What is Tether (USDT) and How Does it Work?

Wait a minute! Another guide about Tether? Are you kidding me?!? What is there left to know about a crypto that was released in 2014? These may very well be your first words when reading the title, and we wouldn’t blame you. We know that we’ve talked before about what Tether is and how it […]

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Wait a minute! Another guide about Tether? Are you kidding me?!? What is there left to know about a crypto that was released in 2014?

These may very well be your first words when reading the title, and we wouldn’t blame you.

We know that we’ve talked before about what Tether is and how it works. The topic has been viewed and analyzed from all possible perspectives. Still, the world’s most popular stablecoin is also one of the most talked-about digital assets out there.

Many years have passed, and Tether still finds a way to make the headlines almost every day. Whether is the fantastic surge that made it the 3rd-largest crypto by market cap or its controversial banking connections, Tether is always in the spotlight. You blink, and a fresh story about Tether pops up.

So today, we dive deep into Tether’s past, present, and future to get a clear view of what this stablecoin is all about. We do a short recap of its definition, then we list all the controversies surrounding Tether, including the incestuous liaison with its sibling, Bitfinex, and in the end, we try to guesstimate what the future of Tether will be like.

Lay back comfortably, put your reading glasses on, and enjoy the ride!

Understanding cryptocurrency volatility

To better understand the particular role that Tether plays in the crypto market, we first have to look at one of the main traits of cryptocurrency: volatility.

Volatility affects all types of currencies. Daily price fluctuations are as certain as the sun is to rise every day. Stability is a short-lived illusion and inflation is every asset’s worst enemy.

Cryptocurrencies do not make an exception from these financial realities. On the contrary, they have to deal with seesawing volatility, harrowing fluctuations, and defeating inflation periods. It is for this high level of instability, that we cannot use cryptos for everyday transactions, yet. It is not the only reason that delays global cryptocurrency adoption, but it is one of the most crucial ones.

For now, we still rely on well-known currencies like the USD, the Euro, and the Pound sterling among many others. These currencies also experience fluctuations, but at a much smaller level than cryptocurrencies.

Early beginnings

The intense volatility that we see today in the cryptocurrency market is not something new. The speculative nature of digital assets dates back to their early and shady beginnings. Before Bitcoin became a global sensation, cryptos were fashionable on the Silk Road, an online black market that had a short, but eventful life.

Back in 2015, when Silk Road was nearing its final days, cryptocurrencies caught the eyes of bankers, financial institutions, and powerful investors. Their oscillations in value did not scare away large investments. On the contrary, they attracted a great deal of them, which eventually contributed to the infamous Bitcoin bubble burst from December 2017.

From that point on, any attempt to drag cryptos back into obscurity was futile. Cryptocurrencies became mainstream and carved a niche of their own in the financial industry.

What makes Tether different from other cryptos?

Cryptocurrencies have come a long way since the days when they were lurking in the murky waters of the dark web. Today, they enjoy a dedicated market, safe exchanges, and unabated support from a global community.

Still, the volatility issue remains, and it is far from reaching its demise. For now, a countermeasure would suffice, and it may come from Tether.

Tether is a centralized digital asset pegged to the US Dollar, and often referred to as USDT. It is a cryptocurrency that uses blockchain technology in similar ways that other cryptos do, but it maintains a stable value in direct correspondence with the value of fiat currency. For this reason, it is also known as a stablecoin.

The idea behind the development of Tether is to prevent owners from holding onto their assets. This practice is also known as “hodling.” Many investors, especially Bitcoin owners, prefer to keep their coins and sell them only when the price is surging and they can make a profit.

Since the price of Tether gets its measure from the US Dollar and the Euro, hodling it makes no difference. Its value is not subject to intense volatility for as long as the USD and the EUR don’t go through epic fluctuations. So, owners have extra incentives to spend their coins, and therefore reduce inflation.

What is Tether and what are its benefits?

Tether is a clear example of the value-for-value principle and makes it easy for investors to use cryptocurrency in everyday transactions.

According to its basic definition, Tether is a fiat-pegged cryptocurrency issued by Tether Limited. It was developed using the Omni Layer protocol – an open-source program that acts as layer software built on Bitcoin, and which allows the Tether community to track and validate the transfer of tokens.

In the autumn of 2017, Tether launched as an ERC-20 token on the Ethereum blockchain. Initially, they only created a limited supply of Dollar-backed tokens for contract developers to play with, and a plan to offer them as a wide-open service to exchange Omni-based tokens for ERC20-based tokens and vice versa.

At the beginning of 2018, Tether announced that Ethereum-based Tether was available for tokenized USD and EUR to be transferred over the Ethereum network. Almost three years later, Ethereum’s share of Tether’s total circulating supply has already surpassed the one on the Omni Layer.

When it comes to the most popular stablecoins in the world, Tether takes the first place by a large margin. On some well-known exchanges like Bitfinex, Binance, and Poloniex, traders even use it as a dollar replacement.

