13 ms·

Tether says its cryptocurrency is worth $2B–but its audit failed

100 points by jmkni 9y ago

koolba 9y ago
> But those "frequent professional audits" have been slow in coming. The accounting firm Friedman LLP had been working on an audit of Tether and Bitfinex—a cryptocurrency exchange that is closely linked to Tether—since May. But last Saturday, Tether admitted to Coindesk that its relationship with Friedman had "dissolved." In the normal business world it's a very bad sign when your auditor fires you as a customer. > So it's possible Tether is keeping the identity of its bank secret to avoid attracting scrutiny from local regulators. This could also explain why some of Tether's funds are being held in the personal account of a Tether associate—perhaps the bank would have refused to open the account if it had known it was really for Tether. When this finally blows up it's going to blow up big. How pervasive is parking money in tether in the crypto world? Is it bitfinex specific? I'm curious how bad the shock waves will be across the industry.
- sharemywin 9y ago
  I used it on bitterex.com
- csorrell 9y ago
  A number of exchanges have USDT pairings. https://coinmarketcap.com/currencies/tether/#markets https://coinmarketcap.com/currencies/tether/#markets
- tehlike 9y ago
  It is not just parking money. When yoy find that the price of the asset you own has propped up price panic ensues.
- random_rr 9y ago
  I mean... are people worried about Dogecoin blowing up? Or any other coin? There is basically no problem here. If you don't believe in USDT... don't buy it. It's like saying government-issued currencies are going to "blow up" because Zimbabwe keeps printing fat stacks. Don't hold Zimbabwe dollars - problem solved! Traders want something like USDT for the utility it provides. I don't think most traders care about the backing of USDT or it's potential redeemability for USD. I think most people enjoy the utility of a token that is always ~1USD. There are other tokens that promise to bring the same utility to crypto (DAI, etc). If USDT disappears (as NZDT just did, RIP Cryptopia's bank accounts), another stable coin will fill the void. So even if Tether explodes, and it's actually been running with 0 financial backing this whole time - uh, well, tell me how that's different from any other cryptocurrency that has exploded and imploded in the last few years? It would seem to me that the healthiest thing for crypto right now is to figure out Tether's financial health (so people can decide if they want to safely use it) - but I don't think the marketplace will feel any "shockwaves" from a possible collapse.
  - dragonwriter 9y ago
    > I mean... are people worried about Dogecoin blowing up? Dogecoin isn't used by exchanges as a vehicle to allow dollar-pegged ated trading without handling actual dollars, and Doge:BTC prices aren't treated by cryptocurrency price trackers as if they were, at some fixed multiple, USD:BTC prices. USDT and Doge don't play a similar role in the ecosystem.
    - random_rr 9y ago
      That's interesting, my Cryptopia DOGE trading pairs (and LTC) beg to differ. Will there be a crisis of confidence if Doge crashes to 0 on Cryptopia? Of course not. USDT is one of many trading pairs offered by crypto exchanges. It matters no more or less than NZDT, Dogecoin, Litecoin, Bitcoin, Ethereum, or any other common trading pair in the crypto world.
      - Grangar 9y ago
        Yes it does, because USDT is (supposedly) inherently pegged to the dollar. It's used as a vehicle for stability when normal banking is not available. See: binance, liqui.io. These exchanges don't have fiat deposits/withdrawals. BTC is meanwhile taking all alts down with it.
      - dragonwriter 9y ago
        > That's interesting, my Cryptopia DOGE trading pairs (and LTC) beg to differ. How? > USDT is one of many trading pairs offered by crypto exchanges. USDT is not a trading pair, it's a single cryptocurrency. The issues that give it a special role, both tied to it's USD peg, is that: (1) It is sometimes treated as equivalent to, and commingled with, USD by exchanges (notably, Bitfinex), and (2) USDT:<X> trading pairs, on exchanges that don't handle USD lat all, are often treated by the community as if they were USD:<X> trading pairs. (3) The special role USD has in world markets.
  - hluska 9y ago
    There is basically no problem here?? There is an organization that claims its security is backed by an equivalent number of American dollars (thus promising relatively stable liquidity). Yet, this organization can't get through an audit and it's looking rather unlikely that that security is actually backed by anything more than website copy. And there is basically no problem here? Tether has a special place in the cryptocurrency ecosystem that makes it completely unlike Dogecoin. This special place means that the types of sketchy things that Tether is doing could ripple through the entire ecosystem.
- zitterbewegung 9y ago
  Tether is in the top 20 in cryptocurrencies by Market cap. What generally happens when an altcoin goes bust is that people try to cash out (buy bitcoin with tether and then sell bitcoin or HOLD). Also, miners will stop mining tether and will move to other cryptocoins. I think it will have a large measurable affect but we shall see.
  - sanxiyn 9y ago
    Tether is issued, not mined.
    - AJ007 9y ago
      I never ceased to be amazed how people will spend money on things they don't understand, but just think the price will go up before they get to sell.
- simias 9y ago
  What surprises me most is that despite all these red flags USDT still holds its peg mostly well. Right now it trades less than a cent below the dollar on kraken for instance. It seems like cryptocurrency traders are paradoxically pretty trusting.
  - conanbatt 9y ago
    I think bitfinex is holding the peg on where you can see it (kraken). Nobody else can buy /sell tether. Even a guy saying tether probably has the money on twitter was only willing to buy at 45% premium. Now, bitfinex looks super solvent though, so its not like the exchange can dissolve like mtgox.
    - DennisP 9y ago
      How is Bitfinex involved with Kraken?
      - simias 9y ago
        I think the idea is that Bitfinex might have enough money to prop USDT up as long as the trading volume is low enough. Just buy on kraken when the peg starts to break. Similarly they can probably afford to actually exchange the USDT for USD up to a certain limit, the question is how deep their pockets are. Do they actually have the full amount in their accounts? $1 billion? 100 millions? 10 millions? We'll know that for sure when there's an actual audit or when there's a bank run and they collapse because they don't have the money to pay for the USDTs.
