Regulators have waited too long to act on so-called stablecoins, to the point where exposure to schemes like that being run using Tether has infected the entire digital asset industry—and even beyond it.
This is thanks to a network of exchanges which surround and rely on Tether and who perform a vital role in Tether’s ability to mint new USDT and get them to market, all while maintaining a paper-thin illusion that the so-called stablecoins are backed by anything at all. In return, the exchanges get to sell the apparently value-less USDT in exchange for BTC.
That the scheme has been so successful that companies like Bitfinex, Binance and FTX—the largest recipients of newly minted Tether—have been able to enjoy unprecedented growth in the current digital asset boom. These companies have been able to leverage this growth into all kinds of extrinsic partnerships. For example, FTX just paid $135 million for the naming rights to American Airlines Arena, home to the Miami Heat. Eric Woolworth, president of The HEAT Group’s Business Operations, said:
“FTX.us is an exciting, young company in an emerging category of the financial services industry that continues to grow at lightning speed, and we are ecstatic to welcome them with open arms to the Magic City.”
But if the growth is being supported by the endless printing of USDT without any real backing, then it’s only a matter of time before the market realizes this—and the whole charade comes crashing down. Miami-Dade had better hope they took payment from FTX up-front.
Tether’s inner circle
Remember when Tether released its one-page reserve report, showing that 74.85% of Tether’s reserve was in “cash and cash equivalents” Only 3.87% of that was cash. The majority is designated as what Tether calls “commercial paper” (65.39%), accounting for 49% of the entire reserve – the single biggest constituent.
Commercial paper is a type of short-term and usually unsecured debt, typically issued by one entity to another to cover short-term obligations. Critically though, there’s another category in Tether’s breakdown which covers secured loans, and those are specifically designated as not given to affiliated entities. This implies that the other categories (including commercial paper) may be with its sister company, Bitfinex.
Tether is something of a nexus between many players in the industry, both large and small. This is something that Tether would like to keep quiet: in fact, up until 2017, Tether and Bitfinex were still insisting that there was no relation between the companies: we now know that they are owned by the same parent company, iFinex.
But Tether’s inner circle is clear as day if you can see where the newly minted USDT go once they leave Tether. Twitter user LucaLand97 tracked the journey of tether’s monster $1 billion mint back in February:
The largest destination for this particular print was FTC, an offshore exchange.
What happens to the Tether once it lands in the wallets of these select few exchanges? In theory, Tether should only be being minted in accordance with demand from investors using USDT as a medium of exchange to introduce their fiat capital into digital assets without needing to sacrifice the stability afforded by the dollar.
However according to a study published in The Journal of Finance in 2020, this isn’t what is happening at all. The study found that in the case of Bitfinex, more than half of the exchange of USDT for Bitcoin at Bitfinex is associated with one large player, which would indicate that the USDT which propagates throughout the market is not the result of many investors using Bitfinex to purchase USDT for cash:
“Following periods of negative returns, Tether flows from Bitfinex to Poloniex and Bittrex, and in exchange, Bitcoin is sent back to Bitfinex… When there are positive net hourly flows from Bitfinex to Poloniex and Bittrex, Bitcoin prices move up over the next three hours,…