Crypto collapse: Tether makes up some numbers, UK MPs call crypto gambling, more regulatory clarity, news from Chapter 11

By Amy Castor and David Gerard

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Tether: It can’t be that stupid, I must be understanding it wrong

Tether has issued another document of unverifiable numbers which got a ton of press coverage from journalists who should absolutely be equipped to know better than to take Tether’s numbers at face value.

Rising interest rates mean more profits for stablecoin issuers if they have the actual reserves they claim to have. Tether says it made $1.48 billion in Q1 2023. Going forward, Tether plans to take 15% of its excess reserves and buy bitcoins with it. As of the end of March 2023, Tether claimed $1.5 billion in bitcoins and excess reserves of $2.4 billion. [Tether, archive; Tether, archive]

You would think with fewer people buying BTC in the current bear market that Tether’s market cap would be on a downward slope like USDC. Traders are cashing in their stablecoins.

But for some reason, Tether keeps printing more tethers. There are currently 83 billion dubiously-backed tethers sloshing around in the crypto markets. This is the one number we can independently verify — the tethers are visible on the various blockchains. [Tether transparency, archive]

Of course, the other difference is that you can cash in USDC. Only Tether’s tiny group of direct customers can cash in their USDT.

Michel de Cryptadamus suggests that Tether’s Q1 windfall profits and BTC purchases are paper-shuffling: [Twitter]

While it is impossible to say for sure bc #Tether’s audits, like unicorns, do not and will never exist, to me it looks a lot like they printed a bunch of $USDT out of thin air, used it to pump the BTC price, and now they have to explain how they got all these bitcoins.

Matt Levine analyzes Tether’s claims. But he starts from the assumption that tethers are fully backed and anything Tether says isn’t a lie. Levine took an unaudited piece of fluff from Tether backed by no evidence and analyzed its claims in a vacuum. [Bloomberg]

The historical record is against assuming any of this is real. Tether’s New York and CFTC settlements in 2021 showed worse behavior than anything we salty nocoiners could come up with, and Tether has a long and extensively documented history of just completely making stuff up.

But journalists, even finance journalists, keep being unprepared for brazen fabulists from the crypto world. They keep assuming basic competence. Look at how even Levine took FTX somewhat seriously — until we saw the exchange was being run worse than Enron, on Quickbooks.

Journalists keep starting from the assumption that there’s something there. It can’t be this stupid, I must be understanding it wrong.

We submit that taking account of the context — Tether’s extensive and well-documented history of lying over and over — is the correct starting point. When writing about crypto companies, reporters should always assume these firms operate like Tether, Quadriga, or FTX, and work back from there.

Sometimes more solid information comes out. There’s a class action lawsuit in progress since 2019 against iFinex (the parent company of Tether and Bitfinex), accusing the companies of market manipulation. We tend to ignore most class actions because so few go anywhere. But this one is about to get interesting — Judge Katherine Polk Failla is allowing depositions under oath of iFinex personnel to go ahead. We don’t see how Tether can get out of this one without conceding the case. We do expect them to delay as long as they possibly can. [Doc 356, PDF; Docket]

UK MPs: Regulate crypto like gambling

Crypto trading is more like gambling than investing in real financial assets. In a new report, “Regulating Crypto,” the UK Treasury Committee is calling for crypto to be regulated as gambling: [UK Parliament; Report]

Cryptocurrencies such as Bitcoin have no intrinsic value and serve no useful social purpose, while consuming large amounts of energy and being used by criminals in scams, fraud and money laundering.

Consumer speculation in unbacked cryptoassets more closely resembles gambling than it does a financial service. We are concerned that regulating retail trading and investment activity in unbacked cryptoassets as a financial service will create a ‘halo’ effect that leads consumers to believe that this activity is safer than it is, or protected when it is not.

We strongly recommend that the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome’.

Some crypto people hope this means crypto gains will thus become exempt from taxation, as gambling winnings currently are in the UK. This is so that you can’t claim gambling losses as a business expense. But this report doesn’t go that far.

The danger is to mum-and-dad investors. Cryptos are super-risky, and it’s easy to lose everything. For ordinary people, crypto is just gambling.

A lot of crypto offerings should just be banned entirely for ordinary investors, the same way the UK banned binary options. But this report is a good start.