      - tim333 9y ago
        I don't think Bitfinex is directly involved with Kraken. Bitfinex is a shady offshore operation [1] and Kraken is a fully US regulated company with their main office in SF. Kraken is however about the only place you can actually trade USDT for real USD. Or indeed short the things. [1] >[people] have attempted to visit the company’s registered address in Hong Kong only to find an accounting company which served as a registration agent for the company >most of the executive team is distributed across the globe.https://medium.com/@cadammitchell/bitfinex-has-a-true-working-office-in-taiwan-a7ab8c55f7c5 https://medium.com/@cadammitchell/bitfinex-has-a-true-workin...
- stult 9y ago
  I think you're right that this is a mess, my only uncertainty is whether it's garden variety incompetence or active bad faith. For an auditor to fire you, either you have to not be paying your bills for a long time or you have to be deeply uncooperative or insanely demanding. That said, the consensus I've heard from my audit colleagues (I work in public accounting) is that no one has the slightest freaking clue how to audit crypto. So I could see the audit taking exceptionally long, causing friction in the relationship which eventually blew up into a full on breakdown. If that's the case, Tether's leadership probably had a poor understanding of the complexities involved. Sometimes that's the client's fault, but sometimes it's the accounting firm making too aggressive of a pitch to sell the work. But the bank account issue makes me think bad faith. That shows a willingness to disregard rules and mislead fiduciary business partners, which is pretty much an auditor's nightmare client.
  - JumpCrisscross 9y ago
    > no one has the slightest freaking clue how to audit crypto This is a fair statement. Auditor resignations are a red flag, not a conviction. Given the background scumminess of the cryptocurrency space [1], Bitfinex/Tether's management's evasiveness and structure's murkiness [2] and the $2 billion with a "b" figure, heightened skepticism is warranted. In that light, the Tether spokesperson blaming the "excruciatingly detailed procedures Friedman was undertaking" for the auditor's resignation, with no corroborating statement from the auditor, is unsettling. [1] https://www.reuters.com/article/us-ico-ernst-young/more-than-10-percent-of-3-7-billion-raised-in-icos-has-been-stolen-ernst-young-idUSKBN1FB1MZ https://www.reuters.com/article/us-ico-ernst-young/more-than... [2] https://www.bloomberg.com/news/articles/2017-12-05/mystery-shrouds-tether-and-its-links-to-biggest-bitcoin-exchange https://www.bloomberg.com/news/articles/2017-12-05/mystery-s...
  - gst 9y ago
    > That said, the consensus I've heard from my audit colleagues (I work in public accounting) is that no one has the slightest freaking clue how to audit crypto. Shouldn't the crypto part be trivial for Tether? You'd just need to check how many Tethers were issued on the blockchain. The hard part ensuring that those Tethers are backed by real Dollars - and that should be a regular accounting task that doesn't have anything to do with crypto.
- panarky 9y ago
  > So it's possible Tether is keeping the identity of its bank secret to avoid attracting scrutiny from local regulators The whole purpose of Tether is to trade USD after Bitfinex lost USD banking relationships. No naturally, if banking relationships were public, they would be at risk. More likely, these aren't traditional bank accounts at all. These are probably dollars pledged by corporations and hedge funds but held in bank accounts of those corporations and hedge funds, not in Bitfinex's name.
  - JumpCrisscross 9y ago
    > The whole purpose of Tether is to trade USD after Bitfinex lost USD banking relationships This is willful money laundering. If true, everyone who ever beneficially owned USDT would be subject to federal money laundering charges. AML law doesn't care about intent or knowledge, just actions. > if banking relationships were public, they would be at risk Any bank which holds electronic U.S. dollars reports, directly or indirectly, to American regulators. Large deposits owned by foreign institutions with possible connections to Americans trigger FATCA filings. American financial regulators are somewhat forgiving when it comes to mistakes; less so when those "mistakes" are willful. If a bank is hiding its direct or indirect relationship to Bitfinex, they are betting the bank on Bitfinex. At that point, laundering drug money is probably a better reward for the risk being taken. (Disclaimer: None of this is legal advice. Do not launder money.) > These are probably dollars pledged by corporations and hedge funds but held in bank accounts of those corporations and hedge funds, not in Bitfinex's name This is plausible, trivial to demonstrate (repo and overnight wholesale financing aren't novel concepts), and a different risk model if true (for the lenders as well as Tether). It would also fly in the face of the Tether spokesperson's claim that Tether has a "relatively simple balance sheet."
    - panarky 9y ago
      I'm the last one to defend Tether because it looks as shady as hell, but ... > This is willful money laundering Money laundering is the concealment of the origins of illegally obtained money. If the money was legally obtained then it can't be money laundering. Just creating an alternate way to move clean money isn't prima facie a crime. > If a bank is hiding its direct or indirect relationship to Bitfinex, they are betting the bank on Bitfinex Banks probably don't even know about Bitfinex. If Fuckwit Capital Partners has $100m on deposit with Wells Fargo and pledges 10% of it to buy Ethereum, those dollars stay in FCP's account and the bank has no idea that the funds are pledged. Upon receipt of the promissory note from FCP, 10m new Tethers get created with the Ethereum as collateral. > claim that Tether has a "relatively simple balance sheet." The balance sheet could be very simple, but devilishly difficult to audit. ASSETS Accounts Receivable from Investors, $2.4 billion LIABILITIES Tethers Payable to Traders, $2.4 billion If Friedman LLP wanted to prove all the pledged USD to back up the receivables, that could be an expensive and invasive audit of counterparties who don't want their banks get wind of their cryptocurrency activities.
bhouston 9y ago
