News: Tether extends doc deadline, resumes printing; GBTC’s premium melts away; Ken Kurson pardoned

We are three-quarters of the way through the first month of the new year. We have a new president in the Whitehouse, and people are getting vaccinated—a glimmer of hope at the end of a long dark tunnel. I’m doing some volunteer work for VaccinateCA, making calls to pharmacies. (I saw @patio11 tweeting about the project and wanted to contribute.)

Maybe toward the end of 2021, we’ll see more in-person crypto conferences, but for now, it looks like Coindesk’s big money-maker Consensus will be virtual again—only $50 to register compared to $2,500 for the real thing in past years. Currently, bitcoin is trading at around $32,000 after climbing to an all-time high of nearly $42,000 earlier this month, and Tether is closing in on $25 billion worth of tethers.

A reminder that I have a Patreon account. If you find my work useful, informative, entertaining, please become a subscriber for as little as $5 a month. I could certainly use the support.

Tether needs 30 more days, restarts presses

Jan. 15, the big document deadline day for Bitfinex/Tether in the NY AG fraud investigation, came and went. On Tuesday, after a three-day weekend, Tether’s law firm requested a 30-day extension to give them more time to turn over documents. The request was on behalf of all parties, so NYAG was apparently okay with this.

We won’t get another status update until mid-February. Until then, Tether has agreed to maintain the status quo, meaning the injunction is still in effect, and Bitfinex cannot dip into Tether’s reserves. (Court filing)

For now, it’s back to business as usual. After what appeared to be a short reprieve, Tether is once again printing tethers with abandon. (On Jan. 19, Tether printed another 400 million USDT.) They literally can’t stop, won’t stop, because they are too deep into the game.

In lieu of an audit, which would put this whole matter of “Are tethers backed?” to rest, Tether continues to recruit reporters, bank execs, and other gullible parties to profess to the world that tethers are fully backed. Meet the next actor in this ongoing charade: Gregory Pepin, Deltec Bank’s deputy CEO. Deltec is an offshore bank in the Bahamas where Tether has been doing its banking since 2018

“Every tether is backed by a reserve and their reserve is more than what is in circulation,” Pepin told Laura Shin on the Unchained Podcast. “We can see it firsthand, so I can confirm that,” he said, while repeatedly dismissing the anonymous “Bit Short” article,” mentioned in my last newsletter, as FUD.

Tethers are fully backed, but backed with what? Before they were called tethers, realcoins were supported by “one-to-one fully auditable stores of dollars,” according to a July 2014 article in the Independent Investor. “The bearer of these realcoins will have the first right to redeem them for subsequent U.S. currency.”

A reasonable assumption at this juncture is that tethers are backed by loans to third parties, bitcoins, equity in an offshore bank, a pile of shit coins, and increasingly fewer real dollars.

So far, we’ve heard from Stuart Hoegner, Paulo Ardoino, and a reporter from The Block, all talking up Tether lately, while the triad—Phil Potter, J.L. van der Velde, and Giancarlo Devasini—have slid off into the hills. (Granted, Potter claims he stepped down a while back.)

Tether invests in Fleet

Tether has invested $1 million of its customer’s money into an ICO. Game publisher Exordium, the company behind Infinite Fleet—a name perhaps borrowed from a popular saline enema product—has launched a public security token offering. It is unclear if Tether invested USDT or real dollars, but public participants can put in euro, BTC, or USDT, according to a company press release. (Decrypt, Infinite Fleet)

Infinite Fleet is Samson Mow’s blockchain game. Coincidentally, Mow is the chief strategy officer at Blockstream, a company responsible for a huge chunk of Bitcoin’s source code. Bitfinex is also a Blockstream investor. These types of incestuous relationships help explain why so many Bitcoin-related company execs are so fiercely defensive of Tether.

Is Tether partnering with startup exchanges?

There is reason to suspect Tether is partnering with startup exchanges by giving them USDT. Over the past year, all kinds of smaller exchanges have been announcing sizable tether giveaways. Alex Dreyfus, CEO and founder of Chiliz, for instance, said he was preparing for a 100,000 USDT giveaway. He also admitted he is a client of Tether and Deltec Bank.

Do a search for “USDT” and “giveaway” on Twitter and plenty will come up. Kucoin is one example. (Binance, an established Tether customer, is also giving away tethers.)

GBTC’s premium melts away

Here is something that hasn’t gotten enough attention. Grayscale Investments has played a role in fueling the bitcoin bubble. By convincing institutional investors they could buy into GBTC at net asset value and sell on secondary markets at a 20% to 30% premium after a six-month lock-up, it has created a self-reinforcing market dynamic.

Accredited investors looking to take advantage of an arbitrage opportunity, bought into GBTC, pushing up GBTC assets under management, which was then used to promote the idea that institutional investors, dominated by hedge funds, were scooping up bitcoin products. All this, in turn, lured more retail suckers into the market. “Look, all the big companies are rushing in! This must be a safe bet!”

But now that premium has dried up as fewer retailers are showing an interest in bitcoin, given the price has dropped by $10,000 in recent weeks. GBTC was recently trading at just 2.8% over NAV, leaving accredited investors stuck with GBTC in an illiquid market. (Bloomberg, Trolly’s thread)

Meanwhile, it looks like Barry Silbert has left the chatroom. He stepped down as CEO two weeks ago.

Just like that, Kurson off the hook

Surprise, surprise. Former Ripple board member Ken Kurson was one of the 74 people Donald Trump pardoned at the last minute on Jan. 19. Kurson is also the co-founder of crypto rag Modern Consensus, where I worked for an intolerable six weeks. It’s just unbelievable this guy, who was criminally charged with cyberstalking, got a pardon. (Full list of pardons, NBC)

While many of Trump’s pardons went to political pals—including Steve Bannon, another pro-bitcoin guy—Kurson’s was an obvious favor to Jared Kushner, whose father, Charles, also received a pardon. Kurson’s pardon stands out, in part, because of the risk it poses to some of the women he stalked and harassed. (The Daily Beast, paywalled) 

“Suffice it to say, what he was actually arrested for was part of an ongoing pattern of abuse, revenge, & sociopathy,” Deborah Copaken, a contributing writer at the Atlantic, said on Twitter. She worked for Kurson in the past, wrote about the experience, and helped the FBI with their investigation. “All jokes aside, I am worried about my own safety. @FBI – How do you protect those who helped you but who are now totally exposed because of a presidential pardon?”

Other newsworthy bits

“How can $24 billion worth of tethers move a $650 billion bitcoin market cap?” The is an insufferably dumb question, and I explain why in a recent blog post. (My Blog)

David Gerard wrote about the history of wildcat banks and early “stablecoins” with excerpts from an 1839 Michigan Bank Commissioner report. (Gerard’s blog)

Craig Wright is at it again. He is now claiming the Bitcoin white paper and Bitcoin.com are his. He is trying to force Bitcoin.org to take down the white paper, which they now refuse to do. (Coindesk)

Balaji Srinivasan outdid himself on Twitter when he compared bitcoin, one of the world’s biggest energy hogs, to a battery, setting off the “bitcoin is a battery” meme.

Stephen Diehl, a programmer, compares crypto to a “giant smoldering Chernobyl sitting at the heart of Silicon Valley which a lot of investors would prefer you remain quiet about.” His thread went viral.

Gary Gensler is officially named for SEC chair. (NYT) We can expect greater crypto oversight from him. (Bloomberg)

Meanwhile, Allison Herren Lee was sworn in as SEC acting chair until Gensler takes over. (SEC, Decrypt)

MicroStrategy bought another 314 bitcoins for $10 million cash. Saylor’s company now holds 70,784 bitcoins acquired at an aggregate $1.135 billion. (SEC Filing, Coindesk)

Circle has surpassed $5 billion worth of its USDC stablecoin. They produce regular monthly attestations. But as Frances Coppola points out, if Circle/Centre were a bank, they would have to produce actual audited accounts.

Updated on Jan 24 with more info on Kurson’s pardon and a quote from Deborah Copaken. Also added the bit about Craig Wright.

‘How can $24B in tethers move a $650B Bitcoin market cap?’ and other mathematically illiterate questions

A question, or some version of it, that keeps popping up on social media lately is, “How can $24 billion worth of tethers move a $650 billion bitcoin market cap?”

This is “a blitheringly stupid question on multiple levels, starting with basic arithmetic,” bitcoin hater David Gerard said on Twitter. “It’s also a perennial dumb question.”

The question is being put forth by bitcoiners in an attempt to put people’s minds at ease about Tether. The thesis is that if tethers were to vanish—something that could happen if the U.S. Department of Justice were to give Tether the Liberty Reserve treatment—it would have little impact on bitcoin’s price, so you should stop worrying and keep buying bitcoin.

Someone posed the query recently on r/buttcoin. I am going to take a stab at sensibly answering the question in three parts starting with, What is market cap?

1. Market cap is meaningless nonsense

Market cap is a nonsensical number when it comes to bitcoin. It’s calculated by multiplying the last transaction price of bitcoin by the number of bitcoins in circulation—currently $35,000 x 18.6 million.

That doesn’t mean that people bought every bitcoin in existence for that price. The vast majority of people who own bitcoin bought it at a far lower price than what it is today. It also doesn’t mean that if everyone suddenly decided to sell all of their bitcoins, each bitcoin would bring them $35,000.

In fact, it doesn’t mean that bitcoin has any value at all other than the hope that some bigger dummy will stroll along who is willing to pay more for it than you did. Bitcoiners like to imagine that bitcoins are valuable because there will only ever be 21 million of them. That makes them scarce.

Beanie Babies were scarce in the 90s, too, with some fetching upwards thousands of dollars on eBay. But by the end of the Beanie Baby bubble, no amount of scarcity could make them desirable. They became worthless

Market cap is just another way to make something that is worthless appear valuable.

Market cap came out of the traditional finance world. And then websites like CoinMarketCap came along and began applying the term to bitcoin. In the stock market, market capitalization refers to the total value of a company’s share of stock. But while companies have an intrinsic value, bitcoin does not. There is nothing behind bitcoin. It’s not a company. It is not a thing. It is simply a number in a database.

Here is an example of how silly market cap is when applied to crypto. Say I create 1 million CastorCoins and start listing them on some little-known offshore exchange for $1. Suddenly CastorCoin has a market cap of $1 million dollars. Does that mean I have a million dollars? No, it does not. 

Or, as u/Ifinallycracked puts it on r/buttcoin: “If a bog roll contains 100 sheets and I manage to sell one sheet for a dollar, that doesn’t make it a $100 bog roll. Apply same logic to Bitscoin market cap. Success.”

Once you grasp that the bitcoin market cap does not mean that people have spent $650 billion on bitcoin, $24 billion worth of tethers—which represents 0.03% of the total bitcoin market cap—becomes a lot more significant.

2. Price is determined at the margins

The price of bitcoin is determined at the margins. If you want to drive up the price of bitcoin, you don’t have to buy every single bitcoin at the current price level. You simply have to scoop up the ones that are for sale. 

Money flowing into bitcoin is what keeps the price afloat. If demand increases and people are willing to pay more for bitcoin, that pushes the price up. The more dollars people throw at it, the higher BTC will go. And it doesn’t matter if you are buying bitcoin with real dollars on a banked exchange like Coinbase—or fake dollars on an offshore exchange like Binance, Huobi, or Bitfinex.

Image: CoinCompare

Right now, the latter is more prevalent—there are far more tethers flowing into bitcoin than actual dollars. In fact, 55% of all bitcoin is currently traded against tethers while only about 15% trade against real dollars, according to CoinCompare.

This is what makes the current bitcoin bubble different than the last. In 2017, when the price of bitcoin ran up to nearly $20,000, there were a lot more real dollars in the system and only 1.5 billion tethers in circulation. Now, it’s mostly tethers pushing up the price of BTC.

3. Bitcoin is illiquid

Bitcoin is relatively illiquid. According to data from Glassnodes, 78% of all bitcoin are not moving. In other words, of the 18.6 million bitcoins currently in existence, only about 4.2 million are in constant circulation.

At least 3 million bitcoin are lost because people like this guy can’t find their keys. (Just because you are the former CTO of Ripple, that doesn’t make you clever when it comes to safekeeping bitcoin.) And there are still plenty of folks holding on to their BTC in the hopes it will go stratospheric. Strong hands!

As a result, it doesn’t take a large buy or sell request to move the price of bitcoin. Printing billions of dollars out of thin air and using it to put supply-side pressure on a market as thin as bitcoin forces the prices up. Conversely, if enough people were to get panicky and rush to sell their bitcoin—weak hands!—the results could be catastrophic. Literally, the entire market cap can go to zero in a moment.

The whole point of Tether is to push up the price of bitcoin and other cryptocurrencies, and then move those assets to OTC desks and banked exchanges, where they can be turned into fiat. As @Baskee puts it: “Tether is a ladle; Bitcoin and USD are ashes and bullet casings, respectively.”

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News: Tether’s offshore Deltec Bank, the Bit Short, NYAG’s document deadline, Tether truthers compare skeptics to QAnon

Finally, another newsletter! I am trying to find a way to write a crypto newsletter that doesn’t take all day to write. This is a (failed) attempt at that. Going forward, this sporadic newsletter will assume you know a thing or two about the crypto space. (If not, read the articles I link to!)

First some housekeeping—I’ve been working to update my blog and move it over from WordPress.com to WordPress.org. My main challenge is finding a WordPress theme that I like, preferably one that is free. If you have any recommendations, please let me know.

Also, the crap butterfly keyboard on my Macbook Pro is failing me, so I’ve ordered a Mac Air with the M1 chip, which will arrive in a few weeks. I’m hoping it makes my life easier.

If you want to support my work, a reminder that I have a Patreon account. Think of it as buying me a cup of coffee, a bottle of wine, or a case of wine once a month, depending on what level you subscribe to.  

Now, on to the news, starting with Tether.

Tether conversations reveal things

I wrote two blog posts recently—these are both transcripts with annotations. If you are interested in Tether and Bitfinex, I recommend you read both, as they contain a lot of good information.  

The first is an interview with Tether frontmen Stuart Hoegner and Paolo Ardoino hosted by bitcoin maxi Peter McCormack. The point of the interview was clearly to attack the “Tether FUD.”

Remember, it’s very important that Tether keep up the illusion that real money is behind tethers and all is well in Tetherland. If the charade crumbles, so does Tether’s dollar-peg and along with it, the bitcoin market.

To that end, Hoegner is claiming that the now $24 billion worth of tethers in circulation are fully backed. What a switch. He told us in April 2019—22 billion tethers ago—they were 74% backed. The question is what are they backed with? He won’t tell us. (Deltec is their off-shore bank in the Bahamas, by the way.) 

Peter: You mentioned Deltec. Are you shareholders in the bank? 
Stuart: We don’t talk about the investments that we have on the Tether side.
Peter: Okay, so are tethers fully backed?
Stuart: Look. The short answer is yes. Every tether is 100% backed by our reserves. And those reserves include traditional currency and cash equivalents, and may include other assets and receivables from loans made by tether to third parties. 

The second transcript I wrote up hasn’t gotten as many views but it is also interesting. It’s a debate between The Block’s Larry Cermak and blogger Bennett Tomlin. They argue whether Tether is acting in good faith. Cermak thinks they are. He believes tethers are fully backed—and wants you to believe that, too.

One question we have to ask is why Cermak, who was a staunch Tether skeptic in the past, has suddenly pulled a 180 and joined the campaign to prop up Tether? Assuming good faith, it appears he has fallen for the same con one Bloomberg reporter did two years ago.

Questions around Tether’s Deltec Bank

Another curiosity that sprung up from Paolo and Stu’s interview: Who is Deltec’s banking partner? If Tether keeps its reserves at Deltec and its largest customers have accounts there too, one would think Deltec needs a U.S. bank partner to store USD. In other words, a nostro account in a foreign bank. 

This should not be a secret. When Bitfinex was banking with Noble Bank in Puerto Rico, Noble openly stated on its website that it doesn’t actually hold the money. Instead, it used BNY Mellon as its custodian.

Presumably, Deltec has a custodian, too. This might explain why the Bahamian Central bank is not reporting inflows that match what Tether claims to have in its reserves. (The central bank publishes a quarterly statistical digest that looks at the total assets that all the country’s banks are holding.)

Of course, another explanation as to why the country’s central bank isn’t showing a large inflow of funds could be that Tether doesn’t have the reserves it says it does—or else, maybe, a good portion are in BTC?

In a year-in-review video, Deltec’s CIO Hugo Rogers dropped a bomb. He said, with the straightest face you can imagine, that the bank has a “large position” in bitcoin.

“We bought bitcoin for our clients at about $9,300 so that worked very well through 2020 and we expect it to continue working well in 2021 as the printing presses continue to run hot.” (He is referring to the U.S. printing press, but we know Tether has been running hot, too.)

Hoegner denied that any of those funds were Tether’s, according to The Block.

The Bit Short

An anonymous blogger published a Medium post on Tether titled “The Bit Short: Inside Crypto’s Doomsday Machine.” It’s full of great quotes and insights, like this one, describing how Tether’s core moneymaking engine may possibly work:

  1. Bob, a crypto investor, puts $100 of real US dollars into Coinbase.
  2. Bob then uses those dollars to buy $100 worth of Bitcoin on Coinbase.
  3. Bob transfers his $100 in Bitcoin to an unbanked exchange, like Bybit.
  4. Bob begins trading crypto on Bybit, using leverage, and receiving promotional giveaways — all of which are Tether-denominated.
  5. Tether Ltd. buys Bob’s Bitcoins from him on the exchange, almost certainly through a deniable proxy trading account. Bob gets paid in Tethers.
  6. Tether Ltd. takes Bob’s Bitcoins and moves them onto a banked exchange like Coinbase.
  7. Finally, Tether Ltd. sells Bob’s Bitcoins on Coinbase for dollars, and exits the crypto markets.

And this great quote here:

“Forget the activity on the offshore exchanges for a moment, and just think of a simple mental picture. Imagine you could stand at a metaphorical booth, where Coinbase’s exchange connects with the US financial system. If you could do that, you’d see two lines of people at the booth. One line would be crypto investors, putting dollars in—and the other line would be crooks, taking dollars out.”

If you can visualize the image above with Coinbase, you can start to understand why FinCEN is so anxious to push through its proposed “unhosted” wallets rule.

Tether’s document deadline has passed

Jan. 15 was the deadline for Bitfinex/Tether to submit a trove of documents to the NYAG, which has been investigating them for Martin Act violations. A lot of folks were hoping to see a court filing drop on Friday with the NYAG taking a position on the documents that it has received. The injunction, which limits Bitfinex from dipping into Tether’s reserves, also ended Friday, according to the NYAG’s letter from Dec. 8.

(Update: This is a bit confusing. I am not completely sure if the injunction ended on Jan. 15, according to the NYAG’s December letter, or it is implicitly extended until the next court order, per the original order.)

The NYAG hasn’t filed any new court documents yet, but we are waiting anxiously. Tether says they’ve so far sent 2.5 million docs to the NYAG—I believe that’s called a document dump.

