Tether’s bad month: CFTC, Bloomberg, Reggie Fowler

As well as the settlement with the CFTC and a $41 million fine this month (covered here two days ago), everyone’s favourite stablecoin issuer, Tether Inc., had a front-cover story in Bloomberg Businessweek — confirming quite a few things that people like me have been saying over the past few years.

 

 

Number go up

The price of Bitcoin pumped spectacularly in early October! Someone bought 1.6 billion dollars’ worth of bitcoins in one lump on Wednesday 6 October in under five minutes, between 13:11 and 13:16 UTC. This pumped the Bitcoin price from about $50,000 to about $55,000.

Of course, they didn’t use dollars to buy the bitcoins — they used tethers to buy the coins on Binance, tethers that had been freshly created and deployed to the exchange a few days earlier.

You might think that’s too comically blatant to be true, but just about zero of the financial press picked up on the chain of events — instead, they talked about the number going up, and not about Tether. So, job done.

CoinDesk came closest: “But why the whale — or whales — placed bitcoin buying orders of nearly $1.6 billion in a few minutes on a centralized exchange remains unclear.” [CoinDesk]

Normally, you do a large trade over-the counter, precisely so it doesn’t cause slippage, which might leave you paying more than you expected to. The only reason to do such a large trade on a public centralised exchange is to pump or dump the price. The usual reasons to pump or dump the price are (a) to burn the margin traders; (b) to cover up bad news.

There was a similar tether-fueled pump, to a new all-time high, just before the CFTC settlement came out on 15 October. This pump continued for a few more days.

This new all-time high was followed by a flash-crash to below $10,000 on some exchanges. Bitfinex’ed blames trading bots being shut off. [Twitter] This also suggests that the un-pumped price of Bitcoin would be far lower than the present price in tethers.

When the price dipped from its unfeasibly-pumped peak, multiple major crypto exchanges coincidentally had simultaneous downtime.

There is no reason to assume the tethers sent to Binance in early October were not just sent as a loan and then the loan accounted as the backing reserve, i.e., Tether sending tethers to a crypto exchange for free — because, as the CFTC settlement notes, Tether has routinely done precisely that, for years. And the Bloomberg story confirms that they still do this in 2021.

Bloomberg: “practically quilted out of red flags”

This sort of price pump generally precedes bad news for Tether or Bitfinex. In this case, the bad news dropped at 09:00 UTC on 7 October, with a front-cover story in the print edition of Bloomberg Businessweek — Crypto Mystery: Where’s the $69 Billion Backing the Stablecoin Tether? [Bloomberg]

Zeke Faux spent several months earlier this year tracing the threads on Tether. The story is a delight, and you must read it.

The story is a history of Tether, and where the current players are now. It confirms a number of claims about Tether.

When Bitfinex and Tether’s banks in Taiwan closed their accounts in April 2017, the executive team considered chartering a jet and flying pallets of physical cash out of the country.

John Betts, who ran Noble Bank in Puerto Rico, says of Tether: “Even their own banking partners don’t know the extent of their holdings, or if they exist.” But Betts maintains that Tether was backed by dollars, and the dollars were in Noble.

This is at odds with the CFTC settlement, which says that Tether was not fully backed for periods including the time they were banking at Noble.

Tether wanted to get more interest on the reserve, and Noble weren’t providing that. Everyone except Phil Potter wanted to move from Noble, so the others bought Potter out for $300 million in June 2018.

CFO Giancarlo Devasini then trusted the Bitfinex and Tether money — which was all commingled — to payment processor Crypto Capital Corp … who vanished with $850 million, apparently seized by the Polish authorities. At this point, Bitfinex “borrowed” from the Tether reserve, which got them into trouble with New York.

Tether presently banks with Deltec in the Bahamas. Faux met with Jean Chalopin, chairman of Deltec. Chalopin also says “We knew the money exists! It was sitting here.” Currently this is the $15 billion that Tether claims in its reserve reports.