> In the normal business world it's a very bad sign when your auditor fires you as a customer. My wife is a professional auditor and she said that this would only happen if the client was pushing for the auditor to certify something that the auditor wasn't comfortable with. Of course she has no direct knowledge of this case. She said it was a really bad sign and she almost never sees this happen.
- aviv 9y ago
  We also don't usually see a private company literally print money.
  - Maert 9y ago
    To be fair, isn't FED a private, non-federal company? :)
    - JumpCrisscross 9y ago
      > isn't FED a private, non-federal company? No. The Federal Reserve was created by Congress in 1913 [1]. Part of its complexity arises from its need to integrate public monetary policy with private capital markets. [1] https://www.federalreserve.gov/faqs/about_14986.htm https://www.federalreserve.gov/faqs/about_14986.htm
    - LargeWu 9y ago
      It's quasi-governmental, in that it is chartered and overseen by the federal government, but largely executes policy without the influence of the executive or legislative branches.
      - spookthesunset 9y ago
        > but largely executes policy without the influence of the executive or legislative branches. Which, to be clear, is a good thing otherwise politics would start to win over sound economic policy...
  - 9y ago
paulie_a 9y ago
tether is a slow moving train crash that is fascinating to watch
Nursie 9y ago
I think this is going to continue to be interesting to watch. It seems likely that the tether company is a fraud, given the size of their January print runs. It seems likely that not only has tether been used by its owners as a way to prop up crypto-currency prices, but to acquire bitcoin and other coins under false pretences. There's no proof either way, but the lack of audit is very, very fishy. Further, I watched the USDT/USD market on kraken on Friday.All morning there was downward pressure, buy-walls of millions of dollars were eaten into and destroyed over the course of a few hours, until there was no bid volume at all down to about 90 cents. All of a sudden, in the course of about two minutes, a rapid cascade of very small trades (a few tens to a few hundreds of dollars) propelled it back to ~98.5 cents. It looked really dodgy.
- flipp3r 9y ago
  >All of a sudden, in the course of about two minutes, a rapid cascade of very small trades (a few tens to a few hundreds of dollars) propelled it back to ~98.5 cents. It looked really dodgy. What's dodgy about that? I think everyone here would love to buy a virtual dollar for 90 cents. Especially given the behavior of the market the past month.
  - Nursie 9y ago
    If you're not seeing it then I'm not going to argue with you, neither of us has the data to prove any of what might be going on. However multiple trades of very similar amounts in under a second, after a long, massive slide in much larger amounts in the morning, looks very dodgy to me. Especially when these trades appear at the last possible moment, when all market resistance to freefall has just disappeared. But sure, whatever. Could be legit.
everdev 9y ago
This is the moment when many in the cryptocurrency space predicted the next big selloff. Bitcoin down 10% this morning.
- sschueller 9y ago
  A lot seem to be selling bitcoin for Tether...
sanxiyn 9y ago
Nobody seems to discuss this, so I want to mention it here: for the first time in history, Tether was revoked in January 31st. Amount was 30 million. http://omniexplorer.info/lookuptx.aspx?txid=24db40680654b8b505fda3e96be722ca10f341a129c99260509eb5d84655f1f0 http://omniexplorer.info/lookuptx.aspx?txid=24db40680654b8b5... Specifically, its transaction type is 56. https://github.com/OmniLayer/spec#field-transaction-type https://github.com/OmniLayer/spec#field-transaction-type I don't think this is a strong evidence, but if Tether is issued out of thin air, it is somewhat strange to make revocation. Does someone have a good explanation?
- Nursie 9y ago
  Unfortunately I don't think anyone has a good explanation for any of it yet. It's strange to issue a revocation, but then it's also strange to get subpoena'd by CTFC, and to print 850 million tethers in the same month you fail to get an audit through... A revocation of about 1.5% is just another confounding factor at this point.
- random_rr 9y ago
  Keeping pace with the market. Tether burning coins is an expected and healthy part of their supply management strategy. Think about how you'd keep a finite-supply coin pegged to a value - you'd print and burn tokens as needed to stabilize the value of the coin.
  - sanxiyn 9y ago
    I agree it is indeed normal if Tether is backed.
  - citricsquid 9y ago
    This is not what Tether is intended to be. Tether is not pegged to the value of 1 USD. The value of Tether does not need to be stabilized. Tether is a 1 for 1 USD backed coin, meaning it's entirely within the scope of Tether for the value of 1USDT to reach $1.10, $1.20 or even $1.50 -- if the market decides that is the value of it. The point of Tether is that for each USDT there is a corresponding USD in an account belonging to Tether. If Tether were printing USDT to keep 1 USDT valued at 1 USD then they would be violating what Tether is publicly stated to be. The whitepaper can be found here: https://tether.to/wp-content/uploads/2016/06/TetherWhitePaper.pdf https://tether.to/wp-content/uploads/2016/06/TetherWhitePape...
dingo_bat 9y ago
I am piling up the popcorn. Cannot wait for the conclusion of the USDT saga.
hluska 9y ago
'"Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame," a Tether spokesperson told Ars by email.' In my mind, this paragraph is the article's money shot. If I was a legitimate business person issuing a security meant to fill Tether's place, I would pray that my auditor was excruciatingly detailed. And frankly, there is no way in hell that a security like Tether could have a 'relatively simple balance sheet' in light of their problems receiving US currency combined with rapidly issuing more tokens. This is bad...and the fact that a PR person said that means things are bad beyond belief.
- arisAlexis 9y ago
  not really. In cryptospace governments want to ban things. Measures need.to be taken as this is just a centralized tool for the decentralised economy
  - hluska 9y ago
    I'm sorry, but I don't think I understand your point. If this was the type of audit that publicly traded corporations need to go through, I'd agree. But in this case, Tether advertised that its claims would be verified by an audit.
  - JumpCrisscross 9y ago