In the meantime, Tether has mysteriously stopped printing tethers. The last big print was 400 million tethers on Jan. 12, and prior to that, 400 million on Jan. 9, according to @whale_alert.

Understanding GBTC

There has been some confusion on Twitter as to how Grayscale Bitcoin Trust (GBTC) works. Grayscale doesn’t buy bitcoin directly. Grayscale customers send Grayscale their bitcoin—or cash to buy bitcoin with—and Grayscale issues shares in return. But why do the shares consistently trade at a premium to net asset value?

This November 2020 article by investor Harris Kupperman explains it well. “Think of GBTC as Pac-Man. The coins go in, but do not go out,” he said, going on to describe how GBTC functions as a “reflexive Ponzi scheme.”

Coinlab cuts a deal with Mt Gox creditors

Coinlab, a former U.S. company that has a $16 billion claim against Mt. Gox, has proposed a deal with Mt. Gox creditors over their claims. If creditors choose to go forward with the deal, they can agree to get back 90% of their BTC ahead of the settlement, according to Bloomberg.

Kim Nilsson of WizSec says Coinlab was never acting in good faith. “CoinLab was insisting on continuing to hold up the process for everyone while they litigate to try to steal everyone’s money, and had to be essentially bribed so as not to obstruct this arrangement.” (WizSec blog)

Other notable news

FinCEN has extended the deadline for comments on its proposed crypto wallet rule. Starting from Jan. 15, you now have 15 days to comment on reporting requirements, and 45 days to comment on proposed rules for reporting counterparty information and record-keeping requirements. (Coindesk, FinCEN notice)

Good-bye and good riddance. Brian Brooks has stepped down as acting commissioner of the OCC. (Coindesk.) The former Coinbase exec recently posted an editorial in the Financial Times shilling DeFi. (FT, paywalled)

The European Central Bank calls for regulating Bitcoin’s “funny business.” (Reuters)

Gary Gensler is reportedly President-elect Joe Biden’s choice to lead the SEC. Gensler is a crypto savvy guy, who taught a course on blockchain at MIT Sloan. Crypto folks can expect greater oversight from him. Hopefully, he will bring the hammer down an all those 2017 ICOs. (Bloomberg)

Tether apologists are now comparing (archive) Tether skeptics to unhinged QAnon conspiracy theorists—an example of what lengths they will go to discredit reasonable questions about Tether’s reserves. Remember, the burden is on Tether to prove they have the assets they say they do.

USDC, a U.S. regulated stablecoin issued by Circle, now has a circulating supply worth $5 billion—far outpacing that of any other U.S. regulated stablecoin.

Frances Coppola debates Nic Carter about bitcoin. (What Bitcoin Did podcast)

Bitcoin mining was partly to blame for the latest blackout in Iran. (Washington Post)

Ripple’s ex-CTO loses access to $200 million in bitcoin. “This whole idea of being your own bank—let me put it this way, do you make your own shoes?” said Stefan Thomas. “The reason we have banks is that we don’t want to deal with all those things that banks do.” (New York Times)

Bitcoin may have helped finance the pro-Trump Capital riots (Decrypt)

Twitter has banned the account of former Overstock CEO Patrick Byrne after he posted conspiracy theories relating to the Presidential election. Byrne is a longtime bitcoiner who led Overstock’s decision to originally accept bitcoin and invest in the space. (Decrypt)

Larry Cermak and Bennett Tomlin debate Tether’s solvency—transcript with notes

Richard Yan of The Blockchain Debate podcast held a debate between The Block’s Larry Cermak and Bennett Tomlin, a data scientist and blogger with an interest in fraud. Patrick McKenzie, a Tokyo-based entrepreneur, who wrote one of the best articles describing Tether to date, joined as a co-host. 

The motion on the debate was, “Is Tether acting in good faith?” Tomlin argued that no, they are not. While Cermak argued for the motion, giving Tether a generous benefit of the doubt.

Cermak is a bit of a puzzle to nocoiners these days. He has recently taken to defending Tether, stating that he believes the BVI-registered stablecoin issuer, which has so far issued $24 billion in tethers, is fully backed. In the past, he took a hard stance against Tether and its sister company, crypto exchange Bitfinex, causing them quite a bit of trouble. In October 2018, for instance, he disclosed in a tweet that Bitfinex was banking with HSBC under a shell. Soon after, the feds froze that bank account. The shell, as it turned out, was registered to Arizona businessman Reginald Fowler, who was indicted the following year on bank fraud charges.

Cermak has also admitted to owning crypto and making money in DeFi markets. He recently bragged on Twitter about gifting his fiancee $1,000 in crypto to gamble in the futures markets. Tomlin, who is working on a book on Tether, told me he does not currently own any meaningful amount of crypto. (At one point, he owned about $500 worth of bitcoin and ether.) “I want to stay as unbiased as possible,” he said.

Tomlin does a good job presenting facts in the debate. He clearly has read through all of the related court documents, and knows what’s in them. Whereas, Cermak tends to rely on “somebody told me this” type of information. His sources appear to be Tether frontman Paolo Ardoino and large Tether customers, such as OTC desks, exchanges, and high-frequency trading firms, who stand to make big profits in the crypto space.

What follows is the transcript with my annotations. I’ve removed filler words (such as uh, basically, you know, right, so, etc.). Brackets indicate words I’ve inserted for clarity. I’ve added links where appropriate and edited out most of the intro. Overall, there’s lots of good info in here, and I recommend reading the full transcript. 

Richard: Bennett, please go ahead and tell us how Tether has been acting in bad faith all this time since they started in 2014.

Bennett: The easiest way to go about this is to look at a specific example that will show many of the patterns that have persisted over this period. Bitfinex gave over $1 billion to payment processor Crypto Capital Corp without a contract or an agreement. This payment processor was not a registered money servicing business or a licensed money transmitter. This payment processor lied to the banks about what the accounts would be used for. And when the principal for this payment processor was arrested, he had in his possession, counterfeit U.S. currency and fake bond certificates

(The “principal” Tomlin is referring to is Reginald Fowler, who allegedly served as Crypto Capital’s money mule, setting up bank accounts under shell companies and moving money for Bitfinex. It is worth mentioning here that Tether and Bitfinex have the same operators: CSO Phil Potter, CEO Jan Ludovicus van der Velde, and CFO Giancarlo Devasini, who are barely heard from these days. Nocoiners refer to them as the triad.)

When this payment processor stopped responding to Giancarlo and Bitfinex’s requests to withdraw funds and the DigFinex executives believed that these funds were potentially lost, Bitfinex publicly insisted that withdrawals were working fine and there were no problems.

(DigFinex is the parent company of Bitfinex and Tether. Here is an org chart for reference. The “lost” funds included $850 million, some of it tied up in a network of 60 bank accounts set up by Fowler and some of it seized by the Polish Ministry of Justice from Crypto Capital’s Polish subsidiary, Crypto Sp. z. oo.)

However, privately, in order to combat this effective insolvency of Bitfinex, the executives of Bitfinex and Tether orchestrated a swap of multiple hundreds of millions of dollars from Tether’s bank accounts to Bitfinex in exchange for a ledger notation saying that tether now possessed the inaccessible funds at Crypto Capital, effectively making Tether insolvent.

This fact was not disclosed and Tether’s homepage and terms and conditions at this point still claimed every tether was fully backed by the equivalent currency, despite this effective insolvency. These are not the actions of good actors in the cryptocurrency space.

(The NY attorney general has been investigating Tether and Bitfinex since late 2018 for violating the Martin Act. Most of the details of what Tomlin is referring to can be found in a court filing.)

Richard: Thanks Bennett. That was very thorough. And I would say you’re probably one of our first guests that have actually prepared a statement and read from it as if this was a hearing or something. But anyway, thank you, Bennett. I definitely don’t think you are in the minority there when you accuse Tether of being in bad faith. So I’d love to hear what Larry has to say next. Larry, please go ahead with your opening statement.

Larry: First of all, Bennett’s statement was great. There’s a lot of merit to it. That being said, Tether has seen tremendous growth this year. It’s important in several different products. It’s incredibly important for the current market structure. Basically all the futures are collateralized by Tether. Now the majority of volume is coming from tether pairs, and we’ve seen legitimate growth from Tether this year. Some people argued that growth is pumped by Tether itself, where you can see similar growth in USDC and competing stablecoins. 

(USDC is a US regulated stablecoin that has also seen a lot of growth, but that growth is dwarfed by Tether, which since March 2020, when BTC plunged to below $5,000, has issued 20 billion tethers.)

There is, at least in my experience, overwhelming evidence that there is money going into Tether and there’s money being redeemed by several different parties. These parties are usually OTC desks, market-makers, and exchanges. The reason why there isn’t much public evidence of this is because these parties tend to be more on a private end and they don’t have much of a reason to actually tell people that they’re redeeming for hundreds of millions of dollars.

I do think that Tether used to act questionably and Bennett highlighted that really well. I do think that they’ve changed significantly in the past year and a half. I’ve been watching Tether for the past four years now. And the behavior has changed a lot. 

They are much more transparent publicly. They are much more transparent in their goals, how they operate. And I do think that right now, my belief is that they are fully backed. And my belief is that they are not acting in bad faith. Quite the opposite. I think they are super important to the crypto space. And I agreed that it’s important to consider the possibility that Tether might at some point stop existing. But I don’t think it’s fair to say that they’ve been acting in bad faith, especially in the last couple of years.

(Tether has not been transparent at all. In a recent podcast, Tether frontmen Poalo Ardoino and Stuart Hoegner refused to say what assets were backing tethers. However, one thing they were clear on—it wasn’t all cash.)

Patrick: If I can jump in here. Assuming, arguendo, that Tether is fully backed, Tether has said a few definitions over the years as to what constitutes backing. Under which definition do we believe that they are fully backed? What is the collateral? Where is it?

Larry: That’s a good question. I think that they are fully backed when it comes to dollars on bank accounts. Tether has the mandate to invest in super low-risk yielding opportunities. So as far as I know, the vast majority is in US dollars on their bank accounts and they don’t just have one, it’s possible. Some of it is in some bonds or really low-yield investment vehicles. I don’t believe that any of that backing is in cryptocurrencies or some kind of other more risky vehicle.

(In his recent podcast, Hoegner counted Tether’s remaining $550 million loan to Bitfinex as an asset backing Tether. In an April 2019 affidavit, Hoegner said the 2.1 billion tethers in circulation at the time were only 74% backed. Tether/Bitfinex have never said anywhere publicly that they’ve invested in bonds. Also, Tether’s terms of service says tethers are backed by “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.”)

Richard: And when we say bank accounts, are those bank accounts at Deltec Bank in the Bahamas or are those bank accounts at Deltec Bank somewhere else? Are there banks that the world doesn’t know [about]?

Larry: Absolutely. As far as I know. The last time I talked to Paolo was maybe a month ago when we were working on a stablecoin report. I asked him this question as well. He did say that the majority of funds are at Deltec and there are also some other banks that they’re working with, but only for smaller amounts. I assume that’s mostly just to make the redemptions and the transfers easier for customers. But I do think that the majority of the funds is at Deltec in The Bahamas.

Bennett: If I can ask a question, because I’ve been curious about that too, just as an outside observer, as to where the funds might be held.

The Central Bank of the Bahamas publishes a quarterly statistical digest that looks at the total assets that all the banks in the Bahamas are holding. And if you look at it, with the most recent one being released in November, you do not see any increase in assets held at Bahamian banks over the last year. Either there must be comparable outflows from somewhere else to match any inflows from tether, or there’s some reason Deltec Bank would not be counted among those statistics. Do you have any insight into why that would be?

Larry: I don’t. I really don’t know. I’ve looked into those documents as well. I’m not sure if it even encompasses all the money that is in the Bahamian banking system. I’m not sure why that is honestly.

Basically the reason why I believe that Tether is fully backed is not just because I talked to Paolo and they feed me this marketing stuff. It’s because I talked to a lot of different actors in the crypto space, those being massive OTC desks, large traders, exchanges directly, and basically anyone who deals with Tether directly, and they have redeemed tens of millions of dollars. I mean, I’ve seen proof of that.

I trust these people, and I’ve talked to so many of them at this point that it’s beyond reasonable doubt that Tether is operating as it should when it comes to redeeming money. The frequent argument that I hear from people on the other side is, why isn’t the supply decreasing at all? Basically, why is it only going up?

The simple answer is that the demand is just so much higher, and they don’t do these redemptions every week or something. They have a system, where if more money is coming in then is coming out, they obviously don’t reduce the supply. And this happens in fairly long periods of time. So that’s why it’s not happening. 

And if what you guys are conferring is that if Tether was not back fully or only had a really small amount of the backing, they would not be able to serve these redemptions. And basically without any issues, these things are happening quickly. And to the point where a lot of these large traders or institutional customers have started their own bank accounts in Deltec, just so they can make the process more efficient. 

(Paolo and Stu confirmed in their podcast that several of their customers also bank at Deltec. Yet, we have no idea what type of arrangement Tether has with its large customers, whether Tether is in fact loaning USDT to them and counting those loans as backing, or what the deal is.)

And so that’s the basis for my argument that Tether is backed. And then also just talking to Paolo and having conversations with people that are close to the business. At this point, I would be shocked to find out that it was less than 98% or 99% backed.

Bennett: I have a couple of things I want to add to that. The initial document released in the New York attorney general investigation said, at that point, the largest redemption was $24.2 million. So Do you think that Tether’s documents that they were handing over before the ex-parte order were incomplete, that the average size of the redemption has gone up significantly in the intervening two years? What would explain that dynamic? 

Larry: Oh, absolutely. I think it has gone up way significantly in the last two years, to the point where now a hundred-plus million dollar redemptions are completely normal. 

That’s because the space has just grown quite a lot. Like I said, the dynamic with Tether has changed significantly. Bitcoin used to be the main reserve currency when it comes to crypto, both for futures and derivatives. Now it’s tether and the same is happening for the pairs. It used to be all bitcoin, now it is tether. 

So Tether is much more important now. The supply is much higher and these parties are using it unquestionably because if they want to get access to futures, and these features are extremely liquid, they do have to have access to tethers. So these redemptions are definitely increasing in size. There’s no doubt about that. 

Also, one thing I would like to point out is that you have to understand that Tether obviously doesn’t want any of their information to be public. And that is not only because they are covering something shady, which could be the case, but it’s also because they just don’t want their own business information to be out there for everyone like you and me. So that’s my basic response to that. I do think that the redemptions are now significantly larger. That still means that they’re not acting in bad faith.

Bennett: There’s one other point I wanted to make there before we move on. You said that you were confident tethers were fully backed because they’ve been able to service these large redemptions. But you also said that there are more deposits actively coming then going out, which would mean to service these redemptions, until there’s a whole group of them, they could in theory, service them with a small amount in reserve and the incoming deposits, correct?

Larry: Yes. It’s hard to estimate how much they would need to have to justify this condition. So I agree with you. Again, I guess the main question here is: What do you think they’re doing with the money? Do you think they’re just taking it for themselves or what do you think they’re doing with it?

Bennett: We know from the New York attorney general investigation, that Tether executives do receive large, aperiodic payments from comingled client and corporate funds out of the Tether account. That was discussed when they were arguing for the initial injunction against them, with the limits on related party transactions. So I do think there is the possibility that money has been exfiltrated by Tether executives.

Their lawyers also argued that their mandate is not just to invest in easy yield or things like that, but that Tether has the ability per Tether themselves to keep zero in reserves and invest anywhere they see fit, including—and the lawyer made very clear that they had done this—in bitcoin and crypto assets. So it is conceivable to me that a meaningful portion of their backing is currently invested in extraordinarily volatile assets.

Larry: I think that’s definitely not true. And again, I’ve had conversations with Tether executives and talked to different people. And as far as I can tell, that’s not true. They’re not investing in bitcoin and volatile assets. They are investing in low-yielding opportunities. 

(It is interesting Cermak would say this, considering he literally wrote an article for The Block in March 2019 with the headline “Tether admits in court to investing some of its reserves in bitcoin.”)

And to your point that some of the money used to go out to some of the executives. I do agree that’s a terrible look. I think it can mostly be explained by the fact that they just had so much trouble banking themselves that they used their personal bank accounts, which is a terrible practice, I agree. I don’t necessarily think that they’re acting in bad faith, but they acted in a careless way. I don’t think at this point that they’re just taking money out of it for their own personal gain. And that’s mainly because Tether now has more than $20 billion [worth of tethers] in supply.

Even if you say that they’re yielding about maybe 0.05% or around 0.01%, that’s a lot of money and the business is really treating them well in that regard. They’ve grown significantly this year and they’re generating a lot of money from it. And that’s while Bitfinex itself, as an exchange, has struggled this year. 

Now it’s picking up again. Early this year and late last year, the volumes really dropped significantly. And that again is another argument against people that think that Bitfinex is just faking value. They’re just creating a lot of Tether, and then the volumes are going up. 

That’s definitely not the case. And the clear evidence against that is because in 2017 and 2016, Bitfinex was one of the most important exchanges when it comes to spot. Now it’s not even in the top five and the volume has dropped significantly compared to other exchanges. So I don’t agree with that fully.

Patrick: It is extremely curious that their lawyers wouldn’t bring up that we only invest in low volatility as zero-custodial-risk assets when asked that in the course of investigation as to whether they were dissipating client funds and instead chose to tell the court that they had the right to invest it in absolutely anything they wanted, including cryptocurrencies. And we’re doing that. These seem difficult to square for me.

Larry: I was the one that read the document first. And I was the one that led the coverage on that first. So I know what the document said. It wasn’t as clear. It was a little bit more ambiguous. 

They’ve said they’ve previously invested on small amounts of cryptocurrencies. Again, I don’t believe that to be a significant amount. And if it was, I still believe that it was a very small amount of the total. And again, it’s hard to explain some of these things because that’s just by talking to people and understanding how Tether works in the background. 

But you keep coming back to the point that they basically can do anything, and that the lawyers don’t want to disclose what they don’t want to tell people. And that to me makes a lot of sense, right? Tether can do almost anything. It’s in their best interest not to disclose the information because they feel like the US people and the United States overall, they don’t have any jurisdiction. Tether claims to not function there. So I would say that kind of explains that.

Patrick: The jurisdictional point is an interesting one for me, because I’m not super familiar with banking regulations in the Bahamas, but if hypothetically Tether is holding large amounts of dollars at Deltec and not in the Bahamas, then the natural thing for me to assume is that they’re holding it in some sort of correspondent banking relationship elsewhere. And so it would matter a bit whether those jurisdictions would care whether the US believes that Tether is subject to a US court order.

So do we actually know what those jurisdictions are? Are they ones like, without loss of generality, Russia, which don’t care about us court orders? Or are they ones like Japan or the United Kingdom, which would happily enforce one?

Larry: I don’t think we know the details. Again, what do you think would have to happen for the money to be frozen by the US authorities?

Patrick:  A polite request to? 

