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I'm all in on the concept that Tether is a fraud. However, isn't it slightly premature to file a lawsuit over losses? The latest price charts still have tether

I'm all in on the concept that Tether is a fraud. However, isn't it slightly premature to file a lawsuit over losses? The latest price charts still have tether at $1~=1USDT. If you have Tether and are worried about its liquidity, shouldn't you just sell Tether to someone who wants it in exchange for something else? Or is there some kind of problem with doing that transaction that I'm not aware of? Maybe some limitation that's not reflected in the price charts? Edit: I see that this is not actually about Tether's liquidity at all. Instead, the accusation is that Tether was used to pump and dump Bitcoin, and those who suffered damages under this theory are people who bought Bitcoin at the top.

deleted 7y ago
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MuffinFlavored 7y ago
Can you spell out (maybe ELI5) why the concept of Tether is a fraud? Why is it not possible to back cryptos to a stabilized "1:1" "medium/currency" (which itself is another crypto it seems) and finally the USD dollar ?
- Animats 7y ago
  Because there really aren't substantial hard assets behind Tether. Even Tether now admits this. What keeps this going is a net inflow of cash into Tether. If that ever switches to a net outflow, the Ponzi scheme collapses.
  - teknopurge 7y ago
    Where does Tether admit this?
    - JumpCrisscross 7y ago
      > Where does Tether admit this? A New York State court filing [1]. (They’re under criminal investigation by the U.S. and New York.) [1] https://www.bloomberg.com/news/articles/2019-04-30/tether-says-stablecoin-is-only-backed-74-by-cash-securities https://www.bloomberg.com/news/articles/2019-04-30/tether-sa...
  - eternalny1 7y ago
    Since Tether can't back the 1/1 USD in an actual bank (due to banking regulations), they have to park that money somewhere. If they are parking it in other cryptocurrencies, then they have to ensure that the value of that particular cryptocurrency does not fall below the average price they had to buy it at (to ensure they can redeem). So if, for example, Tether has had to buy Bitcoin and the average of all those purchases came out to $7,500/BTC, they have to ensure that BTC doesn't fall below $7,500 now because otherwise they end up net-negative. At least from what I can gather.
- lawn 7y ago
  They've already admitted it's not backed 1:1, although they claimed it was always backed before. Others have linked an article with a source.
- hluska 7y ago
  I’m not OP and I’m sure that far more intelligent people than me will take a stab at this. As I understand it, the issue isn’t with a stablecoin. There would be nothing wrong with backing a token to a currency. Unfortunately, it looks like Tether didn’t tell the truth. They claimed that they would have one US dollar in their bank account per token in circulation. This was a lie and they release an enormous number of unbanked tokens into the market. The class action claims they created 2.8 billion USDT between 2017 and 2018. At the time, the market believed the tokens had implicit value (as one was backed by a dollar) so the theory is that this made buying crypto a more compelling investment.
  - jki275 7y ago
    This is an accurate explanation of the issue.
  - macspoofing 7y ago
    >There would be nothing wrong with backing a token to a currency. I don't know about that. Isn't the entire point of stablecoin to skirt existing regulations? Moving fiat currency isn't hard in and of itself. There is no technical challenge in Paypal sending $100,000 to my friend in Iran. What makes it hard are the regulations combating money laundering, criminal and terrorism funding and enforcement of sanctions.
    - papln 7y ago
      Paypal could void the transaction and freeze your account or your friend's account.
      - fwip 7y ago
        Exactly, because PayPal has to comply with regulations.
- conception 7y ago
  Tether's market cap is $4,132,688,008 USD. That means that the folks running tether need to have 4B in reserves. That is... unlikely.
  - deleted 7y ago
    [deleted]
  - papln 7y ago
    This amazes me. It's really hard to get $4B in revenue for an actual product. But they have sold 4B pretend dollars that are no better than dozens of other cryptocurrencies?
    - jacobush 7y ago
      Actually worse than other cryptocurrencies. Because Tether can collapse if (when) they are found guilty. The "normal" cryptocurrencies can collapse only when the market as a whole says so.
  - edmundsauto 7y ago
    According to Matt Levine, some of their reserves are literally accounts receivable from other shell companies they have started.
