The Heartbeat of Cardano.

The Obscurantism of Tether

Photo by Kelly Sikkema on Unsplash

The stablecoin with the highest daily crypto transaction volume has a shady origin story.

Investors can use Tether (USD₮) to buy cryptocurrencies, without having to withdraw their money in fiat dollars. This eliminates many unnecessary exchange fees and any issues with taxes, and has been one of the main driving forces behind the volume of money flowing into the cryptocurrency market.

Tether is traded as a stablecoin, which means its value is pegged to the price of an underlying asset at all times.

Stablecoins can be pegged to any asset, and are useful because they avoid volatility, presenting themselves as a unit of measure for gains in crypto trading with high volatility, tokenizing the underlying currency, and more easily circumventing regulations.

USD₮ is a token accepted on various exchanges such as Bitfinex, Binance, Huobi Global, Kraken, Coinbase, Kukoin, Poloniex, among others, but also built on different blockchains, including Algorand, Bitcoin Cash’s Simple Ledger Protocol (SLP), Ethereum, EOS, Liquid Network, Omni, Tron and Solana, which act as transport protocols, consisting of open source software that interacts with blockchains to enable the issuance and redemption of Tether tokens. 

Tether is pegged to the US dollar, 1 US dollar = 1 Tether

Tether has Euro and Yuan-pegged stablecoins, its USD-pegged stablecoin USDT remains more popular, and now Tether has launched a new Mexican peso-pegged stablecoin.

Even if you have no funds in Tether, or if you have never used it, you are still exposed to the consequences of a Tether implosion. This is because it is literally the central nervous system of liquidity in the crypto markets. It is the largest broker by trading volume, even when compared to Bitcoin. At the time of writing, Tether’s 24-hour trading volume is USD 38M+ doubling Bitcoin’s volume. 

If this asset were to “unpeg” or disappear, the entire crypto market would fall apart in an instant. In fact, two events occurred in 2017, on February 1, it lost parity 15% below the dollar, and then, overvalued by 21% on May 26, but the dominance of USD₮ at that time was less, and also the market was much smaller than today.

The Shadowy History of Tether

The shady creation of Tether begins with its founding team, who first created the Bitfinex exchange, and later created the USD₮ stablecoin. Bitfinex handles a daily volume of USD 270 million, as of May 2022, and Binance, the largest crypto exchange, nearly USD 13 billion, according to CoinMarketCap.

The Founding of Bitfinex

Launched in beta testing in October 2012, Bitfinex got off to a rocky start. The exchange started as a derivative of exchange code Bitcoinica. At the time, Bitcoin developer Amir Taaki, a contributor to Dark Wallet and Open Bazaar, leaked Bitcoinica’s source code, after being hired as a security consultant, causing thousands of bitcoins to be lost to the theft of funds from the MtGox exchange , since the source code contained the Bitcoinica-Mt, MtGox API key.

Bitfinex, owned and operated by iFinex Inc., registered in the British Virgin Islands, (US- Commodity Futures Trading Commission) was founded in May 2013 by Raphael Nicolle, their former CTO, who was a help desk technician before founding Bitfinex, spending most of his time exploring BitcoinTalk, a popular forum for bitcoiners.

Before founding Bitfinex, Raphael lost a large portion of his Bitcoin holdings in the Trendon Shavers Ponzi scheme that was brought down by the Department of Justice. After this, he tried to start his own “high-yield loan program” at 2% a week. After receiving little to no interest in this program, which obviously looked like a Ponzi scheme, he decided to start Bitfinex.

Then Giancarlo Devasini, now CFO of Bitfinex and Tether, quickly joined Bitfinex. In 1996, Devasini was arrested for selling pirated Microsoft software and ordered to pay USD 65,000 in fines.

The next to join Bitfinex was Phil G Potter , now a former CSO of Tether and Bitfinex, who was fired from Morgan Stanley after giving a journalistic interview without respecting the company’s Code of Conduct. 

There are other scandals and money laundering news dotting Bitfinex.