(Banks don’t like dealing with crypto money, so if an onshore bank knew that it was holding Tether money, they would likely freeze the accounts. This is exactly what happened with CIBC and QuadrigaCX in Canada. And it’s why Wells Fargo cut Bitfinex off in early 2017. Bitfinex tried to sue Wells Fargo for it, but later dropped the suit.)

Larry:  Why do you think that would happen? There will have to be significant evidence of some sort of fraud or the money not being used in the right way. And we haven’t seen that yet.

(The NYAG is literally investigating Tether and Bitfinex for fraud at this moment. They have already uncovered evidence, in the form of Bitfinex hiding from its customers the fact that it lost access to $850 million in 2018, leaving the exchange insolvent.)

Bennett: I remember a case where an analyst published some evidence that Bitfinex was using global trade solutions at HSBC. And shortly after that, their accounts got shut down and they had to switch to new banking.

Larry: Oh, absolutely. And I used to be in the same boat as you are. What I realized later is that they’re doing this because they are having so much trouble finding a bank. And that’s why when they find a banking relationship that works for them, they tend to stick to it. And Deltec seems to be the one that has stuck. 

I one hundred percent agree with you. It is really weird when you see they open a new bank account, and then all of a sudden, after everyone finds out, it gets shut down. And that’s because no bank really wants to associate themselves with Tether because they’re risking way more than they would be gaining out of it. That’s just a natural response. 

(Banks have to comply with strict KYC/AML rules. If they touch dirty money, they face huge fines, and crypto money is often dirty, so naturally, they don’t want to do business with Tether, for that reason.)

And also because Tether—and again, I don’t think this is necessarily a bad faith, it could come across as that—but when they start these bank accounts, it’s because they basically are forced to. I want to make sure that everyone who listens understands my position isn’t to defend Tether. They’ve made several major mistakes before, but I do think that they’re super important to the space. And I do think that they’re acting well now. But they were in a difficult position because no one would give them bank accounts. So at that point, you really have no other choice almost.

Patrick: That’s the answer to my question on what the United States government would likely take issue with. If one assumes, arguendo, that tether has not been entirely candid with what it said to prior banking relationships, and then gotten frozen out of their accounts. That record of being less than entirely candid might not just go away because they got a new bank that was willing to say, politely, have a broader risk tolerance, not that a lawyer couldn’t speculate, but that would be a thing that I would not want in my history if I wanted a stable US dollar banking in the future.

Larry: I think that the response to that from Tether would be that they have not really been involved with a lot of the US customers directly. And the US court system doesn’t really have much of a jurisdiction over what they’re doing. I want to be clear again, I do think that something like this is possible. And I’ve warned people about it. Tether at this point is massively important to the crypto space. And if something like a black Swan event were to happen, it’s important to be ready and to be prepared to do something about it, and make sure that you don’t get completely screwed over if something like this happens. I don’t think it’s likely at this point.

(Cermak is on one hand defending Tether, and on the other, he is telling traders “to be ready” in the event something catastrophic happens.)

Richard: Can we take the debate in a different direction? Let’s talk about the fact that institutions do business with Tether. What is the nature of the business relationship between these businesses and Tether? Why do they not do business with USDC on a similar scale, for example. And when they obtain their USDTs, given the fact that Tether had this history of not being fully backed to put it politely, what kind of discount, if any, do the hedge funds or OTC desks get when they get the tethers?

Larry: They get no discount whatsoever. And that was the one point I was going to bring up as well before. If you guys believe that they’re not fully backed and if you believe that they might be acting in bad faith, why do you think there is no discount? And why do you think there is no premium? The discount only happened twice, if I recall correctly. And it was always about 10% maximum, then went back quickly. 

So why do you think that there is no premium, there is no discount. Why do you think it’s trading at par? It’s actually less volatile than USDC, for example, or at least comparable.

Bennett: Generally, if you look at the USDT/USD markets, it trades pretty even at 1:1. And there hasn’t been a major premium since, say, the end of 2018, like comparing tether to spot exchanges. And just speaking more broadly, the OTC quotes I’ve been able to see for tether do generally have it priced right around a dollar. 

I don’t think there’s any major discount in the market for tether like that. And even accepting that tether is not fully backed, I don’t necessarily think there would be a discount, so long as you believe that it’s redeemable or that, at that moment, you’ve got more need for it than you would for the comparable dollar. And so I still think even a potentially fractional reserve tether could still trade one-to-one without that being evidence of it.

Larry: I don’t agree with that myself. I agree with Bennett saying that if it’s only like 85% backed, 90% backed, they would still trade at 1:1. It’s only trading at 1:1 because there’s a future expectation that it will be back 1:1 at some point in the future. Not just because you can redeem it.

These large traders, again, they’re not idiots. They have to hedge their risks. And if they do think that at some point in the future, there might be a background on tether and they won’t be able to redeem all their money, they’re not going to even deal with it. So I don’t agree that. 

Richard: And what about the earlier part of my question? Why don’t these OTC desks do business with USDC, which also has experienced dramatic growth?

Larry: To your earlier point, and then maybe then Bennett can jump in. The biggest reason is because Tether has been the first and it has by far the biggest network effects. 

I brought this up earlier already, but the majority of futures is now collateralized by tether. And that wasn’t the case early this year before BitMEX really started to be affected. And now effectively it’s not even important anymore. BitMEX was all collateralized by bitcoin. And it was by far the largest futures exchange, the most important one by far. 

(Four BitMEX operators were indicted in October for Bank Secrecy Act violations. One was arrested, three remain at large.)

It’s not anymore. Now you have Binance, you have Huobi, you have OKex, you have Deribit, most of them are collateralized by USDT. So that dynamic itself, that shift, has already happened. And those network effects are why these OTC desks and these large institutional players have to get exposure to Tether because the products that they’re available on only function in tether. There are no futures that are collateralized by USDC.

Really the only alternative you have is bitcoin, but then you’re not trading the most liquid futures. The same thing can be said about crypto exchanges. The role of Binance has also grown so much this year, and that’s actually another thing I’m a little bit concerned about. Tether and Binance are by far the two most important companies right now in the space. And if something happens to either of them, we are definitely in trouble. 

I want to make sure that people understand that. And those risks need to be understood and prepared for, if they do happen at some point, even if it’s a low chance of happening. To answer your question, it’s because the market structure just demands tethers. And it’s mostly because of the network effects.

Patrick: Are we seeing some fragmentation of the network where half of the network exists, or some percentage of the network exists in, let’s say the United States and tightly aligned countries and some percentage of the network exists everywhere else. Because it would seem to me, if you want futures exposure, you can get futures exposure at the Chicago Mercantile Exchange at the price of having to be credible to the CME and deal exclusively in regulated dollars. And what I hear you saying is that you would want futures exposure at an exchange that is more flexible with respect to how one funds that futures exposure. Does this portend well for those networks continuing?

Larry: The biggest reason why these funds and these clients are interested in trading on these venues is because they are more liquid. And that’s because, like you said, they’re a little bit more lenient when it comes to which clients they take. It’s hard for someone in China to trade on CME. It’s not hard if they want to trade on Binance or Huobi. 

And naturally, the products with the most liquidity, they end up attracting the most liquidity, and it compounds the debt. CME is not a perfect product. It’s cash settled. But for example, there are pretty high limits of how much you need to get exposure to. And a lot of these exchanges, like Binance or Huobi, they also have a ton of retail clients. And needless to say, some of these funds do want to trade against those people because they’re less sophisticated and it’s easier to market make and all that. CME right now is not a product that is really an alternative to something like Binance or Houbi because you don’t have the same possibilities.

Bennett: I agree almost completely with Larry’s last two answers. Tether’s got the largest market cap and the most adoption because it was the earliest and it is the most used [stablecoin]. It’s been integrated at the most exchanges, it’s used as collateral for the most things. And I do think there is an appeal for a lot of people that Tether is less willing to serve at the beck and call of US regulators. So you see adoption for tether out of China and out of Russia, but even for online gambling and stuff in the Chinese mainland. And the kind of people who would be interested in tether there would not be probably interested in USDC because they would expect there to be a larger risk of funds being frozen or inaccessible, in the sense that Circle would freeze the tokens or block the redemption more so than Tether would.

Larry: I absolutely agree with that. And USDT is viewed by some people, like Bennett said, as less friendly to US regulators and the US overall jurisdiction. The influence of the United States is viewed as much smaller than USDC or Paxos or Gemini dollar. 

Also, one thing I want to point out and I’m sure Bennett will agree as well. The first massive growth of tether initially, end of 2017. We have to remember the reason was that Chinese exchange has got cut off from the fiat systems. And a lot of that money ended up flowing into tether. First couple of billion, or the majority of the money early on, has come from the Chinese exchanges. What that means is that because of these early network effects, there are massive OTC markets in China that use USDT and China was super important early on in crypto, and it still is and those network effects are at this point super hard to destroy. 

And so I do think that when it comes to trading, unless there is some regulatory intervention, Tether will remain the stable candidate it’s used by far the most.

(China told all of its crypto exchanges to shut down in 2017. After that, the only way for traders to on-ramp from the yuan into the crypto world has been via OTC exchanges, which enable peer-to-peer trading by connecting buyers and sellers.)

Richard: Let’s take an audience question. So this is from Nevine Mishra [spelling ?], and this is a question for everyone here. What would be the ratio of bad transactions in Tether? So the bad here basically refers to money laundering, and Tether is basically on-ramp outside of the USD payment system. Just not sure if tether has necessarily instituted the mechanisms to do the proper KYC/AML and so forth. Even though recently they did put out a tweet affirming that they do so. So can you guys speak to basically the possibility and the extent to which these transactions are of the money-laundering nature facilitated by tether?

Larry: I tend to start and then maybe Bennett can answer after me. I do think because of the dynamics that we talked about, it’s by far the most used by trading, it’s also viewed as the most lenient when it comes to just allowing stuff to happen. 

It does end up being used for nefarious activities and activities that are illegal. But it is my belief that Tether’s KYC/AML system internally is as advanced as USDC, as advanced as Paxos. I do think that the compliance is on always the same level, if not the same model.

Their compliance team is great. You can find all the people associated with Tether and the ones that they work on compliance. Also, it’s important to realize that they have frozen a lot of money this year, and a lot of transactions. By far more than USDC, far more than Paxos, and far more than any regulated stablecoin.

(I am not aware of any evidence that points to Tether’s superior KYC/AML system. As noted in the Ardoino and Hoegner podcast, Tether says it does check the identities of its customers, but what about the thousands of other users that tether trickles down to? My theory is that Tether’s large customers are akin to Liberty Reserve exchangers, acquiring tethers in bulk and distributing them in smaller quantities to individuals who require anonymity in their payments.)

Richard: Can you elaborate on that point? The freezing.

Larry: Because it’s more likely to be associated with these activities. And when tether finds out about it, especially this year, they have been really ruthless. When they think something weird is going on, they block it. Some people do believe that they’re more lenient, but actually they do end up blocking a lot. If there is any suspicion that it’s involved in some money laundering activity, they freeze it immediately. 

That has happened a lot this year, and it’s not really happening with USDC and Paxos. The best thing about stablecoins on Ethereum is that all of this data is public. You guys can, after this podcast, go and find the number of blocked addresses on USDC and Paxos, and you’ll see it’s much, much lower than Tether. So the argument that they are less active, it’s like weird that way. But yeah.

Bennet: Larry, you mentioned something that’s one of my biggest frustrations with Tether, and that is that they are at their essence, a finance company that is supposed to be keeping track of all these records of tethers issued, assets in their bank accounts, and all of that. And on their transparency page, on their website, for years, they’ve listed for Omni, their quarantined USDT, the stuff that was frozen, either as part of the initial hard fork after the hack or later after the Omni devs added the freezing ability to Omni. And that number, the number of quarantined USDT they have in their transparency page does not match with what happens if you add up what you can find in the Omni blockchain. And that’s been true for years. So talking about ostensibly, a company where this type of record is the most important thing they keep, and it’s been publicly wrong for years. And it took me like 45 minutes of scanning the blockchain to figure that out and Tether hasn’t done that.

Larry: Again, I do think that Tether has been extremely negligent early on, and to some extent still is, in small ways. So I do agree with that. It is behavior that doesn’t come across. 

The contra agreement to that is that Tether simply doesn’t care about you and me. That’s the thing that Tether skeptics don’t realize. They just don’t care about what’s viewed publicly. They care about one thing, and that’s if they can find counterparties to actually trust them enough, to send them real money and then work with them to redeem their money as well. 

One thing that we didn’t touch on yet, and it’s really important for this to be known, is that Tether functions in a B2B way. It only works with large clients, like exchanges, like OTC desks, like traders, and it only redeems [tethers] with them. 

Whenever there is an argument on Twitter [where someone says] I tried to redeem tether with them directly, it is just not possible. And I agree that early on, [Tether] stated that it was possible—and that’s a major mistake—but they don’t function that way. They don’t care about Tether skeptics at this point. They only care if the tether peg actually remains the same, and they only care if they can find more clients to put in more money and earn more yield. That’s their point of view. And they don’t care about me and Bennett. Why would they?

Bennett: There’s a couple of things here I want to look at. One is yes, they’re B2B. And they really always have been, but that leads to the question of why they publish their stated minimum, which is only $100,000 to redeemed, and why they made such a big deal of reopening their verification platform, supposedly for clients to redeem tethers.

(In November 2018, Tether announced that customers could once again redeem tethers directly via Tether, but all accounts needed to have a minimum issue and redemption of $100,000. At one point, customers could redeem tethers via Bitfinex, but that is no longer possible.)

Also, Tether, themselves, are the ones who still proclaim on their website that they are the most transparent, that they will provide this look inside. And so I don’t think it’s unreasonable to hold them to their own statements.

Larry: I totally agree. And I do think that it makes almost no sense why they would do that. I think initially, it was for people to trust them. Because early on, you have to remember, all this was new and you had a couple of tens of millions in it. It was hard to trust it. And they had to gain the trust somehow. I do think they made some of these statements up because they just wanted people to trust it more, so the peg would actually hold.

One thing that’s important for fiat-backed stablecoins. It’s really the only thing that’s important is trust in that stablecoin itself, because when the trust breaks, it’s very hard to get it back. I think they just were super careless, super negligent, made several of these mistakes before, where they claimed that something was true and that they couldn’t follow up on it. Another example we didn’t bring up yet is they used to claim that they are a hundred percent audited and there was never any audit. There was barely any proper attestation. And I do think that was in some way acting in bad faith—pretending to do something just to gain early trust so it would work at a larger scale. 

Bennett: The curious thing to me is that when they were banking in the Taiwanese banks, they had an accounting firm who did give them a monthly attestation that is in large form similar to what Grant Thornton gives to Circle. And then they stopped that. And a couple years later we got the Friedman report. And then a little bit after that, we got the Freeh report and then the Deltec letter and then nothing. So at one point they were able to get monthly attestations saying that the balance in their accounts was greater than the number of tethers issued. And then they stopped.

Larry: Yeah, that’s a really good question. And when I talked to Paolo and if someone at Bitfinex is listening to this, I one hundred percent agree. Attestations should be the bare minimum of what they publish, especially because it’s fairly easy to do and it’s reasonable, cheap. Everyone else does it. 

I think the reason why they don’t do it goes back to the point that they just don’t have to. It just functions well enough without that the attestations and people at this point trust it enough that they just feel like it’s not even worth their time, right? 

Tether is still a relatively lean team, similar to Bitfinex. And they just probably feel, who cares? Unless the peg starts breaking, we’re not going to release any attestations. And there’s precedent to this before. I’m sure you recall, Bennett, but whenever there was some sort of a break to the peg, historically, pretty much like clockwork, like a week or two afterwards, they started doing some sort of a relationship that confirmed some of these reserves, and they work with Bloomberg as well. So my view on this is that they only do the bare minimum because they just don’t feel like they have to. They feel like at this point, they’re trusted enough that they just don’t have to go to these lengths and spend the money. But if someone, again, if someone at Bitfinex is listening right now, I think this would be the bare minimum. They make enough money right now to justify it and it’s really a no brainer.

Patrick: Do you feel that their reticence with regards to attestations might be related to their reticence with regards to disclosing banking relationships? If I recall back in the day on the UI for requesting a wire from them, they put in red text that they didn’t want you to disclose the wiring information to or from them because it would put the entire cryptocurrency economy at risk. I think I read that in a tweet of yours, if I’m not mistaken. Are we allowed to take them at their word? Is that the reason why they don’t want to disclose this?

Larry: I don’t agree with this approach as well. Their argument is that they have these banking relationships that at least back then used to work in a way that had to be in almost a shady way. And they believed that was the case. 

I don’t think that’s the case anymore, by the way. I do think that all the banking partners that they have now are aware of the relationship. And I do think that at this point, they’re functioning in a much more legit way that they were before. Back then that’s why I was a Tether skeptic as well because they had literally, no one was associated with each other. No one really was able to answer these questions that I had. That has changed. So I’ve changed my mind on a lot of these things because of their approach and because of the information I’ve been provided by other third parties. But I was in the same boat as well.

Richard: We’re seeing a lot more institutional interest in Bitcoin, but the counter narrative to Bitcoin right now is just that it’s heavily manipulated with tether possibly being the biggest manipulator. What do you think is the level of due diligence these institutional investors have performed on this particular matter?

Larry: The first thing I would like to address is that this is like one of the laziest arguments that people make on Twitter, that Tether is manipulating the markets, that they’re creating tethers to pump the price of Bitcoin. There have been several papers debunking the system. And it’s apparent from data that they’re not doing this.

I track data on a daily basis. I track pretty much all the indicators that are there and every indicator this year has been going up. Everything like spot inflows, [just talking to?] exchanges that support fiat. There’s no evidence whatsoever that Tether is creating USDT to pump the price of Bitcoin. 

You can do some fairly simple data analysis by how the market reacts based on when the tethers are created. Really, the simplest explanation to why some people are confused is because when new money comes into Tether, they have to create USDT and that money ends up going into some sort of a cryptocurrency because otherwise they wouldn’t even put it in tether. 

They conflate the relationship of training tethers to market going up. It’s just a natural reaction when you put more money in the system, the price will go up. I would like to just make sure that people actually study this relationship more closely because that’s one of the latest arguments. And I think that Bennett agrees on this point.  

Bennett: I largely do. Generally when people are talking about tether manipulating the market, they’re referring to the paper from University of Texas that was published in 2018, “Is Bitcoin Untethered?” And that paper has some methodological issues, specifically, if I remember right with periodicity, meaning that to get the results they get, it’s very dependent on which periods you look at and how you analyze the flows with respect to that.

I don’t necessarily think that’s we’re seeing. The common conspiracy theory is: unbacked tethers are printed, and they’re used to buy bitcoin. The bitcoin is then inflated, sold. Money goes back into each Tether’s bank account [while they’re backed?]. The market I think is too liquid for that to really effectively work.