- rtempaccount1 7y ago
  It's entirely possible to have a stablecoin and indeed others exist. The key to a stablecoin however, is trust. Users have to trust that their holdings are actually backed by real fiat currency as that's the promise of the stablecoin. That trust can typically be bolstered by things like 3rd party audits, which is something Tether promised for many years and did not deliver. With Tether the problems are that they have avoided scrutiny and audit, made statements on their website that subsequently turned out to be false and have a somewhat murky corporate structure. None of these, should , engender trust.
  - noxer 7y ago
    Stablecoin do not need to be backed by fiat. They can be backed by crypto as well an be stable against fiat or anything of value. This way trust can mostly be removed. No 3rd party audit needed because you can lock up crypto in a way it's public verifiable for everyone. There are some trust issues that are still problematic like for example someone needs to provide a price feed against which the value will be stabilized. Whoever is in control of that price feed could of course damage the system to the point where people loose all their money. But in the real world such a price feed could come from a DEX so its not controlled by someone but instead by what people buy and sell. In a closed system this could however cause a "runaway" of the price due to price feedback loops. Here is an interesting talk about a crypt collateralized stablecoin proposal https://www.youtube.com/watch?v=Se2CDsmMqvE https://www.youtube.com/watch?v=Se2CDsmMqvE again this does NOT yet exist!
    - ht85 7y ago
      I have a hard time understanding how a stablecoin could be backed by crypto. Traditional currencies are mostly backed by things that are very unlikely to crash like real estate, profit share in companies and other ressources with value besides speculation. What would happen if BTC crashed to 1/10 of its price, and all other coins followed?
      - jki275 7y ago
        You've hit upon the problem. All the stable coins, unless they're actually based on and backed by something other than other cryptocurrencies, are essentially fraudulent.
- biggestdecision 7y ago
  Tether promised that 1 USDT would be backed by 1 USD, and they would always honor a 1:1 exchange rate. Now it turns out that USDT are not backed by USD, and Tether will not exchange between the two. You are reliant on third party exchange services, that don't guarantee the exchange rate. Traditional banking services are hostile to crypto, so they cut off Tether's ability to trade in USD. And Tethers own interest (widespread use of USDT) is at odds with their inability to provide adequate backing USD. Exchanges all wanted more USDT to provide more liquidity, and so Tether just printed USDT without backing. A crypto backed 1:1 by USD is a great idea, the trick is finding a way to actually guarantee the backing currency & exchange rate.
  - tptacek 7y ago
    Is it a great idea? Or does it not reliably exist for a reason: because it's in tension with banking regulations, and anyone who tries to do it without applying all the same KYC and AML regs that motivate stablecoins in the first place are going to be frozen out the same way Bitfinex was, to the point where they too will end up pitifully reliant on money laundering firms opening fleets of fraudulent accounts at tiny banks?
    - seibelj 7y ago
      USDC from ycombinator-funded Coinbase is doing fine https://www.coinbase.com/usdc https://www.coinbase.com/usdc But the same old tropes about crypto always get the upvotes.
      - papln 7y ago
        How is USDC operation financed? Is it a marketing expense of Coinbase? Is "Convert USDC at a ratio of US$1.00 for 1 USDC with no fees" expected to change to a fee in the future?
        nostrademons 7y ago
        Loss leader to get you to trade more. The existence of USDC makes it easier to move in and out of crypto positions, and to send crypto to other exchanges without taking on exchange-rate risks. Coinbase's business model is to take a fee whenever you transact. The more transactions you make, the more money they make. It's similar to Google's "make the web faster" efforts (Chrome, V8, AMP, mod_pagespeed, hosting JQuery & other AJAX libs, developer education). If the web is faster, you visit more pages. If you visit more pages, you search more. If you search more, you click on more ads, which makes Google more money.
