It bottomed out at 85 cents on Kraken. Which is not quite the $0.98 to $0.99 it’s been for the past few months … but what just happened?<\/p>\n
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<\/p>\n One purported purpose is so that you can arbitrage between exchanges \u2014 altcoin prices are very unstable, but something that has a stable value would be useful. Some traders use it as a hedge in volatile markets.<\/p>\n The purpose in practice is so that questionable exchanges can trade in “dollars” without all that tedious mucking about with KYC\/AML and banks. Tethers are the usual \u201cUS dollar\u201d on the sort of exchange that never saw an altcoin it didn\u2019t like.<\/p>\n Tether is the main source of liquidity in crypto trading. Of daily trades to and from “dollars,” 80% can actually be tethers.<\/a><\/p>\n There have been long-running concerns<\/a> over Tether \u2014 ever since they started releasing extravagant quantities of tethers last year. Issuance at 2 April 2017 was 55 million tethers \u2014 issuance today is 2.5 billion.<\/em> Supposedly backed by $2.5 billion in cash … somewhere.<\/p>\n Tether’s front page<\/a> (archive<\/a> from this morning) still<\/i> claims that “Our reserve holdings are published daily and subject to frequent professional audits.” But Tether has never released an audit, and their last proper accountant quit before completing an audit.<\/a><\/p>\n Tether have since claimed it would not be possible<\/a> to audit Tether. “The bottom line is an audit cannot be obtained. The big four firms are anathema to that level of risk,\u201d said Stuart Hoegner, Tether\u2019s general counsel.<\/p>\n It seems impossible to cash out tethers to actual money. Many have tried,<\/a> and some claim they know someone who managed it \u2014 but there are no confirmed reports. Tether tell users to sell their tethers on one of the\u00a0 exchanges that use it.<\/p>\n I recommend Amy Castor’s Timeline of Tether and Bitfinex Events<\/a> from February. (Which is getting an update shortly!)<\/p>\n Many suspected for months that Tether releases were timed to pump<\/a> the Bitcoin price \u2014 and John Griffin and Amin Shams at UTexas Austin showed that it was all but impossible<\/a> that this was coincidence. The evidence is statistical \u2014 but it’s glaring.<\/p>\n The pumps have been less and less effective, though \u2014 over half a billion new tethers were issued in August 2018, and what did they get out of it? A temporary $600 pump<\/a> in the price of Bitcoin.<\/p>\n Frankly, I’m amazed the market priced these things at about a dollar as long as it did.<\/p>\n Tether is owned and run by the same team as crypto exchange Bitfinex.<\/p>\n Per chapter 8<\/a> of Attack of the 50 Foot Blockchain<\/i>,<\/a> Bitfinex lost their US dollar banking in April 2017, as Wells Fargo, the correspondent bank<\/a> for their Taiwanese banks, refused to transmit their bank wires from Taiwan to the US.<\/p>\n This came eight months after Bitfinex was hacked, in August 2016, losing 120,000 bitcoins. They applied a 36% “haircut” to all their users \u2014 and made this up with “BFX” tokens, each notionally worth one dollar. In April, they announced they had fully made their users whole from the haircut! … by giving them tethers for each BFX.<\/a><\/p>\n Bitfinex\/Tether’s banking since then has been … ad hoc. They seem to form shell companies for their inflows and outflows of conventional currency. Once one is cut off, they go to another.<\/p>\n Occasionally they seem to run out of banks. Cash deposits and withdrawals were temporarily cut off in June,<\/a> for example.<\/p>\n They had an apparently-safe bank for a while \u2014 Noble Bank,<\/a> in Puerto Rico. This was founded by the same team, led by Brock Pierce, that founded Tether. (And also attempted to buy out the Mt. Gox exchange a few years ago.<\/a>)<\/p>\n However, Bitfinex banking at Noble came to light,<\/a> and they left shortly after.<\/a> Noble has also had a bit of a revolving<\/a> door<\/a> for senior staff.<\/p>\n Each time Bitfinex lose banking, their users play Tether roulette \u2014 is this when the music stops? Or will it start again?<\/p>\n On crypto Twitter, Patrick McKenzie sets out<\/a> some possible bad ends for Tether:<\/p>\n Eventually, a bank or, more likely, a regulator is going to say \u201cActually this doesn\u2019t look like a legit deposit that we\u2019re uncomfortable with supporting due to AML\/regulatory reasons. It looks an awful lot like proceeds of crime intermingled with grey money.\u201d<\/p>\n And the terrifying outcome, from the cryptocurrency economy perspective, is the regulator doing what the USFH did with respect to Mutum Sigillum<\/a> (Mt Gox\u2019s US front): \u201cOK, we\u2019re going to give you two choices.\u201d<\/p>\n Door #1: Prove that it\u2019s legal money. This should be trivial for you because KYC is the law and your compliance should be automatic. So have your lawyer suit up. BTW we expect this to take 3+ years.<\/p>\n Door #2: We propose a 50% haircut.<\/p>\n Gox\u2019s bankruptcy administrator took the haircut. That was an eminently sensible call.<\/p>\n I think there is a material risk that Tether absorbs a billion dollar hair cut.<\/p>\n The cryptocurrency economy relies on Tether, specifically, far more than the global financial system relies on money market funds. It has convinced itself that they\u2019re equivalent. That is wrong. It has always been wrong. It may soon be experimentally disproven catastrophically.<\/p><\/blockquote>\n Most recently, last week Bitfinex were discovered to be using an account at HSBC,<\/a> under the name “Global Trading Solutions.”<\/a> That’s the HSBC who were fined 1.9 billion dollars in 2012<\/a> for blatant money-laundering for drug dealers, and are a favourite example for bitcoin advocates of how corrupt the existing banking system is.<\/p>\n As it turns out, HSBC doesn’t seem to want to deal with crypto either \u2014 shortly after that story appeared, Bitfinex suspended all cash deposits.<\/a><\/p>\n This is when the market finally<\/i> started losing faith in Tether.<\/p>\n Tethers are supposedly pegged to the dollar. Since Tether don’t seem to accept tethers for cash, this appears to be done with trading bots<\/a> on the few tether-to-dollar trading pairs, on exchanges such as Kraken.<\/p>\n Weird things started happening with Tether in late September \u2014 monthly trading volumes were the third biggest since its creation,<\/a> higher than the peak of the crypto bubble in December 2017 and while bitcoin and ether volumes were still down:<\/p>\n <\/p>\n 1\/ While cryptocurrency trading volumes continue to decline amid the bear market, Tether recorded higher volume in September than it did at the peak of the bull market in December. pic.twitter.com\/bXtxIzfmK0<\/a><\/p>\n — Larry Cermak (@lawmaster) October 9, 2018<\/a><\/p><\/blockquote>\n![\"\"](\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2018\/01\/rollercoaster-explosion.gif\")
<\/a><\/p>\nWhat is Tether, and why are people worried?<\/h3>\n
![\"\"](\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2017\/11\/tether-logo.png\"){kind=logo}
<\/a>Tether is a “stablecoin” that is supposedly pegged to the US dollar. Its purpose is to flow between exchanges easily and quickly.<\/p>\nBitfinex’s banking woes<\/h3>\n
Tether: The music stops for a moment<\/h3>\n
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