Tether can’t move the market enough to get back enough to make that effective. However, there is still again, we get back to the question of backing and what’s really behind the tethers. Because if there’s a general belief in the marketplace that there are 23 billion real dollars behind this tether purchase, seeing this bitcoin and whatever, if that is not fully backed, if that amount of dollars did not actually enter the ecosystem, I think that could fairly be called manipulation.

Now as to the size of that effect. I don’t necessarily think it’s a large effect. I don’t think tether is responsible for any of the bull runs in bitcoin or anything like that. But I do think that tether could have still slightly inflated the price if they were not fully backed.

(I asked Tomlin later what he meant in saying that tethers aren’t responsible for bitcoin bull runs. “It’s just a highly leveraged frenzy,” he said. “Bubbles are always caused by some amount of organic interest. Bitcoin is exacerbated by being a relatively, or historically at least, thin market that now is loaded with leverage.”

I disagree. I think large tether issuances have a huge impact on the market. Unlike in 2017, I believe the bitcoin price, which recently went as high as $41,000, is mainly pushed up by tethers in this bubble. Price plays a huge part in fueling the frenzy. Read my story, “Are pixie fairies behind Bitcoin’s latest bubble?”)

Larry: To some extent, I agree with that. One thing I would like to add is a fun consequence of the paper being published from manipulation is that, I don’t know if you guys will notice, but now Tether basically like they don’t disclose whenever they create new tethers exactly. They basically give it like a week in advance or something. So they prevent people from actually conflating these two things that’s happening at once.

Richard: You mean they authorize first, right? So they basically mint and then they say they authorize it, but it hasn’t been deployed. And then they distribute them to various places.

Bennett: I feel like you could still do much the same analysis. Instead of tracking the issuing address, you could just check movements from the treasury. 

Larry: You probably could, but it’s just like a funny consequence. 

Richard: Going back to that paper Is “Bitcoin Really Untethered” by John Griffin and Amin Shams that Bennett was referring to, what did you say specifically was the issue with their methodology? And also about other papers that have been debunking this? 

I actually have the papers here, but I am not sure where the debunking part is. One of them is called “The Impact of Tether Grants on Bitcoin,” by Wang Chun Wei. And then the other one is, “What keeps Stablecoins Stable,” by Richard Lyons and Ganesh Viswanath-Natraj.

The first paper, “The Impact of Tether Grants on Bitcoin,” conducts an independent study as to whether Tether prints prior to bitcoin pumps. If there’s any kind of statistical relationship and basically says, there’s none. But it doesn’t directly debunk “Is Bitcoin Really Untethered.” So when Bennett says there’s some kind of methodology problem, I’m not familiar as to what exactly the issue is there.

Bennett: It’s been a while since I looked at that paper in specific. But if I remember, and they even mentioned this in one of the appendixes for the paper. If you change the way the period is measured or something like that, you see the impact from the tether flows decreases significantly. 

The other thing we do need to talk about is what Larry said is you expect when tethers enter the market, when legitimate money enters the market, that generally the prices of things are going to go up because there’s more money coming in. And so I’ve looked at a bunch of data around tether and I can push it and tweak it and get statistically significant results that are potentially interesting. But in order to get them, you have to pick magic numbers. So you’re picking a certain period, a certain cutoff, a certain something in order to make sure that your data looks the way it does. And the paper has some of those kinds of things in it.

Richard: As you’re saying the statistical finding isn’t sufficiently robust. If you pick a particular window in construction of your variable, you get a favorable result. And if you just move that a little bit, you no longer have a favorable result. Is that what you were saying?

Bennett: Yeah. If I remember even with the change in the periodicity, it was still directionally correct, but the impact became much smaller. And just looking at it, as a skeptic and as someone who tries to observe this market, it was not convincing enough to me and I was predisposed to be convinced by it.

Richard: The other interesting thing that’s been happening lately is that some of the Tether executives seem to have become a little bit more open in terms of appearing on podcasts and having conversations with the public. First of all, do you agree with that assessment that they’re being a little bit more open these days and second of all, if so, why do you think they’re doing that?

Larry: It’s one hundred percent by design and that’s one thing, like I mentioned before, that led me to trust into Tether more than I did before. They are public for one simple reason. And that’s to make sure that people stop spreading conspiracies. It’s for marketing purposes. When  you have a person that can go directly against some of these claims early on, it’s much more effective than letting someone like Bitfinex’ed just go with these theories that sometimes don’t have any merit. Sometimes they do. Sometimes they don’t. 

But they’re doing it because they want people to think of Tether as more legitimate than it has the rep for right now. Paolo keeps claiming that Tether is as regulated as other stablecoins. It’s a marketing move and it’s a good move as well.

(To be clear, the Tether/Bitfinex triad haven’t been seen at all in a long while. Paolo Ardoino, Tether’s CTO, took on the role of Tether frontman starting around November 2019. He constantly tweets reassurances that Tether is fully backed, regulated and is following KYC/AML protocols.)

Bennett: I am not necessarily convinced that they are more public. If you go back in time to earlier Bitfinex and Tether history, like I’ve saved the entire post history of Raphael Nicolle, the founder of Bitfinex on Bitcoin Talk. I’ve got the same for Giancarlo Devasini, and “myself” [a pseudonym for] one of the early consultants for Bitfinex, and Phil Potter would frequently show up, not on podcasts and stuff like this, but if you’re looking back to 2016, 2017 on the Whalepool teamspeaks and in other places like that, where they were still trying to reach out to crypto traders and stuff like that. 

And I agree with Larry, it definitely is a marketing move, but it’s also interesting to me that not all the executives have been more public, like Paolo. He’s probably the most public face of both. And  Stuart, Hoegner, the general counsel for both Bitfinex and Tether, is probably the one you hear from next often. You will almost never hear from [J.L. van der Velde], the CEO of both Bitfinex and Tether, who originally came over from Perpetual Action Group Asia, or you’ll occasionally hear from Giancarlo now, but you hear from him a lot less even than you used to. I don’t necessarily buy that they’re more public or more open about this stuff now than they were historically. 

Richard: The weird thing is, if you are going to spend the time to go on all these podcasts and try to assuage the public about your legitimacy, why not just spend the money and do the report? Obviously, we have just been through this point and it sounds like both of you actually agree that some attestation should be in order.

Larry: Like I mentioned briefly before, Bitfinex hasn’t been doing so well in the past two years and they attribute that to marketing as well. Because they haven’t done much of marketing before and volumes went down significantly. Liquidity went down. So I don’t think it’s just about Tether, it’s about Bitfinex as well. And it’s about overall just having a face that you can connect to Bitfinex and Tether that is more public facing. 

Richard: Let’s take another audience question. This is from someone called EastMother: Does a stablecoin issuer, such as Tether, have fiduciary duties towards the people to whom issuances are made and, or the secondary market token holders, any opinion on us.

Bennett: This was a matter of debate of law in the New York attorney general case when Bitfinex was trying to appeal it. They basically claimed even in the initial transcript that they had no responsibility to secondary market participants, meaning tether holders who were not directly contracted with Tether Holdings Ltd. 

I think it’s reasonable to say that Tether, if they don’t have a legal responsibility, at the very least as a moral responsibility, that if they are issuing this asset that they say will maintain this value, that the asset does that, whether or not there’s a legal obligation fiduciary obligation towards any secondary market holders. I’m not qualified to answer.

Larry: I totally agree with Bennett there. I don’t think that legally they do. I do think that ethically that they do, but also one thing to realize that we haven’t touched on it much yet, but the collapse of Tether, if it were to happen at some point, and if we are assuming that they’re acting fraudulently, it would be terrible for their business and Bitfinex and Tether as well. They’re pretty profitable. 

So that argument to me never made too much sense. Yeah, you can probably make more money more quickly if you just rug pull and take all the money now, but you’re sitting on a business that’s generating millions dollars in revenue. You have Coinbase going public this year and likely trading at more than $40 billion and all these exchanges are going to be worth gold soon. So you would have to be shooting yourself in the leg, if you were doing this. Like why not just run the business for 10 years and probably end up making even more money? It seems ridiculous to me that some people think that this would be a legitimate strategy.

Richard: Back to the fiduciary duty part. So there have been recent regulations put forth by the US government. And one of them is the [proposed] STABLE Act, which basically says, if you are a stablecoin operator, you need to be regulated like a bank. And the second one is more of a rumor in that stablecoins might be classified as security and as such an SEC would have jurisdiction over them. Neither of them actually is law, but if they were to become law, what would be the implication on tether and then second order effect on the crypto market?

Larry: The first thing, I believe that stablecoins will never be considered securities. I don’t think that will ever happen, but I am not a lawyer, so I can’t say that for sure, but I think that’s extremely unlikely. The STABLE Act, I think, is a little bit more realistic, and it would definitely affect in a lot of ways, because if you do have to have a banking charter, if you do have to have to essentially be a bank to operate stablecoins in US dollars, that would put Tether in a really difficult spot. And it would be interesting to see if they would continue operating.

Richard: That would conflict with an earlier point in that the Tether folks basically think that the US doesn’t have jurisdiction over them. If so, then the STABLE Act or whatever the SEC wants to do, as long as they claim Americans aren’t touching this stuff, then it’s fine.

Larry: That’s a really good question. Maybe Bennett has some views here. I’m not an expert on this, and I’m not sure if they would continue operating if they were directly against one of these laws. I think they might, but not so sure, honestly.

Bennett: This is a tricky question. So I don’t think currency backed stablecoins, like a one-to-one backed, or pegged coin will be considered a security anytime soon. Now, there were more complicated algorithmic models like Basis before they were shut down. I thought there was the potential for parts of that model to end up being considered a security, but that necessarily an acute worry with something like Tether.

Richard: Why is that though? With stablecoins, there’s no expectation to profit from the effort of others. So that particular component of Howey Test wouldn’t work.

Bennett: When I mentioned before was a multi token system involving Basis bonds and a couple of other pieces all working together in order to allegedly maintain a pegged value, which ended up accruing a larger number of Basis coins, the stablecoins, to the holders of the Basis bond.

Larry: Basically what Bennett is trying to say that it’s a multitoken system where one of these tokens is very similar to security.

Bennett: It’s a functioning part of the stablecoin system. And I could even see the argument being made that Maker is a security, but I can’t necessarily see the argument Dai [is a security.]

Larry: Right. I absolutely agree.

Bennett: As for the STABLE Act, this is always where I get conflicted with tether because they try to act as though they’re not regulated by US regulators, but in early 2016, Bitfinex was willing to sign a settlement with the CFTC and collaborate with regulators in those respects. 

My guess is a more restrictive, stablecoin law, like the STABLE Act would be somewhat similar to a regulatory shutdown of Tether with the difference being, they would probably be able to spin it down more gracefully, so there’d be a lot less collateral harm to the market and to holders. 

But I would agree with Larry and say that with a regulation like that, it is unlikely to me that Tether would continue to offer a dollar-backed stable coin. They initially tried to diversify with the Euro tether, which was never popular. They kept trying again and they’ve got the Tether Gold and the Chinese yen tether and all that. My guess is that is part of the reason they have those other coins.

Patrick: One of the other risks for any regulatory regime is that there’s a sort of regulatory contagion where regardless of whether a Bitfinex or Tether—which are alter egos of each other—regardless of whether they are subject to US law or jurisdiction, some people who would like to be involved in the cryptocurrency ecosystem are subject to US law, or jurisdiction, and they might not be able to interact with US counterparties, which interact with tether because of the risk of, basically the tether cooties, attaching to those counterparties. 

And potentially I know people in the cryptocurrency ecosystem don’t think this is likely because it’s so technically easy to mix funds via distributed finance, et cetera, et cetera, but potentially that sort of contagion risk could cause… If your regulated stablecoin is fungible for a non-regulated stablecoin via any mechanism you can reasonably foresee, then you have to solve that problem for the government, basically.

Bennett: This proves Tether’s claim that they’re not subject to US regulation that they’re separate from all that doesn’t hold up. They are a dollar-backed stablecoin. And fundamentally, if you’re working in dollars, the long arm of the United States government will extend to you. And I mean, that’s part of the fundamental risk of Tether is that at some point that long regulatory arm of the United States government, whether it be the CFTC, the Department of Justice or a state government, like the New York attorney general, will find something that justifies them seizing a large amount of tether’s funds and leaves them deeply insolvent.

Larry: I do agree that’s a significant risk that’s worth considering. I think that Bennett’s totally right. I do think that if the US government and the US system wanted, they can take out Tether, probably fairly easily. But one thing that I don’t necessarily agree with, maybe Bennet has more information on this, but I don’t believe that they claim they’re less affected by US regulation and the United States itself. I think that’s what people assume, but I’m not sure that actually claims this. 

Bennett: This is where you get into their public statements in press releases, blog posts and things Phil Potter says in a Whalepool teamspeak because you’ll see the Bitfinex executives try to make arguments like that, that they’re not subject to certain US regulations because of where they’re domiciled. And you saw Giancarlo making these back on Bitcointalk a couple of years into Bitfinex’s existence and stuff like that. So there are public statements by DigFinex executives making those kinds of claims. But the press releases, the blog posts, marketing materials on the website will generally be carefully worded to give them the impression that they’re compliant with all relevant US regulations.

Larry: And are you aware of any of these statements being made more recently versus early on in Tether’s functioning?

Patrick: The litigation with the NYAG at oral argument, they were asked point blank, who is your regulator? And they said, we are not regulated.

Larry: This is a really nuanced topic. We’ve been working on a stablecoin report for almost two months. And we talked to several different stablecoin providers, like USDC, Paxos, all of those. But when we asked them about this, what does it mean to be regulated as a stablecoin? And everyone has different answers. It’s like when you use the word regulated, it’s just so ambiguous. 

You have to think of several different ways of how you regulate it. One is, do you have AML and compliance teams? There are several other aspects. Where are you keeping your funds? Is someone monitoring that? Do you have the compliance manual? 

It’s just so many different things like that. And so Tether publicly claims that they are as regulated as a USDC. I think that’s questionable. They are registered with FinCEN, which means that they have to report when some activities out of the ordinary happen. 

But it’s probably not as stringent as when you are registered with the New York Department of Financial Services, like Paxos or Gemini Dollar. It is difficult to say what regulated means in this sense, because there are no clear rules. And because these things function globally and every jurisdiction has different rules and different regulations.

Richard: As far as the NYAG lawsuit goes, and I’ve asked this question in a previous podcast as well, but I’m curious to hear your thoughts. What do you think is the timeline for some kind of outcome and some kind of resolution. And what do you think would be the knock on impact on the Tether ecosystem?

Bennett: So the next due date for a document production is January 15th, which is coming up right around the corner. What will be included in that? If documents will be provided. [Here is the NYAG’s letter to the NY supreme court.]

Richard: Which documents are the prosecutors looking for?

Bennett: Financial records for Tether going back to 2017 showing KYC, AML history of redemptions and history of issuances. But I do not have that in front of me.

Larry: My question for you, Bennett, is do you think that the NYAG  has the right to ask for these documents while. Bitfinex has pretty publicly said that no customers can have access to Tether.

Bennet I am a New York resident. The Block was very recently able to register an account on Bitfinex and trade with the name “I am NY resident.”

Richard: I’m not familiar with what you were saying about The Block registering as a New York resident. Can you guys elaborate on this?

Larry: It was an article that we published a year and a half ago, or almost two years ago, where some user registered with a name that said, “I’m a New York resident.” And as part of registration, when you go through the registration process, there’s a box that says that you have to tick that says, I’m not a resident of New York, or I’m not a resident of the United States. 

And that user ticked that box, even though the name said, I’m a NY resident. And it was supposedly to test if the compliance would pick up on it. But the reason why I’m bringing it up is because sure, your customers definitely had exposures to Tether, but it is probably reasonable to say that Bitfinex is not interested in those customers, unless they are based outside of the US with their own subsidiary.

Bennet: That’s irrelevant for New York jurisdiction, Bitfinex being interested in them. Doesn’t matter to the New York attorney general. 

Larry: I agree.

Bennett: And going back, this is particularly striking because if you read the 2016 CFTC settlement that Bitfinex signed, they agreed to ensure that they would stop violating sections 4A and 4D of that act. And part of that was making sure they were at no point offering non-physically delivered futures to US citizens. 

And I think it’s pretty safe to say that they continued to do that for a while after early 2016. And I think if you look at what the New York attorney general has found, meaning that there are several professional firms that Tether has hired in New York, that there are tether traders in New York that you’ve got Giancarlo emailing the head of Galaxy Digital and telling him that he should meet up with Phil Potter because they’re both in New York. I think it becomes under the Martin Act, it would appear that New York has the jurisdiction to ask for these documents. I think the better question is, what happens if Bitfinex chooses to ignore the New York attorney general, and not produce the documents? I do not know how far their ability to enforce goes.

Patrick: It’s worth mentioning that this possibly be a legal tactical move to ask for the document production. That question was put to them at oral argument and by the judge, if I recall, and they were given the opportunity to not deny that they were solely looking for Martin Act violations. So it’s possible that they’re using a statutory authority that they have to compel the production of documents, which would allow them to uncover evidence of other things that they could throw at Tether later.

Bennet: Which I think is actually an interesting thing for us to come back to because the New York attorney general launched their investigation into Tether before the really conflicted transaction — where they transferred the [$700 million] out of tether into Bitfinex in order to deal with the insolvency. So there was something before that that triggered a New York attorney general investigation, and Bitfinex and Tether were both producing documents and cooperating with the New York attorney general up until the time of this transaction. 

And that’s when then the Tisha James and [Assistant Attorney General] Brian Whitehurst had to go for the ex parte order. And then Bitfinex has been endlessly appealing and they are now out of appeals. You’re right, the Margin Act violation is not the only thing they’re potentially interested in, but they thought it gave them the best argument for document production.

Larry: I agree with that as well. I will say, some of these New York trading firms have subsidiaries in jurisdictions that allow them to get exposure to these instruments, even if they are officially based in New York. And similar can be said about what The Block published on the NY resident. Yeah, it is true compliance wise. I think it’s probably improved since then. That being said, someone basically had to take someone, who was  not the resident of New York. So technically you are still breaching the registration form.

Patrick: I know I’ve been intervening too much on one side of this debate. Bennett, what would you be satisfied with? Is there a way that tether could demonstrate their operating above board?

Bennett: If they were to start getting regular attestations by a qualified auditing firm, that would go a long way towards assuaging many of my fears. I still think that the history of tether has left them with enough detritus that they’ll never truly be compliant. And that eventually one of those albatrosses around their neck will pull them under water. But if I started seeing a true good faith effort like that to be publicly transparent and show that they are living up to their own promises, that would make me feel a lot better about them.

Richard: There’s an article from Decrypt last year about how a lot of us USDT on-ramp is done by Chinese nationals looking to move their wealth overseas because of the tight capital control there. Can you speak to the extent that this is true and whether you see this trend continuing?

Larry: From my experience and from the data that I’ve seen, I don’t think it’s as much of a problem as Decrypt made it out to be. Tether does have a lot of clientele in China and a lot of the money that was sitting on Chinese exchanges that then got cut off the fiat system. Some of it is now sitting in Tether. So there’s a very large Chinese ecosystem when it comes to tether. 