- jcranmer 7y ago
  Tether claimed to be backed 100% by USD (this claim was walked back in successive stages, but at the time of the 2017 bubble, it was still the claim). To have that, you need $100M - $1B of USD currency sitting in a bank. At that scale, any bank needs to be asking where that money came from to comply with regulations. The goal of Tether, quite literally, is to park money without having to answer those pesky questions, which means no reputable bank is going to take them as a client. Evidently, the "banks" Tether found who could work with them ended up being money launderers who were busy skimming off actual assets Tether was accumulating. More generally, cryptocurrency carries with it a whiff of KYC/AML regulatory evasion. With the purpose of stablecoins is generally stated as pretending you're trading in USD without actually doing so (and the financial regulations implied by actually doing so kicking in), it is not hard to infer that many, if not most, users are interested solely in evading this rules, which is going to cause banks' compliance officers to look at it very skeptically.
- DylanBohlender 7y ago
  It all boils down to fractional reserves in an illiquid market. If you're keeping the USD in a bank and issuing a coin representing it, no problems arise, because you'd effectively be acting like a bank. In Tether/iFinex's case, you have a situation where there was a "pseudo-bank" (Tether) and a crypto exchange (iFinex) that were highly intertwined. Because Tether was more or less controlled by iFinex, which also controlled one of the largest cryptocurrency exchanges by volume, this provided a unique cover for fraud, and different profit motives than a traditional bank would have. Tether did its business by exchanging USD for Tethers. iFinex did its business by pocketing spreads and fees from crypto to crypto trades. Meaning, Tether had a bunch of USD on hand, and iFinex had a bunch of crypto (primarily Bitcoin) on hand. What likely happened in Tether's case was that iFinex instructed Tether to create unbacked Tethers out of thin air, and used these Tethers to pump up the value of iFinex's own Bitcoin holdings. For example, suppose issuing $1M of Tether and spending it on Bitcoin moved the spot price up enough to increase the value of iFinex's Bitcoin holdings by more than $1M. Isn't that basically free money? You've spent $1M and created more than $1M in paper value. All you have to do is sell those Bitcoins at the new, higher price for real USD, and you've made relatively risk-free profit. Why the hell did this work for so long? First, the market believed Tethers were backed 1:1 with USD and treated the two as functionally equivalent. Some traders would see the Bitcoin price increase on a Tether exchange like Bitfinex, and then buy Bitcoin at nominally "cheaper" prices on non-Tether exchanges like Coinbase, so that they could transfer the coins over to Bitfinex and sell them for a tidy profit. In this way, the Tether exchanges could impact Bitcoin's price even on exchanges that didn't use Tether due to the natural incentive for arbitrage. Second, the crypto markets are quite illiquid, and because orderbooks are thin it only takes a small amount of buying or selling firepower to push prices pretty drastically. The alleged fraud is that iFinex did exactly that, and progressively pushed prices up. Third, as prices swelled, Bitcoin attracted more _real_ investors, and many such investors then spent actual USD on Bitcoin, creating a self-fulfilling prophecy that in theory would have enabled iFinex to totally get away with it - all they had to do was sell off enough Bitcoin to cover for all of those unbacked Tethers they'd issued, and they would essentially become whole. Now, things get interesting when it comes to how iFinex ran its business. iFinex refused to implement KYC/AML checks on their exchange, because nominally they were "crypto-to-crypto" and thus considered themselves to be outside of the US financial system's jurisdiction. In practice they used an indirect relationship via one of Wells Fargo's affiliates for a long period of time until they were found out, and then the US financial system more or less put a moratorium on doing business with them. It turns out that being locked out of the US financial system is extremely damaging when your customers want to withdraw US dollars, so for a period of time, iFinex tried jumping around from bank to bank, trying to stay ahead of regulators who had effectively blacklisted them by having customers making deposits wire their money to pay off other customers looking to withdraw money, and all kinds of other shady practices. Eventually they ran out of options and started doing business with what looks to have been a money laundering shadow bank, Crypto Capital Corp, who then promptly stole a bunch of their money, which then led to the current debacle. All told, it's one of the most interesting stories in the financial markets by a long shot. It will be fascinating to watch it continue to play out.
- lubesGordi 7y ago
  The CONCEPT of stablecoin is fraudulent/fantasy because you can't take a stablecoin and look at it and see exactly where the fiat that is backing it is. You can't prove that it's fiat backing exists in any way. The only reason it exists is because there are a ton of fanboys for anything crypto and they don't have a clue how it works. TONS of people were freaking out about tether very shortly after it became well known.