In theory, being backed by the USD means that for every Tether issued, there is an equivalent amount of dollars kept in reserve. Its value should not vary, as it ought to remain equivalent to $1 at all times.

Using Tether at the expense of other cryptocurrencies has exponential benefits, such as:

  • Easy crypto conversion

Tether makes it easy to convert fiat money into digital currency. Due to its blockchain use, transactions are easy, quick, and secure. It is even faster to convert it to other cryptocurrencies than it is to transform real cash into digital coins.

  • Far-reaching acceptance

Numerous exchanges and platforms have adopted Tether as a means of a transaction when the US Dollar option was not available. As a result, you can use it in various transactions on multiple markets without fearing incompatibility.

  • A reliable safe net

You can count on Tether to represent most if not all of your investment in cryptocurrency. The amount of Tether that is in circulation at any moment is proportionate to the backup funds.

How does Tether work?

All the Tether coins are issued by Tether Limited, which is a Hong Kong-based company. According to the Tether whitepaper, Tether Ltd. holds fiat funds that correspond to the amount of Tether tokens in circulation. This way, the assets are backed by real-life money, and the transactions that take place on the blockchain are perfectly secure and transparent.

In theory, Tether sounds like the ideal immersion protocol into cryptocurrency for new traders everywhere. People can use exchanges to transfer fiat currency into Tether, and reverse the conversion at a later date without losing money. Meanwhile, they can be active on the blockchain and engage in crypto transactions.

However, it doesn’t always work that easy. Several controversies surrounding the Tether Limited operations and audits have shaken the trust out of numerous investors. We will discuss these special cases in detail below.

One of the main issues that detractors tend to criticize Tether for is that it’s drifting away from one of the primary principles of cryptocurrency, decentralization.

Thanks to the Omni protocol, the Tether tokens are anchored on the Bitcoin blockchain. Still, the users depend on Tether Limited for issuance and consent to maintain Tether a pegged currency.

One event when this loophole in the roadmap affected owners took place on April 18, 2017. Back then, after a few days of continued delays in processing international wires to and from Tether users, Bitfinex witnessed a stop to wire transfer services from Taiwanese banking partners, resulting in congestion of pending transactions for international investors.

The impact on Tether and its users was a small tragedy at the time, as Tether value dropped below its pegged correspondent at $0.91. The future of USDT seemed bleak, to say the least. The most pessimistic voices were imagining a scenario where Tether funds would be frozen, and the owners could not redeem their money before the token would lose its pegged value.

All the Controversies Surrounding Tether and Bitfinex

Almost every cryptocurrency that has ever seen the light of day and made it past its first anniversary has been the subject of one or more controversies. Allegations of market manipulation, false promises, and Ponzi schemes seem to affect most of them.

While most cryptos shake off the accusations in time, Tether appears to add more to its name with every month going by. If there was a pageant for most controversies in the industry, Tether would win it by a landslide.

Here are all the major embroilments that Tether and Bitfinex have gotten into over the years!

The people behind Tether and Bitfinex

The biggest controversy surrounding Tether regards its connection with popular cryptocurrency exchange Bitfinex. Both companies function under the umbrella of the parent company, iFinex Inc. Throughout history, they shared the same people as CEO, CTO, CFO, CSO, and members of the general counsel.

The people who are allegedly pulling the strings backstage for both companies seem to be Philip Porter and Giancarlo Devasini, according to the Paradise Papers.

The documents leaked by the International Consortium of Investigative Journalists in November 2017 revealed that Phil Potter, a graduate of Yale University, and a former derivatives analyst for Morgan Stanley was the director of Tether and the chief strategy officer at Bitfinex.

According to the same files, Bitfinex incorporated in Hong Kong in 2013 but then changed its name to Renrenbee Ltd. a year later. Giancarlo Devasini, Tether’s CFO appears as the CFO of Bitfinex as well in the Paradise Papers.

According to Tether and Bitfinex, these are their teams of executives at the time of this writing:

Bitfinex Senior TeamTether Senior Team
JL van der Velde (CEO)JL van der Velde (CEO)
Giancarlo Devasini (CFO)Giancarlo Devasini (CFO)
Philip Potter (CSO)Philip Potter (CSO)
Stuart Hoegner (general counsel)Stuart Hoegner (general counsel)
Matthew Tremblay (chief compliance officer)Matthew Tremblay (chief compliance officer)
Paolo Ardoino (CTO)Paolo Ardoino (CTO)
Chris Ellis (community manager) 

Tether & Bitfinex vs. Wells Fargo

The first suspicions concerning Tether and Bitfinex surfaced a few months earlier, in April 2017, in the wake of the scandal with the Taiwanese banks.

Back then, Bitfinex sued its U.S. banking correspondent, Wells Fargo for allegedly prohibiting the banks in Taiwan from completing outbound wire transfers. Tether was also part of the suit, again under the parental arm of iFinex Inc.

Only a week later, Bitfinex chose to withdraw the lawsuit against Wells Fargo and signaled that the exchange is seeking to look past the dispute. 