I don’t think it’s being used that much for fleeing capital controls. It definitely is to some extent, I don’t think it’s one of the biggest use cases of tether. Because there’s already a lot of money that was previously in these Chinese exchanges now with tether. But it’s important to say, the OTC markets for tether is the primary on-ramp for crypto in China right now. Basically running exchanges in China is illegal. You can argue whether that’s being enforced or not, but a lot of these exchanges like Huobi, Binance, and OKex, they have OTC P2P desks that allow people to convert their fiat to tether a Bitcoin directly. It is definitely being used. I don’t think it’s used at a massive scale. 

Richard: If I can summarize our debate so far, it seems that what Larry is saying is that tether has had these unprofessional practices, to put a charitably, in the past, where they also had constraints with banking access and so forth. But ultimately they crossed the line in various different ways in the past. But now the situation is slightly different. 

Number one is they’re a B2B business. They have enough institutional flow as it is. So they don’t really care so much for the retail opinion. Therefore, they don’t have to worry about attestation reports and so forth. And secondly, they have made up their mind, or at least taking comfort in the fact that they are outside the relevant jurisdiction that is pursuing legal action with them. That’s why they basically continue to operate the way they do. But ultimately, Larry’s arguing that they’re no longer acting in bad faith because they’re just doing enough to satisfy their existing clientele. Is that a fair summary of your position, Larry?

Larry: Yes. That’s a very good summary. Did a great job.

Richard: I think a big question on my mind is whether Tether is playing these games to pump the market with unpacked collateral. I know we’ve run around on this, but so far, I don’t think I’m thoroughly convinced that they’re not doing this. So if Larry, you could summarize in one or two sentences to convince somebody that this is not the case, what arguments would you use?

Larry: When new money comes into the system, you can expect the price to go up and evidence here is that when new tether is created and deployed, the price of Bitcoin goes up and even this relationship can be true while not manipulating the market. That’s really the only argument that I have.

Richard: The biggest hole I see in that argument is that there’s no proof that there’s money coming to the market. If there’s proof, which is probably what the attestation report can provide, then I think that whole logic will flow. But right now the problem is just that there’s no proof that money is coming in, right?

Bennett: That’s largely my problem is that we don’t have any public attestation, audit, or anything like that to suggest that the $23 billion in US dollars are actually there. And other oddities, like the fact that you don’t see those show up in the Bahamian central bank report and other things like that. Again, Tether making a better effort to be more public on that stuff would assuage lots of those fears.

Richard: I think the most favorable view with regard to this under collateralization problem is something like, even though there’s a lot of issuance of tether, right after a bearish movement in Bitcoin price and after the tether issuance, the Bitcoin price comes up. Even though that’s all true, that doesn’t mean there’s foul play. It could very well be that there’s authentic demand that is rushing into the market to take advantage of a temporary price dislocation. But the issue is that somehow still not sufficient to change people’s skepticism. 

Larry: It’s almost impossible to change their mind, honestly. [Their thinking is that] it’s beyond reasonable doubt that tether is manipulating the price. And if you believe this, your bias is too much to be objective. 

Richard: Let’s move on to the concluding remarks stage. Starting with Bennett, synthesize your thoughts and tell us how you feel after having this debate regarding your initial.

Bennett: I still believe tether has at many points in their history been a bad faith actor. You see this as early as 2015, when they’re lying about their ownership. You see this continuing through with the frivolous lawsuit against Wells Fargo. You see it continue with the interactions with Crypto Capital. You see it compounded by some of their opacity surrounding the tether hack and the forced hard fork of the Omni network. And just this continued pattern of behavior combined with just the public incompetence of failing to track their own assets on their public transparency page makes me believe that Tether does not at this point deserve the benefit of the doubt. And there is not sufficient evidence that they are making a good faith effort to be a good member of the crypto community and to be publicly transparent about both their functioning and their backing.

(Bennett has provided additional notes on his blog, as a follow up to this debate.)

Richard: Okay, great. Larry, go ahead with your closing remarks. 

Larry: I agree with Bennett that Tether has acted in, what someone, can call bad faith. I think I would call it bad faith early on, as well. I think they were forced to act in this way to basically survive and to find the product market fit early on, and then to grow that business early on.

I think some of it was necessary for the business to function. I don’t agree with a lot of these practices and I do think that they’ve made several mistakes. They’ve behaved in a negligent way. They behave unprofessionally. That being said, recently it has changed drastically. I don’t think they’re acting in bad faith anymore. I think they’re a really important actor in the crypto space. And I think that with all that I’ve said, and it might sound like I’m defending tether, but I still think that there is a chance that there is a regulatory intervention at some point, which would put the markets into chaos for some time.

And I do think it’s a possibility that even people like me that don’t think Tether is acting in bad faith should consider because the US government can do something about Tether and can if they really want to and let it set. And this one, it’s a reasonable possibility. I still think it’s fairly low chance that something happens, but whoever’s listening to this, it’s important to, consider this closely. And if it does happen, make sure that you’re prepared for that possibility. 

That being said again, I think this was a good debate and I agree with a lot of Bennet’s points, but I do not think that Tether is acting in bad faith now. And I don’t think it has been in the past year and a half. 

Richard: Okay, great. Thanks for joining the debate today, Bennett and Larry, and thanks for co-hosting Patrick.  

# # #

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Tether’s Paolo Ardoino and Stuart Hoegner do a podcast—transcript and my comments

Avid bitcoiner Peter McCormack released a podcast interview (archive) with two Tether/Bitfinex frontmen today—CTO Paolo Ardoino and General Counsel Stuart Hoegner.  

McCormack is a well-known Tether apologist whose podcasts are funded almost exclusively by bitcoin companies. Tether is also paying his legal fees in a libel suit brought against him by Craig Wright. Despite that, McCormack claims to be completely objective, although he makes it clear he believes all the “Tether FUD” circulating on Twitter stems mainly from “salty nocoiners,” who are upset because everyone is getting hilariously rich with bitcoin but we’re not.

I’ve transcribed the interview and added my comments. I skip the first few minutes of the interview where McCormack lists his numerous crypto sponsors and goes on to say he thinks Tether is legit. I’ve also edited out the “uhs,” and some repeated words to make reading easier.

Peter: Can you just explain to me and for other people who are listening, because they probably don’t really fully understand it, how tethers are issued and redeemed?

Stuart: Let’s be clear on our terminology, if we’re going to talk about issuances and redemptions. We use four principal terms when we talk about this: authorized tethers, issued tethers, redeemed tethers, and destroyed. 

Authorized tethers are tokens that are created on a blockchain, and they’re available for issuance to the public. This process involves multiple blockchains and multiple persons participating to sign creation transactions. Once created, they’re available for sale to third parties, but until then, they sit in Tether’s treasury as authorized but not issued.

These authorized-but-unissued tokens aren’t counted—or [are] not counted—in the market cap of tethers as they have not been issued or released into the ecosystem. You should think of them a little bit like an inventory of products that are sitting on the shelf that are awaiting purchase. 

Issued tethers are authorized tokens in actual circulation, and they have been sold to customers by Tether and are fully backed by Tether and the reserves, unless, and until they’re redeemed. 

As tokens are issued, the stock of authorized-but-not-issued tethers, is depleted. And they’re replenished through authorization of new tokens based on market demand. When that happens, this is what Paolo is referring to in his PSA on the replenishment of the tether inventory. This is adding to the authorized and unbacked and ready for sale, but not issued, sold and backed tethers.

(I love how Hoegner makes it clear that authorized tethers in the hundreds of millions, like this one here, which we see going out via @whale_alert, are not actually backed. They’re just tethers on the shelf. Tether has issued $24 billion in tethers to date—and nearly 20 billion of them since March 2020.)

Peter: Okay. Why do you need to do that? Because I would have thought the creation of tethers is a very simple and easy job. Why do you need to leave them on the shelf?

Stuart: It’s a straightforward job, but it’s an important job. And it’s one that comes with security risks, and Paolo can speak to this a little bit. But there are security risks involved in using sensitive private keys to create new tethers, authorized. And to have those at the ready, and not in the marketplace, not backed. That exposes those keys to less risk. That’s not just a theoretical risk—there’s a serious security risk associated with that. Paolo, do you want to speak about that?

Paolo: Yeah, I believe that we can think [of] Tether authorization, private keys as among the most important sets of private keys in our industry. If you get hold of the private keys, you can really issue any amount of tethers you want. What we want to do is to limit the number of times per week when these private keys get accessed by signers. 

So, having an unsigned [ro? roll?] transaction that gets prepared with a fixed amount and then signed when they need to, that really helps tether security. Because then you can see that we are issuing round numbers, like $200 million, right? 

It means that we pre-prepared a [ro?] transaction that is an authorization transaction. Then tether signers, sign that transaction and broadcast it. And as Stu said, we are leaving a bit of inventory on the shelf in order to fulfill what we think that future requests from customers could be.

(The inventory does fly off the shelf pretty quickly. You can literally watch in realtime tethers shooting off to crypto exchanges Binance, Huobi, Bitfinex, and lots of unknown wallets, where they are quickly put to work.)

In our day-to-day activity, we are always in talks with customers. So, we [have] a good sense of what they might need, or they ping us in advance and they say, okay, we might need a certain [of] this amount or we might need that amount of tethers. In time, we learned how much tethers we should authorize in advance and keep it on the shelf in order to make these tethers available as soon as they are needed. But at the same time also protecting the security of tether, not continuing to touch the private keys every single time there is just one insurance.

Peter: Okay, I’m going to just push back on you saying they’re the most important private keys in the industry. I would say, personally, my private key is the most important one. Outside of that, I would probably say wherever the biggest honeypot is, maybe it’s Satoshi, his private keys, are the most important because Bitcoin is completely censorship resistant—but Tether isn’t, right? You can, if required, censor transactions. You can, if somebody issued a bunch of fake tethers, you could block those, I believe.

Paolo: First of all, I agree that bitcoin private keys are, well, everyone’s private keys are like their own babies. No doubt about that. The difference as you said is that if someone gets ahold of the private keys in tether, they can issue anything that they want. While in Bitcoin, if someone gets hold of the private keys, they can just steal the funds of the people that got hacked, rather than minting fake bitcoins. 

So this is really important, and this is the reason why we want to keep these private keys so secure and touch them as little as possible. 

So, yes, we can freeze, fake tethers. But at the same time, you can imagine if someone gets ahold of the…in order to freeze tethers, someone has to have the private keys. But if someone already has the private keys, then he can unfreeze our attempt to freeze tethers. 

So we will become an endless attempt of freezing and unfreezing and trying to save tether. That is not ideal. The responsible thing to do is touch the private keys as little as possible and use, of course, for our blockchain, we use a multisig approach. So there are multiple private keys held by different signers in geographical different [locations] so that we can ensure the highest security possible in all our operations.

Peter: Stuart, I interrupted you, you were going to talk about redemptions. We should finish that bit off.

Stuart: Sure. So redemptions are just when customers send their tokens back to tether and they get fiat back and return. Those tokens then go back into inventory, like their products that have been returned to inventory, awaiting future purchases. And then those tokens can be held by tether and its treasury or destroyed. 

And then destruction is just, multisig transactions being broadcast to reduce the number of outstanding tokens existing on the selected blockchain. And those tokens are forever eliminated. Basically, that’s the reverse of authorization. So those four concepts you have the lifecycle of the tether.

(The only time we’ve seen Tethers destroyed was in October 2018 when Tether burned 500 million USDT. This was just after Bitfinex lost access to $850 million in the hands of its Panamanian payment processor Crypto Capital, and the NYAG began investigating Tether/Bitfinex for fraud. Hoegner confirms our suspicions that once tethers are created, they are generally never uncreated.)

Peter: So, Paolo, who is using tethers. What are they using it for and what is the KYC process for people who want to use tether? And actually I’ll throw another one in there: who can’t [use tether]? Who applies and who do you turn down?

Paolo: Let’s start with who uses Tether. I think Stuart can speak better about the KYC/AML process,

Tether was born in 2014. It started from the Omni Layer. And the reason why it was born is because there was an issue among crypto trading exchanges. In 2013, Bitcoin reached, for the first time, $1,000, but across different exchanges, you [could] see that the spread was $200 to $300. And the reason was pretty simple.  

Bitcoin moves with the pace that is every 10 minutes because that is the average block time, while dollars and fiat in general move much slower. So you send a wire and you can take one day, five days, and that was not allowing proper arbitrage across platforms. And that is really important for healthy markets. You don’t want to have OKCoin to be $1,000 and Bitfinex to be [$1,300] and so on. That is the job of arbiters. They step in and try to close these gaps. 

But with just fiat, it was really difficult in 2014. It is slightly a bit better now, but you want both legs of a trading pair, like BTC/USD, to move at the same speed, at the same pace. And the only way to do that was to use the same underlying technology. So, the Omni Layer was and is using Bitcoin transactions to move tethers on-chain. That was the perfect use case. And so tether was born for that specific reason—to solve a problem

Recently, of course, we started to look into different use cases because I believe that is the time that tether should outgrow the crypto market. That is still our main market, but we are looking to work with [inaudible] businesses that offer remittances, businesses that want to optimize their payment solutions—payments for salaries, for inventory, for anything. So we got bombarded on a daily basis [with] requests. And that’s pretty awesome because we don’t want to be only for crypto. We were born in crypto, but we want to go on a global scale. So, Stu, you may or may want to touch base about our process onboarding customers.

(Tether first started issuing tethers in large quantities in 2017, after Bitfinex lost its banking. Note that Ardoino is trying to say that Tether’s massive issuance of tethers over the course of 2020 was due to expanded growth—e.g., we want to go global. Of course, there is no evidence of Tether being used outside of crypto except for online gambling in China. And the idea that businesses would want to use tether to pay salaries makes no sense, as you can’t pay rent and buy groceries with tethers.)

Stuart: Sure. I’m always happy to discuss this, because contrary to the online characterizations in some quarters, tether has an outstanding compliance program. Our AML and our CTF sanctions program is built to exceed or meet the standards of the U.S. Bank Secrecy Act and applicable BVI laws. We work hard to detect, monitor and deter AML/CTF violations. And our program is tested periodically by independent third-party auditors. We always work to understand the identity, business type, source of funds, and the related risks of each and every customer on tether. And we conduct enhanced due diligence on all customers. We risk-rate every customer. We monitor all customers using World-Check and we deploy Chainalysis to detect potential crime related to our services and users. 

We regularly help international law enforcement agencies with investigations in order to trace and potentially freeze wallets. Also, tether will share information with law enforcement when given valid legal process, and we’ve helped law enforcement and victims to freeze and return millions of USDTs. That’s a bit of an overview of our compliance and what we look to do.

(Hoegner claims Tether does due diligence and knows who its customers are, but who are its customers? Further along in this interview, he hints that Tether’s customers consist of a small group of “large customers,” likely exchanges and OTC desks, that bank with Deltec Bank & Trust. What about the hundreds of thousands of tether users? They are apparently not counted as customers. This leads me to think that Tether’s “big customers” serve a function akin to Liberty Reserve exchangers—acquiring tethers in bulk directly from Tether and then distributing them in smaller quantities to individuals who require anonymity in their transactions.)

Peter: Have any customers ever lost their account?

Stuart? Lost their account? 

Peter: Yeah. Have you ever closed people’s accounts? They can’t work with you anymore. Have there been in any instances where you’ve tracked behavior and, like, you can’t work with us anymore. Or has everyone kept a clean relationship? 

Stuart: We have ended relationships with customers in the past. Sure.

Peter: Okay. Interesting. In terms of the issuance of tethers, there’s a lot that seems to happen on times when banks essentially would be closed, right? So weekends and holidays. There was certainly some over the holiday break, and I’ve seen people commenting on that. How come that’s happening? How are you able to do that?

Paolo: I will take this one. So you’re right. There is a lot of misconception and FUD around this very point. You would expect that to go to HSBC on Sunday and it is closed, so you cannot move your money. Right? We, as Tether, are using Deltec as a primary bank, and most of our biggest customers are banked into the same bank. 

(They claim Deltec Bank & Trust is their main bank. If most of their “biggest customers” have accounts at this tiny bank in the Bahamas, that likely means Tether doesn’t have a lot of what it considers customers.)

During the weekends, during all the days, there is always personnel from the bank that allows internal transfers between accounts. So, Tether has its own accountant, and let’s say, customer A has his own account. Customer A wants to acquire new tethers. So they ask the bank personnel to do an internal transfer from their account to Tether, a Deltec account. And that gets settled and is available immediately to tether. 

So, when we issue tethers, they are fully backed because we already received the internal transfer. So, the problem that people are making fun of—the fact that we are issuing over weekends—is just pure [mis]understanding on how the financial market and the banking system works.

(It sounds here that one of the advantage of being a big Tether customer with a Deltec account is you have a close, trusted relationship with Tether. Also, we are definitely seeing a trend where the BTC price is pumped on the weekends, followed by a selloff on Mondays.)

Peter: You mentioned Deltec. Are you shareholders in the bank? 

Stuart: We don’t talk about the investments that we have on the Tether side.

Peter: Okay, so are tethers fully backed?

Stuart: Look. The short answer is yes. Every tether is 100% backed by our reserves. And those reserves include traditional currency and cash equivalents, and may include other assets and receivables from loans made by tether to third parties. 

(Essentially, tethers are backed by cash and a bunch of other stuff that Tether won’t disclose. For years, Tether claimed that tethers were backed “1-to-1” by U.S. dollars held in cash reserve. Tether changed the rules of the game in 2019, after Bitfinex lost access to $850 million and had to dip into Tether funds. Tether’s terms of service now states that reserves means “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.”)

Now that lending includes the loan to Bitfinex, which currently stands at a principal balance of $550 million. The principal having been paid down ahead of schedule. The loan is on commercially reasonable terms. All interest is prepaid to the end of this month, and it’s otherwise in good standing. 

(Hoegner says Bitfinex has paid off $150 million of the $700 million it took out of Tether’s reserves in early 2019. And he is including the loan as a legitimate part of Tether’s reserves, which makes absolutely no sense at all. This is missing money, so how can it be used to back anything? Also, note that Hoegner keeps referring to Tether’s original loan to Bitfinex and claiming it is insignificant and paying interest. But his language does not exclude the possibility that Tether has made other loans to other customers or even to Bitfinex itself.

Here’s how the “loans” part might work: Even though Tether could say that it issued USDT—say to Bitfinex—in exchange for USD or BTC, Bitfinex does not have to actually hand over the USD or BTC right away. It can just promise to do so. Then that promise can be counted as a loan that backs those USDT.

And one more thing—what happened to the $1 billion that Bitfinex raised when it sold all those LEO tokens? I would have thought that would have been plenty to cover the $700 million loan.)

Every USDT is also pegged one-to-one to the dollar. So USDT is always valued by tether at one USDT to one USD. Tether has always been able to honor redemption requests, and to put it simply, there’s never been a single instance in which tether could not honor a redemption and our detractors can’t point to one because one doesn’t exist.