    > In cryptospace governments want to ban things American regulators default to permissiveness, particularly in the face of new financial technologies. Their laissez faire comment-and-wait approach to Bitcoin, ICOs and related events is not particularly jarring. But India's regulators are of the shoot-first-ask-questions-later variety [1]. Cryptocurrencies are a unique global phenomenon of immense regulatory restraint, not zeal. (This is probably explained by cryptocurrency's technical complexity, growth and metastasisation as well as some regulators having been won over by the pitch.) [1] https://en.wikipedia.org/wiki/Licence_Raj https://en.wikipedia.org/wiki/Licence_Raj
    - 9y ago
apo 9y ago
There are similarities to Mt. Gox. One of the most important is the near-complete lack of user panic, despite ample warnings, right up to the collapse. I remember vividly seeing Mt. Gox users warned to leave. They didn't. Somehow, they discounted or ignored every warning. Then they became angry when their money was stolen. Then they claimed Mt. Gox was responsible for their loss. History seems to be repeating itself here. Tether holders somehow don't see, can't see, or refuse to see the writing on the wall.
- conanbatt 9y ago
  The difference between mtGox and this is that bitfinex is seemingly infinitely solvent. Some estimates are like 20-30 million revenue per day. Its the top running exchange. I doubt they would expose themselves to a bankrupcy event having such a cash cow. I believe they did market manipulation, and that they are committing fraud with tether, but I'm not convinced tether is not solvent.
  - AJ007 9y ago
    What if they covered up other breaches?
    - conanbatt 9y ago
      There is no reaason to believe that happened afaik.
    - sushid 9y ago
      We would have seen the losses happen in real time on various blockchains for ETH, BTC, BCH, etc.
  - Sangermaine 9y ago
    >Its the top running exchange. So was mtGox.
    - conanbatt 9y ago
arisAlexis 9y ago
misleading article. No audit "failed"
- pmlnr 9y ago
  What does, in your read, mean 'auditor backed out from auditing'?
  - arisAlexis 9y ago
    nobody knows who fired who, the author is speculating.
bradleyjg 9y ago
It's pretty clear that tether is a scam. A more interesting question to me is whether a legitimate tether could break even. That is, is the risk-free demand deposit interest rate high enough to support the services that would be needed for a full reserve cryptocoin? Services which include creation/redemption facilities, proof of work rewards to drive a blockchain, and third party audits to ensure that the trusts aren't stealing the reserves. For reference the current market cap of tether is (allegedly) around $2.2B, which at the overnight rate would generate around $30 million a year in interest.
- Ajedi32 9y ago
  Could an actual bank perhaps decide to issue cryptocurrency to its customers at a $1/coin exchange rate? Wouldn't be full reserve, given that it's a bank, but the deposits would be FDIC-insured, right?
  - matthewbauer 9y ago
    I think you’d lose FDIC insurance when you let people trade it.
  - pmlnr 9y ago
    One could, in theory, yes, but given the strictness on banks, I'm pretty certain they would have no problems auditing it.
  - bradleyjg 9y ago
    I'm not sure how that would work. It sounds like the opposite of a normal bank relationship. In general the idea of fractional reserve is that you, the customer, deposit dollars in a bank account, the bank lends out those dollars to borrowers, but still allows you to come and get your dollars back at any time you like. This takes advantage of something like statistical multiplexing -- it is unlikely that everyone will want his dollars back at the same time. And in modern times it is backed up by various government schemes which will provide liquidity in the case of a run on the bank. If the bank issued you a cryptocurrency at a rate of $1/coin then it would be same thing as giving you your dollars back. It would reduce the banks reserves. I guess your scheme would make more sense on the other side of the bank. That is, the bank could lend out coins rather than dollars. But in that case there isn't a multiplier for coins, because the reserves would still be in dollars.
qwerty456127 9y ago
Every currency is only worth what people believe it is, nothing else, it doesn't really matter what did it actually cost to make it. Even if that's true, trying to convince people it's not backed the way it was meant to is nearly as questionable ethically as issuing unbaked coins probably was. If people keep believing nobody will get hurt, if people stop believing the results can be catastrophic. Of course this is a slippery idea itself yet the matter is too serious to just ignore it.
- Nursie 9y ago
  People have already been hurt - if it's not backed, bitfinex have helped themselves to two billion dollars worth of crytocurrency though fraud. Other people have paid more for crytocurrency than they might have had to because this fraud would have pushed up prices. You're begging us to let criminal activity carry on.
  - qwerty456127 9y ago
    I am not begging you anything but think twice. I personally am not an interested party, I have no blockchain-related assets but I think about all those people who has and I see 2 possible outcomes: if it gets publicly confirmed that the coins were not backed many innocent people will loose their legitimate investments and if it's doesn't they won't, and this doesn't depend on whether the coins actually were backed or not. I don't advocate scam but punishing them may be not really worth the global consequences for people who were not consciously involved. I am not telling what should the people investigating this should choose, I am only telling they should consciously consider all potential results of their decisions. I personally believe that it usually is more important to save what we still have than to revenge what we have lost and that we should always think about the people who happen to be in a less advantageous position than we ourselves are at the time. In fact I love to speak unpopular and "inappropriate" things aloud and question "unquestionable", somebody has to anyway.
    - Nursie 9y ago
      It's not revenge, it's revealing the truth about the market, without which the market cannot function correctly. You are asking for continuation of the lie of overvaluation, which can only continue if more people continue to pump in more money under false pretences. I'm sorry for people who were caught by this - they've been scammed. Pretending they haven't isn't going to help in the long term but make it worse and for more people.