The suit was gone, but the bad blood remained, and the exchange chose to cut its services for the U.S. customers due to the cost of operations.

Did Tether influence the Bitcoin Rise and Crash of 2017?

Soon after the Wells Fargo scandal, many observers in the community signaled that most of the new Tether accounts started flowing through Bitfinex only, and some of them argued that a surplus of Tether was issued to create artificial demand. The allegations went as far as to say that the spectacular surge in Bitcoin value throughout 2017 was the result of price manipulation by Bitfinex.

According to a paper by John Griffin, a finance professor at the University of Texas, and Amin Shams, a graduate student, the Bitcoin price was artificially inflated. The two researchers concluded that every increase in Bitcoin price can be traced to the hours immediately after Tether flowed to a limited number of other exchanges, usually when the value was declining.

Griffin and Shams questioned the way Bitfinex provides more Tether on the market whether there is a demand for it or not. In their opinion, this strategy leads to an artificial value increase for other cryptocurrencies, and especially for popular ones like Bitcoin. The practice is comparable to that of printing more money.

More Tether in circulation would convince owners to convert their tokens into BTC, which would subsequently increase Bitcoin’s trading value. When the prices would eventually follow a downtrend slope, they would default the “redeem Tether” option, or they would blame a “hack-attack” for the loss or disappearance of Tether and their pegged US Dollars.

Bitfinex takes up the “Master of Puppets” role

The two researchers argued that a considerable amount of Tether coins was issued and transferred to several exchanges. The tokens were then used to buy Bitcoin immediately after a market dip would take place. This way, the market would experience a false demand for BTC that would attract even more investors to buy Bitcoin and take part in an artificial bullish push that ultimately led to $19,783, its highest value in history.

The study went as far as to remap the transactions and identify the exchanges that were associated with Bitfinex throughout the massive, supply-driven issuance of Tether.

The most fascinating aspect of this alleged intervention is that Bitfinex did it in the open, and anyone could observe it if they were able to take their eyes off of Bitcoin’s dazzling climb to never-before-seen heights.

In fact, one of the prominent voices in the industry that pointed out the fishy Tether issuance was that of Charlie Lee, creator of Litecoin. In a tweet dated November 30, 2017, he said “There’s a fear going on that the recent price rise was helped by the printing of USDT (Tether) that is not backed by USD in a bank account. I urge @bitfinex and @Tether_to to perform a 3rd party audit to prove their reserves. Please do the right thing. Thanks.”

Despite similar alarming inputs from other industry experts, the Tether show continued. As Griffin and Shams showed in their study, newly-issued Tether would appear directly in Bitfinex from where it would instantly ship to selected cryptocurrency exchanges that included:

The strangest thing about these transactions is that very few or almost no Tether tokens would return to Tether Ltd. to be redeemed for real USD.

Griffin and Sham dug deep into the Bitfinex transactions while following the Tether trail. An interesting result of their study was the special connection with two other exchanges, Poloniex and Bittrex.

Their findings show that between February 2017 and January 2018, the Tether circulation increased by almost 9,000%. In token numbers, the USD-pegged coin exploded from $25 million to more than $2.8 billion units.

In December 2017 alone, Tether witnessed a 52.3% increase in its total supply after a massive issuance of 775 million tokens. Until February 2018, Bitfinex sent more than 2.99 billion Tether to Bittrex and Poloniex. In return, the two exchanges sent back only 1.89 billion Tether coins.

The Kraken connection

The two researchers at the University of Texas were not the only ones noticing something odd going on with the plethora of Tether tokens appearing suddenly on the market, and their subsequent, almost identical trail.

Bloomberg released a report titled Crypto Coin Tether Defies Logic on Kraken’s Market, Raising Red Flags on June 29, 2018. In it, investigation journalists showed that Tether issuance and price were not compatible with the cryptocurrency market economics of supply and demand. They chose to focus their attention on Tether’s activity on Kraken between May 1 and June 22, 2018.

The 56,000 trades concerning Tether that had taken place on Kraken during this period included small orders that managed to move the price as much as larger orders, and “oddly specific order sizes—many going out to five decimal points, with some repeating frequently.”

The transactions reminded of a form of market manipulation in which an investor simultaneously sells and buys the same financial assets to create misleading, artificial activity in the marketplace, which is also known as “wash trading.”

Two of the world’s most renowned economy experts, New York University Professor and principal at Global Economics Group Rosa Abrantes-Metz and former Federal Reserve Bank examiner Mark T. Williams agreed with Bloomberg and shared their opinions in the report.

Less than two days after the release of the Bloomberg report, Kraken published a blog post brazenly titled On Tether: Journalists Defy Logic, Raising Red Flags. In it, the Kraken writers went as far as to claim that the Bloomberg authors and their expert counselors failed to “comprehend basic market concepts.”

Kraken’s pleading was that Tether did not experience the same level of volatility as other cryptocurrencies thanks to its USD-pegged status.

