Source: tether.to
Stablecoins have been getting a lot of attention recently with the collapse of Terra’s algorithmic stablecoin UST. Stablecoins are digital currencies either backed by assets or by an algorithm which regulate their supply. They supposedly hold stable value and are therefore designed to reduce volatility and to facilitate trading in other digital assets. With a market capitalization of almost $150B today, stablecoins are getting more and more adopted and are under growing scrutiny by the regulators.
This article is part of the miniseries about Stablecoins in which we will present the 4 main stablecoins: Tether, USD Coin, Binance USD, and Multi Collateral Dai.
Tether Ownership
The Alleged Founders
Source: https://commons.wikimedia.org/wiki/
USDt, Tether’s stablecoin, originally known as RealCoin, was launched by Brock Pierce, in September 2014 with the company Tether Limited Inc. Former Disney child actor, he is the chairman of the Bitcoin Foundation. He sold the company to mysterious buyers in 2015 when its market cap was $451,600. Tether was the first stablecoin in the crypto ecosystem.
The Current Management
Diagram of Tether and BitFinex
"Respondents (Tether) and BitFinex shared common ownership, leadership, management, employees and operational resources. For example, the same individuals at Tether and BitFinex serve as Chief Executive Office, Chief Financial Officer, Chief Technology Officer and General Counsel, respectively. They have also shared common business functions including marketing, audit, legal, compliance, finance, tech and support resources", CFTC Enforcement Order, 21st October, 2021.
Jan Ludovicus Van Der Velde
Source: www.linkedin.com
J L van der Velde, a Dutchman living in Hong Kong is CEO at DigFinex Inc., Tether and BitFinex, one of the largest crypto exchanges.
According to an article from the Financial Times, JL van der Velde was in IT sales with businesses in China before becoming the chief executive of one of the biggest cryptocurrency in the world, (See Kadhim Shubber, Ryan McMorrow and Siddharth Venkataramakrishnan, Tether’s CEO: from IT sales to calling the shots in crypto land, FT ( Dec. 17, 2021). His companies were regulars at the Chinese Court of Justice for unpaid bills and late tax payments.
In 2009 he took control of Huashun Electronics. When asked about Huashun, Yang Hebinga, Huashun creditor told the FT: “The company was poorly managed and it could not repay the money”. According to the article, Huashun never paid the money owed to creditors and is still technically owned by JL van Der Velde through an offshore company called PAG Asia.
Giancarlo Devasini
Source: https://www.crunchbase.com/
According to Crunchbase, Giancarlo Devasini, an Italian man, is CFO at DigFinex Inc., Tether and BitFinex. When he was young, he was a plastic surgeon who changed careers and became a salesperson, selling computers and software. He subsequently went on to cryptocurrencies, becoming the CFO of Tether, a major cryptocurrency.
According to the FT, one of G Devasini's businesses faced a claim about an alleged patent infringement.
According to Stefano Vergine, an Italian investigative reporter, Giancarlo's official resume hides interesting parts. He was apparently investigated in 1996 by the Milan Prosecutor's Office and the Italian Finance Police for theft of goods and digital piracy and decided to negotiate a deal. To add a cherry on the cake, Stefano Vergine, in his report, discovered that Gennaro Platone, known for being Europe's king of VAT scams, partnered with G. Devasini and JL van der Velde in almost all of their businesses.
JL van der Velde and G Devasini have known each other and done business together for a very long time. PAG Asia, the offshore company that owns Huashun, is a sister company to PAG Monaco, which is run by G Devasini.
Uncanny connections continue. Before the release of the Paradise Paper in 2017, little was known about Tether owners and senior executives. The release of the Paradise Paper identified JL van Der Velde as CEO, Philip Grzac Potter as CSO (at the time), and Giancarlo Devasini as CFO of Tether Holdings Company, a company registered in BVI and was setup in September 2014, few days before the incorporation of Tether Limited. We could then speculate that Brock Pierce was not the real creator of Tether. As per Tether's diagram above, Tether Holding Company fully owns Tether Limited. The paper also revealed that Tether and BitFinex were owned and operated by the same people.
To this day, only a dozen people are known to work for Tether, a stablecoin worth $65B.
The Stablecoin
USDt
Tether has 5 distinct stablecoins: USDt, Tether Gold XAUt, Euro Tether EURt, Yuan Tether CNHt and Mexican Peso Tether MXNt. In this article we will focus on the US dollar-pegged stablecoin USDt, which is the largest.
Source: unsplash.com
USDt is the largest stablecoin by market capitalization, with a market cap of $65.50B today and with the biggest 24H trading volume of $19.742B compared to $1.755B for USD Coin USDC, the second largest stablecoin. Making Tether the most widely traded and a highly liquid stablecoin.