100 points by jmkni 9y ago

> But those "frequent professional audits" have been slow in coming. The accounting firm Friedman LLP had been working on an audit of Tether and Bitfinex—a cryptocurrency exchange that is closely linked to Tether—since May. But last Saturday, Tether admitted to Coindesk that its relationship with Friedman had "dissolved." In the normal business world it's a very bad sign when your auditor fires you as a customer. > So it's possible Tether is keeping the identity of its bank secret to avoid attracting scrutiny from local regulators. This could also explain why some of Tether's funds are being held in the personal account of a Tether associate—perhaps the bank would have refused to open the account if it had known it was really for Tether. When this finally blows up it's going to blow up big. How pervasive is parking money in tether in the crypto world? Is it bitfinex specific? I'm curious how bad the shock waves will be across the industry.

sharemywin 9y ago
I used it on bitterex.com
csorrell 9y ago
A number of exchanges have USDT pairings. https://coinmarketcap.com/currencies/tether/#markets https://coinmarketcap.com/currencies/tether/#markets
tehlike 9y ago
It is not just parking money. When yoy find that the price of the asset you own has propped up price panic ensues.
random_rr 9y ago
I mean... are people worried about Dogecoin blowing up? Or any other coin? There is basically no problem here. If you don't believe in USDT... don't buy it. It's like saying government-issued currencies are going to "blow up" because Zimbabwe keeps printing fat stacks. Don't hold Zimbabwe dollars - problem solved! Traders want something like USDT for the utility it provides. I don't think most traders care about the backing of USDT or it's potential redeemability for USD. I think most people enjoy the utility of a token that is always ~1USD. There are other tokens that promise to bring the same utility to crypto (DAI, etc). If USDT disappears (as NZDT just did, RIP Cryptopia's bank accounts), another stable coin will fill the void. So even if Tether explodes, and it's actually been running with 0 financial backing this whole time - uh, well, tell me how that's different from any other cryptocurrency that has exploded and imploded in the last few years? It would seem to me that the healthiest thing for crypto right now is to figure out Tether's financial health (so people can decide if they want to safely use it) - but I don't think the marketplace will feel any "shockwaves" from a possible collapse.
- dragonwriter 9y ago
  > I mean... are people worried about Dogecoin blowing up? Dogecoin isn't used by exchanges as a vehicle to allow dollar-pegged ated trading without handling actual dollars, and Doge:BTC prices aren't treated by cryptocurrency price trackers as if they were, at some fixed multiple, USD:BTC prices. USDT and Doge don't play a similar role in the ecosystem.
  - random_rr 9y ago
    That's interesting, my Cryptopia DOGE trading pairs (and LTC) beg to differ. Will there be a crisis of confidence if Doge crashes to 0 on Cryptopia? Of course not. USDT is one of many trading pairs offered by crypto exchanges. It matters no more or less than NZDT, Dogecoin, Litecoin, Bitcoin, Ethereum, or any other common trading pair in the crypto world.
    - Grangar 9y ago
      Yes it does, because USDT is (supposedly) inherently pegged to the dollar. It's used as a vehicle for stability when normal banking is not available. See: binance, liqui.io. These exchanges don't have fiat deposits/withdrawals. BTC is meanwhile taking all alts down with it.
    - dragonwriter 9y ago
      > That's interesting, my Cryptopia DOGE trading pairs (and LTC) beg to differ. How? > USDT is one of many trading pairs offered by crypto exchanges. USDT is not a trading pair, it's a single cryptocurrency. The issues that give it a special role, both tied to it's USD peg, is that: (1) It is sometimes treated as equivalent to, and commingled with, USD by exchanges (notably, Bitfinex), and (2) USDT:<X> trading pairs, on exchanges that don't handle USD lat all, are often treated by the community as if they were USD:<X> trading pairs. (3) The special role USD has in world markets.
- hluska 9y ago
  There is basically no problem here?? There is an organization that claims its security is backed by an equivalent number of American dollars (thus promising relatively stable liquidity). Yet, this organization can't get through an audit and it's looking rather unlikely that that security is actually backed by anything more than website copy. And there is basically no problem here? Tether has a special place in the cryptocurrency ecosystem that makes it completely unlike Dogecoin. This special place means that the types of sketchy things that Tether is doing could ripple through the entire ecosystem.
zitterbewegung 9y ago
Tether is in the top 20 in cryptocurrencies by Market cap. What generally happens when an altcoin goes bust is that people try to cash out (buy bitcoin with tether and then sell bitcoin or HOLD). Also, miners will stop mining tether and will move to other cryptocoins. I think it will have a large measurable affect but we shall see.
- sanxiyn 9y ago
  Tether is issued, not mined.
  - AJ007 9y ago
    I never ceased to be amazed how people will spend money on things they don't understand, but just think the price will go up before they get to sell.
simias 9y ago
What surprises me most is that despite all these red flags USDT still holds its peg mostly well. Right now it trades less than a cent below the dollar on kraken for instance. It seems like cryptocurrency traders are paradoxically pretty trusting.
- conanbatt 9y ago
  I think bitfinex is holding the peg on where you can see it (kraken). Nobody else can buy /sell tether. Even a guy saying tether probably has the money on twitter was only willing to buy at 45% premium. Now, bitfinex looks super solvent though, so its not like the exchange can dissolve like mtgox.
  - DennisP 9y ago
    How is Bitfinex involved with Kraken?
    - simias 9y ago
      I think the idea is that Bitfinex might have enough money to prop USDT up as long as the trading volume is low enough. Just buy on kraken when the peg starts to break. Similarly they can probably afford to actually exchange the USDT for USD up to a certain limit, the question is how deep their pockets are. Do they actually have the full amount in their accounts? $1 billion? 100 millions? 10 millions? We'll know that for sure when there's an actual audit or when there's a bank run and they collapse because they don't have the money to pay for the USDTs.
