Can We Trust USDT After the New York AG Suit of Tether/Bitfinex?
The past week has been very bad for Tether, Bitfinex, and the cryptocurrency markets at large. Though prices have largely recovered from losses incurred at the news that the New York Attorney General (AG) had sued Tether and Bitfinex over misappropriation of funds, we’re still no closer to learning what is to become of Tether. For better or worse, USDT is a major placeholder in 2019 crypto trading. Will it crash? What would happen to the price of Bitcoin if it did?
These myriad unknowns speak to organizations that are opaque, at best. Analysts have long suspected that Tether didn’t have the 1:1 Dollar reserves that it claimed. Reasonable suspicions also suggest that unbacked Tether were, on many occasions, “printed” out of thin air, then used to drive up the price of Bitcoin during the 2017 bull market.
As Tether’s issuer, Bitfinex is at the center of this investigation’s crosshairs, now thankfully in the hands of New York State authorities. This suit alleges that Bitfinex, through shady dealings known and unknown, lost $850 million in user funds. That’s nearly a billion dollars that Bitfinex was not able to give back to users trying to withdraw from their accounts. By the standards of any fintech company, a loss of that magnitude is a big deal.
So, what did Bitfinex do about this? One thing they did not do was inform investors. Instead, the company ostensibly used the Tether reserves as a slush fund to make up the difference. Bitfinex misappropriated $700 million of these funds to make up most of the difference so that it could keep up operations without announcing its losses. Following the suit, Bitfinex must cease and desist all of these activities, with a thorough investigation almost certainly already in progress.
Bitfinex is crying foul, claiming that they are fully cooperative while at the same time completely misunderstood. We tend to find these claims more than a little unconvincing, though, after watching the downright dishonest tendencies that have appeared time and again in Bitfinex’s management of USDT.
So, what does this all mean for Tether? Well, at the very least, Tether is operating at a fractional reserve, just like a bank. This isn’t necessarily a game-breaking feature. Banks use fractional reserves because it’s never necessary, nor remotely practical, to have 100% of user funds onsite at all times. It’s entirely possible (and, in fact, likely) that Tether has been operating like this for years. However, this is a problem because, time and time again, Tether has claimed to have 100% backing for all USDT in circulation.
Nonetheless, at the time of this writing, USDT is holding firm at $1. In the hours that followed the breaking of this news, UDST dropped as low as $0.98. It seemed, for a moment, like the bottom might fall out any second. Then Tether recovered.
It’s entirely possible that Tether will persist at $1, simply because investors agree to buy and sell it for $1. But should we continue to accept Tether? And will the NY AG suit unearth evidence that will sink Tether and/or Bitfinex forever?
It’s our opinion that investors should steer clear of Tether. There are many qualified alternatives to Tether that are fully trustworthy. Why risk holding wealth in a shady cryptocurrency that could collapse at the next news cycle? We can’t claim to know that Tether is doomed, but for our money, alternatives like Gemini Coin, Maker, and Digix are looking like safer harbors in the gathering crypto-storm.
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