  - seibelj 7y ago
    YC-funded Coinbase has monthly attestation reports for its USDC stablecoin, which is the second most popular https://www.coinbase.com/usdc https://www.coinbase.com/usdc
    - lubesGordi 7y ago
      The only reason something like this can work is because of trust in the institution that provides it. That whole premise is counter to the crypto currency model.
- deleted 7y ago
  [deleted]
- JumpCrisscross 7y ago
  > Can you spell out (maybe ELI5) why the concept of Tether is a fraud? Tether sold tokens on the promise that 1 USDT would be backed by U.S. dollars. They didn't keep one U.S. dollar for each USDT sold. If they did (or concealed) that willfully, it's fraud. > Why is it not possible to back cryptos to a stabilized "1:1" "medium/currency" (which itself is another crypto it seems) and finally the USD dollar ? U.S. dollars can be held as hard cash or in bank accounts. Holding $4 billion physically is bonkers. Banks holding U.S. dollars, meanwhile, have to follow U.S. anti-money laundering law. That requires, among other things, knowing who beneficially owns their deposits. If an LLC opens a bank account, the bank will ask about its owners. With Tether, the beneficial owners are USDT holders. Since Tether can't identify them, they can't satisfy any bank's compliance questions. So either (a) Tether's banks are violating U.S. AML law, (b) Tether is lying or (c) Tether is silently restricting and keeping records on who owns every USDT. Given we have contrevidence for (c), one can conclude–based solely on Tether's claims–that there's fraud afoot. Disclaimer: I am not a lawyer. This is neither legal nor trading advice.
  - londons_explore 7y ago
    > With Tether, the beneficial owners are USDT holders. As far as the bank is concerned, USDT is a valueless token and potentially empty promise by Tether Inc. The beneficial owner of the money is Tether Inc, not the USDT holders.
  - paulie_a 7y ago
    You never need to add that disclaimer.
- Legogris 7y ago
  The commenter you're replying to is "all in on the concept that Tether is a fraud", not "all in on that the concept of Tether is a fraud". Ie they're talking about Tether specifically, not the concept of fiat-backed digital assets.
JumpCrisscross 7y ago
> isn't it slightly premature to file a lawsuit over losses People bought, and Tether sold, USDT on assurances of being 100% backed by U.S. dollars. Tether is now admitting that not only is it not 100% backed, it isn't even entirely backed by U.S. dollars [1]. That's enough to allege fraud. > The latest price charts still have tether at $1~=1USDT Tether is under criminal investigation by the United States and New York State for, among other things, market manipulation. Taking Bitfinex's word that one's USDT has suffered no losses, all while they delay and unreasonably condition withdrawals [2], is like trusting Adam Neumann's on WeWork being worth $47bn. [1] https://www.bloomberg.com/news/articles/2019-04-30/tether-says-stablecoin-is-only-backed-74-by-cash-securities https://www.bloomberg.com/news/articles/2019-04-30/tether-sa... [2] https://tether.to/announcement/ https://tether.to/announcement/
- asdfasgasdgasdg 7y ago
  OK, so, I don't have a strong position on this -- I'm purely asking a question. No need to go all ham with hyperbolic similes. Also, am I taking Bitfinex's word when I look at the exchange-derived price of Tether? I'm not sure. I would have thought that I was trusting the price discovery mechanism in general. If I'm trusting Bitfinex on this at all, it's only to the extent that Bitfinex would be backstopping the price of Tether on all other exchanges. Right? I mean, they can lie about how much a Tether is worth, but they can't lie about how much it's trading for on exchanges they don't own.
  - Slartie 7y ago
    The problem is: the Tether-USD pairing, which is the one that is supposed to always be at 1:1, is really exotic on exchanges. The only major one coming to my mind is Kraken, and even there the volume on the pair is anemic compared to the Tether market cap. Or at least it was this way last time I was really active in cryptos, which I‘m not really at the moment. But a quick scan of Coinmarketcap didn’t really indicate that this has changed.
