Tether: can’t audit, won’t audit

Concerns around Tether’s USDT token are climbing ever higher in the wake of the business parting company with its auditor – thereby ruining any chance of proving that USDT is backed by real dollars and that the outfit has been run in a legal and compliant manner. And it’s not going to get better.

A while ago we published a new perspective on the Tether situation, and it’s one that seems to be gaining currency. Rather than Tether simply creating unbacked USDT and artificially pumping the market, we believe something slightly different is going on:

• Print unbacked USDT
• Buy BTC with this fake money, pumping the market in the process
• Sell BTC at a higher price, either on the large OTC markets or on Coinbase (as now seems more likely – thanks @bitfinexed for this nuance)
• Use dollars received to retrospectively back USDT, and pocket the difference

Read more in Tether could be guilty of perpetrating a huge fraud, just not the one we think.

In recent weeks there has been a slew of eyewitness reports from insiders and investors that Bitfinex and Tether’s bank accounts are indeed stuffed with dollars. That may well be true, but if it is, the fact that USDT is backed by real cash does not mean they’re off the hook. If an audit revealed that the funds had arrived in the wrong order (i.e. USDT were created before USD deposits were made) then there would be hell to pay. It’s our belief this is exactly the problem they have, and consequently that no audit will ever prove them innocent. Tether wanted simple confirmation that USDT was matched with equal funds in their bank accounts. This is the easiest and quickest part of an audit. Unfortunately for them, no respectable auditor would leave it at that.

Crypto index provider Hedge has an additional perspective on why Tether will not and cannot obtain an audit:

On the case of Liberty Dollar (United States of America vs. Bernard von Nothaus), it has been established that producing private money resembling domestic of foreign currency in the US is a felony. This carries the important consequence that Tether CANNOT be audited for the fear of legal persecution, regardless if there are actual USD reserves in their bank accounts or not. At the very least, the banks where Tether supposedly holds the US Dollars would lose the correspondent banking connections necessary for USD clearing.

Warren Buffett famously said, ‘When the tide goes out you find out who’s been swimming naked’. The good news is that USDT may not pose the systemic risk to the crypto markets that so many have feared. The narrative was that the price of BTC and key alts may have been propped up by non-existent money. If – and it is ‘if’ – Tether have been selling the BTC they buy with new USDT and back-filling their reserves, then that at least represents real demand.

The bad news is that there is still market risk, just from a different direction. If – and probably when – the wheels come off USDT, it will come with a regulatory response. (That may happen because of regulators’ investigations, or further regulation may come as result of a fraud being exposed – either way, assume regulators are a-comin’.) In general, clear regulation is beneficial to crypto, and is a pre-requisite for it going mainstream. However, we can expect some jurisdictions’ knee-jerk reactions to give certain key markets an unwanted kicking.

To be clear, we do not accept the narrative that the crypto markets have been pumped to many times their natural level by fake dollars, and that the death of Tether would result in $2,000-$3,000 BTC, as some have claimed. There is too much evidence of real, global interest and trading against real currencies to accept that. What is clear is that:

• Tether will not conduct an audit, and probably cannot, ever.
• Tether/Bitfinex will consequently remain a black box, within which all kinds of nefarious activities could be occurring and – by all accounts – probably are.
• Sooner or later it will get shut down by the authorities.
• There will be regulatory consequences to that
• One of the largest global marketplaces will likely go offline too.

All of this will have a temporary effect on an otherwise promising and fast-growing sector, and such bad actors nevertheless need weeding out for crypto to thrive. Meanwhile, individuals using USDT and Bitfinex should bear in mind that the party cannot go on forever and that they may incur personal losses when it ends (locked/seized funds, delayed withdrawals, unwanted KYC, market volatility, ‘revalued’ USDT, and so on).

TL;DR Tether’s model inherently requires trust by its users, and the current situation requires further trust in its processes and integrity. However, Tether has repeatedly shown itself to be untrustworthy and undeserving of users’ faith in their honesty. There is a high degree of probability that something will go wrong. Precisely how that will occur and the impact it will have are unknown.

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