USDt is built on top of 10 protocols and blockchains including Bitcoin (Omni Layer) and Ethereum.
Tether is allegedly pegged to its Tether Reserves and is supposedly pegged 1 to 1 with a matching fiat currency, US Dollars in the case of USDt. Meaning that for each dollar spent by their clients, they will issue 1 USDt (minus fees).
Source: https://tether.to/en/transparency/#reports
Tether’s Peg
According to its website, Tether backing is highly liquid and safe as it is mainly backed by Cash and Cash Equivalent (82.45%) most of which is in US Treasury Bills (70%) and only 0.09% is held in Commercial Paper (unsecured and risky short term corporate loans).
Tether’s reserves breakdown has been verified and “assured” by an accounting firm via an assurance document. The accounting firm recently used by Tether is DBO Italy, part of DBO Group, which is one of the top accounting firms in the world.
The Issues
Terms & Conditions
The breakdown shows quite a safe approach to the composition of the reserves but Tether's Terms & Conditions inform us that the management can change the composition of the Tether reserves to their good will:
Source: https://tether.to/en/legal
It is clearly stated in Tether’s reserves assurances that Tether Management is responsible for gathering and providing the information which will be assessed by the auditing firm, as stated in the latest report:
Source: September 30, 2022, Assurance Report of Tether Reserves, DBO Italy
Reasonable assurance is not absolute assurance
An audit, an attestation or an assurance doesn't prove that the business is not committing a fraud; an "absolute assurance is not attainable".
Source: https://pcaobus.org/oversight/standards/archived-standards/
It is important to note that an assurance is an opinion, aiming at reassuring investors of the reputation of Tether but is not a full annual audit and therefore Tether does not follow the Generally Accepted Accounting Principles (GAAP), which is the accounting standard accepted by the Security and Exchange Commission.
Scope limitations
An assurance is an attestation at a certain point in time that the corporate data is credible and as mentioned in DBO's report: “Activity prior to and after this time and date was not considered when testing the balances and information described above”.
Misinterpretation of the law
According to Tether's General Counsel's Affidavit addressed to NYAG in April 2019, Tether "operates under a fractional reserve system" like banks do, and therefore its reserves are not 100% liquid.
Source: Stuart Hoegner's Affidavit addressed to NYAG, April 2019
Indeed, banks use fractional reserves but are highly regulated and controlled; the customers are therefore highly protected. In the US, customers funds held in a Federal Deposit Insurance Corporation (FDIC) insured bank can be recovered for up to $250,000 if the bank fails.
More surprisingly, in a Proposal Letter to the OAG in May 2019, Tether explain why it needs to use its own reserves to pay employees, and not a separate account where profits from transaction fees would be held, alternative proposed by the OAG:
Tether Troubled Banking Relationships
2013 - 2017
Prior to 2017, Tether was using Taiwan based banks and used Wells Fargo as a correspondent bank, according to the NYAG Court Order, 24th April, 2019. In March 2017, Wells Fargo stopped dealing with the wire transfers for Tether. Tether then sued the bank but withdrew its lawsuit shortly afterwards. From this point, relationships with banks became unstable and almost inexistent.
2017 - Today
To put things into context there are still few regulations regarding cryptocurrencies and banks are still very fearful to accept crypto exchanges and companies as clients.
NOBLE BANK
Bloomberg confirmed that Tether started using Noble Bank from September 2017 until 2018, a Puerto Rico based entity co-founded by Brock Pierce, one of the allegedly founder of Tether, yes you've read it correctly. Noble Bank was incorporated in Puerto Rico in 2013, just before the launch of RealCoin or Tether.
CRYPTO CAPITAL
Crypto Capital Corpis is Tether's and BitFinex's shadow bank owned by Reginald Fowler, an ex-NFL owner. R Fowler had setup a network of shadow banks that crypto exchanges were able to use. In the past he created shell companies like Global Trading solutions LLC, in order for Tether to move funds. In April 2019, he was indicted in the US for bank fraud.
In November 2018, Bitfinex received $625 million from Tether's Deltec bank account. A sum that BitFinex will then transfer back to Tether, however this time through the shadow bank Crypto Capital. In his Affidavit, Stuart Hoegner, Tether and BitFinex's General Counsel recognizes that Tether and BitFinex's "funds held with Crypto Capital had been the subject of a partial governmental seizure", a fact known by Tether and BitFinex since August 2018, welln before the intra-companies funds transfers.
As Matt Levine, Bloomberg columnist covering finance, puts it:
Source @matt_levine
DELTEC BANK
Since 2018, Tether's banking partner is Deltec Bank & Trust, a bank registered in the Bahamas. After a brief online research, we found a very recent US lawsuit against Deltec Bank for fraud.