Where are Tether’s billion-worth USD reserves?

If the entire cryptocurrency community could demand just one thing from Tether for a clear and honest response, it would channel it through Cuba Gooding Jr.’s famous line from Jerry Maguire (1996): “Show me the money!”

Since its inception, Tether Limited claimed that it has the necessary funds of US dollars corresponding to the amount of Tether coins circulating on the market. They always make it quite clear that they can redeem any customer request of withdrawal upon demand.

However, that was not always proven true, as the case of entrepreneur Oguz Serdar shows it. In November 2017, he made a withdrawal request for $1 million that he had safeguarded in Tether for fear of a Bitcoin slump. Unfortunately, Tether refused to pay up citing “banking difficulties.”

Serdar let his anger known on Twitter, where he revealed that Tether would provide a limited list of exchanges where he could take out his money. The problem was that even the most advantageous rate on the list, which was from Kraken, would have had him dump 1 Tether for $0.3 in return.

The string of doubts regarding Tether’s USD reserves continued, and journalist Jon Evans blatantly asked “Do we have any reason to believe those dollars actually exist?” in an article for TechCrunch from August 2018, titled “What the hell is the deal with Tether?

Evans argued that, upon his research, he could not find a single purchase or redemption of newly-issued Tether between the end of 2017 and August 2018 that could be publicly verified. He also considered that Tether’s Transparency Report and their alleged connections with banks all over the world may offer a partly-reliable substitute for their failure to present an external audit report.

Tether’s Transparent External Audits that Do Not Exist

The U.S. Commodity Futures Trading Commission (CFTC) showed signs of looking into Tether towards the end of 2017 when it sent subpoenas to Tether, Bitfinex, and to Tether’s former auditor, Friedman LLP.

Tether replied that they would provide extensive and transparent external audits, but less than a month later the company said that it no longer had a relationship with their auditor. Instead, they delayed their hearing, and in June 2018, they published an attempt at a transparency audit on their website.

The document is a report by the law firm Freeh, Sporkin & Sullivan LLP (FSS) which appears to confirm that the issued tethers are fully backed by dollars. Instead of clearing the air, the report increased the suspicion regarding Tether’s alleged USD reserves.

Even the authors of the FSS report stated that “FSS is not an accounting firm and did not perform the above review and confirmations using Generally Accepted Accounting Principles.” This fact is mentioned within the document, and it shows that while they audited Tether Limited, they did not do it using the instruments that would validate the report as an honest, transparent audit.

If Tether doesn’t want to reveal where its reserves are, we can only go on and ask the banks that the company flaunts around as its collaborators, if they know where the money is. The U.S. Federal regulators tried, but the answers did not surface that easily.

Tether’s short-term flings with the banks

If Tether was a real person, it would be that friend who can never hold a relationship for too long. In this case, its partners would have to be banking institutions, some of which may be just as flakey.

All jokes aside, Tether has reported links to several banks over the years. However, many of its connections have proven suspicious, to say the least. Unsurprisingly, these were its short-term flings that faded into obscurity.

Noble Bank

After severing its ties to Wells Fargo, Tether refused to name the banks that store its precious, billion-worth reserves of USD. However, after receiving the CFTC subpoena in December 2017, the company named Noble Bank in Puerto Rico as the entity responsible for handling its USD transfers.

Noble Bank acted under the custody of the Bank of New York Mellon Corporation. Less than a year later, Noble Bank departed from its custodian and declared insolvency in October 2018. The event sparked public outcry as Tether owners could not redeem their money.

Deltec Bank

In the aftermath of the Noble Bank debacle, Tether and Bitfinex were quick to address any insolvency fears regarding their accounts. They went on to nominate a new banking link with the Bahamas-based Deltec Bank in November 2018.

According to an official announcement on their website, Tether had a $1.8 billion deposit in Deltec Bank. The blog also contained a letter that Tether had allegedly obtained from Deltec as a confirmation of the deposit. However, a spokesperson for Deltec refused to confirm or infirm the authenticity of the letter or of the connection between the bank and Tether Limited.

ING Bank

One of the most prestigious banks associated with Bitfinex and Tether is Dutch financial services company ING who confirmed that Bitfinex has an account with the bank in the Netherlands. However, very little is known about the nature of the connection between the two entities.

The ING representatives refused to give more details about the type of account that Bitfinex has with the bank or whether it represents a deposit for their Tether operations. While the bank does not engage in cryptocurrency transactions, it has no problem with serving “companies that are in the value chain of cryptocurrencies.”

Other banks and deposit institutions

To diminish the suspicion around Tether’s USD reserves, Bitfinex teamed up with at least six banks between 2017 and 2019. Among these institutions were:

The latter is a bank for Poland, and its connection with Bitfinex seemed like a shady one from the very beginning. Allegedly, the bank was storing nearly $814 million of Bitfinex money, but Wladyslaw Klazynski, the bank’s chief executive officer, wouldn’t confirm if any accounts have been opened by Bitfinex clients for Tether operations. That claim would return against them in 2019 when the Crypto Capital Scandal broke out.

