As of July 2021, Tether (USDT) is the third token with the largest market capitalization, valued at $64 billion and witnessing the highest trading volumes. But even though it has gained investors' trust so far, the two-year investigation conducted by New York's Attorney General James brought to light the unlawful behaviours of the company, questioning its fate for the future.
Tether is a stable coin, meaning it is a cryptocurrency that doesn't fluctuate in value. In this case, its value is pegged to the U.S. Dollar, implying that one USDT equals one USD. The advantages of such coins are numerous, varying from getting around regulations or selling your investment during crashes. If you invest in cryptocurrencies, the chances are that you might have already used Tether. But even if you didn't, you could be subject to its potential crash, as it holds the position of the backbone of liquidity.
Created in 2014, Tether first appeared as a promising project, holding the claim that "Every Tether is always backed 1-1 by a traditional currency held in its reserve". Tether Limited would mint one USDT in the exchange of $1 and then keep them secured in a bank. Already, however, the suspicions started arising when people began reading through its terms and services. Tether never promised to return any dollar in return for their token, stating they reserved "the right to delay the redemption or withdrawal of Tether tokens" and "the right to redeem Tether Tokens by in-kind redemptions of securities".
In 2017, the terms and conditions on the webpage changed. Interestingly, the statement declaring "Our reserve holdings are published daily and subject to frequent audit" became "The value of our reserves is published daily". The truth is, as of today, there has not been a single audit of the company. They bailed out in the middle of the one they had accepted to do with Friedman LLP "given the excruciatingly detailed procedures Friedman was undertaking".
However, New York's Attorney General James investigated the ties between Tether Limited and the cryptocurrency exchange called Bitfinex. Many groups had already used in the past their position as both cryptocurrency developers and crypto-exchange owners to design infinite money-printing schemes. But Tether's team kept denying the link between the two and claimed their independence from each other.
Unfortunately for them, with the release of the Paradise Papers in November 2017, Tether's name was there, and it became clear that the same people owned Bitfinex and Tether.
Nonetheless, back in 2017, Bitfinex sued Wells Fargo regarding the suspension of their U.S. dollar wire transfers. The lawsuit showed that Tether and Bitfinex did not have any banking tools at the time. Still, Tether appeared to have issued millions of tokens while not being able to receive transfers. In response to the situation, they printed an attestation stating that they have the funds to support the circulation of Tether.
The investigation showed that the company convinced the third party to issue the attestation on a particular date (15th September 2017) for a specific account. The account did not exist before the 15th of September 2017 and received $400 million from Bitfinex on that day, making Tether's reserve appear as in order.
The story does not end there. In 2018, Bitfinex lost around 80% of their customer's funds during an international money laundering case targeting their payment processor provider, Crypto Capital. It can be challenging for companies related to cryptocurrencies to find a bank that's willing to work with them. As a result, Bitfinex established connections with Crypto Capital, a less-looking partner than regular banks. This loss accounts for a giant hole of $850million in Bitfinex's balance, which in most circa would have meant the end for it.
Anyhow, on the 1st of November 2018, Tether issued a new attestation stating that they have a reserve of $1.8 Billion on a bank account at DELTEC, reassuring that each token is backed with a regular dollar. Ironically, the next day, $475million was moved to Bitfinex's account at DELTEC (partial pugging the gap). In other words, the day after reassuring people that each Tether was backed up, it was not anymore the case.
Since 2019, after spending five years claiming that Tether is backed one to one by U.S. Dollars, they slightly changed their commitments. Today, their website displays that "Every Tether token is always 100% backed by our reserves", which now only includes cash at a percentage of 3.87% but also and mostly loans made by Tether to third parties.
In conclusion, Bitfinex and Tether deceived customers and markets by overstating reserves and hiding roughly $850 million in losses around the globe. Moreover, the claim that Tether is backed by one dollar on a one-to-one basis is outdated and misleading. None of this is promising for the future of the project.