And in fact, there’s considerable evidence of USDT being redeemed by our customers, freely. [Cofounder of CMS Holdings] Dan Matuszewski has talked about this before. [Head of OTC-APAC at Alameda Research] Ryan Salame just recently spoke about this, confirmed. 

We can’t share specific information about customers because of confidentiality concerns. But they are free to share that information with the market, if they wish. 

(Ryan Salame said in a tweet that he has been redeeming tethers for three years, but he doesn’t say for what, so we don’t know if it was an actual dollar redemption. Matuszewski said in the past that he “created and redeemed billions of tethers” when he was head of Circle’s OTC desk.)

So let me just ask if anyone seriously believes after we, you know, that we could be put under the microscope in the way that we have and still be operating if we weren’t backed. Defies logic. 

Let me touch on one issue here that might be of interest to your listeners. The 74% number that’s come up from time to time, specifically in the context of tether’s backing. This is another number that’s been talked about a lot, and I want to be clear about this and give some context.

I swore out an affidavit in New York, in the New York litigation with the AG on April 30th of last year. And that affidavit contained a number of items, including touching on tether backing. 

And in a statement, I said that of the then $2.1 billion in reserves. And today, just for context, that amount has grown to $22 billion. 

Tether had cash and cash equivalents on hand representing approximately 74% of the current outstanding tethers. And that referred to issued tethers. You remember, we were talking about authorized and issued tethers, et cetera? That was issued tethers. 

People took from that, that I said, this means they’re only 74% back. But that’s not correct. And that’s not what I said. It meant and means that the reserves were 74% cash and cash equivalents. Tethers were and are 100% backed by reserves. 

So the loan to Bitfinex is still good backing. Interest has been paid ahead of schedule, as I said, and the principal has been repaid again, ahead of schedule. 

So that forms part of tether’s reserve backing. So maybe people object to the amount of the backing, but it’s not nothing. It’s a valuable and productive asset. And just note that that loan is now $550 million, out of almost $22 billion in reserves, or 2.5% of the total. So I just want to be clear about the nature of the backing and the context and our overall asset mix on that point.

(Hoegner is backtracking and doing his own math to now claim that Tether has always been 100% backed. This is nonsense. He said in an affidavit in April 2019 that tethers were 74% backed. The truth is nobody really knows what is behind tethers and what difference does it make anyway? Tether makes it clear that it is not obligated to redeem tethers at all, and if it does, it can hand you back whatever useless assets it wants.

According to its terms of service, “Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves.” 

Peter: Okay. So you talk about the backing of currencies and different currencies. Is any of the backing in Bitcoin?

Stuart: We were very clear last summer in court that part of it is in bitcoin. And if nothing else, there are transaction fees that need to be paid on the Omni Layer. So bitcoin was and is needed to pay for those transactions, so that shouldn’t come as a surprise to anyone. And we don’t presently comment on our asset makeup overall as a general manner, but we are contemplating starting a process of providing updates on that on the website in this year, in 2021.

Peter: But you have to manage the assets that back the tether. Are there any instances where you are buying bitcoin because you think it’s a good asset to hold within the basket?

Stuart: Again, we don’t comment on the basket of assets in a general manner, but we are exploring providing updates on that on the website in 2021.

(Hoegner won’t reveal what sort of assets are backing tethers. If it’s only partly cash, what part is cash? And what is the rest made up of? Tether has so far issued $24 billion worth of tethers, but it is not telling customers what is behind those tethers—for all we know, nothing but a lot of worthless assets.

Peter: Okay. Because that’s one of the areas where people will be like, hmm, they can issue tether. They can buy the bitcoin, which backs the tether, at the right time in the market. And that’s where people might say that you have the ability to essentially pump the market.

Stuart: Well, hold on, we don’t have the ability to buy the bitcoin at the right time in the market. We’re not prognosticators about whether the market’s going to go up or down. That presumes some level of clairvoyance that we know when markets go down, which we don’t have.

Peter: No, it doesn’t mean that. I just mean that if you have to manage your basket of assets and if bitcoin, was say…any investment you have to make, you have to make a decision. You could make a decision and say, look, we believe that bitcoin would be a good investment right now. And you could issue tethers to buy bitcoin.

Stuart: No, no, we don’t issue tethers to buy bitcoin. We issue tethers to customers that want tethers.

Peter: So how does bitcoin end up within your basket?

Stuart: Well, as I said, if nothing else, bitcoin is there to pay for transactions on the Omni Layer.

Peter: No, no, but how does it get there? How does, what’s the process of the bitcoin reaching your basket?

(This is a good question. If bitcoin is backing tethers, what is Tether using to buy those bitcoin with? Notice how Hoegner is being very careful not to say that they are buying BTC with tethers. Well, what else would they be buying them with? Why not hand tethers out to Tether customers in exchange for BTC? Or you could set up an account on Bitfinex, fund it with tethers, and use those to buy BTC from your own customers on the exchange.)

Stuart: Oh, Paolo, do you have any comments on that?

Paolo: I’m not sure if the question is really clear. We talked about the fact that how we acquire the bitcoin that we need in order to fulfill the Omni Layer transactions.

(Ardoino is pretending like he doesn’t understand the question.)

Stuart: So how do we get that bitcoin, Paolo?

Paolo: I would say that [there] are a good amount of bitcoin remaining from past acquisitions that we likely did in 2015, 2016. That with the fact that the Omni Layer is slowing a bit down compared to the other blockchains that we are supporting…the amount of bitcoins that we luckily got a really good price in 2015 and 16, is probably enough for perpetuity.

(Now he is saying that they happened to have a stash of BTC lying around from five or six years ago, and that’s what they are using to back tethers. If Tether had a stash of bitcoin that large, it could have sold them long ago and taken care of the $850 million hole left when the money disappeared from its payment processor.)

Stuart: But again, Peter, let me emphasize, this has been in the public records since at least last summer. In my view, this isn’t new or shouldn’t be new to anyone. 

Peter: What I’m trying to understand is, if it’s only bitcoin, that’s held for transactions on the Omni Layer. I understand that. But if bitcoin is held within the basket because it’s seen as a good asset to hold, then how does it end up there? I’m just trying to understand that.

Paolo: So, but why we should issue—even in the case someone would like to add the bitcoin to its own basket. Why issuing tethers to do that? Right. So there are fiat exchanges. So why, if someone wants to manage his portfolio would just take part of dollars and buy bitcoins. So why issue tether to do so?

Peter: I don’t know. That’s why I’m asking. 

Paolo: In any case, the entire concept of us issuing tether to buy bitcoin for ourselves, doesn’t make sense. So why issuing tethers when we already have the dollars and we have the ability to manage our inventory and our portfolio, so we could just use the dollars, right? So the entire narrative is completely nonsense, right? So why we have to do two steps when we can do one?

(Ardoino wants us to believe that if Tether wanted to buy bitcoin, it would simply go to a banked exchange and buy BTC with cash. But why would Tether use cash to buy its stash of bitcoin if it has copious tethers on hand? He is doing a terrible job of trying to evade this question. )

Peter: That’s fair. Okay. Okay. 

In terms of an audit, this is something that comes up over and over. And I discussed this with Phil Potter a long time ago. I know you’ve got it on your website, but people don’t trust your own lawyers providing the audit. Is there anything stopping you from having a full and independent audit? 

(The only thing that would remove all doubt that Tether has any cash or reasonable assets backing tether at all, would be an independent audit. But Tether and Bitfinex have consistently avoided this over the years, and they always have some excuse.)

Stuart: We spoke about this two and a half years ago when we said that we couldn’t get an audit in part because of the amount of business that we had at a single financial institution at that time. 

We have provided consulting reports from our accounting firm. I think you’re referring to these in your question, from a law firm, Freeh Sporkin Sullivan, a firm of ex-federal judges and an ex-director of the FBI, and a letter from our bank. 

And those were good faith efforts to try to provide transparency, and some of the comfort that assurance services would provide. We said at the time that we continue to search for new ways to bring more information to the community. I mentioned Ryan Salome’s remarks earlier, that’s part of those efforts. Interviews like this are part of those efforts, public comments from our bankers are part of those efforts. 

So we continue to look for useful ways to share information with the community, to be more open and transparent. And we have important plans in that regard for the coming year. But I can’t get into specifics on that just now. So all I can say on that one is stay tuned. 

Peter: Well, we can keep talking. Okay. So the reason I reached out to you is I get a lot of DMs, a lot of emails, and just suddenly over the last couple of weeks, I’ve had so many about tether and I’m posting things online and people say, it’s tether manipulation, and I haven’t seen it in a long time. 

Now that I’ve done my own research. I don’t believe tether is manipulating the market.

Stuart: Few serious people do.

Peter: And that’s what I realized, few serious people do. So my question really is for you is where do you think this is coming from?

(I love how McCormack is acting like it is a complete mystery why anyone would think Tether is anything but a completely legitimate operation.)

Stuart: That’s a good question. I couldn’t hazard a guess. I think it’s probably nocoiners that just don’t believe in the bitcoin project and by extension, they don’t believe in Tether. It could be people with their own agenda. That’s really not for me, for us to speculate.

But, we’ve noticed the same thing, Peter. Like this comes up from time to time. It’s almost a six months schedule. Every six months or so, there’s some kind of huge push to get a whole bunch of FUD out there. And it can vary as to the reasons why. This current batch might be related to the January 15th date that people have been talking about in the NYAG litigation.

Peter: Well, I’m going to ask you about that, but you’ve got people like Nouriel Roubini, Amy Castor, Frances Coppola, all quite openly accusing you of manipulating the market and running a pump with tether to pump bitcoin. So they’re quite serious allegations from quite known profiles. Have you not considered any litigation against them for libel?

(I’m truly flattered my name would come up here. Nocoiners believe Tether has printed billions of unbacked tethers out of thin air because Hoegner has flat out admitted in court documents that tethers are not fully backed. And he is telling us here, again, in this interview, that they are backed by mysterious assets, nonsense loans and goofy math. We believe Tether is manipulating the markets because we know for a fact that more BTC are traded against USDT than fiat. I find it amusing McCormack is suggesting Tether sue us all for libel.)

Stuart: Look, we don’t believe in suing our critics into silence. We have never made a claim against anyone for defamation. It’s not to say that we wouldn’t ever, but it would be a high bar. We think it’s better to try to counter fiction with facts and truth. And in fact, contrary to what some may think we’re not particularly litigious people. And that obviously, for what it’s worth, extends to journalists as well. We’re not about to hail Forbes media into federal court in New Jersey. As to why Nouriel, why Frances, why Amy, are engaging this kind of discussion, these kinds of statements. You’d have to ask them.

(We engage these kinds of discussions because Tether/Bitfinex have failed to provide evidence that Tether is fully backed and the companies have a long history of shenanigans. Also, the NYAG is investigating you for fraud.)

Peter: Yeah, fair enough. Okay. If you look back historically, because you’ve had all these accusations, you have to deal with all this pressure. Is there anything where you look back and you think, okay, we did that wrong? We’ve handled this in the wrong way. Are there things you should have done better, should have done differently?

Stuart: Absolutely. Look, for people out there that are true skeptics, and I’m not talking about deniers, not haters, that it will never be convinced. I think one thing that we could have done better in the past and we’re getting better at now is communications. 

And that’s not a reflection on anyone. Paolo’s brilliant at this stuff, just like he is with everything else. He’s a brilliant guy. Joe Morgan is great whom, you know. And we have very capable defenders out there, making our case for us. But we’ve been so focused on building cool things that we have—and I’ve said this publicly–we have neglected our comps. We have always known that we are a tech firm or not a law firm. We’re not a PR shop. We’re not a compliance shop. Although compliance is very important.

And mea culpa. I want to be clear I’m as guilty of this as anyone else to the extent that I haven’t prioritized public communications. And I’ve said in the past, some of the FUD, it will just go away. You know, let’s not give it oxygen. I was wrong about that. So you can blame me for that. But we are getting better at communicating with people. We’re getting better at this. We’re learning. We’ll continue to learn, and we’ll continue to improve and get the facts and evidence out there.

Peter: All right. Let’s talk about the NYG case. For those people who don’t know, because it is quite complicated, how would you summarize the accusations?

Stuart: Let’s start with some baseline information on NYAG. First, there is no lawsuit or complaint that’s been filed against Bitfinex or tether in New York by the AG. 

Second, this is not a criminal investigation. And third, the special proceeding is only directed at getting information and keeping the injunction in order for the AG to conduct her investigation. 

Now, Bitfinex and Tether have cooperated with the AG’s office for over two years and have produced approximately 2.5 million pages of materials. While the AG’s office originally obtained an injunction relating to Tether’s reserves, in April of 2019, that injunction was substantially narrowed in the ensuing weeks and has not disrupted the day-to-day business of either Bitfinex or tether. And the injunction in the order for information is what we’ve been referring to online when we speak about the 354 order.

So the injunction set to expire by its terms on January 15th, which is the January 15th date that I referenced earlier that people have been talking about. And by that time, the companies expect to have finished producing documents to the attorney general. 

So we’ve seen a lot of FUD and fear-mongering about January 15th, much of it by those who hate, not just tether, but the entire digital token ecosystem. Despite those rumors and attacks, let me assure you that the business of tether and Bitfinex will remain the same after January 15th. I think our discussions with the AG are going well. I think they’re constructive. And we look forward to continuing that conversation with them.

(The Jan. 15 date he is speaking of refers to the date Tether/Bitfinex are supposed to handover their financial records to the NYAG, so the investigation into their business can proceed. The NYAG letter to the court is here.)

Peter: But what is it they’re pursuing here, particularly?

Stuart: The original order had an injunction component, enjoining us from doing certain things, which doesn’t affect our day-to-day business, at this time. It also sought information. So if you go through all of the requests that were in the original order from last April, they set a series of things that they wanted, a series of documents, information they wanted from us. 

We pushed back on that. We appealed the New York Supreme Court’s ruling on that. We lost. We accept that, and we’ve mediated our disputes as the attorney general said in their letter to the courts a few weeks ago. So again, they’re looking for that information. We are in the course of providing that. That’s going to be done by the 15th and we’re continuing to talk with them.

Peter: So what, what happens after the 15th? What are the next steps in this, because two years is a long time. I’m sure you want this wound up as quickly as possible. What are the next steps after that?

Stuart: Time will tell. Again, our discussions with them are constructive. We’re on track to give them everything they’re looking for. And we’ll see where it goes.

Peter: Okay. I’m trying to understand what the various possible outcomes are from this and whether you can even talk about them. Is there a scenario where Tether is wound up? Is there a scenario where Tether is just fine and is there a scenario where they actually complete their investigation, and there’s no action to be taken?

Stuart: Certainly. They may complete their investigation and they may bring a complaint. They may complete their investigation and think that there’s nothing further to be done. There may be some kind of settlement between the parties. There are any number of things that could happen.

Peter: What about the other lawsuit? What about the other one I read about, there’s a class-action lawsuit regarding the traders. Where are you at with that? You applied to have that ended, right?

Stuart: Yeah, so we have filed our motion to dismiss and the plaintiffs have given a reply in that, and we are waiting at this point to see if there’s going to be oral argument on the motion.

Peter: Okay. Just on the regulation side. It’s quite an interesting time for, I’m going to say crypto, and I hate that word, but crypto slash bitcoin slash stable coins and very interesting things that happened with the OCC recently. It feels like there’s more regulation coming, but some of it’s quite open regulation that’s actually allowing this industry to continue, but with a lot of oversight. Specifically, regarding Tether, what are the regulations you have to follow? What are the agencies you have to work with?

Stuart: Tether is registered with FinCEN as a money services business. That means the tether has to make reports up to FinCEN, have a compliance program, which I referred to earlier, just in passing, subject to examination by FinCEN, that kind of thing. 

Tether also makes reports to the BVI’s financial investigation agency under applicable law there, as most of the corps in the Tether group are BVI companies. So the bottom line is that Tether is regulated. So this notion, you’ll see sometimes that tether is quote “unregulated,” which a big word in some mouths, in my view is just flat wrong. And it’s a little bit irritating, but those are the baseline rules that that Tether has to follow. And our compliance program has been built to match or exceed those standards.

(Tether is not regulated in any meaningful sense. The company is registered in the British Virgin Islands. In fact, the reason it got into hot water with the NYAG, is because it was allegedly doing business in NY without a BitLicense, required for crypto companies to do business in the state, and it violated the Martin Act by misleading customers into believing that tethers were fully backed when in fact, they were not.)

Peter: So what did you make of the OCC letter? Because it was quite interesting, the idea that banks can start issuing stablecoins. I imagine for someone like you guys, that’s quite interesting because could you see a scenario where they’re working directly with Tether?

Stuart: I think it’s premature to say that. I agree that the OCC letter was very interesting. Other people far smarter than I am, have talked about that and opined on it already. And I’ll certainly defer to our U.S. counsel on that. But it’s very interesting and look, we always are interested in working with and cooperating with and teaching and learning from regulators and policy-makers and law enforcement agents around the world, not just in the United States. 

That’s another step on that road. I think you’re right. I think increased regulation in this space is coming. I think it’s going to be different, depending on where it is. We don’t take U.S. customers. But we are still registered with FinCEN, so that’s something that we need to pay attention to. And we’ll continue to engage on a worldwide basis with anyone who wants to work with us to help develop their own policies, help develop their own regs and figure out what they can learn from us and what we can learn from them.

(If you are registered with FinCEN but you don’t take U.S. customers, what is the point of being registered with FinCEN?)

In that kind of context. We just think that other people are better qualified to do the last mile and we’re happy to cede the field to them. 

Peter: This might be a question for you Paolo, but are there scenarios where Tether can fail, any form of catastrophic failure?

Paolo: I think that the only one that I’m not worried about, but due to my technical nature, I’m working every single day and second of my life to prevent, is ensuring that the private key stays safe. That’s it, right? So what we do is choose the blockchains that we allow tether on in a really careful way. So we choose blockchains that are, first of all, supported by a wide community. We choose blockchains that have a native type of token support, if possible, that has a built-in multisig pattern that we can use and have support for hardware wallets. 

So these are basically the key requirements for us to operate safely on a specific blockchain. We do have the capability of freezing accounts on most of the blockchains. That is really important. As Stu said, we save tens of millions of dollars. Part of those were also some of these situations were public when we did that. Recall one exchange hack, for example. So, yeah, basically my life is all about thinking how things can go wrong and try and make sure that we can prevent those from happening.

Peter: Which blockchains are you currently supporting?

Paulo: We support bitcoin two ways, from Omni Layer and Liquid. Then we support EOS, Ethereum, Tron, Algorand. [Speaking to Peter] Don’t do that face please. [Laughs]

Peter: Fucking Tron. 

Stuart: On a podcast called What bitcoin did, you’re going to get the grimace, Paolo.

Paolo: Ethereum fees were $16, mate.