All of these banks were used by Bitfinex as suggestions to direct Tether operators whenever they needed to deposit fiat funds.

The Crypto Capital Scandal

Crypto Capital used to be a fiat banking platform that enabled its users to deposit and withdraw fiat currency from any exchange that dealt with cryptocurrencies anywhere in the world. It started operating in 2013, and for a few years, it was one of the closest business partners of Bitfinex.

In 2017, after severing its ties with Wells Fargo, Bitfinex urged its clients to deposit funds and engage in fiat operations with Crypto Capital, and more specifically with the platform’s subsidiary in Poland, Crypto Sp. Z.O.O.

The CEO of both Crypto Capital and Crypto Sp. Z.O.O. was at the time Ivan Manuel Molina Lee, a citizen of Panama who may have acted as “filler” for many Panama-based companies in the past.

In April 2018, Polish authorities identified several ties between Colombian drug cartels and Crypto Sp. Z.O.O. As a result of their investigation, they seized $371 million from an account held by Crypto Sp. Z.O.O. with Bank Spółdzielczy w Skierniewicach in Poland.

The news did not seem to affect Bitfinex too much, and the exchange denied any connection with the accounts that were subject to the investigation.

In the meantime, Bitfinex gained some credibility by partnering with ING. It also increased its banking connections and directed customers to deposit fiat funds in accounts held by Swiss-based Global Trade Solutions via Portuguese bank Caixa Geral de Depositos.

Unknown to some of the clients at that moment, Global Trade Solutions was a subsidiary of Crypto Capital, which also facilitated other fiat transactions for Bitfinex through Citibank, HSBC, and Enterprise Bank & Trust.

Out of the blue, Crypto Capital dissolved and liquidated itself in June 2018. Global Trade Solutions overtook its entire set of operations almost immediately.

Trouble in Paradise

In August 2018, Bitfinex tried to access its funds that were in the custody of Crypto Capital. The latter refused their demand citing problems with the authorities in Poland and Portugal who were allegedly “holding” approximately $500 million of their capital.

The desperation of the exchange to retrieve funds from Crypto Capital transpires from the chat logs documenting communications between Bitfinex executive “Merlin” and Crypto Capital’s “Oz” that were provided to the New York State Office of the Attorney General for its investigations.

Finally, in October 2018, in the space of just five days, two of the top Crypto Capital executives were arrested. One was Ivan Manuel Molina Lee who was detained by Polish authorities under accusations of money laundering.

On the other side of the world, Oz Yosef, another executive of Crypto Capital, was indicted by the United States for conspiracy to commit bank fraud and to operate an unlicensed money transfer service.

Almost immediately after the events, Stuart Hoegner, general counsel to Bitfinex, issued a statement responding to the arrests and rejecting any accusations that would proceed from Crypto Capital’s ties with narcotics cartels or money laundering operations.

Bitfinex also motivated their inability to process customer withdrawals for redeemable Tether as a result of Crypto Capital withholding approximately $880 million worth of its funds. The allegation results from the subpoena that the exchange filed with a California court to the former vice president of TCA Bancorp, Rondell Clyde Monroe, who in their view held essential information about the funds.

When it fell, Crypto Capital took with it more than Bitfinex’s money and reputation. It also affected some of its other customers like Coinapult and the QuadrigaCX exchange, with the latter losing access to $190 million of its customers’ funds and being forced to shut down.

Businessman Reggie Fowler’s name was also dragged into the case for his connections with Crypto Capital. Some sources point to his involvement in the disappearance of $850 million worth of client and corporate cash through the Panama-based platform.

Hacks that question Tether’s decentralization

In August 2016, Bitfinex reported a loss of up to $65 million in an attack. The exchange later stated that the users were to share 36% of Bitcoin losses after the hack that deprived them of 119,756 Bitcoins. The attack was just one of many blows that Bitfinex registered, and which included a 2015 hack of around 1,500 BTC.

These examples of poor security for Bitfinex spread to its sibling Tether, who reported a record hack of almost $31 million in November 2017. Apparently, $30,950,010 worth of Tether tokens were displaced from one of the company’s cores “treasury wallets” and directed to an unauthorized Bitcoin address on 19 November.

Besides the substantial amount of stolen tokens, the hack did not seem too controversial at first. Cryptocurrencies, digital wallets, and exchanges are under attack all the time.

However, what raised many eyebrows was Tether’s statement immediately after the incident, which said that Tether would  “flag” USDT in the hackers’ possession and prevent them from converting to USD.

Additionally, they would release a new version of the Omni Core software, which every client must upgrade to prevent the spending of the stolen funds, and which was essentially a hardfork of the Omni layer.

Later, Tether deleted the post and announced that they had “quarantined” the stolen funds to prevent them from being transacted on the market.

Several voices in the industry started questioning Tether’s claim of decentralization as it was obvious that the company could control the ledger, freeze funds, and reverse transactions. The “stolen” funds were still frozen at the time of this writing.