The founding of Tether

In 2014, Brock Pierce, Craig Sellars, and Reeve Collins developed a stablecoin project, called Real Coin. At some point during the summer, the property was purchased by Bitfinex executives. On September 5, 2014, Phil Potter, Bitfinex’s Chief Strategy Officer at the time, and Giancarlo Devasini, founded Tether Holdings Limited. Shortly after, the first Tethers were printed on October 6, 2014. 

Bitcoin/OmniTransaction ID: ce36efda15bc6cf99ba6a010e71b47b00a5ea2071a392839effe7ed392cf690f

Both companies then shared the same executive team, a fact that was actively covered up by all members. Then Paolo Ardoino joined the Tether / Bitfinex team in 2015. He was Senior full-stack developer for FrameAM internal Financial platform.

Later joined by now General Counsel: Stuart Hoegner, who was chief compliance officer for the parent company of UltimateBet , an online poker company rocked by a gambling cheating scandal. Hoegner left the company shortly after this was exposed.

Its small team of founders, with 37 employees, has the largest ownership-to-employee ratio of any company in the world, with ~ USD 2 billion in assets per employee.

All this was initially exposed by the anonymous researcher, Bitfinex’ed, who revealed in an interview with Coffeezilla that he initially noticed something was wrong in March 2017, during a lawsuit between Tether and Wells Fargo. You can see his complaints on his YouTube channel.

You can see the current management team.

The Centralization of Tether on Bitfinex 

Bitfinex is a cryptocurrency exchange just like Binance or Coinbase, and was the main exchange that used Tether, before it became hugely popular in the market.

In May 2015, Bitfinex was hacked. Their hot wallet with 1,500 Bitcoins was depleted, however, they were able to cover it with corporate funds. The broader ecosystem still believed strongly in Bitfinex’s positioning, and this attack does not appear to have affected it negatively.

However, things got significantly more complicated in June 2016 when Bitfinex settled with the Commodities and Futures Trading Commission and paid a USD 75,000 fine for “offering illegal, retail, financed off-market transactions in bitcoin and other cryptocurrencies.” 

Part of the core problem, in this case, is that the Bitcoins in the futures were not “physically delivered”, and to solve this problem, Bitfinex sought out the services of BitGo, securing their platform with this multi-signature wallet provider, which provided them with It would allow the segregation of the balance of each user to “physically deliver” the Bitcoins.

Shortly after this new infrastructure implementation, Bitfinex was hacked again. In August 2016, 119,756 Bitcoins were stolen from the Bitfinex wallet, in what remains one of the largest hacks in history. In response, Bitfinex applied a 30.67% haircut to all of its clients, receiving a BFX token. Those who received BFX tokens had two potential options, wait for Bitfinex to pay them out or convert them into Bitfinex shares. Many seem to have chosen to convert them into stocks and thus became enthusiastic supporters of Bitfinex. The rest cashed in their tokens in March 2017.

New details emerge about Bitfinex’s history amid hacking probe 

In the 2017 Paradise Papers leak it was revealed that Tether and Bitfinex were not only working together, but were in fact owned by the same people, namely Phil Potter and Giancarlo Devasini.

Because this “stablecoin” is controlled by the same company that runs a massive crypto exchange, it essentially means centralization, without any scrutiny or intervention from a third party.

Bitfinex had problems with its financial model. They were getting too big to remain without financial services, and they desperately needed a real institution to operate with. They decide to carry out banking operations with Crypto Capital , an offshore Panamanian “bank” that dealt exclusively in cryptocurrencies, and turned out to have many ties to some of the biggest players in the world of organized crime, the international drug cartels.

In March 2019, Tether and Bitfinex would enter into an extraordinary agreement in which Tether would extend a revolving credit facility to Bitfinex of up to USD 900 million at 6.5%. The loan was secured with shares of iFinex Inc. and was signed by the same people for both companies.

Finally, in April 2019, when the New York Attorney General learned about this strange loan agreement, he requested an order against Bitfinex and Tether to prevent these types of transactions. 

Subsequently, in another irregular situation, after 2 years of investigation, the New York State Attorney General, determined on February 23, 2021, that Bitfinex and Tether misled customers and the market, by overvaluing reserves, hiding approximately USD 850 million in worldwide trading losses, stating: “Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” said Attorney General Letitia James

As a settlement they were fined USD 18.5 million and barred from practicing in New York. 

