Byte Me: BitFinex and Tether in hot water
Bitfinex, the often and rightly criticised cryptocurrency exchange, is in a standoff with the New York Attorney General’s office (NYAG), which has accused it of a $850m fraud.
Bitfinex has long been notorious, even in the murky cryptocurrency market, but, despite a US Securities and Exchange Commission investigation, Bitfinex and its stablecoin spawn Tether have proved enormously resilient.
For those who are not up with the world of cryptocurrency, a stablecoin is a cryptocurrency pegged to a fiat currency such as US dollars. It is not supposed to have any value as a speculative asset, but it has some important uses as a market utility. In the cryptocurrency market, stablecoins provide a convenient way for investors to park money overnight and avoid being buffeted by the notoriously volatile 24-hour cryptocurrency markets. In normal markets, banks are experimenting with their own stablecoins as a means of facilitating instant settlements.
(Side note: if you’re not paying attention to the world of cryptocurrency, you might want to. Bitcoin has been on the way back up for a couple of months, climbing from $3,500 to $,5500 this quarter, according to coinpaprika.com.
(Side note 2: This above is very much not investment advice. Byte Me does not own any cryptocurrencies, so the only impact on us when the price goes up is the amount of smugness that we must endure on Twitter.)
Stablecoins are important and Tether, a product of Bitfinex, is the largest and so the most important of them all. It has a float of around $2.8bn, which is supposed to be collateralised one-for-one with real dollars, driven by real investor demand.
That has been in doubt for a long time, because Bitfinex did not provide an audit and had only the shakiest evidence of the cash it claimed to hold. But in spite of the long-standing rumours that Tether had issued stablecoins without collateral (allegedly in an effort to support the flagging bitcoin price) and an SEC subpoena, the company and its asset battled on.
Tether always maintained that, although it did not provide proof, it hadmoney backing Tether and could fund any withdrawals at any time… up until it didn’t. In March, without making any announcement of the fact, Tether removed the claim that that its stablecoin was collateralised 1:1 with dollars from its terms of service, instead saying it was backed by their reserves including “traditional currency… other assets and loan receivables”.
Then, last week, the NYAG dropped a bomb, filing a court order alleging an $850m fraud. The order claims that, in order to cover a loss of $850m which it handed over to its bank Crypto Capital Corp, Bitfinex borrowed $850m of client money that should have been collateralising its Tether tokens.
By the end of the filing, it would appear that, rather than 100% collateralised, Tether has been about 74% collateralised.
Bitfinex has responded with a firm rejection of the NYAG’s claims, claiming that the $850m sent to Crypto Capital was not lost but “seized and safeguarded” by “authorities in the US, Poland and Portugal”, which gives you some idea of Crypto Capital’s reputation. It took the money from Tether accounts as a loan secured by equity, on which it paid 6.5% interest, thus fulfilling the loan receivables part of the terms of service.
Borrowing the money that should have been collateralising their stablecoin is bad, yes. But Bitfinex fanboys are quick to point out that your bank deposits with Barclays and JP Morgan are a hell of a lot less collateralised than that, because of the magic of fractional reserve banking.
It has been very entertaining to watch the hardliners shout about how the rumours that Tether was not collateralised were false and malicious, and then pivot to new line that collateralisation is overrated.
But more worrying are the posts on forums and message boards claiming that Bitfinex has not honoured their withdrawal requests.
What’s worse is that this is not even the first time Bitfinex has done this. In 2018, Bitfinex redesignated a frozen account worth $625m as Tether collateral, and took $625m of healthy unfrozen reserves.
One of the funnier conspiracy theories is that these allegations are a coordinated FUD (fear, uncertainty and doubt) effort involving the NYAG to break Tether’s peg to the dollar, buy it cheap and then sell when the price rallies.
We’ll let you be the judge of that.
Amid all these allegations of fraud and wrongdoing, perhaps the most impressive part is that Tether remains impervious and the peg remains intact.