The Close Ties Between Tether and Bitfinex: Should You Be Concerned?

On March 21, Tether issued another 300 million USDT. What’s the big deal, you may ask? If you want a stablecoin, Tether’s value tends to hover around $1, making it useful for moving money between exchanges without touching the banks.

In fact, that’s what a lot of traders do. However, the value of Tether becomes a concern when you consider the fact that Tether is very vulnerable to investigations, has ties to Bitfinex that may be a little too close to comfort, and may not survive an effective bank run in which several large bagholders attempt to exchange their USDT for fiat all at once.

Investigations May Form a Ring Around Bitfinex

Last December, the CFTC opened an investigation into ties between Tether and Bitfinex who, as Bloomberg revealed using evidence from leaked documents, share a CEO. Regulators seemed to be especially interested in whether Tether truly has the fiat currency to back its tokens.

Evidence for the idea that Tether’s at-will printing of more USDT is careless and completely unbacked by dollars include cutting ties with its sole auditor, Friedman LLP, leading to speculation that the auditor was perhaps getting a little too close to evidence that Tether was biting off more than it would be able to chew in the long run by printing large amounts of USDT that it couldn’t back. Tether also refuses to disclose its relationships with banks.

Unfortunately, Bitfinex and Tether are both foreign companies, so there may be limits on what the CFTC can do beyond forcing them to choose between operating in the United States and paying fines if and when they violate U.S. regulations. Neither company seemed to be very concerned about the subpoena and issued statements that it was normal for them to receive and at least attempt to cooperate with regulators on any question or concern that arises.

Circumstantial evidence indicates that Tether might also be behind recent Bitcoin price manipulations. Bitcoin took a nosedive and then recovered to $9,000 at about the same time that Tether printed that extra 300 million USDT. Tether and Bitfinex have been accused of collusion to drive up Bitcoin prices on the exchange with their shared CEO as a facilitator. Although Bitfinex has not yet been named as a potential target for investigation, the CFTC has issued subpoenas to Coinbase, Kraken, itBit and Bitstamp for trading data that might indicate potential manipulation. Could the investigation lead to senior Bitfinex officials?

Longtime Cryptocurrency Insiders May Be Right to Be Concerned

Even without the accusations of printing more USDT than Tether has money in the bank to cover and the CEO of both Tether and Bitfinex possibly being a party to price fixing, cryptocurrency insiders may be right to be concerned about a currency that seems to think nothing of issuing effectively unlimited new USDT at will.

This is basically the opposite of Bitcoin. Where Bitcoin’s cap of 21 million whole units was hardcoded into it from the start, which has historically made it effective as a deflationary counter to economic uncertainty and hyperinflation, Tether could easily go the way of the Venezuelan Bolivar once it becomes obvious to even its most ardent supporters that the company isn’t being straight with them about its liquidity.

Common sense says that printing hundreds of millions of USDT at a time gives it more in common with inflationary currencies than it does with most cryptocurrencies and is likely to does cause Tether to lose value over time. This applies even if Tether and Bitfinex may routinely buy back Tether to keep its value near $1 because observant observers will realize that this USDT still exists and, therefore, can be sold to an unsuspecting bagholder just before Tether runs out of steam.

When Tether inevitably has a meltdown, it could well cause a ripple effect throughout the rest of the cryptocurrency market. As mentioned before, many traders rely on Tether as an easy way to move money without touching the banking system because, while Bitcoin and Ethereum could theoretically work just as well for this purpose, Tether can get the job done with fewer worries about losing $500 or more while waiting for confirmations in the fast-moving world of cryptocurrencies.

From this standpoint, using a stablecoin can be a good thing for moving money around. This just won’t stop observers from biting their nails over the use of a cryptocurrency backed by a company that may not have enough money in the bank to cover its butt.

Besides, banks seem to really, REALLY hate Bitfinex and Tether as two companies that may be a bit too casual about regulation for the taste of most bankers, if not participating in outright illegal activity. Wells Fargo and Taiwanese banks ended support in 2017.

For this reason, Bitfinex has to rely on other methods for moving money, using Tether if it needs to and reports circulating around Telegram indicate that Bitfinex is also using shell companies based in Poland and owned by someone in Panama. This sort of setup smacks of levels of money laundering that could attract any law enforcement agency that wants to make itself look effective by making a major score in the financial crime department.

Thta means investors expect a major meltdown once regulators catch up with Bitfinex and Tether’s own promise of a 1:1 exchange between USDT and dollar bills comes back to bite it in the butt. The entire cryptocurrency market could suffer some major losses in market caps before it’s over. Could it recover? Probably.

Long-term hodlers are notoriously stubborn and may just see it as a chance to fill their bags and start again when it comes to building their ability to be taken seriously as an industry that could rival the “normal” banking system.

However, in the short term, a Tether meltdown could set off a chain of events that scares off many of the newer and more casual participants and gives cryptocurrency critics something to point at when they say, “I told you so!” So if your idea of investing in cryptocurrency is to go for the short-term profits, then it’s quite reasonable to be concerned about the effect that Tether and Bitfinex could have on value of your cryptocurrency portfolio.

Thanks for reading!


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