Tether (USDT), the world’s largest stablecoin by market capitalization, has been at the center of controversy and speculation for years. Allegations against Tether range from mismanagement of funds to outright fraud, painting a picture of a company that operates in the shadows, without the transparency expected of a financial entity managing billions of dollars in assets.
According to Justin Bons, Founder & CIO of CyberCapital and a long-time cryptocurrency researcher, Tether is allegedly a $118 billion scam, potentially bigger than infamous financial frauds like FTX and Bernie Madoff combined. But why does he say that, you might ask.
The Allegations About Transparency & Accountability
Tether claims that each USDT token is backed 1:1 by equivalent fiat reserves, making it a stable digital proxy for the US dollar. However, according to Bons, Tether has consistently failed to provide conclusive proof of these reserves. Despite repeated promises to undergo a full audit since 2015, Tether has never delivered on this commitment. Instead, it has released limited attestations that fall short of a formal audit, raising serious questions about the validity of its claims.
1. No Proof of Reserves or Formal Audit
The core of the allegations against Tether is the absence of a comprehensive, third-party audit of its reserves. Although Tether has released periodic “accountant’s reports” with the help of BDO, these are not equivalent to a full audit. Without an independent and unrestricted audit, stakeholders must take Tether at its word that it holds the necessary collateral to back $118 billion worth of USDT tokens in circulation. This lack of verification is troubling, as it leaves the entire market reliant on the integrity of Tether’s claims without any external validation.
2. The CFTC Fine and Misleading Statements
In 2021, Tether was fined $41 million by the Commodity Futures Trading Commission (CFTC) for making untrue and misleading statements about its reserves. The CFTC’s investigation revealed that Tether had misrepresented the backing of its stablecoins, further fueling concerns about the company’s trustworthiness. Tether’s assurances of fully backed reserves were found to be misleading, as the actual collateral included commercial paper of unknown quality and liquidity—far from the stable cash or cash equivalents that investors were led to believe.
3. Firing Auditors for Being Too Thorough?
In an interesting episode, Tether terminated its relationship with Friedman LLP, the first auditing firm it engaged, allegedly because the auditors were conducting “excruciatingly detailed procedures.” This alleged decision could suggest an aversion to scrutiny and potentially raise red flags about Tether’s willingness to submit to rigorous, unbiased evaluation. It alleges that if Tether were fully transparent and confident in its reserves, a thorough audit would be seen as a positive step rather than a threat.
Governance Concerns and Potential Conflicts of Interest
The governance structure of Tether is another area of concern. Recent disclosures indicate that Tether Holdings is controlled by a board of only two members, Giancarlo Devasini and Ludovicus van der Velde, giving these individuals significant control over the company’s operations and reserves. This concentrated control raises questions about accountability and the risk of mismanagement. With such a small governance structure, the potential for conflicts of interest and abuse of power is magnified, especially in the absence of segregated reserves and external oversight.
Tether’s Troubling Connections to Bitfinex and Crypto Capital
Tether’s close ties with Bitfinex, a major cryptocurrency exchange, further complicate the narrative. Both companies share management and have been involved in several controversial dealings, including a significant incident involving Crypto Capital, a Panama-based bank with links to organized crime. Crypto Capital’s president was arrested for money laundering, and the bank’s assets were frozen, leading to a loss of $850 million for Bitfinex. Conveniently, Tether had $475 million USDT available to cover Bitfinex’s shortfall, raising suspicions about the use of Tether’s reserves for purposes other than collateral backing.
Market Manipulation
A 2019 academic paper by John M. Griffin and Amin Shams suggested that Tether was used to manipulate Bitcoin prices during the 2017 bull run. The study found patterns consistent with the hypothesis that unbacked Tether tokens were issued to inflate demand artificially, driving up Bitcoin prices. Such manipulation not only distorts market dynamics but also undermines the credibility of the entire cryptocurrency market.
The Risk of Collapse
If Tether were to collapse, the consequences could be catastrophic for the broader cryptocurrency market. As the third-largest cryptocurrency by market capitalization and a primary source of liquidity in the crypto ecosystem, Tether’s failure would likely trigger a severe liquidity crisis. A “bank run” on Tether, where users rush to redeem their USDT for fiat, could reveal that Tether does not have sufficient reserves, leading to a potential devaluation of the stablecoin and widespread financial contagion.
The parallels to the collapse of Terra Luna are striking. Terra’s algorithmic stablecoin lost its peg to the dollar, leading to a market-wide crash that wiped out billions in value. Bons warns that Tether could be heading down a similar path, with far greater implications given its size and interconnectedness within the crypto industry.
Reducing Dependence on USDT
Given the mounting evidence and historical missteps, Bons advocates for a shift away from USDT to more transparent and reputable stablecoins. The presence of alternatives like USDC, which undergoes regular attestations and maintains a higher standard of transparency, offers a safer choice for users and institutions alike. Transitioning to such alternatives could mitigate the risks posed by Tether’s potential collapse.
A Call for Greater Scrutiny and Accountability
The allegations against Tether are severe but not yet proven. As the blockchain industry continues to mature, the importance of transparency, robust governance, and independent verification cannot be overstated. The lessons learned from past financial scandals, whether in traditional finance or crypto, underscore the dangers of unchecked power and the critical need for stringent regulatory standards.
Author Profile
- Lucy Walker covers finance, health and beauty since 2014. She has been writing for various online publications.
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