The New York vs. Bitfinex & Tether Lawsuit

In April 2019, Bitfinex found themselves on the wrong side of a suit filed by New York Attorney General (NYAG) Letitia James.

The U.S. prosecutors accuse Bitfinex of illegally moving Tether reserves to cover up a loss of $850 million. The lawsuit also states that when the exchange was unable to seal a solid relationship with a transparent banking institution, it deposited over $1 billion with a Panama-based payment processor, which was no other than Crypto Capital.

Allegedly, the funds in the cause were a mix of client deposits and corporate capital. However, there was never a written agreement between Bitfinex and Crypto Capital that would validate a legal transfer. Both Bitfinex and Tether are accused that they facilitated Crypto Capital into fleeing with the money without informing the investors of the loss.

James went on to obtain a court order against iFinex Inc. through which she ordered them to cease violating New York law and defrauding New York residents. Under the court order, iFinex directors, officers, principals, agents, employees, contractors, assignees, or any other affiliated individuals were to cease any claim or use of Tether USD reserves.

The filing did not impose a cease-and-desist order on Bitfinex. On the contrary, it allowed the exchange to continue its operations pending completion of the investigation.

Bitfinex responded quickly to the allegations in a post on their website, stating that “The New York Attorney General’s court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million “loss” at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released.”

The plot thickens

In May 2019, iFinex went on the counterattack by filing a motion to dismiss the investigation, arguing that the authorities lack subject matter and personal jurisdiction.

The parent company of Bitfinex and Tether considers that since it is not based in The State of New York, it is not liable before the NY authorities. The Supreme Court denied iFinex’s motion, but the company went on to appeal it.

After more than a year’s wait, Bitfinex lost the appeal before the Appellate Divisions of the Supreme Court of the State of New York and must face trial in the case of the lost $850 million.

The Supreme Court ruling was welcomed as a decisive victory by NY Attorney General Letitia James who criticized the efforts of Bitfinex and Tether to halt her office’s investigation back in December 2019.

Back then, the defendants’ lawyers claimed that NYAG does not have the authority to investigate the companies because “tethers are not securities or commodities.” However, in the latest ruling, the Supreme Court rejected the argument pointing to the Martin Act’s comparatively wide definition of those terms.

Losing the appeal leaves Bitfinex and Tether in hot water. Some of the immediate effects of the ruling also include:

  • iFinex must now provide the Attorney General with all the requested documents
  • The $900 million lines of credit between Bitfinex and Tether has been frozen
  • The company’s executives must now testify before the NY court under oath

The $1 Trillion Lawsuit

Just when it seemed that things cannot get any worse for Bitfinex and Tether, they became potentially catastrophic.

In October 2019, the exchange and the crypto company were hit with a massive class-action lawsuit in New York. The two entities are accused of engaging in deceptive, anti-competitive, and market-manipulating practices, resulting in economic damages for the plaintiffs.

In this case, the plaintiffs are David Leibowitz, Benjamin Leibowitz, Jason Leibowitz, Aaron Leibowitz, and Pinchas Goldshtein. Besides Bitfinex and Tether, the other defendants include Poloniex, Digfinex, and Crypto Capital.

The filing states that “the crimes committed by Tether, Bitfinex, Crypto Capital, and their executives include Bank Fraud, Money Laundering; Monetary Transactions Derived From Specified Unlawful Activities, Operating an Unlicensed Money Transmitting Business, and Wire Fraud. Their liability to the putative class likely surpasses $1.4 trillion U.S. dollars.”

Bitfinex replied in another post on their website, saying that the lawsuit was baseless and that it was created with the sole purpose of undermining the cryptocurrency community.

The lawsuit was updated in June 2020, and it refers to USDT as a “fraudulently issued crypto-asset” while claiming that the iFinex subsidiaries “made massive, carefully timed purchases of crypto commodities to signal to the market that there was enormous demand and thus cause the price of those commodities to spike.”

These are not the only legal troubles that iFinex and its subsidiaries are facing. An additional class-action lawsuit in which two crypto traders accused Bitfinex and Tether to artificially fuel the Bitcoin bull run of 2017 was launched on 22 November 2019 in Washington.

The two investors, Eric Young and Adam Kurtz are basing their claims on the study conducted by Professor John Griffin and Amin Shams.

Bitfinex immediately categorized it as a “mercenary and baseless complaint.” In their defense, the exchange accused greedy lawyers who were trying to profit from all the turmoil generated by the New York cases around it and its sister company, Tether.

Bitfinex went on to state “To be clear, there will be no nuisance settlements or settlements of any kind reached. Instead, all claims raised across both actions will be vigorously contested and ultimately disposed of in due course.”

On January 7, 2020, the two crypto traders suddenly revoked their lawsuit. What seemed to be the result of a silent agreement between the parts was soon disproved, as the two plaintiffs chose to merge their suit with two other class suits against Bitfinex, Tether, and co. in New York.