A large chunk of the remaining reserve is “commercial paper” — short-term unsecured IOUs from corporations. If this were held in the US, Tether would be the sixth-largest commercial paper holder in the entire market.

Nobody on Wall Street who deals in commercial paper has heard of Tether being involved in the business. “If there were a new entrant, it would be usually very obvious,” said one trader.

The commercial paper turns out to be Chinese — though not Evergrande. The risk here is that the whole Chinese market is susceptible to destabilisation in the course of Evergrande’s managed collapse.

Tether also lent billions of tethers to crypto companies, taking bitcoins as collateral. Alex Mashinsky of Celsius says they pay 5–6% interest on a loan of about a billion tethers.

(Mashinsky also told the Financial Times a couple of weeks later: “If you give them enough collateral, liquid collateral, bitcoin, ethereum and so on … they will mint tether against it. New USDT is issued for such loans.” Bitfinex’ed called this out in September.) [FT, paywalled; Twitter]

Large crypto traders stick by Tether because there’s nowhere else for them to go — Tether is the only game in town. Faux says: “It wasn’t that they trusted Tether, I realized. It was that they needed Tether to trade and were making too much money using it to dig too deeply.”

Sam Bankman-Fried from FTX happily states that FTX bought billions of tethers to use in trading — “If you’re a crypto company, banks are nervous to work with you.”

No regulator seems to oversee Tether. They claimed on a podcast that they were registered with the British Virgin Islands Financial Investigation Agency — but that agency tells Bloomberg that Tether has never registered with them in any way.

Arthur Budovsky founded Liberty Reserve, a non-cryptocurrency dollar substitute token that was also popular with people who had trouble with banks asking too many questions. Budovsky is currently serving a 20-year prison sentence for money laundering. He sends Tether his best wishes: “The U.S. will come after Tether in due time. Almost feel sorry for them.”

Reggie Fowler

There’s a pile of new documents in the case against Reggie Fowler, Bitfinex and Tether’s erstwhile bag man in the US. Fowler would take money from the iFinex companies and move it to customers, or move it the other way, setting up bank accounts with false information to do so. He’d also skim 10% of the money off the top for himself. [case docket]

Fowler’s new lawyer — the previous one quit ’cos Fowler didn’t pay him — has filed a motion to exclude a pile of evidence against Fowler as “fruits of the poisonous tree.” The claim is that the 2018 search warrants into Fowler’s bank accounts were obtained without probable cause. [Memorandum of law, PDF]

The lawyer’s claim is that a news report in The Block, where Larry Cermak tweeted then wrote up how Bitfinex was using an account at HSBC,  wasn’t sufficient evidence to do a search “without vetting the reporter or the source of the reporter’s information”.

The affidavits for the 2018 search warrants themselves are also included. One thing these note is that none of the entities involved — Fowler’s Global Trading Solutions or the Bitfinex companies themselves — were licensed as money transmitters in the states that Fowler was transmitting really quite a lot of money in. And they really should have been. [affidavit, PDF; affidavit, PDF]

Other good news for Tether

Hedge fund Hindenburg Research has offered up to $1 million to anyone who can give them detailed information on the composition of Tether’s reserve. (Several people responded that they should just give the $1 million to Bitfinex’ed.) [Hindenburg]

The CFTC has put out a call for whistleblowers who provided useful information in their recent settlement with Tether and Bitfinex to claim bounties. You have until 18 January 2022 to put in your claim. [CFTC]

Financieele Dagblad, the top Netherlands finance paper, put Tether on the front page of their Saturday print edition. [FD, in Dutch, paywalled]

The fundamental issue for Tether is that $69 billion is a lot of money. Crypto people don’t seem to understand this — or don’t want to understand it — but that’s a big enough number to attract the attention of those whose job is to keep things stable.

Bitfinex’ed said to Ben MacKenzie and Jacob Silverman: [Slate]

I’m going to give you a grenade, and this grenade has a random timer. It could be 30 seconds. It could be six months. I’m going to pull the pin. And for every 10 seconds you hold that grenade, I’m going to give you a thousand bucks in cash. How long are you going to hold the grenade for?