    - asdfasgasdgasdg 7y ago
zelly 7y ago
Most people who talk about Tether agree it's a scam, yet a lot of people hold money in it. It's an interesting case of mass psychology. How long can you kick the can down the road? Nobody can say they weren't warned.
- bduerst 7y ago
  One of the things I learned in my behavioral finance class during grad school was that there are people who would invest into ponzi schemes knowing it was a scam. They are betting the returns on getting out before the scam collapses and they lose everything.

deleted 7y ago

[deleted]

MuffinFlavored 7y ago

Can you spell out (maybe ELI5) why the concept of Tether is a fraud? Why is it not possible to back cryptos to a stabilized "1:1" "medium/currency" (which itself is another crypto it seems) and finally the USD dollar ?

Animats 7y ago
Because there really aren't substantial hard assets behind Tether. Even Tether now admits this. What keeps this going is a net inflow of cash into Tether. If that ever switches to a net outflow, the Ponzi scheme collapses.
- teknopurge 7y ago
  Where does Tether admit this?
  - JumpCrisscross 7y ago
    > Where does Tether admit this? A New York State court filing [1]. (They’re under criminal investigation by the U.S. and New York.) [1] https://www.bloomberg.com/news/articles/2019-04-30/tether-says-stablecoin-is-only-backed-74-by-cash-securities https://www.bloomberg.com/news/articles/2019-04-30/tether-sa...
- eternalny1 7y ago
  Since Tether can't back the 1/1 USD in an actual bank (due to banking regulations), they have to park that money somewhere. If they are parking it in other cryptocurrencies, then they have to ensure that the value of that particular cryptocurrency does not fall below the average price they had to buy it at (to ensure they can redeem). So if, for example, Tether has had to buy Bitcoin and the average of all those purchases came out to $7,500/BTC, they have to ensure that BTC doesn't fall below $7,500 now because otherwise they end up net-negative. At least from what I can gather.
lawn 7y ago
They've already admitted it's not backed 1:1, although they claimed it was always backed before. Others have linked an article with a source.
hluska 7y ago
I’m not OP and I’m sure that far more intelligent people than me will take a stab at this. As I understand it, the issue isn’t with a stablecoin. There would be nothing wrong with backing a token to a currency. Unfortunately, it looks like Tether didn’t tell the truth. They claimed that they would have one US dollar in their bank account per token in circulation. This was a lie and they release an enormous number of unbanked tokens into the market. The class action claims they created 2.8 billion USDT between 2017 and 2018. At the time, the market believed the tokens had implicit value (as one was backed by a dollar) so the theory is that this made buying crypto a more compelling investment.
- jki275 7y ago
  This is an accurate explanation of the issue.
- macspoofing 7y ago
  >There would be nothing wrong with backing a token to a currency. I don't know about that. Isn't the entire point of stablecoin to skirt existing regulations? Moving fiat currency isn't hard in and of itself. There is no technical challenge in Paypal sending $100,000 to my friend in Iran. What makes it hard are the regulations combating money laundering, criminal and terrorism funding and enforcement of sanctions.
  - papln 7y ago
    Paypal could void the transaction and freeze your account or your friend's account.
    - fwip 7y ago
      Exactly, because PayPal has to comply with regulations.
conception 7y ago
Tether's market cap is $4,132,688,008 USD. That means that the folks running tether need to have 4B in reserves. That is... unlikely.
- deleted 7y ago
  [deleted]
- papln 7y ago
  This amazes me. It's really hard to get $4B in revenue for an actual product. But they have sold 4B pretend dollars that are no better than dozens of other cryptocurrencies?
  - jacobush 7y ago
    Actually worse than other cryptocurrencies. Because Tether can collapse if (when) they are found guilty. The "normal" cryptocurrencies can collapse only when the market as a whole says so.
- edmundsauto 7y ago
  According to Matt Levine, some of their reserves are literally accounts receivable from other shell companies they have started.
rtempaccount1 7y ago
It's entirely possible to have a stablecoin and indeed others exist. The key to a stablecoin however, is trust. Users have to trust that their holdings are actually backed by real fiat currency as that's the promise of the stablecoin. That trust can typically be bolstered by things like 3rd party audits, which is something Tether promised for many years and did not deliver. With Tether the problems are that they have avoided scrutiny and audit, made statements on their website that subsequently turned out to be false and have a somewhat murky corporate structure. None of these, should , engender trust.
