stole 120,000 Bitcoins, which resulted in Bitfinex cutting more than a third of the value off each customer’s account—although, reportedly, not for a favored few.
Tether had long claimed that for every USDT it put into circulation, it would have one U.S. dollar in the bank. But after years of evasions and refusals to release a complete audit of its finances, a Tether lawyer finally admitted, in a 2019 court filing, that Tether was only 74 percent backed—a number that seemed to include cash, securities, Bitcoin, and other money owed to Tether. Tether’s continued refusal to fully audit itself, combined with its feverish printing of new coins, has led many critics to question even this 74 percent number.
Then, last August, John M. Griffin and Amin Shams, two academics who study cryptocurrencies, published the final version of a paper that had been attracting great attention in the cryptocurrency world since it was published in an earlier form in June 2018. Their 119-page study, “Is Bitcoin Really Un-Tethered?” analyzed flows of Tether and Bitcoin, finding that half the movement in Bitcoin prices during part of the 2017 bubble were driven by “one entity.” As the academics stated, “we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices.”
Griffin and Sham’s analysis also suggested that Tether wasn’t sufficiently backed and that the company might be printing coins and moving assets around to cover holes in its balance sheet. “Tether claimed our paper was incorrect,” said Griffin in a phone call. “But we appreciate the fact that due to the work of the New York AG, the lawyer on record admitted their currency was unbacked. Tether has confirmed the main finding of our paper.” (Paolo Ardoino did not respond when contacted for comment via Twitter, but Tether general counsel Stuart Hoegner issued a statement to TNR calling the study “roundly discredited.” He claimed that “there is no causal relationship between the issuance of Tethers and market movements up or down” and that “Tether is always 100% backed by Tether reserves, which include traditional currency and cash equivalents.”)*
The trouble with Tether is not just one fly-by-night company with opaque financial dealings. Bitfinex and Tether’s web of relationships extends throughout the cryptocurrency world, encompassing numerous exchanges, wealthy traders, and unaccountable executives living in the margins between legal jurisdictions. Even Bitfinex has portrayed itself as a victim of yet another concern, a Panamanian “shadow bank” called Crypto Capital that handled money for major crypto exchanges—until some of its backers, including former NFL owner Reginald Fowler, were arrested on embezzlement charges. Bitfinex maintains that Crypto Capital made off with $850 million of its money but that the two companies never even had a written contract. (The New York Attorney General has alleged that Bitfinex used Tether funds to cover up the shortfall.)
If Tether’s critics are right and this is a rehash of the 2017 bubble—but bigger—how long can the company keep pumping the Bitcoin market while multiple investigations bear down on it? And if the price of Bitcoin can be manipulated—by a company that simply prints digital money (not unlike the Federal Reserve’s practice of quantitative easing, a policy despised by Bitcoiners)—doesn’t that undercut one of the core selling points of Bitcoin?
“If you believe the asset is riskless for long enough, it will find itself in the infinite variety of structures which need a riskless asset,” wrote Patrick McKenzie, a Silicon Valley engineer, in an analysis of Tether. “And when those structures suddenly have a hole where their riskless asset should be, calamity quickly follows.”
The danger for the crypto market is that that hole might soon appear. The Treasury Department has signaled interest in further regulating stablecoins. (Tether has been used for money-laundering and in attempts to bribe Department of Justice officials.) The class-action lawsuit’s discovery process may force Tether to reveal more about its internal operations and decision-making, along with its murky banking relationships. At its most devastating, this array of investigations and legal and regulatory threats could bring down Bitfinex and Tether entirely and cause billions of dollars of investor losses.
Should Tether collapse, via government crackdown or a run on the Tether bank, the prices of Bitcoin—which, as of this writing, has a market capitalization of more than $639 billion—and other cryptocurrencies may plummet. Tens of billions of dollars in investments will disappear—from institutional investors who can take the hit, yes, but also from thousands of everyday people who decided to follow the crypto boom and put their assets into Bitcoin. Cryptocurrencies have a certain unreality to them, but the damage would be widespread and very real.
* This article has been updated.