Tether Untethered

A year ago, I looked at The State of Crypto and found it far from ready for prime time.  Amid the proponents attempting to create a useful decentralized cryptocurrency and blockchain that advances Satoshi’s White Paper vision, the industry remains fertile ground for scammers.  Any rationale for creating crypto or an ICO that could attract buyers came to market.  The only real requirement is a new marketing ploy based on complicated technological jargon that differentiates your crypto in some manner from others.  A new and better proof of work that’s secure, scalable, reduces block time, increases block size, and makes the blockchain more efficient.  Sell those ideas, and you can sell your crypto.  There are thousands of cryptos whose only reason for existence is that they go up in price. And the main reason they go up in price is that with limited to fixed supply, any demand, real or fake, increases value.  When you create something of value out of literally nothing/ether, there are no barriers to entry.

The early years of crypto were the Wild West, and the industry is only slowly getting tamed.  For the most part, it is still unregulated and ripe for scammers.  Limited regulation is starting to arrive.  Regulation will increase rapidly once central banks are ready to enter the crypto/digital arena.

Yesterday, the NY Attorney General settled a significant case into the illegal and deceptive practices of crypto trading platform Bitfinex and its subsidiary Tether.  The settlement requires Bitfinex to cease trading with any New York entities, pay $18.5 million in penalties, and provide quarterly reports demonstrating transparency in its business practices.

Bitfinex creates the stablecoin tether whose original claim stated that it held 1 USD for every 1 tether.  In March 2019, it changed its description to:

Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”).

Tether’s 1:1 USD reserve backing is just one of many financial promises that Bitfinex is unwilling or unable to uphold. A close look at Bitfinex’s management and history reveals a host of red flags in its operating procedures.  By mid-2017, Bitfinex did not have access to banking anywhere in the world.  In 2018 it entered into an arrangement with Panama-based third-party payment processor Crypto Capital Corp.  Soon after, $850 million of Bitfinex customer funds held by Crypto Capital went missing.  Accounting for these missing funds still hasn’t been properly resolved.  Bitfinex is offshore and unregulated.    

At the recent peak of $58,000 per bitcoin, tether’s market capitalization was $34 billion. Somehow, an offshore company with a shady past and no access to banking is supposed to have reserves to back that amount of tether.

Finance professors John M. Griffin and Amin Shams linked Bitfinex and tether to the 2017 bitcoin rise to $20,000.  In June 2018, they published a report of their forensic analysis of tether’s impact on bitcoin’s price. 

Griffin and Shams used forensic algorithms to analyze trading data. Their paper shows that a single large entity on the Bitfinex exchange created tether unbacked by dollar reserves to purchase bitcoin when its price was falling. In other words, the entity created tether out of thin air to purchase bitcoin and manipulate its price upwards. These purchases were then sterilized toward the end of the month to balance accounting requirements. Griffin and Shams allege that manipulation by a single entity is the reason for bitcoin’s stratospheric rise from $1000 in January 2017 to $20,000 in December 2017.

Has anything changed with Bitfinex’s alleged ability to create tether out of thin air and purchase bitcoin?  Bitfinex remains unaudited and until the NYAG settlement, not held to any standard of normal business transparency.

The NY Attorney General issued an injunction against Bitfinex in April 2019. Bitfinex dragged the case out through legal proceedings until a settlement was reached on February 23, 2021.  In the middle of these legal proceedings, bitcoin enjoyed another historic rise in price similar to 2017.  Coincidentally, bitcoin reached its top of $58,000 two days before the announced settlement with the NYAG.

Did Bitfinex again manipulate bitcoin’s price increase through the creation of unbacked tether?  Was tether created out of thin air to purchase bitcoin on unregulated exchanges?  Will the NYAG settlement,  future legal proceedings, and increased regulation bring light to Bitfinex and tether’s unaudited operations?  Is tether a monumental scam with the potential to collapse the entire crypto space?  

Bitcoin’s trustless design supposedly makes it superior to trusted centralized Fed-controlled fiat.  Satoshi created Bitcoin as the monetary antidote to the Fed’s magic checkbook that allows the Fed to create dollars out of thin air unreferenced to any monetary standard.  A distant memory is that until 1971, the Fed did reference a monetary standard and linked the dollar to gold.  Yet, if an unregulated offshore exchange can create tether out of thin air, maintain the illusion that its value is linked to the USD, and drive up the price of bitcoin, how is this in any way superior to the current global fiat system? The great crypto paradox is that the “superior” trustless cryptocurrency system has evolved into trust in unaudited, shady offshore exchanges.

The problem for bitcoin is that even its adherents no longer think of it as Satoshi’s revolutionary cryptocurrency system that competes with fiat.  It is simply a speculative asset whose sole objective is to go up in price.  The reason it goes up in price appears not to matter.  At least in the short run.  The long-run requires a sustainable system envisioned by Satoshi.

Caveat Emptor 


  1. JD

    Another excellent piece. When I studied crypto at Oxford I was amazed at the vast proliferation of ICO’s. It also seemed at the time that Central Banks are giving private entities a lot of rope to develop the tech before they take it over for CBDC’s.

    1. Michael Kendall (Post author)

      The deeper you get into Bitfinex and Tether’s operating history and associations, the more alarming this becomes. The NYAG settlement makes clear that Bitfinex adheres to no acceptable business practice standards. It will be interesting to see what happens in 90 days when Bitfinex’s first transparency report is due. The settlement requires Bitfinex to list its assets backing tether, among other disclosures.

      For the seven years of its existence, Bitfinex has never provided an acceptable audit. Who does Bitfinex think it is? The Federal Reserve?


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