People bought, and Tether sold, USDT on assurances of being 100% backed by U.S. dollars. Tether is now admitting that not only is it not 100% backed, it isn't even entirely backed by U.S. dollars [1]. That's enough to allege fraud.

> The latest price charts still have tether at $1~=1USDT

Tether is under criminal investigation by the United States and New York State for, among other things, market manipulation. Taking Bitfinex's word that one's USDT has suffered no losses, all while they delay and unreasonably condition withdrawals [2], is like trusting Adam Neumann's on WeWork being worth $47bn.

[1] https://www.bloomberg.com/news/articles/2019-04-30/tether-sa...

[2] https://tether.to/announcement/

The complaint [1] seeks to certify precisely this class.

"Plaintiffs and members of the Class have suffered actual damages and injury in fact due to artificial prices to which they would not have been subject but for the unlawful conduct of the Defendants as alleged herein" (¶ 260). This is par for the course when it comes to "part-fraud, part-pump-and-dump, and part-money laundering" (¶ 2) schemes.

Note that the defendants are various, from Tether to its affiliates, including Bitfinex.

[1] https://www.courtlistener.com/recap/gov.uscourts.nysd.524076...

Also, am I taking Bitfinex's word when I look at the exchange-derived price of Tether? I'm not sure. I would have thought that I was trusting the price discovery mechanism in general. If I'm trusting Bitfinex on this at all, it's only to the extent that Bitfinex would be backstopping the price of Tether on all other exchanges. Right? I mean, they can lie about how much a Tether is worth, but they can't lie about how much it's trading for on exchanges they don't own.

Or at least it was this way last time I was really active in cryptos, which I‘m not really at the moment. But a quick scan of Coinmarketcap didn’t really indicate that this has changed.

The more important metric is comparing what it costs to buy BTC on Coinbase with cold hard USD, and what it costs to buy and then transfer out BTC with Tether anywhere else.

If you can buy large quantities of BTC with your Tether at close to the USD:BTC rate, then you can exit your Tether holdings at or close to the effective peg.

Start send X from a bank account USD to trading spot. Do USD->Tether->BTC

Immediately follow up with:

Take BTC received and do BTC->Tether->USD (Y) => fire to the bank account

The confusion is because in theory, the market price should be tracking Tether reserves. Bitfinex admitted in a court filing that only 73% of outstanding Tether was backed by dollars. In an efficient market, that should imply that the price of Tether would fall to $0.73. Instead, it went back up to about $1. The implication is that traders either figured Tether would somehow be able to make up the shortfall, or that it just didn't matter.

Interestingly, people who shorted Tether expecting the market to be efficient got rekt, and the people who were actually correct (so far, at least) were the ones who were irrational. I wonder what this says about rationality and efficient markets today.

There isn't an efficient market around Tether.

The exchanges that trade it are predominantly controlled by its backer. Fraud investigations in play make a short's gains at risk for clawback. (Or at the very least, creating a legal headache for their owner.)

There is no assurance that the end game isn't a crash in value, but no value, which makes closing out a short position difficult or even impossible.

I have traded securities my entire career. It's been pretty obvious, from the start, that Tether is a scam. I wouldn't short it.

Disclaimer: This is not securities advice. Don't buy or sell securities or currencies based on Internet comments.

Nothing new. Markets are more heavily dominated by those with more resources. If these players decide to act irrationally, then you'll go bankrupt faster than they will.

This is why you don't short industries, you only short companies. Industry will eat you alive. There are also strategy and tactics. Musk can fend off the short siege even though they might collectively have more resources than he does. If you want to beat someone in the market, your better bet is to enter it yourself than to try to bet they're going to fail.

Trying to use a short maneuver to expose market irrationality is not for the faint of heart. It never was. Shorts were only ever really useful to try to profit off of stupidity, not irrationality.

Tether sold tokens on the promise that 1 USDT would be backed by U.S. dollars. They didn't keep one U.S. dollar for each USDT sold. If they did (or concealed) that willfully, it's fraud.

> Why is it not possible to back cryptos to a stabilized "1:1" "medium/currency" (which itself is another crypto it seems) and finally the USD dollar ?

U.S. dollars can be held as hard cash or in bank accounts. Holding $4 billion physically is bonkers. Banks holding U.S. dollars, meanwhile, have to follow U.S. anti-money laundering law. That requires, among other things, knowing who beneficially owns their deposits.

If an LLC opens a bank account, the bank will ask about its owners. With Tether, the beneficial owners are USDT holders. Since Tether can't identify them, they can't satisfy any bank's compliance questions.

