Regulators have actually waited too long to act on so-called stablecoins, to the point where direct exposure to programs like the one run using Tether has actually infected the entire digital asset industry – and even beyond.
This is through a network of exchanges that surround and depend on Tether and perform a crucial function in Tether’s ability to hit new USDTs and bring them to market, while still keeping a paper-thin impression that the so-called stablecoins are backed by anything. In return, the exchanges can sell the seemingly worthless USDT in exchange for BTC.
That the plan has been so successful that companies like Bitfinex, Binance, and FTX – the biggest beneficiaries of recently created Tether – have in fact had the ability to rejoice in an unprecedented development in the current digital asset boom. These companies have been able to take advantage of this development in all types of extrinsic partnerships. For example, FTX just paid $ 135 million for the identification rights to American Airlines Arena, home of the Miami Heat. Eric Woolworth, President of HEAT Group Corporate Operations, said:
“FTX.us is a young and exciting company in an emerging classification of the money services market that continues to grow at breakneck speed, and we are happy to welcome them with open arms to the Magic City. “
However, if development is supported by unlimited printing of USDT with no real support, then it is only a matter of time before the market realizes that… and the whole masquerade collapses. Miami-Dade was much better off accepting payment from FTX up front.
Tether’s Inner Circle
Keep in mind when Tether released its reserve report page, revealing that 74.85% of Tether’s reserve remained in “money and currency equivalents.” Only 3.87% of that was in cash. Most of it is referred to as what Tether calls “commercial paper” (65.39%), accounting for 49% of the entire reserve – the largest constituent.
Commercial paper is a type of short-term and generally unsecured financial obligation, usually ceded by one entity to another to cover short-term liabilities. Seriously though, there is another classification in Tether’s breakdown that covers secured loans, and these are particularly referred to as non offered to affiliated entities. This implies that the other classifications (including commercial paper) could be with its sister company, Bitfinex.
Tether is a kind of link between many players in the industry, large and small. This is something Tether wants to keep in the dark: in fact, until 2017, Tether and Bitfinex still strongly insisted that there was no relationship between the companies: we now understand that they belong to the same parent company, iFinex.
However, Tether’s inner circle is clear as day if you can see where the fresh-minted USDTs go as soon as they leave Tether. Twitter user LucaLand97 followed the journey of the $ 1 billion Tether Monster to mint in February:
The biggest destination for this specific impression was FTC, an overseas exchange.
What happens to Tether once it lands in the wallets of these select few exchanges? In theory, Tether should only be issued based on the needs of financiers using USDT as cash to present their fiat capital as digital assets without compromising the stability offered by the dollar.
According to a study published in The Journal of Financing in 2020, this is not happening at all. The research study found that when it comes to Bitfinex, more than half of the USDT for Bitcoin exchange at Bitfinex is tied to a big player, which would show that the USDT spreading in the market is not the result of many financiers using Bitfinex to buy USDT for cash:
“After periods of negative returns, Tether switches from Bitfinex to Poloniex and Bittrex, and in exchange, Bitcoin is sent back to Bitfinex… When the net hourly flows of Bitfinex are favorable to Poloniex and Bittrex, the prices of Bitcoin increase over the course of 3 years. next few hours, resulting in predictable high Bitcoin returns. The impact on rates is present after durations of negative returns and periods following the impression of Tether i.e. when there is likely a Tether in the system. “
“This phenomenon strongly recommends that the cost impact be driven by Tether emissions. In addition, the impact on rates is strongly related to trading a single large player and not to other accounts on Poloniex, Bittrex or other Tether exchanges. “
It’s unclear what Tether accepts from these platforms in exchange for the USDT (although in the case of sister company Bitfinex, we can see from the NYAG grievance that the two are sending huge amounts of goods between them without even a doubt). This is the example that would be almost immediately identifiable if Tether actually released a third-party audit, but due to the holes opened in Tether’s account on its stash, one has to wonder if the ‘payout’ for newly created Tether finds out its in Tether’s stash as “industrial paper” and worse yet, as digital assets.
Tether saves money
People hold Tether because they assume it is fully backed up by Tether’s silver reserve (or nowadays currency equivalents), however, if that USDT is used – as the study found. Journal of Finance research – to buy BTC, then the BTC rate has depended – for many years – on how much USDT is struck at any one time offered. For what it deserves, Tether has more trading volume than the next 3 – BTC, ETH, and XRP – combined.
What started as worried speculation has in fact turned into awareness of a looming crisis in digital possession in the industry and in particular the BTC district. If you’re still not convinced by the industry-wide (and beyond) direct exposure to the Tether scam, the files exposed by the NYAG review show that CFO Giancarlo Devasini was worried about this exact thing that needs to be suspended by Bitfinex clients: p>
These chosen exchanges are a crucial pillar of Tether fraud. Tether remains in the cash printing business, but exchanges like Binance and FTX are where USDT becomes real value. Therefore, it remains in Tether’s best interests to save these entities when needed.
As before this month, which saw a digital possession sale that cleaned up 50% of digital asset costs almost overnight. Amid the unfolding chaos, on May 21, The Block announced that FTX unexpectedly found itself in the middle of a fundraising round worth around US $ 1 billion. Regardless of the report backed by 3 anonymous sources, there is no indication as to who is leading the fundraising cycle and details of their function are unclear. It should be explained that Binance, another member of Tether’s inner circle, participated in a strategic collaboration with FTX in 2019, involving a financial equity investment in FTX. As part of the collaboration – and probably the central idea of the agreement – ” FTX will also help develop liquidity offerings and institutional articles in the Binance environment ”.
The very next day, May 22, Tether hit USDT 1 billion.
The answer
The answer to this mess is stablecoin regulation. Tether managed to achieve its current position in the market by camouflaging itself as a stable coin – something Tether himself defined as a coin backed by cash reserves at a rate of 1: 1 – and at a glance on Twitter will inform you that those who acquire Tether do so on this basis. However, in reality, the actual makeup of Tether’s reserves is one to guess. Even taking Tether’s pie charts at face value, we can say that he does not hold more than 4% of his cash reserve.
Tether grassroots attorney Stuart Hoegner appeared to try to excuse this in the affidavit he submitted to the NYAG in their investigation when he compared Tether’s design to the fractional reserve system used by banks. Hoegner no doubt regrets ever having invited the comparison, as the level of regulatory oversight and public disclosure related to banking entities would put an end to Tether’s masquerade.
And yet, without a regulator to mention, Tether’s organization continues largely unattended. Which, quite possibly, is a big reason in December 2020, the US Congress proposed the “STABLE Act”, which would need stable coins to obtain full banking licenses and comply with existing banking regulations. The law would have permanently ruled out any Tether changing property story – if any – the USDT backs.
Sadly, any action – whether from lawmakers or law enforcement – will now come much as late to save markets from digital possession of the Tether Time Bomb, whose explosion radius begins with the Tether’s inner trading circle and now extends beyond the marketplace and into the NBA.
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