Peter: In fairness, you’ve answered all the questions that I wanted to ask you, and these were based on a lot of the questions that were coming out in Twitter, when I put it out there. Most of them are related to, is it fully backed, blah, blah, blah. I personally still think there’s work to be done there. So I’m going to keep pushing you on that. 

Stuart, is there anything I’ve not asked that you kind of wish I had?

Stuart: No, I don’t think so, but I do want to just jump back to your comment. I actually agree with you. I think that there is work to be done. I think you should continue to push us and nothing is perfect. We can always do better and we look forward to doing better this year and beyond, but we’re really excited about 2021. And we look forward to being pushed. We look forward to these questions. We look forward to engaging with the community and putting the facts out there on the table.

Peter: How comfortable would you be doing one in the future, give a couple of months and perhaps allow people to submit questions in and take the questions submitted?

Stuart: I would have to talk to our PR folks. But personally, I’m very comfortable with that. I’m fine with that.

Peter: I think we should do that. As I said in the start, and for full transparency, people should know that I’m in a legal situation and Tether has helped support that at some points

But, at no point, does that change the line of questioning. I told you beforehand, I’m only doing this if I can ask any question I want. People should know that. I wanted to do it because whilst people say, Oh, you’re a journalist Pete, you should be completely impartial. 

I think this is all FUD. And, I’m finding it really annoying. And I’m finding a consistent pattern and who it’s coming from. And it’s coming from people who’ve had an agenda against bitcoin for a long time. And it’s coming from people who I think are nocoiners and they’re salty. 

I haven’t found anyone, I actually respect doing this, so I can be impartial at best with my questions, but I’m not impartial because I believe this is FUD. But I will continue to push you. I’ll continue to ask you questions. And I appreciate you coming on, man. And yeah, hopefully, we’ll do this again in a couple of months and, if that’s okay with you guys, I’ll open up to the floor and see if questions in the community.

Update Jan. 12: An earlier version of this story stated that Tether had minted 20 billion tethers this year alone. That’s incorrect—it’s 20 billion since March 2020.

Related stories:
Nocoiner predictions: 2021 will be a year of comedy gold
Are pixie fairies behind Bitcoin’s latest bubble?

The curious case of Tether: a complete timeline of events

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News: Bitcoin tops $24,000, Ledger’s gift to SIM swappers, Pornhub only accepts crypto now, FinCEN’s new rule

The price of bitcoin keeps hitting new all-time highs, recently topping $24,000, which means things are getting a little nutty. The coiners want bitcoin to shoot to the moon. And the no-coiners want Tether to get taken down and the nonsense to end, like it should have three years ago after the 2017 bubble.

I’ve now got hundreds of new Twitter followers, most of them bitcoiners repeating the same boilerplate phrases like “have fun staying poor,” “gold is a Ponzi too” (it’s not) and proclaiming me the U.S. dollar is going to collapse, which would be a shame as bitcoin is mainly traded in dollars.

Caught up in the whirlwind, Mike Novogratz, CEO of Galaxy Digital, has gotten a tattoo—a large moon and a rocket with the letter “B” on it. Fortunately, the “B” is relatively small, so he can easily get that part lasered or covered up if bitcoin crashes, which it will, because that is the fate of all Ponzi schemes.

Here is the news:

Ledger creates a target list for SIM swappers

In July 2020, hardware wallet provider Ledger was hacked, with the hackers gaining access to its customer database. The database has been circulating for five months now, and the hacker has just dumped it on RaidForums, a site dedicated to sharing hacked databases, for the whole world to access—at no charge.

“The first confirmed price I saw for this database was 5 BTC,” the hacker wrote. “Today you can get it for free.”  

The database contains the emails, physical addresses, and phone numbers of 272,000 Ledger buyers along with emails of 1 million additional users.

Essentially, Ledger, a company dedicated to security, has given hackers access to a massive target list for SIM swappers and phishing campaigns. Ledger is very, very sorry for the leak. 

Coinbase plans to go public

Coinbase, the most valuable U.S. crypto firm, has filed confidentially for an IPO with the SEC. When the crypto exchange last raised private funding in 2018, it was valued at $8 billion. It is probably worth plenty more now, with investors going mad over tech stocks

The San Francisco company has tapped Goldman Sachs to bring it to market, meaning that that the bank will lead the syndicate of banks underwriting the deal. (Cointelegraph)

Several VCs have invested hundreds of millions of dollars into Coinbase, and it makes sense that at some point they want to realize the returns on their investment, probably before this bubble blows.

According to Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, the IPO “is entirely about a16z and the other VCs unloading their ownership-bags, not cryptocurrency bags, before the space implodes because Tether finally gets killed.”

FinCEN to impose new rules on exchanges

The Financial Crimes Enforcement Network has unveiled new rules aimed at closing anti-money laundering loopholes for regulated cryptocurrency transactions. The rules call for additional customer verification and more reporting.

According to the proposed rule, if a user makes a deposit or a withdrawal of over $3,000 involving a non-custodial wallet, exchanges have to record the name and physical location of the wallet owner. Crypto exchanges also have to report to the U.S. Department of Treasury any deposit or withdrawal over $10,000. 

The rule is devastating to regulated crypto exchanges. In a lengthy Twitter thread last month, when he first learned of the new rule coming down the pipes, Coinbase CEO Brian Armstrong publicly attacked the new regulation. He knows serious KYC requirements will kill a lot of his business.

Nouriel Roubini responded by bashing Armstrong as a contemporary Gordon Gekko—a character in the 1987 Oliver Stone movie “Wall Street”—putting his profits ahead of the need to enforce regulations to stop the financial activities of criminals, tax evaders, terrorists, drug dealers and human traffickers.

Coming soon: Mt. Gox bitcoins

Tokyo bitcoin exchange Mt. Gox went bankrupt in early 2014, and its former users are still waiting to get some portion of their funds back. Their long wait may soon be over. Recently, the Mt. Gox trustee submitted a draft plan for the rehabilitation of creditors. 

If the Tokyo District Court gives the plan a thumbs up, that means 140,000 bitcoin may soon flood the market. The price of BTC has gone up substantially since 2014, so no doubt claimants will want to sell as quickly as possible—and that could create a bear market, pushing down the price of BTC. (Coindesk)

Unless there’s enough real cash left in the system—which is unlikely, because if there was, we wouldn’t need 20 billion tethers—Tether will need to issue an additional 2.5 billion tethers to absorb those bitcoin. 

Tether surpasses $20 billion

Tether has now crossed $20 billion worth of tethers in circulation. Paolo Ardoino, Bitfinex and Tether CTO, bragged about it on social media. He tweeted: “#tether $USDt 20 BILLION!”

Patrick McKenzie, the software engineer who last year wrote this brilliant article explaining Tether, says all he wants for Christmas is for “Tether to unwind explosively.”

As Tether keeps issuing more and more tethers to pump bitcoin’s price, remember that the whole point in all this is to lure real dollars into the system. Look, the price keeps going up! You too can get rich! Buy bitcoin!

As David Gerard explained in a recent blog post, bitcoin price pumps are almost always immediately followed by a sell off. If you’re still not convince how the game works, CryptoQuant CEO Ki Young Ju provides proof.

He points out that when bitcoin hit $20,000, it was a coordinated pump fueled by stablecoins—127 different addresses depositing stablecoins to exchanges in one block of transactions on Ethereum minutes before the first price peak. “Price is all about consensus,” he said.

Porn Hub only accepts crypto now

Visa and Mastercard said they will stop processing payments on Pornhub following a report in the NYT about  illegal content on the site uploaded by unverified users. Mastercard has cut off ties completely, while Visa says it has cut off ties pending an investigation. (Decrypt)

According to Vice, Pornhub purged 70% of its content in an attempt to get the card providers back. How else will it stay in business? The site still accepts crypto—and cash via checks and wires—but apparently that’s not enough. There’s no way it can function without the credit card payments. More proof that bitcoin is a failed payments system.

Other news

The Dread Pirate Roberts is sorry, so please let him go. President Trump is weighing granting clemency to Ross Ulbright, the founder of the Silk Road. (Daily Beast)

“If Ulbricht’s supporters really cared about the war on drugs or libertarian ideals, they’d be demanding that the nearly half a million people currently in U.S. jails for drug offenses should be pardoned too.” (Vanity Fair)

A NY judge says Reggie Fowler’s defense team can withdraw from the case. Their client hasn’t paid them in a year. Fowler has 45 days to find a new lawyer who is also willing to risk not getting paid. (My blog)

Binance reportedly puts zero actual effort into keeping U.S. customers out. The info comes by way of a U.S. user who created a BFX account (no VPN), transferred bitcoins to BFX and sent some out from there. (Twitter)

If you want to cash out your USDT on Kraken, the exchange apparently only takes two types: Omni or ERC-20. (Twitter)

Eric Peters, CEO of One River Asset Management, has set up a new company to invest in crypto. His firm will bring its holdings of bitcoin and ether to about $1 billion as of early 2021, he said. (Bloomberg)

Michael Saylor wants to lure Elon Musk into bitcoin. (Decrypt)

Judge gives Reggie Fowler 45 days to find new defense counsel

A New York district judge agreed to allow Reginald Fowler’s defense team to withdraw from their client’s case due to nonpayment. He then gave Fowler 45 days to seek a new attorney. 

Judge Andrew L. Carter

Fowler is the former NFL minority owner linked to hundreds of millions of dollars in missing Tether and Bitfinex funds. Tether is the company that has so far issued $20 billion worth of stablecoins, and Bitfinex is a crypto exchange. Both companies are operated by the same individuals.

In a telephone status conference today, Judge Andrew L. Carter agreed to allow Fowler’s defense counsel—Hogan Lovells and Rosenblum Schwartz & Fry—to step down. They claim their client owes them more than $600,000.

However, while the government agreed to letting the lawyers withdraw, it was opposed to an adjournment of the April 28 trial, arguing that the situation was of Fowler’s own making. After all, his lawyers had been warning him since February they were planning to quit. The trial has already been postponed twice.

“We believe the almost four months until trial is sufficient time for a new counsel to prepare for trial,” U.S. Assistant Attorney Jessica Greenwood told the judge.

Judge Carter disagreed. That assumes Fowler’s new attorneys have already been retained and are on the case today, he said, stressing that it may take time for Fowler to find a new lawyer—especially given that his current lawyers are seeking to withdraw because he hasn’t paid them.

“That usually doesn’t make the defendant a very attractive client to a subsequent law firm,” Carter said.

The judge then explained to Fowler—who was on the call, joined by his defense team—that if he was unable to afford a new attorney, the court would provide him one free of charge. However, he would need to fill out a financial affidavit for the court to make that determination.

Although Fowler would not admit to whether he could afford an attorney, he did say he wished to try and hire one who would be more willing to work with him given his “current condition.” 

“The government has seized all my assets,” he said, starting to sound a bit angry. “The government has asked me to put the properties that I have that are free and clear up for bail. The government has handcuffed me. They have shut me down. They have locked down my family,” he said—though it’s not clear what he meant in saying his family was “locked down.”

“I can’t even get a bank account. My business has been shut down since COVID, so we don’t have any income. We do have assets. We can’t get to the assets because the government has tied them all up, so what I want to do, respectfully, is to try to find a firm that will work with me, understanding that we have assets that are tied up by the government, i.e., the properties that have me set for bail, or whatever you call it.”

Fowler, now living in Chandler, Arizona, is free on $5 million bail. Five properties were put up for lien in order to secure his bond.

He called it “ludicrous” that the government forced him to put up “nearly $2 million worth of nearly free-and-clear properties” for bond. (A quick look on Zillow puts the properties’ value at around $1.4 million.)

Fowler said if he could not find an attorney to work with him, he would ask the court for assistance.

The judge stressed that Fowler has a right to be represented by an attorney, and gave him until Feb. 2, 2021, to find one on his own. A new trial date will be set after that time, the judge said.

Hogan Lovells also represents Fowler in a class-action complaint against Tether and Bitfinex, in which Fowler is named. They are seeking to withdraw from that case as well.

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News: Michael Saylor buys bitcoin with abandon, Tether reaches $20B, MassMutual jumps on BTC bandwagon

The price of bitcoin is headed back over $19,000 again. What will it take to push it past $20,000—more tethers? More institutional buying? Or maybe, more crypto journalists proclaiming (without evidence) that tethers are fully backed? Here’s the news:

MicroStrategy wants more, more, more

Michael Saylor, the new crazy god of bitcoin institutional buying, continues his bitcoin buying spree. He seems really, really confident the price of BTC will go up.

Saylor’s publicly traded company MicroStrategy currently owns 40,824 bitcoins—because no sense using all that excess cash for buying back a ton of stock or paying a big dividend. Better off to gamble it on crypto.

Now the firm is actually going into debt to buy bitcoin. After completing a $650 million bond offering, MicroStrategy plans to plow all the proceeds into buying more bitcoin. (Microstrategy PR, Cointelegraph)

Citibank isn’t impressed. Analyst Tyler Radke downgraded MicroStrategy (MSTR) from neutral to sell, calling the recent rally—MSTR went up after its first few BTC buying announcements—”overextended” and a possibly “deal-breaker” for software investors. (The Block)

Tether: Ain’t no stopping us now

Tether is now at $20 billion worth of tether—that’s assets, but circulating supply is soon to follow—and there is no evidence whatsoever to conclude that there is $20 billion in real cash behind all those tethers. Why? Because the company has never had a formal audit.  

Still, last month, The Block’s Larry Cermak defended tethers as being “either fully backed or very, very close,” telling folks “everything is in order now.” He based that on conversations he claimed to have had with “third-parties” who told him they had successfully redeemed several hundred million in tethers.  

Cermak is not the only one to buy the Tether line of B.S.

In December 2018, after looking at Tether bank statements, Bloomberg’s Matt Leising also reported that Tether appeared to be fully backed. He was wrong.

Unbeknownst to him at the time, in the previous two months, the DOJ froze five NY bank accounts belonging to Reginald Fowler, who ran a shadow banking service for Tether/Bitfinex’s Panamanian payment processor. And in November, the NYAG, having serious concerns about Tether’s finances, issued subpoenas to Bitfinex and Tether asking for details on their banking. Finally, in April 2019, Tether admitted it was only 74% backed. And that’s before it went off and printed another 17.5 billion tethers. So what’s backing all those?

In a recent blog post, David Gerard explains why Tether is “too big to fail.” Essentially, it’s keeping the entire BTC market afloat. If Tether were to get the Liberty Reserve treatment, the price of bitcoin is unlikely to ever recover.

Thus, “the purpose of the crypto industry, and all its little service sub-industries, is to generate a narrative—so as to maintain and enhance the flow of actual dollars from suckers, and keep the party going,” he said. 

NYAG: Tether documents forthcoming

Meanwhile, there’s been a new document filing in the NYAG Tether probe.

In a letter to the NY supreme court, NYAG says Bitfinex/Tether are cooperating on document production and the parties expect to finalize things “in the coming weeks.” These documents, of course, consist of everything NYAG asked for in its original November 2018 subpoena—information that will shed light on the Tether and Bitfinex’s shadowy dealings since 2015.

A part of me wants to get excited about this news, but another part says, wait a minute. In the past when Tether’s operators said they were going to hand documents over, they simply handed over material that was already public information. They also have a long history of shenanigans, so let’s just wait and see.

How to turn USDT into cash 

Jorge Stolfi, a computer scientist from Brazil, shared on Reddit a “mainstream theory” on what could be happening behind-the-scenes at Tether—specifically, how Tether’s operators could convert USDT into cash for their own personal use. Remember, this is totally unproven. It is just a theory. (The “triad,” by the way, refers to Tether CSO Phil Potter, CEO and man of mystery J.L. van der Velde, and CFO Giancarlo Devasini. They are the same operators behind sister company Bitfinex.)

He writes:

  1. The owners of Tether Inc (which I will call “the Triad”) print billions of USDT without any backing.
  2. The Triad deposits those USDT into Bitfinex (which they own too).
  3. The Triad uses those USDT to buy BTC and other cryptos from other Bitfinex clients, attracted by the better price.
  4. The Triad withdraws the BTC to their private wallets.
  5. The Triad moves all or some of those BTC to other exchanges that handle real currencies, such as USD, EUR, JPY, etc.
  6. The Triad sells those BTC for real money.
  7. The Triad withdraws the real money into their personal bank accounts.

This is a theory. This is not proven. But the point is, when you have no checks and balances in place along with massive loopholes in oversight, anything can happen. We saw this already with QuadrigaCX—the Canadian crypto exchange that went bankrupt after the founder disappeared (aka “died in India”), taking along with him hundreds of millions of dollars in customer funds.

Coinbase loses half critical security team

After NYT reporter Nathaniel Popper reported about discriminatory complaints at Coinbase, new information came out. Among those who recently resigned to protest the exchange’s new internal policies, were four of the seven people on Coinbase’s critical security team—aka the “key management team.”

The key management team is responsible for securing the cryptographic keys to Coinbase’s cold wallets, where the majority of the company’s crypto is held—somewhere in the neighborhood of $30 billion.

“No job is more fundamental to the company’s success,” Popper said.  

Coinbase’s security chief shot back, saying Coinbase’s security team is managed by several teams with redundancy built in. Of course, he wants us to believe everything is fine, but not everyone is convinced.

MassMutual invests in BTC

Bitcoin has a new institutional investor: MassMutual. The Springfield-Mass insurance firm purchased $100 million worth of BTC for its general investment account, which totals $235 billion. (WSJ)

MassMutual purchased the bitcoin through NYDIG, a New York-based fund management company, which has $2.3 billion worth of crypto under management. MassMutual also acquired a $5 million minority equity stake in NYDIG.

The $100 million cash injection into bitcoin sounds like a lot, but it’s small potatoes. That money will cover the network’s operators—the bitcoin miners—for only six days. Remember, bitcoin miners are selling their 900 newly minted bitcoin per day for $17 million, at current BTC prices. Investors will never see that money again. Bitcoin doesn’t make any real profits on its own—just investor money going in one end, out the other.

Other news

Former Ethereum developer Virgil Griffith moves to dismiss his indictment—again. Attorney Brian Klein argues speech is a protected by the constitution. (Reply memo in support of motion to dismiss.)

Law firm Hogan Lovells is requesting to withdraw their representation of Reggie Fowler in a class-action against Bitfinex and Tether in which Fowler is also named. (Motion to withdraw)

Bryce Weiner has written a nice overview of how Tether works in relation to the crypto industry.

Crypto-friendly CFTC chair Heath Tarbert plans to resign early next year. His term was set to expire in 2024. (The Block)

Bitcoin’s right-libertarian anarcho-capitalism fits right in with far-right extremism. Crypto analyst Tone Vays brags on Twitter about spending a night with the Proud Boys. 

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News: Bitcoin’s new crazy god, Tether’s runaway train, Binance sees $1B profits, STABLE Act threatens stablecoins

Crypto has come of age. What does that mean?

Among other things, it means MicroStrategy CEO Michael Saylor has replaced Patrick Bryne as the new crazy god of institutional bitcoiners. And another crypto exit scam has been invented: dying in India. (See Jorge Stolfi’s full reddit post. He is a computer scientist in Brazil.)