    - tim333 9y ago
      I don't think Bitfinex is directly involved with Kraken. Bitfinex is a shady offshore operation [1] and Kraken is a fully US regulated company with their main office in SF. Kraken is however about the only place you can actually trade USDT for real USD. Or indeed short the things. [1] >[people] have attempted to visit the company’s registered address in Hong Kong only to find an accounting company which served as a registration agent for the company >most of the executive team is distributed across the globe.https://medium.com/@cadammitchell/bitfinex-has-a-true-working-office-in-taiwan-a7ab8c55f7c5 https://medium.com/@cadammitchell/bitfinex-has-a-true-workin...
stult 9y ago
I think you're right that this is a mess, my only uncertainty is whether it's garden variety incompetence or active bad faith. For an auditor to fire you, either you have to not be paying your bills for a long time or you have to be deeply uncooperative or insanely demanding. That said, the consensus I've heard from my audit colleagues (I work in public accounting) is that no one has the slightest freaking clue how to audit crypto. So I could see the audit taking exceptionally long, causing friction in the relationship which eventually blew up into a full on breakdown. If that's the case, Tether's leadership probably had a poor understanding of the complexities involved. Sometimes that's the client's fault, but sometimes it's the accounting firm making too aggressive of a pitch to sell the work. But the bank account issue makes me think bad faith. That shows a willingness to disregard rules and mislead fiduciary business partners, which is pretty much an auditor's nightmare client.
- JumpCrisscross 9y ago
  > no one has the slightest freaking clue how to audit crypto This is a fair statement. Auditor resignations are a red flag, not a conviction. Given the background scumminess of the cryptocurrency space [1], Bitfinex/Tether's management's evasiveness and structure's murkiness [2] and the $2 billion with a "b" figure, heightened skepticism is warranted. In that light, the Tether spokesperson blaming the "excruciatingly detailed procedures Friedman was undertaking" for the auditor's resignation, with no corroborating statement from the auditor, is unsettling. [1] https://www.reuters.com/article/us-ico-ernst-young/more-than-10-percent-of-3-7-billion-raised-in-icos-has-been-stolen-ernst-young-idUSKBN1FB1MZ https://www.reuters.com/article/us-ico-ernst-young/more-than... [2] https://www.bloomberg.com/news/articles/2017-12-05/mystery-shrouds-tether-and-its-links-to-biggest-bitcoin-exchange https://www.bloomberg.com/news/articles/2017-12-05/mystery-s...
- gst 9y ago
  > That said, the consensus I've heard from my audit colleagues (I work in public accounting) is that no one has the slightest freaking clue how to audit crypto. Shouldn't the crypto part be trivial for Tether? You'd just need to check how many Tethers were issued on the blockchain. The hard part ensuring that those Tethers are backed by real Dollars - and that should be a regular accounting task that doesn't have anything to do with crypto.
panarky 9y ago
> So it's possible Tether is keeping the identity of its bank secret to avoid attracting scrutiny from local regulators The whole purpose of Tether is to trade USD after Bitfinex lost USD banking relationships. No naturally, if banking relationships were public, they would be at risk. More likely, these aren't traditional bank accounts at all. These are probably dollars pledged by corporations and hedge funds but held in bank accounts of those corporations and hedge funds, not in Bitfinex's name.
- JumpCrisscross 9y ago
  > The whole purpose of Tether is to trade USD after Bitfinex lost USD banking relationships This is willful money laundering. If true, everyone who ever beneficially owned USDT would be subject to federal money laundering charges. AML law doesn't care about intent or knowledge, just actions. > if banking relationships were public, they would be at risk Any bank which holds electronic U.S. dollars reports, directly or indirectly, to American regulators. Large deposits owned by foreign institutions with possible connections to Americans trigger FATCA filings. American financial regulators are somewhat forgiving when it comes to mistakes; less so when those "mistakes" are willful. If a bank is hiding its direct or indirect relationship to Bitfinex, they are betting the bank on Bitfinex. At that point, laundering drug money is probably a better reward for the risk being taken. (Disclaimer: None of this is legal advice. Do not launder money.) > These are probably dollars pledged by corporations and hedge funds but held in bank accounts of those corporations and hedge funds, not in Bitfinex's name This is plausible, trivial to demonstrate (repo and overnight wholesale financing aren't novel concepts), and a different risk model if true (for the lenders as well as Tether). It would also fly in the face of the Tether spokesperson's claim that Tether has a "relatively simple balance sheet."
  - panarky 9y ago
    I'm the last one to defend Tether because it looks as shady as hell, but ... > This is willful money laundering Money laundering is the concealment of the origins of illegally obtained money. If the money was legally obtained then it can't be money laundering. Just creating an alternate way to move clean money isn't prima facie a crime. > If a bank is hiding its direct or indirect relationship to Bitfinex, they are betting the bank on Bitfinex Banks probably don't even know about Bitfinex. If Fuckwit Capital Partners has $100m on deposit with Wells Fargo and pledges 10% of it to buy Ethereum, those dollars stay in FCP's account and the bank has no idea that the funds are pledged. Upon receipt of the promissory note from FCP, 10m new Tethers get created with the Ethereum as collateral. > claim that Tether has a "relatively simple balance sheet." The balance sheet could be very simple, but devilishly difficult to audit. ASSETS Accounts Receivable from Investors, $2.4 billion LIABILITIES Tethers Payable to Traders, $2.4 billion If Friedman LLP wanted to prove all the pledged USD to back up the receivables, that could be an expensive and invasive audit of counterparties who don't want their banks get wind of their cryptocurrency activities.