Now, Bitfinex and Tether are facing a difficult legal battle in the State of New York against the merger of three class-action lawsuits, David Leibowitz et al, Eric Young et al, and Bryan Faubus et al.

Tether’s Competitors – Other Stablecoin Alternatives

With so many controversies surrounding Tether, one would wonder why doesn’t another stablecoin step up and challenge its dominance.

Well, they already have. Tether is the most popular stablecoin in the cryptocurrency market, but it doesn’t lack the competition. Some of the most renowned alternatives to Tether include:

  • Gemini Dollar
  • Paxos
  • TrueUSD

Let’s break them down and see how much of a challenge they pose to Tether’s supremacy!

Gemini Dollar

Gemini Dollar (GUSD) is a USD-pegged crypto that has been fully approved by the U.S. regulators, who did not waste the opportunity to give it as an example of transparency and regulatory compliance. It is the first regulated stable coin that was built on the ERC-20 Ethereum standard.

The coin was launched in October 2016 by Cameron and Tyler Winklevoss, who are the founders of Gemini Trust Co., one of the United State’s largest cryptocurrency exchanges.

At the moment, there are 11,854,823 GUSD, and Gemini claims that each of these units is backed by USD funds held at the State Street Bank and Trust Company.

With a market cap of nearly $12 million at the time of this writing, GUSD is very far behind Tether’s massive market capitalization that borders $10 billion. Furthermore, Gemini’s intense regulation takes it closer to the definition of a centralized currency than free-ruling crypto.

Paxos Standard

Another stablecoin that appeared on the cryptocurrency market in late 2018 is Paxos Standard (PAX). Similar to the Gemini Dollar, Paxos is pegged to the USD and regulated by the New York State Department of Financial Services (NYDFS).

PAX is an ERC-20 token issued on Ethereum blockchain that promises instant worldwide transactions and decentralized accountability. According to their website, customer funds are held in segregated accounts at FDIC-insured, U.S.-domiciled banks.

The Paxos team is led by co-founder and CEO Charles Cascarilla and consists of professional experts in cryptocurrency, accounting, cryptography, and other fields.

The current market capitalization of the Paxos Standard is $244,477,784. At the time of this writing, there were no less than 244,951,954 PAX in circulation out of a total supply of 249,952,065 PAX.


One of Tether’s most serious competitors is TrueUSD (TUSD), which is a stable ERC-20 token pegged to the US Dollar. It was launched in January 2018 by Trust Token, a San Francisco-based startup.

TUSD advocates for full transparency for all stablecoins, which is why it has no access and is not involved in the transfer of deposited funds. All the transactions of TrueUSD are monitored and handled by third-party trust companies. The assets that make the subject of each transaction are backed by US dollars, held in escrow accounts, and accessible by trusted third-party fiduciary partners.

According to its website, TrueUSD accepts “full collateral, regular auditing, and legal protections.” The company also abides by “a code of ethics demonstrating our commitment to always being fully backed, redeemable, stable, and compliant.”

Purchasing TUSD is not as easy as it seems. If you want to add TrueUSD to your crypto portfolio, you will have to provide your name, tax ID, address, date of birth, government ID, and address verification per the applicable BSA/AML regulations.

As of March 2020, Trust Token holds over $138 million in escrow for TrueUSD. At the time of this writing, TUSD had a market capitalization of $239,972,130, and a circulating supply of 239,847,530 units.

How safe is Tether now?

With so many controversies surrounding its name, and with an expanding market for stablecoins biting at its heels, it wouldn’t be unreasonable to ask:

  • How safe is Tether at the moment?
  • Is it worthwhile investing in a stablecoin that cannot hold a banking relationship to save its life?
  • Can you hold Tether in your wallet knowing very well that the company has repeatedly failed to prove that it has reserves backing all the USDT in circulation?

The answer to these alarming questions is a surprising, but categorical YES!

Besides the obvious reasons why stablecoins have long-term benefits over other cryptos (indistinct volatility, low fees, etc.), investing in Tether has potentially huge advantages in 2020 and beyond, such as:

  • Increasing market capitalization
  • A high number of transactions
  • Multi-blockchain asset
  • Potential future on the Lightning Network
  • Peaceful coexistence with CBDCs

Let’s break them down!

Increasing market cap

At the time of this writing, Tether has become the 3rd-largest cryptocurrency by market capitalization. It has surpassed Ripple’s XRP as the historical indweller of the last place on the podium, and just behind industry giants Bitcoin and Ethereum.

The current market cap of Tether is $10,004,960,260 USD. There are 9,998,221,723 USDT in circulation out of a total supply of 10,281,372,504 USDT.

In the first six months of 2020, Tether has printed over $5 billion USDT. While speaking as a guest on the “On The Brink With Castle Island” podcast, Tether CTO, Paolo Ardoino said that the reason behind the massive amount of USDT flooding the market is the desperate craving that exchanges have for cash.