The searing light of regulatory clarity

Eun Young Choi, the director of the US Department of Justice crypto enforcement team, says the agency is targeting crypto exchanges alongside mixers and tumblers to stop illicit behavior. They aim to “send a deterrent message.” [FT]

China still hates crypto and is now turning its attention to NFTs. The Supreme People’s Procuratorate, the highest national prosecutor, worries that NFTs bring financial risks, management risks, network security risks, and legal risks. Because NFTs are also brittle crypto gambling tokens. [Guidelines for NFTs, in Chinese; CoinDesk]

The EU’s Markets in Crypto Assets (MiCA) regulation is still trundling forth. The Council presidency and the European Parliament provisionally agreed on the text in June 2022. The European Parliament passed the final text in April 2023. The Economic and Financial Affairs Council (EcoFin) just unanimously agreed to put MiCA into law in each EU country. [Press release]

Crypto whiners want you to know that MiCA could drive crypto out of the EU! Except there’s nowhere else for it to go, because MiCA is an implementation of the Financial Action Task Force (FATF) virtual asset guidelines that have been similarly trundling forth since 2019 and are being implemented by every country that wants to keep doing business with the rest of the world.

Pakistan is not going to legalize crypto — apparently so it can stay on good terms with the FATF. Pakistan’s Minister of State for Finance and Revenue Dr. Aisha Ghaus Pasha told the Senate Standing Committee on Finance that crypto would “never be legalised in Pakistan” as “FATF had set a condition that cryptocurrency will not be legalised” for Pakistan to be removed from the FATF Gray List in October 2022. [The News; TechJuice]

News from Chapter 11

Voyager Digital is getting on with its liquidation. Creditors are expected to get back 35.72% of what they’re owed.

The payout will be larger if Voyager is allowed to keep the $446 million it paid back by FTX before FTX filed for Chapter 11. (John Jay Ray is trying to claw that money back.) Various tokens will be paid out directly to creditors pro-rata or in cash, VGX holders will be paid out in USDC, and other small altcoins will be sold for cash and that will be distributed. [Doc 1374, PDF]

The Celsius Network bankruptcy auction has been going on since April 22. All parties hope for a resolution soon. [Reuters]

Michael Lewis, author of The Big Short, is writing a book about Sam Bankman-Fried. In an interview with the New York Times, Lewis said: “He’s the ideal subject. He’s locked up in his house an hour from my house with an ankle monitor. He can’t go anywhere. It’s unbelievably convenient, as long as they keep him there. So, as long as he welcomes me into the house, it’s fine. I’ve been seeing him roughly every two weeks.” The book comes out in October. [New York Times, archive]

Bankman-Fried bought a worthless company, stock trading platform Embed, for $240 million — just six weeks before FTX filed for bankruptcy. FTX wants all that money back. John Jay Ray  is suing Sam, along with Embed execs and shareholders, saying that Sam overpaid for the company and its bug-riddled software. [Doc 1504, PDF]

More good news for bitcoin

North Korean hacker groups have stolen a total of $2.3 billion in crypto from businesses from 2017 to 2022, according to Elliptic. They particularly hit businesses in Japan, Vietnam, the US, and Hong Kong, [Nikkei]

In unsurprising news, celebrity-backed crypto offerings are more likely to be a scam: “celebrity-endorsed ICOs are associated with a 23-26 percentage point increase in scams through September 2019 and a 39-40 percentage point increase in fraudulent ICOs through April 2023.” [SSRN, PDF]

Oh no! Binance has emailed its Australian customers to let them know that their payment provider has cut off all gateways for Australian dollars. Meanwhile, Westpac — one of the Big Four banks in Australia — has officially cut off Binance entirely. “Since the rise of digital currency, we’ve noticed that scammers are increasingly using overseas exchanges.” [Reddit; AFR]

The Tornado Cash ethereum money laundering smart contract’s DAO got taken over in a governance attack. A proposal for an anti-cheating mechanism included a function that gave the attacker a majority of votes on the project. The attacker then drained and sold TORN governance tokens and put  360 ETH (about $655,300) through Tornado Cash to hide its eventual destination.

This also means that one single guy now controls Tornado Cash. Nicholas Weaver tells us: “now that individual is responsible for all the OFAC and money laundering implications. It might be wise for the attacker to brick that contract now rather than wait for the FBI to do an arrest.” The attacker has kindly submitted a proposal to reverse his sole governance — now that he’s stolen the money. [Twitter, archive; Etherscan; CoinDesk]