- noxer 7y ago
  Stablecoin do not need to be backed by fiat. They can be backed by crypto as well an be stable against fiat or anything of value. This way trust can mostly be removed. No 3rd party audit needed because you can lock up crypto in a way it's public verifiable for everyone. There are some trust issues that are still problematic like for example someone needs to provide a price feed against which the value will be stabilized. Whoever is in control of that price feed could of course damage the system to the point where people loose all their money. But in the real world such a price feed could come from a DEX so its not controlled by someone but instead by what people buy and sell. In a closed system this could however cause a "runaway" of the price due to price feedback loops. Here is an interesting talk about a crypt collateralized stablecoin proposal https://www.youtube.com/watch?v=Se2CDsmMqvE https://www.youtube.com/watch?v=Se2CDsmMqvE again this does NOT yet exist!
  - ht85 7y ago
    I have a hard time understanding how a stablecoin could be backed by crypto. Traditional currencies are mostly backed by things that are very unlikely to crash like real estate, profit share in companies and other ressources with value besides speculation. What would happen if BTC crashed to 1/10 of its price, and all other coins followed?
    - jki275 7y ago
      You've hit upon the problem. All the stable coins, unless they're actually based on and backed by something other than other cryptocurrencies, are essentially fraudulent.
biggestdecision 7y ago
Tether promised that 1 USDT would be backed by 1 USD, and they would always honor a 1:1 exchange rate. Now it turns out that USDT are not backed by USD, and Tether will not exchange between the two. You are reliant on third party exchange services, that don't guarantee the exchange rate. Traditional banking services are hostile to crypto, so they cut off Tether's ability to trade in USD. And Tethers own interest (widespread use of USDT) is at odds with their inability to provide adequate backing USD. Exchanges all wanted more USDT to provide more liquidity, and so Tether just printed USDT without backing. A crypto backed 1:1 by USD is a great idea, the trick is finding a way to actually guarantee the backing currency & exchange rate.
- tptacek 7y ago
  Is it a great idea? Or does it not reliably exist for a reason: because it's in tension with banking regulations, and anyone who tries to do it without applying all the same KYC and AML regs that motivate stablecoins in the first place are going to be frozen out the same way Bitfinex was, to the point where they too will end up pitifully reliant on money laundering firms opening fleets of fraudulent accounts at tiny banks?
  - seibelj 7y ago
    USDC from ycombinator-funded Coinbase is doing fine https://www.coinbase.com/usdc https://www.coinbase.com/usdc But the same old tropes about crypto always get the upvotes.
    - papln 7y ago
      How is USDC operation financed? Is it a marketing expense of Coinbase? Is "Convert USDC at a ratio of US$1.00 for 1 USDC with no fees" expected to change to a fee in the future?
      - nostrademons 7y ago
        Loss leader to get you to trade more. The existence of USDC makes it easier to move in and out of crypto positions, and to send crypto to other exchanges without taking on exchange-rate risks. Coinbase's business model is to take a fee whenever you transact. The more transactions you make, the more money they make. It's similar to Google's "make the web faster" efforts (Chrome, V8, AMP, mod_pagespeed, hosting JQuery & other AJAX libs, developer education). If the web is faster, you visit more pages. If you visit more pages, you search more. If you search more, you click on more ads, which makes Google more money.
jcranmer 7y ago
Tether claimed to be backed 100% by USD (this claim was walked back in successive stages, but at the time of the 2017 bubble, it was still the claim). To have that, you need $100M - $1B of USD currency sitting in a bank. At that scale, any bank needs to be asking where that money came from to comply with regulations. The goal of Tether, quite literally, is to park money without having to answer those pesky questions, which means no reputable bank is going to take them as a client. Evidently, the "banks" Tether found who could work with them ended up being money launderers who were busy skimming off actual assets Tether was accumulating. More generally, cryptocurrency carries with it a whiff of KYC/AML regulatory evasion. With the purpose of stablecoins is generally stated as pretending you're trading in USD without actually doing so (and the financial regulations implied by actually doing so kicking in), it is not hard to infer that many, if not most, users are interested solely in evading this rules, which is going to cause banks' compliance officers to look at it very skeptically.