bhouston 9y ago

> In the normal business world it's a very bad sign when your auditor fires you as a customer. My wife is a professional auditor and she said that this would only happen if the client was pushing for the auditor to certify something that the auditor wasn't comfortable with. Of course she has no direct knowledge of this case. She said it was a really bad sign and she almost never sees this happen.

aviv 9y ago
We also don't usually see a private company literally print money.
- Maert 9y ago
  To be fair, isn't FED a private, non-federal company? :)
  - JumpCrisscross 9y ago
    > isn't FED a private, non-federal company? No. The Federal Reserve was created by Congress in 1913 [1]. Part of its complexity arises from its need to integrate public monetary policy with private capital markets. [1] https://www.federalreserve.gov/faqs/about_14986.htm https://www.federalreserve.gov/faqs/about_14986.htm
  - LargeWu 9y ago
    It's quasi-governmental, in that it is chartered and overseen by the federal government, but largely executes policy without the influence of the executive or legislative branches.
    - spookthesunset 9y ago
      > but largely executes policy without the influence of the executive or legislative branches. Which, to be clear, is a good thing otherwise politics would start to win over sound economic policy...
- 9y ago

paulie_a 9y ago

tether is a slow moving train crash that is fascinating to watch

Nursie 9y ago

I think this is going to continue to be interesting to watch. It seems likely that the tether company is a fraud, given the size of their January print runs. It seems likely that not only has tether been used by its owners as a way to prop up crypto-currency prices, but to acquire bitcoin and other coins under false pretences. There's no proof either way, but the lack of audit is very, very fishy. Further, I watched the USDT/USD market on kraken on Friday.All morning there was downward pressure, buy-walls of millions of dollars were eaten into and destroyed over the course of a few hours, until there was no bid volume at all down to about 90 cents. All of a sudden, in the course of about two minutes, a rapid cascade of very small trades (a few tens to a few hundreds of dollars) propelled it back to ~98.5 cents. It looked really dodgy.

flipp3r 9y ago
>All of a sudden, in the course of about two minutes, a rapid cascade of very small trades (a few tens to a few hundreds of dollars) propelled it back to ~98.5 cents. It looked really dodgy. What's dodgy about that? I think everyone here would love to buy a virtual dollar for 90 cents. Especially given the behavior of the market the past month.
- Nursie 9y ago
  If you're not seeing it then I'm not going to argue with you, neither of us has the data to prove any of what might be going on. However multiple trades of very similar amounts in under a second, after a long, massive slide in much larger amounts in the morning, looks very dodgy to me. Especially when these trades appear at the last possible moment, when all market resistance to freefall has just disappeared. But sure, whatever. Could be legit.

everdev 9y ago

This is the moment when many in the cryptocurrency space predicted the next big selloff. Bitcoin down 10% this morning.

sschueller 9y ago
A lot seem to be selling bitcoin for Tether...

sanxiyn 9y ago

Nobody seems to discuss this, so I want to mention it here: for the first time in history, Tether was revoked in January 31st. Amount was 30 million. http://omniexplorer.info/lookuptx.aspx?txid=24db40680654b8b505fda3e96be722ca10f341a129c99260509eb5d84655f1f0 http://omniexplorer.info/lookuptx.aspx?txid=24db40680654b8b5... Specifically, its transaction type is 56. https://github.com/OmniLayer/spec#field-transaction-type https://github.com/OmniLayer/spec#field-transaction-type I don't think this is a strong evidence, but if Tether is issued out of thin air, it is somewhat strange to make revocation. Does someone have a good explanation?

Nursie 9y ago
Unfortunately I don't think anyone has a good explanation for any of it yet. It's strange to issue a revocation, but then it's also strange to get subpoena'd by CTFC, and to print 850 million tethers in the same month you fail to get an audit through... A revocation of about 1.5% is just another confounding factor at this point.
random_rr 9y ago
Keeping pace with the market. Tether burning coins is an expected and healthy part of their supply management strategy. Think about how you'd keep a finite-supply coin pegged to a value - you'd print and burn tokens as needed to stabilize the value of the coin.
- sanxiyn 9y ago
  I agree it is indeed normal if Tether is backed.
- citricsquid 9y ago
  This is not what Tether is intended to be. Tether is not pegged to the value of 1 USD. The value of Tether does not need to be stabilized. Tether is a 1 for 1 USD backed coin, meaning it's entirely within the scope of Tether for the value of 1USDT to reach $1.10, $1.20 or even $1.50 -- if the market decides that is the value of it. The point of Tether is that for each USDT there is a corresponding USD in an account belonging to Tether. If Tether were printing USDT to keep 1 USDT valued at 1 USD then they would be violating what Tether is publicly stated to be. The whitepaper can be found here: https://tether.to/wp-content/uploads/2016/06/TetherWhitePaper.pdf https://tether.to/wp-content/uploads/2016/06/TetherWhitePape...

dingo_bat 9y ago

I am piling up the popcorn. Cannot wait for the conclusion of the USDT saga.

hluska 9y ago

'"Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame," a Tether spokesperson told Ars by email.' In my mind, this paragraph is the article's money shot. If I was a legitimate business person issuing a security meant to fill Tether's place, I would pray that my auditor was excruciatingly detailed. And frankly, there is no way in hell that a security like Tether could have a 'relatively simple balance sheet' in light of their problems receiving US currency combined with rapidly issuing more tokens. This is bad...and the fact that a PR person said that means things are bad beyond belief.