During an investigation by the NYAG, Tether mentioned the problem of "unregulated or offshore companies that deal in virtual currencies" to get bank accounts in the US. Hence the involvement with shady institutions and the use of friends and employees to transfer funds.
Tether lawsuits
Source: unsplash.com
CFTC Investigation
In October 15, 2021, after years of investigation, the Commodity Futures Trade Commission (CFTC) and Tether settled and Tether was fined $41M.
Here are the CFTC findings:
Tether’ Untrue or Misleading Statements and Omissions: USDt Would Be Fully Backed by US Dollars Held In the Tether Bank Accounts. “The order also finds that, instead of holding all USDt token reserves in U.S. dollars as represented, Tether relied upon unregulated entities and certain third-parties to hold funds comprising the reserves; commingled reserve funds with BitFinex’s operational and customer funds; and held reserves in non-fiat financial products.”
The Tether Reserves: USDt Was Not At All Times Fully Backed by U.S. Dollars Held In the Tether Bank Accounts. According to the report, the Tether Reserves were “fully-backed” by fiat currency reserves held in the Tether Bank Accounts only 27.6% of the time.
The Tether Reserves Were Not Audited. “According to the order, Tether retained an accounting firm to perform a review of Tether reserves on a date Tether selected in advance, and BitFinex transferred over $382 million to Tether’s bank account in advance of that review.” In the morning of the review, Tether opened an account at Noble Bank, a bank co-founded by Brock Pierce, one of the alleged founders of Tether, in order for BitFinex to transfer the funds from BitFinex's Noble Bank account to Tether newly opened Noble Bank account.
and https://amycastor.com/tag/ifinex/
Tether Failed to Employ an Automated Process to Track Reserves. Tether apparently used Excel Spreadsheets to record customers transactions and to track reserves.
2018 - New York Attorney General (NYAG) Investigative Subpoena
In 2018 Tether is hit with another lawsuit, this times by the NY Attorney General Letitia James for violation of the Martin Act. The New York's Martin Act "prohibits fraud or misrepresentation in the public offer, sale and purchase of securities and commodities" states law firm Jones Day; it basically protects customers.
Tether settled in February 2021 with the state of NY for a $18.5 million fine but was barred from doing business in New York, as part of the agreement. As part of the settlement, Tether was required to provide transparency report quarterly.
"an investigation by the Office of the Attorney General (OAG) found that iFinex Inc. — the operator of BitFinex — and Tether made false statements about the backing of the “tether” stablecoin, and about the movement of hundreds of millions of dollars between the two companies to cover up the truth about massive losses by BitFinex." Source AG NY Press Release, February 23rd, 2021
“BitFinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” said Attorney General James in a Press Release. “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie."
In 2022, a judge for the Southern District of New York, as part of a continuing lawsuit, ordered Tether to provide financial statements in order to assess the backing of their stablecoins including bank statements. If Tether would provide those documents, it could bring more confidence and improve their credibility.
According to their auditing firm, Tether is currently a defendant in three legal cases.
Tether’s Operations Improvement
Tether and BitFinex CTO, Paolo Ardoino, proudly tweeted in June 2022 that Tether had been able to process $16B in redemption, approximately 19% of their reserve.
Source: @paoloardoino
Since May 2019, on requirement by the NYAG, Tether segregates its operational and reserve funds and the firm now proceeds to quarterly snapshot reports “assured” by renown DBO Italia auditing firm.
Regulations
The CFTC findings show that much tougher regulations are needed in the crypto space and for stablecoins in particular. Their stable natures makes consumers feel comfortable holding them and therefore can be risky if not regulated properly.
The Senate Banking Committee
In a letter sent to stablecoin issuers and exchanges on November 23rd, 2021, the Chair of the Senate Banking Committee, Sherrod Brown, asked Tether questions on how they protect consumers.
Source: United States Senate Committee on Banking, Housing and Urban Affairs, 27.11.2021
In September 2022, Gary Gensler, the SEC Chairman, asked the US Congress to give the CFTC more power in order to regulate stablecoin issuers. The Financial Stability Oversight Council also recommended Congress to pass new legislations regarding stablecoins. According to Gary Gensler, most of the cryptocurrencies are securities and therefore under the SEC umbrella while the stablecoins should be considered as commodity and therefore should be covered by the CFTC.
Conclusion
The findings are very consistent; recurring terms include: fraud, fines, lies, deceit, lawsuits. Tether to this day has issued over 73 billion Tether token and the company has proven liquid until now. But what about the next Black Swan event? The FTX saga has just reminded us that nobody is too big to fail.
If it looks like a duck, swims like a duck, and quacks like a duck, then it's probably a duck.
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.