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The Labyrinth of Tether: A new Mt. Gox or just a case of Hysteria?

Bitfinex and Tether Receive U.S. Subpoenas (How is a USDT made?)

Reading Time: 3 minutes by on January 30, 2018 Altcoins, Bitcoin, News, Regulation

United States Regulators have subpoenaed the cryptocurrency exchange Bitfinex and Tether on January 30 leading to an almost immediate drop in the overall market. Tether has a miniscule market cap when compared to the entire crypto market, but the fear instilled in investors during these instances is what is most significant.

Tether: USDT

Not to be mean, but it is about time. How has Tether been able to exist until now without any accounting for the billions of Tethers that have been issued in the last few months? Because the whitepapers say there must be $1 for each Tether in trust, the entire crypto population is supposed to believe it? Tether was hacked for $30 million plus and a few days later released another $50 million Tether (USDT).

No financial institution would have given that amount of money to a group that was just hacked, especially days later without new security protocols in place. There has been doubt simmering in the crypto space for some time now. This is why they hired independent auditors to review their accounting. In the last 48 hours Tether “dissolved” their relationship with their auditor which clearly throws up a red flag. Well unfortunately for Tether, January 30 was the day the red flags finally caught up with them.

There has been speculation for some time now that Tether was issuing new Tethers without having the equivalent amount of USD in trust, backing up each Tether. The whole purpose of Tether was to be tethered to the United States Dollar.

If there were not the equivalent amount of money in trust, then their entire whitepaper would be a farce and the principal they stood for in essence destroyed. In dissolving their relationship with their auditor and it becoming public in the Paradise Papers that Bitfinex was behind Tether, a subpoena from the U.S. Commodity Futures Trading Commission was sent on December 6, 2017, to both entities (Tether and Bitfinex).

If Tether’s peg to the U.S. dollar was, in fact, a lie and the U.S. dollars didn’t exist in trust, this may be one of the largest scams in crypto history. However, being supported by Bitfinex it is more likely that the total amount of money is not in the trust, but a whopping majority is. If just $1 was not in the trust they could expect an audit, but by dissolving their relationship with their auditors and releasing billions of USDT, they’ve sent up many red flags. Here come the subpoenas.

Subpoenas for Tether and Bitfinex

The main reason both Tether and Bitfinex received subpoenas is that they both share the same Chief Executive Officer (CEO). It is never a good sign when a company dissolves their relationship with their auditor especially amidst allegations of a scandal in the billions of dollars. The fear caused by these subpoenas caused the price of bitcoin to decline more than 12 percent to under $9,950. If bitcoin closes under $10,000, it would be the first daily close below this level since November 2017. The panic has begun to spread regarding what will happen.

However, Tether has a market cap of under $4 billion, and even if it completely collapsed and was removed from the cryptocurrency markets, it would only make up less than one percent of total value. However, the fear news like this creates has caused the market to retract far more than the one percent that would have taken place if all the Tether’s were literally simultaneously removed from the market.

Tether and Bitfinex cleverly do not disclose on their websites or publicly where they are physically located or who’s in charge. However, in a December 3 email, Jan Ludovicus van der Velde was allegedly the CEO of both enterprises. Phil Potter is a Tether director while also being the chief strategy officer at Bitfinex. It is clear Bitfinex is intermingled with Tether which is why the U.S. government has subpoenaed both parties. For the sake of Tether and Bitfinex’s existence in the long term, it is hoped they have had the exact number of USD (in trust) as they’ve issued USDT in the last six months.

Conclusion: How is a Tether Made?

Well, the U.S. government is about to find out. The whitepaper is basically the only place the populous can look to try to figure out how a Tether is created. The market pricing, placing a USDT around $1, makes it seem as if the greater public has faith each USDT is backed by $1.

However, very little information is actually available regarding how this is guaranteed. This has resulted in a December subpoena being publicly announced today and Tether dissolving their relationship with their auditor two days ago. The King has significant faith in the crypto space as a whole, but there has to be more transparency and adherence to whitepapers for this to become a respected industry like stocks and bonds. Tether has a market cap under one percent of the entire crypto market cap, yet negative news like this has the ability to shift the entire market ten percent.

The traders need in crypto need to have stronger hands, this news is negative for Tether, but will result in better policies for exchanges and coins in the future.

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