Ardoino further elaborated on the topic saying that the mid-March market crash, partially induced by the COVID-19 outbreak, has instilled fear into exchanges and OTC desks, which started buying Tether heavily. From his point of view, if the trend continues, Tether may soon reach a market cap of $200 billion.

A high number of transactions

According to a recent tweet from Ardoino, Tether is the “most used product in the entire crypto ecosystem. It may sound like a bold statement, but the numbers are on the CTO’s side this time as well:

  • Tether is one of the biggest gas consumers on Ethereum with over $6 billion USDT existing as an ERC-20 token
  • Tether also “consumes” a large slice of the TRON chain where it reached figures as high as $2.8 billion USDT
  • Tether is largely used by most arbitrageurs on centralized exchanges, and no Ethereum (ETH)-based Tether (USDT) tokens have ever been burned, according to this report

Ardoino also believes that a lot of the fuel behind Tether’s spectacular surge throughout 2020 is the company’s choice to invest in startups and scaling solutions that share its “values and vision,” which increase its visibility and credibility on the market.

Multi-blockchain asset

Tether’s expansion across the cryptocurrency market has been nothing short of remarkable. The stablecoin has tested no fewer than eight different protocols to date: Omni Layer, Ethereum, Litecoin, TRON, EOS, Algorand, Liquid Network, and Bitcoin Cash. All of them currently support Tether, except Litecoin.

In June 2020, Tether integrated with the OMG Network, a plasma-based Ethereum sidechain to reduce the congestion on Ethereum. Through this invasion-like strategy, the popular stablecoin aims to make itself available to as many blockchain communities in the crypto industry as possible.

Even if Ethereum will most likely continue to hold most of the USDT in circulation, Tether will strengthen its position as a multi-blockchain asset that ensures its accessibility, increase in use, and overall acceptance.

Potential future on the lightning network

Tether has set its sights for expansion on the Lightning Network for a long time. The confirmation for a likely future of USDT on the LN came in July 2020. In a short tweet, the company’s CTO, Paolo Ardoino stated that Tether is funding RGB, which is an L2 protocol for issuing assets on the LN.

According to its GitHub repository, the RGB project is “a completely free, open-source, non-profit and community-oriented effort, promoted by the BHB Network and aimed at the development of standards and best practices to issue, transmit and store Bitcoin-based non-bitcoin assets.”

The project goes in line with Bitfinex’s plans to contribute to the development of the Lightning Network, which the company also made public back in 2017.

Peaceful coexistence with CBDCs

Despite its numerous controversies regarding banking relationships, Tether has managed to keep itself free of governmental control. It may look like a disadvantage in its rivalry with other stablecoins, but it may prove to be huge leverage in the upcoming competition with Central Bank Digital Currencies (CBDCs).

Some of the most ambitious CBDCs, like China’s Digital Yuan, aim to dethrone the U.S. Dollar, so they pay even less attention to its existing pegged cryptos like Tether. Still, according to industry experts, China’s digital currency will have a hard time displacing Tether in Asia, where the crypto’s borderless nature is especially useful for the local and regional traders.

While the surge of CBDCs is not a minor threat, Tether does not consider it as an end-game movement. The CTO of Bitfinex and Tether, Paolo Ardoino stated that USDT and Central Bank Digital Currencies will be able to live in peaceful coexistence.

In an interview for Coin Rivet, Ardoino said “Of course you could see governments issue digital versions of their native currencies like Euro or Dollar, it is obvious that with the snap of a figure they can create a market cap that is larger than Tether. I believe that is fine and I don’t believe it will represent an issue for Tether. It will be a great demonstration that Tether was right and that people need them.”[…]

[continued]”I think Tether will remain more agile in the sense that we can keep our hedge on technical innovation. It isn’t just a stablecoin, it’s using DeFi, it’s looking at being launched on the Lightning Network. So although compared to a national stablecoin we will hardly be able to compete in terms of market capitalization, we will be able to compete in more use cases and faster adoption to the evolution of technology.”

The Bottom Line

It’s not easy, and probably unwise to stamp a conclusion on Tether right now. The popular stablecoin has a Sisyphic task in dismantling all the controversies around its name and that of its sibling, Bitfinex. Some of the current lawsuits against both companies seem like lost causes for the defendants even before the first hearing takes place.

Still, Tether’s most recent, exponential growth, far-reaching expansion on the market, and increased support from traders may be enough to shield its reputation and to fuel its continuation regardless of how all present and future trials end.

Even Paolo Ardoino confirmed on the “On The Brink With Castle Island” that Tether will have to get the backing of a tier-one bank if the stablecoin confirms its wide margins for scalability and goes above $100 billion in market capitalization.

So, despite all the dark clouds covering Tether’s sky right now, there may still be a few silver linings shining through. Tether could suffer a huge blow from its encounters with the U.S. law, especially if it’s a contribution to the 2017 Bitcoin Bubble Crash is proven. But, Tether could also be spearheading the stablecoin revolution that could reach a $1 trillion market cap by 2025, according to some optimistic cryptocurrency experts.

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