So either (a) Tether's banks are violating U.S. AML law, (b) Tether is lying or (c) Tether is silently restricting and keeping records on who owns every USDT. Given we have contrevidence for (c), one can conclude–based solely on Tether's claims–that there's fraud afoot.

Disclaimer: I am not a lawyer. This is neither legal nor trading advice.

As far as the bank is concerned, USDT is a valueless token and potentially empty promise by Tether Inc.

The beneficial owner of the money is Tether Inc, not the USDT holders.

Traditional banking services are hostile to crypto, so they cut off Tether's ability to trade in USD. And Tethers own interest (widespread use of USDT) is at odds with their inability to provide adequate backing USD. Exchanges all wanted more USDT to provide more liquidity, and so Tether just printed USDT without backing.

A crypto backed 1:1 by USD is a great idea, the trick is finding a way to actually guarantee the backing currency & exchange rate.

It's actually pretty lousy idea, because in practice it's exactly what we already have in normal banking system, where the "bank-USD crypto", that is, the numbers in your bank accounts, are already backed 1:1 by actual government USD, with government regulations backing the companies and the exchange rate.

If you can freely exchange cryptocoins to USD, there's absolutely no reason to ever consider a stablecoin, unless your goal is to evade money laundering, KYC, etc regulations, hence Tether.

Thanks for saying so. I see so much hype about digital money from people that apparently have never used direct deposit and a debit card, which is exactly digital money.

That's an important and needed service.

Furthermore, even in a fractional reserve banking scenario, your bank will have 1:1 assets backing it up, since the money it loans out is counted as an asset, although it needs to be recognized that the loan is valued at less than par because of the risk of default. There is quite a lot of legal regulations on what capital can back up accounts, and the minimum ratios of various kinds of quality of capital.

Only a fraction of those reserves are cash. Hence fractional reserve. The remainder aren't liquid, but they are worth enough to cover the reserves, under best accepted accounting practices.

Tether's non-cash reserves largely consist of "A money launderer stole our money, but pinky swears that they'll give it back." It's not like a fractional reserve bank, it's just a straight up fraud. It's why despite many assurances from Tether, it has still not been independently audited.

Although Tether's purpose has largely been to avoid regulation, and participate in cryptocurrency speculation, a stablecoin would be superior for actual commerce. Bitcoin has failed for commerce, to some extent because of instability and speculation.

Being able to use something equivalent to cash to transact digitally, with client-side security seems like a desirable technology to me.

Superior to bitcoin, surely, but no superior to dollars. I have absolutely no difficulty with using my dollars to pay for anything I want.

The biggest reason one might not want to use dollars is to conceal one's identity, and while I admit that there exist valid uses for that, most of the market for anonymous commerce is illegal activity.

The currency exchange rate is a minor price to pay for such a convenience.

Meanwhile with <insert literally any cryptocurrency here> it’s just a simple <convoluted 20-step process not even guaranteed to work and with no consumer protection>.

But the same old tropes about crypto always get the upvotes.

It's similar to Google's "make the web faster" efforts (Chrome, V8, AMP, mod_pagespeed, hosting JQuery & other AJAX libs, developer education). If the web is faster, you visit more pages. If you visit more pages, you search more. If you search more, you click on more ads, which makes Google more money.

If they are parking it in other cryptocurrencies, then they have to ensure that the value of that particular cryptocurrency does not fall below the average price they had to buy it at (to ensure they can redeem).

So if, for example, Tether has had to buy Bitcoin and the average of all those purchases came out to $7,500/BTC, they have to ensure that BTC doesn't fall below $7,500 now because otherwise they end up net-negative.

At least from what I can gather.

A New York State court filing [1]. (They’re under criminal investigation by the U.S. and New York.)

[1] https://www.bloomberg.com/news/articles/2019-04-30/tether-sa...

The key to a stablecoin however, is trust. Users have to trust that their holdings are actually backed by real fiat currency as that's the promise of the stablecoin.

That trust can typically be bolstered by things like 3rd party audits, which is something Tether promised for many years and did not deliver.

With Tether the problems are that they have avoided scrutiny and audit, made statements on their website that subsequently turned out to be false and have a somewhat murky corporate structure. None of these, should , engender trust.

There are some trust issues that are still problematic like for example someone needs to provide a price feed against which the value will be stabilized. Whoever is in control of that price feed could of course damage the system to the point where people loose all their money.

But in the real world such a price feed could come from a DEX so its not controlled by someone but instead by what people buy and sell. In a closed system this could however cause a "runaway" of the price due to price feedback loops.

Here is an interesting talk about a crypt collateralized stablecoin proposal https://www.youtube.com/watch?v=Se2CDsmMqvE again this does NOT yet exist!