arisAlexis 9y ago
not really. In cryptospace governments want to ban things. Measures need.to be taken as this is just a centralized tool for the decentralised economy
- hluska 9y ago
  I'm sorry, but I don't think I understand your point. If this was the type of audit that publicly traded corporations need to go through, I'd agree. But in this case, Tether advertised that its claims would be verified by an audit.
- JumpCrisscross 9y ago
  > In cryptospace governments want to ban things American regulators default to permissiveness, particularly in the face of new financial technologies. Their laissez faire comment-and-wait approach to Bitcoin, ICOs and related events is not particularly jarring. But India's regulators are of the shoot-first-ask-questions-later variety [1]. Cryptocurrencies are a unique global phenomenon of immense regulatory restraint, not zeal. (This is probably explained by cryptocurrency's technical complexity, growth and metastasisation as well as some regulators having been won over by the pitch.) [1] https://en.wikipedia.org/wiki/Licence_Raj https://en.wikipedia.org/wiki/Licence_Raj
  - 9y ago

apo 9y ago

There are similarities to Mt. Gox. One of the most important is the near-complete lack of user panic, despite ample warnings, right up to the collapse. I remember vividly seeing Mt. Gox users warned to leave. They didn't. Somehow, they discounted or ignored every warning. Then they became angry when their money was stolen. Then they claimed Mt. Gox was responsible for their loss. History seems to be repeating itself here. Tether holders somehow don't see, can't see, or refuse to see the writing on the wall.

conanbatt 9y ago
The difference between mtGox and this is that bitfinex is seemingly infinitely solvent. Some estimates are like 20-30 million revenue per day. Its the top running exchange. I doubt they would expose themselves to a bankrupcy event having such a cash cow. I believe they did market manipulation, and that they are committing fraud with tether, but I'm not convinced tether is not solvent.
- AJ007 9y ago
  What if they covered up other breaches?
  - conanbatt 9y ago
    There is no reaason to believe that happened afaik.
  - sushid 9y ago
    We would have seen the losses happen in real time on various blockchains for ETH, BTC, BCH, etc.
- Sangermaine 9y ago
  >Its the top running exchange. So was mtGox.
  - conanbatt 9y ago

arisAlexis 9y ago

misleading article. No audit "failed"

pmlnr 9y ago
What does, in your read, mean 'auditor backed out from auditing'?
- arisAlexis 9y ago
  nobody knows who fired who, the author is speculating.

bradleyjg 9y ago

It's pretty clear that tether is a scam. A more interesting question to me is whether a legitimate tether could break even. That is, is the risk-free demand deposit interest rate high enough to support the services that would be needed for a full reserve cryptocoin? Services which include creation/redemption facilities, proof of work rewards to drive a blockchain, and third party audits to ensure that the trusts aren't stealing the reserves. For reference the current market cap of tether is (allegedly) around $2.2B, which at the overnight rate would generate around $30 million a year in interest.

Ajedi32 9y ago
Could an actual bank perhaps decide to issue cryptocurrency to its customers at a $1/coin exchange rate? Wouldn't be full reserve, given that it's a bank, but the deposits would be FDIC-insured, right?
- matthewbauer 9y ago
  I think you’d lose FDIC insurance when you let people trade it.
- pmlnr 9y ago
  One could, in theory, yes, but given the strictness on banks, I'm pretty certain they would have no problems auditing it.
- bradleyjg 9y ago
  I'm not sure how that would work. It sounds like the opposite of a normal bank relationship. In general the idea of fractional reserve is that you, the customer, deposit dollars in a bank account, the bank lends out those dollars to borrowers, but still allows you to come and get your dollars back at any time you like. This takes advantage of something like statistical multiplexing -- it is unlikely that everyone will want his dollars back at the same time. And in modern times it is backed up by various government schemes which will provide liquidity in the case of a run on the bank. If the bank issued you a cryptocurrency at a rate of $1/coin then it would be same thing as giving you your dollars back. It would reduce the banks reserves. I guess your scheme would make more sense on the other side of the bank. That is, the bank could lend out coins rather than dollars. But in that case there isn't a multiplier for coins, because the reserves would still be in dollars.

qwerty456127 9y ago

Every currency is only worth what people believe it is, nothing else, it doesn't really matter what did it actually cost to make it. Even if that's true, trying to convince people it's not backed the way it was meant to is nearly as questionable ethically as issuing unbaked coins probably was. If people keep believing nobody will get hurt, if people stop believing the results can be catastrophic. Of course this is a slippery idea itself yet the matter is too serious to just ignore it.

Nursie 9y ago
People have already been hurt - if it's not backed, bitfinex have helped themselves to two billion dollars worth of crytocurrency though fraud. Other people have paid more for crytocurrency than they might have had to because this fraud would have pushed up prices. You're begging us to let criminal activity carry on.
- qwerty456127 9y ago
  I am not begging you anything but think twice. I personally am not an interested party, I have no blockchain-related assets but I think about all those people who has and I see 2 possible outcomes: if it gets publicly confirmed that the coins were not backed many innocent people will loose their legitimate investments and if it's doesn't they won't, and this doesn't depend on whether the coins actually were backed or not. I don't advocate scam but punishing them may be not really worth the global consequences for people who were not consciously involved. I am not telling what should the people investigating this should choose, I am only telling they should consciously consider all potential results of their decisions. I personally believe that it usually is more important to save what we still have than to revenge what we have lost and that we should always think about the people who happen to be in a less advantageous position than we ourselves are at the time. In fact I love to speak unpopular and "inappropriate" things aloud and question "unquestionable", somebody has to anyway.
  - Nursie 9y ago
    It's not revenge, it's revealing the truth about the market, without which the market cannot function correctly. You are asking for continuation of the lie of overvaluation, which can only continue if more people continue to pump in more money under false pretences. I'm sorry for people who were caught by this - they've been scammed. Pretending they haven't isn't going to help in the long term but make it worse and for more people.