As Protos reported in August, 2021, market makers Alameda Research (spearheaded by crypto billionaire Sam Bankman-Fried) and Cumberland Global (a subsidiary of trading giant DRW) are still the biggest fish in Tether markets. Tether Papers: This is exactly who acquired 70% of all USDT ever issued

Diffuse Transparency

Tether has remained completely murky about how they peg the value of their purported stablecoin to their main asset, the US dollar. For Tether to work, they need a 1:1 ratio of Tether to dollars at all times. If new Tethers were minted without the exact same number of real dollars in their reserves, and there was low demand, they would instantly destroy the “stability” of their currency.

Historically, they have always claimed that Tether is backed 1:1 by real dollars, but have recently muddied the waters on this position by adding a host of new assets that they claim keep the coin backed by dollars. 

Looking at this pie chart, we can see that Tether is far from holding 1:1 in real dollars. Of the 75% portion of the pie chart labeled “Cash and Cash Equivalents…”, only 3.87% are actual dollars, which equates to a total of ~3% actual cash.

Tether’s legitimacy lies in its reserves. The company stated that until 2018 its reserves were subject to frequent professional audits. This is unverifiable, as not a single independent audit of Tethers reserves had been published until 2020, which was conducted by an internationally unrecognized agency, Moore Cayman, located in the Cayman Islands, 10 Market Street, Suite 6 Camana Bay, PO Box 30900 Grand Cayman KY1-1204.

The last Audit publication corresponds to the Consolidated Reserves Report as of September 30, 2021, of Tether Holdings Limited, by Moore Cayman.

The report of this latest audit on their Reserves is somewhat better, according to what they detail, raising to 5.81% the cash, which is equivalent to ~5% of the actual total funds. Of course, they remain illiquid.

During a  Twitter Spaces event on May 12, 2022, discussing stablecoins and recent cryptocurrency volatility, Tether CTO Paolo Ardoino said they had halved the amount of commercial paper backing their stablecoins. 

Tether will have audits coming soon (?)

Audits are necessary to build trust in those who invest in something, be it a particular company or product. 

Although Tether Inc. had not published audits since its inception until 2020, it has announced that it will do so regularly. Recently, Stuart Hoegner, the company’s general counsel, said in an interview with CNBC that an audit “is in the works” and will come in “months, not years.” 

Final Words

The popularity of USD₮ as an intermediary currency, between fiat money and cryptocurrencies, makes more sense in trading, not so much for “Hodl” (holding), since, whether you buy with fiat money via p2p or through an exchange, as if you collect your income in cryptocurrencies, it makes no sense to use Tether, unless you consider saving in USD₮ to maintain an “intended” parity with the US dollar.

It is not difficult to conclude that there are too many facts that show the obscurity of the Tether stablecoin, and now you know it. 

The collapse of USD₮, that is, the loss of parity with the dollar which is its main function, could cause a huge network effect, since in addition to being the main trading instrument in the crypto market, it has its protocol running on different blockchains, as I explained at the beginning.

Currently, Cardano on its Milkomeda sidechain supports USD₮ as a wrapped token through two bridges, Celer and Nomad, with WingRiders being the first DEX to use USD₮, bringing it to the Cardano ecosystem. Could a Tether crash directly impact Cardano due to this interoperability? You can read this topic in my article: Blockchain Interoperability: Lights and Shadows — Part 2.

In my article: The Crypto-Time Bomb you can read about the trading scheme that uses USD₮ in the crypto industry.

I hope this article will help you understand the crypto ecosystem even more, in which there are large utility projects, but bankers and charlatans will always appear to create their spurious businesses, showering the entire crypto industry with doubts, giving regulators an argument to impose more rules, undermining free trade on the blockchain. 

Always DYOR (Do Your Own Research).

Bonus: Richard Yan of The Blockchain Debate had a discussion ‘s Larry Cermak The Blockand Bennett Tomlin, a data scientist and fraud analyst blogger, on the origin story of Tether, providing unique insight and condemnation of its founding members.

Sources: Bitfinex’ed and Bennett Tomlin.

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