Traditional currencies are mostly backed by things that are very unlikely to crash like real estate, profit share in companies and other ressources with value besides speculation.

What would happen if BTC crashed to 1/10 of its price, and all other coins followed?

If you had a coin backed by a basket of other cryptocurrencies, it would likely be relatively stable in that the distinct individual volatility of each of the backing coins would be mitigated. OTOH, the overall volatility of the cryptocurrency market (which often moves rapidly and in the same direction) would not, so it wouldn't be very stable.

More generally, cryptocurrency carries with it a whiff of KYC/AML regulatory evasion. With the purpose of stablecoins is generally stated as pretending you're trading in USD without actually doing so (and the financial regulations implied by actually doing so kicking in), it is not hard to infer that many, if not most, users are interested solely in evading this rules, which is going to cause banks' compliance officers to look at it very skeptically.

As I understand it, the issue isn’t with a stablecoin. There would be nothing wrong with backing a token to a currency.

Unfortunately, it looks like Tether didn’t tell the truth. They claimed that they would have one US dollar in their bank account per token in circulation. This was a lie and they release an enormous number of unbanked tokens into the market. The class action claims they created 2.8 billion USDT between 2017 and 2018. At the time, the market believed the tokens had implicit value (as one was backed by a dollar) so the theory is that this made buying crypto a more compelling investment.

I don't know about that. Isn't the entire point of stablecoin to skirt existing regulations? Moving fiat currency isn't hard in and of itself. There is no technical challenge in Paypal sending $100,000 to my friend in Iran.

What makes it hard are the regulations combating money laundering, criminal and terrorism funding and enforcement of sanctions.

In Tether/iFinex's case, you have a situation where there was a "pseudo-bank" (Tether) and a crypto exchange (iFinex) that were highly intertwined. Because Tether was more or less controlled by iFinex, which also controlled one of the largest cryptocurrency exchanges by volume, this provided a unique cover for fraud, and different profit motives than a traditional bank would have. Tether did its business by exchanging USD for Tethers. iFinex did its business by pocketing spreads and fees from crypto to crypto trades. Meaning, Tether had a bunch of USD on hand, and iFinex had a bunch of crypto (primarily Bitcoin) on hand. What likely happened in Tether's case was that iFinex instructed Tether to create unbacked Tethers out of thin air, and used these Tethers to pump up the value of iFinex's own Bitcoin holdings. For example, suppose issuing $1M of Tether and spending it on Bitcoin moved the spot price up enough to increase the value of iFinex's Bitcoin holdings by more than $1M. Isn't that basically free money? You've spent $1M and created more than $1M in paper value. All you have to do is sell those Bitcoins at the new, higher price for real USD, and you've made relatively risk-free profit.

Why the hell did this work for so long? First, the market believed Tethers were backed 1:1 with USD and treated the two as functionally equivalent. Some traders would see the Bitcoin price increase on a Tether exchange like Bitfinex, and then buy Bitcoin at nominally "cheaper" prices on non-Tether exchanges like Coinbase, so that they could transfer the coins over to Bitfinex and sell them for a tidy profit. In this way, the Tether exchanges could impact Bitcoin's price even on exchanges that didn't use Tether due to the natural incentive for arbitrage. Second, the crypto markets are quite illiquid, and because orderbooks are thin it only takes a small amount of buying or selling firepower to push prices pretty drastically. The alleged fraud is that iFinex did exactly that, and progressively pushed prices up. Third, as prices swelled, Bitcoin attracted more _real_ investors, and many such investors then spent actual USD on Bitcoin, creating a self-fulfilling prophecy that in theory would have enabled iFinex to totally get away with it - all they had to do was sell off enough Bitcoin to cover for all of those unbacked Tethers they'd issued, and they would essentially become whole.

Now, things get interesting when it comes to how iFinex ran its business. iFinex refused to implement KYC/AML checks on their exchange, because nominally they were "crypto-to-crypto" and thus considered themselves to be outside of the US financial system's jurisdiction. In practice they used an indirect relationship via one of Wells Fargo's affiliates for a long period of time until they were found out, and then the US financial system more or less put a moratorium on doing business with them. It turns out that being locked out of the US financial system is extremely damaging when your customers want to withdraw US dollars, so for a period of time, iFinex tried jumping around from bank to bank, trying to stay ahead of regulators who had effectively blacklisted them by having customers making deposits wire their money to pay off other customers looking to withdraw money, and all kinds of other shady practices. Eventually they ran out of options and started doing business with what looks to have been a money laundering shadow bank, Crypto Capital Corp, who then promptly stole a bunch of their money, which then led to the current debacle.

All told, it's one of the most interesting stories in the financial markets by a long shot. It will be fascinating to watch it continue to play out.