Is the Stablecoin Tether (USDT) really covered by enough reserves? This question has been hanging like a sword of Damocles over the crypto space for a long time. But this could soon be finally clear.
Not only the central banks let the money printing machines run at full speed in 2020. Tether Limited, publisher of the stablecoin Tether, also created more USDT tokens than ever before. Stablecoin critics question whether every USDT is really covered 1: 1 by the reserve of Tether Limited. But soon, there could be final clarity about Tether’s financial position: On January 15, Tether and iFinex, operator of the Bitcoin exchange Bitfinex, had to give the New York Public Prosecutor’s Office (Office of the Attorney General, OAG) access to their books. Both companies are subsidiaries of DigFinex Inc. There is also overlap on the executive floor.
The OAG, then headed by Barbara Underwood, has had Bitfinex and Tether in its sights since 2018. At the center of the investigation is the allegation that the sister companies are said to have committed a criminal offense under Article 23-A of the New York Trade Act. The article concerns “Fraudulent Practices Relating to Stocks, Bonds and Other Securities.”
Since January 1, 2019, Underwood’s successor Letitia James has been concerned with the Bitfinex / Tether case. In late April 2019, she filed a public lawsuit against iFinex with the New York Supreme Court. The allegation: Bitfinex is said to have secretly borrowed over $ 850 million from Tether in 2018 to cover up a liquidity shortage. Numerous Bitfinex customers complained about problems with withdrawing funds. That, in turn, had fueled rumors of a bankruptcy on the Bitcoin exchange.
In a press release on April 24, 2019, the OAG stated:
Our investigation has shown that the operators of the “Bitfinex” trading platform, who also control the virtual currency “Tether,” have entered into a cover-up for the apparent loss of $ 850 million in mixed customer and company funds to hide
Associated with this was a request to Bitfinex and Tether to send all relevant documents, including those relating to financial flows between the companies, to the OAG. In addition, the OAG issued an injunction that prohibited Bitfinex and Tether from further transactions with each other until further notice. The OAG relies on paragraphs 352–353 (“Martin Act”) in Article 23-A. These give the public prosecutor considerable leeway in the investigation. This includes, among other things, the authority to request all information from the suspect that is required to clarify an allegation.
The replica from iFinex followed a month later. The New York Public Prosecutor, so the arguments of iFinex, exceeded their competence because the companies did not operate in New York. AG James should therefore stop their investigation.
Bitfinex’s request was dismissed by the New York Supreme Court in August 2019. Among other things, on the grounds that New Yorkers were also among the customers of the Bitcoin exchange Bitfinex. In this way they could buy Tether for US dollars, which was no longer possible via the Tether homepage at that time.
Nevertheless, in the following months the suspects were able to repeatedly extend the deadline for surrendering the documents — originally this was supposed to take place within one month. Tether and Bitfinex lawyers argued that the OAG’s request was too extensive and insisted on limiting the amount of documents they should provide to the OAG. In December 2020, the parties finally agreed on January 15 as the deadline for submitting the documents as well as for the temporary injunction, which prohibits Bitfinex from using the tether reserve.
With a market capitalization of over $ 24 billion, Tether (USDT) is by far the most important stablecoin in the crypto market. This is linked to the fact that the USDT / BTC trading pair is responsible for the largest trading volume. Should the doubts about the coverage of Tether be confirmed by the investigations of the OAG, this could lead to enormous market distortions. In this case, the 1: 1 peg to the US dollar would collapse.
However, it can be doubted whether this would really lead to a permanent withdrawal of investors from the crypto space. There have been numerous regulated alternatives to the offshore stablecoin for a long time, such as the USD Coin (USDC) from Circle and Coinbase. And if you don’t feel like buying stablecoins from a company after the Tether debacle, you still have the option of using decentralized alternatives such as DAI. The chances are good that Bitcoin and Co. would survive a general tether ban on US crypto exchanges. Nevertheless, crypto investors should prepare for turbulent times in the short to medium term.