DylanBohlender 7y ago
It all boils down to fractional reserves in an illiquid market. If you're keeping the USD in a bank and issuing a coin representing it, no problems arise, because you'd effectively be acting like a bank. In Tether/iFinex's case, you have a situation where there was a "pseudo-bank" (Tether) and a crypto exchange (iFinex) that were highly intertwined. Because Tether was more or less controlled by iFinex, which also controlled one of the largest cryptocurrency exchanges by volume, this provided a unique cover for fraud, and different profit motives than a traditional bank would have. Tether did its business by exchanging USD for Tethers. iFinex did its business by pocketing spreads and fees from crypto to crypto trades. Meaning, Tether had a bunch of USD on hand, and iFinex had a bunch of crypto (primarily Bitcoin) on hand. What likely happened in Tether's case was that iFinex instructed Tether to create unbacked Tethers out of thin air, and used these Tethers to pump up the value of iFinex's own Bitcoin holdings. For example, suppose issuing $1M of Tether and spending it on Bitcoin moved the spot price up enough to increase the value of iFinex's Bitcoin holdings by more than $1M. Isn't that basically free money? You've spent $1M and created more than $1M in paper value. All you have to do is sell those Bitcoins at the new, higher price for real USD, and you've made relatively risk-free profit. Why the hell did this work for so long? First, the market believed Tethers were backed 1:1 with USD and treated the two as functionally equivalent. Some traders would see the Bitcoin price increase on a Tether exchange like Bitfinex, and then buy Bitcoin at nominally "cheaper" prices on non-Tether exchanges like Coinbase, so that they could transfer the coins over to Bitfinex and sell them for a tidy profit. In this way, the Tether exchanges could impact Bitcoin's price even on exchanges that didn't use Tether due to the natural incentive for arbitrage. Second, the crypto markets are quite illiquid, and because orderbooks are thin it only takes a small amount of buying or selling firepower to push prices pretty drastically. The alleged fraud is that iFinex did exactly that, and progressively pushed prices up. Third, as prices swelled, Bitcoin attracted more _real_ investors, and many such investors then spent actual USD on Bitcoin, creating a self-fulfilling prophecy that in theory would have enabled iFinex to totally get away with it - all they had to do was sell off enough Bitcoin to cover for all of those unbacked Tethers they'd issued, and they would essentially become whole. Now, things get interesting when it comes to how iFinex ran its business. iFinex refused to implement KYC/AML checks on their exchange, because nominally they were "crypto-to-crypto" and thus considered themselves to be outside of the US financial system's jurisdiction. In practice they used an indirect relationship via one of Wells Fargo's affiliates for a long period of time until they were found out, and then the US financial system more or less put a moratorium on doing business with them. It turns out that being locked out of the US financial system is extremely damaging when your customers want to withdraw US dollars, so for a period of time, iFinex tried jumping around from bank to bank, trying to stay ahead of regulators who had effectively blacklisted them by having customers making deposits wire their money to pay off other customers looking to withdraw money, and all kinds of other shady practices. Eventually they ran out of options and started doing business with what looks to have been a money laundering shadow bank, Crypto Capital Corp, who then promptly stole a bunch of their money, which then led to the current debacle. All told, it's one of the most interesting stories in the financial markets by a long shot. It will be fascinating to watch it continue to play out.
lubesGordi 7y ago
The CONCEPT of stablecoin is fraudulent/fantasy because you can't take a stablecoin and look at it and see exactly where the fiat that is backing it is. You can't prove that it's fiat backing exists in any way. The only reason it exists is because there are a ton of fanboys for anything crypto and they don't have a clue how it works. TONS of people were freaking out about tether very shortly after it became well known.
- seibelj 7y ago
  YC-funded Coinbase has monthly attestation reports for its USDC stablecoin, which is the second most popular https://www.coinbase.com/usdc https://www.coinbase.com/usdc
  - lubesGordi 7y ago
    The only reason something like this can work is because of trust in the institution that provides it. That whole premise is counter to the crypto currency model.
deleted 7y ago
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JumpCrisscross 7y ago
> Can you spell out (maybe ELI5) why the concept of Tether is a fraud? Tether sold tokens on the promise that 1 USDT would be backed by U.S. dollars. They didn't keep one U.S. dollar for each USDT sold. If they did (or concealed) that willfully, it's fraud. > Why is it not possible to back cryptos to a stabilized "1:1" "medium/currency" (which itself is another crypto it seems) and finally the USD dollar ? U.S. dollars can be held as hard cash or in bank accounts. Holding $4 billion physically is bonkers. Banks holding U.S. dollars, meanwhile, have to follow U.S. anti-money laundering law. That requires, among other things, knowing who beneficially owns their deposits. If an LLC opens a bank account, the bank will ask about its owners. With Tether, the beneficial owners are USDT holders. Since Tether can't identify them, they can't satisfy any bank's compliance questions. So either (a) Tether's banks are violating U.S. AML law, (b) Tether is lying or (c) Tether is silently restricting and keeping records on who owns every USDT. Given we have contrevidence for (c), one can conclude–based solely on Tether's claims–that there's fraud afoot. Disclaimer: I am not a lawyer. This is neither legal nor trading advice.
- londons_explore 7y ago
  > With Tether, the beneficial owners are USDT holders. As far as the bank is concerned, USDT is a valueless token and potentially empty promise by Tether Inc. The beneficial owner of the money is Tether Inc, not the USDT holders.
- paulie_a 7y ago
  You never need to add that disclaimer.
Legogris 7y ago
The commenter you're replying to is "all in on the concept that Tether is a fraud", not "all in on that the concept of Tether is a fraud". Ie they're talking about Tether specifically, not the concept of fiat-backed digital assets.

JumpCrisscross 7y ago

> isn't it slightly premature to file a lawsuit over losses People bought, and Tether sold, USDT on assurances of being 100% backed by U.S. dollars. Tether is now admitting that not only is it not 100% backed, it isn't even entirely backed by U.S. dollars [1]. That's enough to allege fraud. > The latest price charts still have tether at $1~=1USDT Tether is under criminal investigation by the United States and New York State for, among other things, market manipulation. Taking Bitfinex's word that one's USDT has suffered no losses, all while they delay and unreasonably condition withdrawals [2], is like trusting Adam Neumann's on WeWork being worth $47bn. [1] https://www.bloomberg.com/news/articles/2019-04-30/tether-says-stablecoin-is-only-backed-74-by-cash-securities https://www.bloomberg.com/news/articles/2019-04-30/tether-sa... [2] https://tether.to/announcement/ https://tether.to/announcement/

asdfasgasdgasdg 7y ago
OK, so, I don't have a strong position on this -- I'm purely asking a question. No need to go all ham with hyperbolic similes. Also, am I taking Bitfinex's word when I look at the exchange-derived price of Tether? I'm not sure. I would have thought that I was trusting the price discovery mechanism in general. If I'm trusting Bitfinex on this at all, it's only to the extent that Bitfinex would be backstopping the price of Tether on all other exchanges. Right? I mean, they can lie about how much a Tether is worth, but they can't lie about how much it's trading for on exchanges they don't own.
- Slartie 7y ago
  The problem is: the Tether-USD pairing, which is the one that is supposed to always be at 1:1, is really exotic on exchanges. The only major one coming to my mind is Kraken, and even there the volume on the pair is anemic compared to the Tether market cap. Or at least it was this way last time I was really active in cryptos, which I‘m not really at the moment. But a quick scan of Coinmarketcap didn’t really indicate that this has changed.
  - asdfasgasdgasdg 7y ago

zelly 7y ago

Most people who talk about Tether agree it's a scam, yet a lot of people hold money in it. It's an interesting case of mass psychology. How long can you kick the can down the road? Nobody can say they weren't warned.

bduerst 7y ago
One of the things I learned in my behavioral finance class during grad school was that there are people who would invest into ponzi schemes knowing it was a scam. They are betting the returns on getting out before the scam collapses and they lose everything.