All Ponzi schemes eventually implode, even if it takes 25 years like Bernie Madoff’s did. When that happens, you have two choices: turn yourself in or disappear. Gerald Cotten chose to disappear. Of course, many people believe he is really and truly dead. I’m just not one of them.

With that, here is the news that I find interesting from Bitcoinlandia, an imaginary place where people keep insisting bitcoin is not a Ponzi.

MicroStrategy buys more BTC

MicroStrategy continues to funnel its excess cash into bitcoin. The analytics firm bought another $50 million worth of bitcoin, Saylor disclosed in a tweet.

MicroStrategy bought its most recent pile of bitcoins at an average price of $19,427—at the top of the market—and now owns a total of 40,824 bitcoins.

Here’s the thing: Saylor holds 73% of the voting stock of MicroStrategy, so he does not need buy-in from stockholders to make decisions. He is ruler and king, and if he wants his firm to buy more bitcoin, so be it.

Saylor also has a large private stash of bitcoins. I would be very curious to know how much BTC he owned before and after MicroStrategy’s recent purchase.  

If those bitcoin hold their value, all will be fine, Jorge Stolfi said on Reddit. But, if BTC “drops back to $8,000, the other stockholders will be upset, and may have grounds to sue Michael for mismanagement or whatever—even if there are no other shenanigans. If he did sell his coins while the company bought them, it will be worse.”

Guggenheim Partners

Another institutional investor has jumped on the bitcoin bandwagon. In a recent SEC filing, Guggenheim Partners, a leading Wall Street investment firm, revealed that it is looking to invest 10% of its $5.3 billion Macro Opportunities Fund into Grayscale’s Bitcoin Trust.

To be clear, Guggenheim is not buying bitcoin directly. It plans to invest nearly $500 million in GBTC shares. Grayscale itself now owns more than 500,000 bitcoin.

And Guggenheim isn’t taking on any risk. The firm makes money whether the price of BTC goes up or down. The retailers who are invested in the fund are the ones who carry all the risk.

Bitcoin is highly volatile and has no role in retail investor portfolios. As Economist Nouriel Roubini explained in a lengthy Twitter rant:

“Investing in BTC is equivalent to [taking] your portfolio to a rigged illegal casino & [gambling]; at least in legit Las Vegas casinos odds aren’t stacked against you as those gambling markets aren’t manipulated the way BTC is. Instead BTC is manipulated heavily by Tether & whales.”

Tether’s runaway train

On to my favorite topic: Tether—a firm that mints a dollar-pegged stablecoin that’s hugely popular on unbanked exchanges.

On Nov. 28, Tether surpassed 19 billion tethers in circulation. And like a runaway train with no way of stopping, it is fast on its way to issuing 20 billion tether—worth the notional equivalent in US dollars.

So, what is going on with the New York Attorney General’s investigation into Tether and Bitfinex?

The last bit of real news we had was in September when Judge Joel M. Cohen once again ordered Bitfinex and Tether to turn over financials. However, he did not set a deadline. He left that decision to a special referee, according to Coindesk. And we haven’t heard anything on the matter since.

Stepping back, recall that Bitfinex/Tether have been resisting handing over documents since November 2018 when the NYAG—in pursuant to the Martin Act, which gives it broad powers to investigate fraud—first served subpoenas for information stretching back to January 2015.

In April 2019, when the NYAG was concerned that iFinex (parent company of Bitfinex/Tether) was insolvent and Bitfinex was dipping into Tether’s cash reserves, it sought an ex parte order compelling the companies to produce documents and staying further actions pending the ongoing investigation.

iFinex responded with a motion to dismiss. In August 2019, the Supreme Court denied the motion and the respondents sought to appeal, arguing that the NYAG did not have the power to demand documents since Bitfinex and Tether didn’t have sufficient contacts in New York.

In July 9, 2020, a New York state appeals court sided with the NYAG. (Court filing)

As I’m writing up this newsletter, Coindesk’s Nikhilesh De has just pulled up a new court filing in the case from Dec. 4 that is a bit bewildering. At first glance, it appears to be the same filing from July, repeated twice.

Drew Hinks, a lawyer not involved in the case, said the filing is a remittitur—a jurisdictional document that formally ends the life of an appeal by notifying the world that the decision is final.

I’ll update this post as I learn more—specifically why a remittitur is important after the appellate judgment has already been issued and become final. Does this help the investigation going forward?

(Update: I am pretty sure that the remittitur was just a procedural thing that signals that the appellate court is done and has kicked the ball back to the original court—i.e., Justice Cohen.)

Bitcoin sets new all-time high

On Nov. 30, the price of bitcoin reached $19,900 on Coinbase, according to the Block, surpassing its previous all time high (ATH) set on Dec. 17, 2017, by about $10.

After bitcoin reached its new high, it promptly lost 13% of its value.

When you see bitcoin getting pumped like this, what you are seeing is traders cashing out before the bubble bursts. Bitcoin is not a company. It does not create any actual revenue. Cash coming into the system goes to paying the miners, who sell their 900 newly minted BTC per day and earlier investors lucky enough to sell at the right time.

I’m sure the current pump has nothing to do with the NYAG getting closer to exposing Tether/Bitfinex’s inner workings, the recent indictment of BitMEX operators, and Binance’s latest efforts to aggressively block U.S. citizens from using its exchange.

Binance pulls in big profits

The largest tether exchange expects to earn between $800 million and $1 billion in profits for 2020, its captain Changpeng Zhao (“CZ”) told Bloomberg. The Malta-registered exchange also expected $1 billion in profits 2018.

Speaking of Binance, the crypto exchange is suing Forbes and two journalists for a recent report claiming that the exchange had a plan to dodge regulations. (Here is the complaint.) It’s unlikely CZ will get anywhere with this lawsuit because the suit will get torn apart in discovery.

Similar to when Bitfinex threatened to sue prolific critic Bitfinex’ed in December 2017, this is likely more of warning to other journalist: don’t dig too deep, or we’ll come after you.

STABLE Act

The big news of the week is that three congressional democrats are trying to pass a bill that will require stablecoin issuers to comply with the same regulations and rules as banks.

If passed, the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, would require stablecoin issuers to apply for bank charters, get approval from the Federal Reserve and hold FDIC insurance. (The bill, press release.)

Stablecoin issues are like wild cat banks. Back in the 1800s banks would issue their own currency, and nobody knew what was backing the currency. And because these banks were often in remote, hard to get to locations, people often had trouble redeeming their notes for silver or gold or whatever it was that was supposed to be backing them.

Other news

Facebook’s Libra Association has announced a change of name. It is now the Diem Association. (Press release)

Tether skeptic Cas Piancy debates Sino Global Capital CEO Matthew Graham. (Podcast)

PayPal is shilling bitcoin on Facebook and Twitter.

Reggie Fowler owes his defense team $600,000. Lawyers were conned by a con. (My blog)

Joe Biden intends to nominate Adewale Adeyemo as Deputy Treasury Secretary, not Gary Gensler as previously thought. (New York Times)

Bill Hinman, who first spoke of “sufficient decentralization,” served his last day as SEC’s Division of Corporation Finance director on Friday. (SEC statement on departure)

Spotify is looking to add support for crypto payments. The streaming service wants to hire an associate director to lead activity on the libra project and other crypto efforts. (Coindesk)

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Reggie Fowler owes lawyers $600,000

Reggie Fowler, the former NFL minority owner linked to missing Tether and Bitfinex funds, owes his defense team more than $600,000, according to a new court filing on Tuesday. 

Fowler’s lawyers want to drop out of the case due to nonpayment, but they need to get permission from the court first. 

Last we left off, U.S. District Judge Andrew Carter ordered attorneys at law firm Hogan Lovells—also representing defense lawyer Scott Rosenblum at Rosenblum Schwartz & Fry—to file three versions of a sealed letter dated Nov. 18.

The public version—redacting what should not be revealed to the government or the public—discloses more details on the lawyers’ frustrations with a client who perpetually strings them along. 

Hogan Lovells attorneys James McGovern and Michael Hefter initially asked for a $25,000 retainer in late 2018 when they first met with their client. Fowler only ever paid the retainer, and two years later, he now owes them $600,000.

His defense team believed all the stories he told them that he was swimming in money, so they weren’t too concerned—at first.

“From the very inception of this matter, we have been led to believe that Mr. Fowler is a high net worth individual with substantial assets, which would allow him to pay his legal bills with little hardship,” the lawyers said in their letter to the judge.

Hogan Lovells started working with Fowler on October 18, 2018. They had their first meeting with him on Nov. 8, 2018, around the time Fowler was initially contacted by the FBI.

“When we agreed to represent Mr. Fowler, it was our understanding that he had been targeted by cryptocurrency businessmen seeking to take advantage of Mr. Fowler’s personal balance sheet as a means of transacting cryptocurrency transactions without drawing the attention of bank compliance officers or regulators,” they said.

Fowler was later arrested in Chandler, Arizona, on April 30, 2019. (DoJ press release and indictment.)

After his release in May on $5 million bail, Fowler hired Scott Rosenblum to join the defense team. Rosenblum asked for a $275,000 retainer and an additional $85,000 per week retainer, if the case went to trial. Rosenblum received a partial retainer of $100,000, which Hogan Lovells notes that Fowler paid “while he had several unpaid, overdue invoices for legal services issued by Hogan Lovells.” 

Additionally, Fowler paid another lawyer (unnamed) in Portugal in full for her services. He also paid international law firm Reed Smith LLP for services rendered in 2018.

“The fact that other attorneys had received payments from Mr. Fowler for their services led us reasonably to believe that Mr. Fowler’s representations to us that he would pay our bills was truthful,” the lawyers said.

In the second half of 2019, the lawyers were diligent about contacting Fowler for money. Each time they reached out, he told them payment was imminent and that “transactions or business deals that would fund the payment of our fees were in process”—but he never paid him. 

In February, following a plea bargain that went awry and a superseding indictment, the defense team realized the case would likely go to trial, requiring a substantial amount of work, and still no check from their client.

Fowler has ample funds, they said, including “$10 million in real estate that is unencumbered and could have been liquidated or monetized at any point during the past two years.” His refusal to pay, the lawyers added, has “led to a breakdown in the attorney-client relationship.”

The government has till Dec. 8 to respond and replies are due Dec. 11.

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Are pixie fairies behind Bitcoin’s latest bubble?

Are the pixie fairies sprinkling gold dust on bitcoin’s market again? By the looks of things, you might think so.

Like in the bubble days of 2017, the price of bitcoin is headed ever upward. On Wednesday morning, it surpassed $18,000 — a number not seen since December 2017 when bitcoin, at its all-time peak, scratched $20,000.

Of course, the market crashed spectacularly the following year, and retailers lost their shirts. But here we are once again, trying to unravel the mysteries of bitcoin’s latest price movements.

Several factors may explain it — Tether, PayPal, and China’s crackdown on over-the-counter desks — but before we get into that, let me reiterate how critical it is for bitcoin’s price to stay at or above a certain magic number

Bitcoin miners — those responsible for securing the bitcoin network by “mining” the next block of transactions on the blockchain — need to sell their newly minted bitcoins for real money, so they can pay their massive energy bills.

Roughly $8 million to $10 million in cash gets sucked out of the bitcoin ecosystem this way every day. So, in order for the miners — the majority of whom are in China — to turn a profit, bitcoin needs to be priced accordingly. Otherwise, if too many miners were to decide to call it quits and unplug from the network all at once, that would leave bitcoin vulnerable to attacks. The entire system, and its current $345 billion market cap, literally depends on keeping the miners happy.

Now let’s jump to May 11, an important day for bitcoin. That was the day of the “halvening,” an event hardwired into bitcoin’s code where the block reward gets slashed in half. A halvening occurs once every four years.

Before May 11, miners received 1,800 bitcoin a day in the form of block rewards, which meant they needed to cash in each bitcoin for $5,000. But after the halvening, the network would produce only 900 bitcoins per day, so miners knew they needed to sell each precious bitcoin for at least $10,000.  

But trouble loomed. Just months before the halvening, the price of bitcoin went into free fall. Between February and March, when the world was first gripped by the COVID crisis, bitcoin lost half its value, sliding to $5,000 — barely enough to pay the system’s energy costs post-halvening. Miners were likely pacing, wringing their hands, wondering how they would stay in business. Who would guarantee their profits?

That is when Tether — a company that produces a dollar-pegged stablecoin of the same name — sprung into action and started issuing tethers in amounts far greater than it ever had before in its five years of existence.

Tethers, for the uninitiated, are the main source of liquidity for unbanked crypto exchanges, which account for most of bitcoin’s trading volume. Currently, there are $18 billion (notional value) worth of tethers sloshing around in the crypto markets. And nobody is quite sure what’s backing them.

Due to Tether’s lack of transparency, its failure to provide a long promised audit, and the fact that the New York Attorney General is currently probing the firm along with Tether’s sister company, crypto exchange Bitfinex, for fraud, a good guess is nothing. Tethers, many suspect, are being minted out of thin air. 

(Tethers were initially promised as an IOU where one tether was supposed to represent a redeemable dollar. But that was long before the British Virgin Island-registered firm began issuing tethers in massive quantities. And no tethers, to anyone’s knowledge, have ever been redeemed—except for when Tether burned 500 million tethers in October 2018, following the seizure of $850 million from its payment processor Crypto Capital.)

According to data from Nomics, at the beginning of 2020, there were only $4.3 billion worth of tethers in circulation. That number remained stable through January and February and into March. But starting on March 18, just five days after bitcoin dipped below $5,000, the tether printer kicked in.

BTC price and USDT supply. Image: Nomics.com

Tether minted $1.9 billion worth of tethers in March, and another $1.5 billion worth in April — crypto’s own version of an economic stimulus package. The price of bitcoin rose in tandem back up to $10,000, just in time for the halvening. Yet the Tether printer kept printing, pushing the price of bitcoin ever skyward and giving bag holders an opportunity to cash out. 

In May, June and July, Tether issued a combined total of $6 billion in tethers. In August, when the price of bitcoin reached $12,000, it spun out $2.5 billion in tethers. And in September, when BTC slid to $10,000, Tether infused the markets with another $2 billion in tethers, although, even that couldn’t lift bitcoin up to $12,000 again. It just hovered in the $10,000 range. 

And then in October — just after US prosecutors charged the founders of BitMEX, a Seychelles-registered, Hong Kong-based bitcoin derivatives exchange, for failing to maintain an adequate anti-money laundering program — the price of BTC started to soar. What happened?

Tether’s frenzied pumping

One theory is that Tether just kept issuing tethers, billions and billions of them, and those tethers were used to buy up bitcoin. A high demand drives up the price — even if it’s fake money. 

Only unlike in 2017, the effort to drive up bitcoin’s price is requiring a lot more tethers than ever before. (At the end of 2017, before the last bitcoin bubble popped, there were only $1.3 billion worth of tethers in circulation, a fraction of what there are today.)

Nicholas Weaver, a bitcoin skeptic and a researcher at the International Computer Science Institute in Berkeley, is convinced bitcoin’s latest price moves are 100% synthetic.

“The amount of tether flooding into the system is more than enough explanation for the price as it is well more than the amount needed to buy up all the newly minted bitcoin,” he told me. “If it was organic, there would at least be some significant increase in the outstanding amount of non-fraudulent stablecoins.”

What he means is, if real money was behind tether, we’d be seeing a similar demand for regulated stablecoins. But that is not the case. Only one regulated stablecoin has seen substantial growth — Circle’s USDC — but that growth is far overshadowed by Tether, and mainly a result of the growing decentralized finance (DeFi) market — a topic for another time.

Jorge Stolfi, a professor of computer science at the State University of Campinas in Brazil, who in 2016 wrote a letter to the SEC advising about the risks of a bitcoin ETF, which the SEC published, agrees.

“As long as fake money can be used to buy BTC, the price can be pumped to whatever levels to keep the miners happy,” he told me. He went on to explain in a Twitter thread that the higher the bitcoin price, the faster real money flows out of the system — assuming miners sell all their bitcoin for cash. Multiply bitcoin’s current price of $18,600 times 900, and that’s nearly $17 million a day. Investors will never get that money back, he said.

Klyith (not his real name) from Something Awful, a predecessor site to 4Chan, explains Tether this way:

“A bunch of pixies show up and start flooding the parchment market with fairy gold, driving prices to amazing new heights. But when any of the player characters try to spend the fairy gold in other towns or to pay tithes to the king, it turns into worthless rocks.

“If you denounce the pixies to the peasants or start using dispel magic to reveal that fairy gold is rocks, the price of parchments will collapse and the peasants may stop using them altogether. But if you ignore the pixies and keep the parchment economy going, you will end up with more and more worthless rocks instead of gold. The pixies can of course tell the difference between fairy gold and real gold at a glance. So they will quickly drain all the real gold from the whole township if you don’t act. What do you do?”

Still, it is hard to imagine that outside events don’t have some impact on bitcoin’s price. Two other events are being talked about right now as reasons behind bitcoin’s price gains—and they are getting a lot more media attention than Tether.

PayPal’s shilling

One of the biggest companies in the world is now promoting crypto, giving retail buyers the impression that bitcoin is a safe investment. After all, if bitcoin were a Ponzi or a scam, why would such a well-known, respectable company embrace it? I should add that MicroStrategy, Square, Fidelity Investment and Mexico’s third-richest person, Ricardo Salinas Pliego, are also currently shilling bitcoin on the internet.

On Oct. 21, PayPal announced a new service for its users to buy and sell crypto for cash. And on Nov. 12, the service became available to U.S. customers, who can now buy and sell bitcoin, bitcoin cash, ether, and litecoin via their PayPal wallet. 

If you are a PayPal user, you have already gone through the process of proving you are who you say you are. And that removes the hassle of having to sign up with an crypto exchange, like Coinbase in the U.S., and take selfies of yourself holding up your driver’s license or passport.

Of course, there are limitations. You can’t transfer crypto into or out of your wallet, like you can on a centralized exchange. But you can pay PayPal’s 26 million merchants with crypto — although, not really, because what they receive on their end is cash. And the transaction is subject to high fees, like 2.3% for anything under $100, so what is the point? All you are doing is taking out a bet against PayPal that the price of bitcoin is going to rise. 

Stolfi describes PayPal on Twitter as “a meta-casino where you can choose to use special in-house chips with a randomly variable value.”

The broader point is that PayPal makes it easy to buy crypto for people who are less likely to understand how crypto really works or know about Tether and the risk it imposes on the crypto markets. (If authorities were to arrest Tether’s operators and freeze its assets, similar to what happened to Liberty Reserve in 2013, that could lead to a huge plummet in bitcoin’s price.)

If you think Tether doesn’t have that big of an impact on bitcoin’s price, recall that Tether/Bitfinex CFO Giancarlo Devasini (going by “Merlin”) is recorded in the NYAG’s 2019 complaint as having reached out to Crypto Capital to plead for missing funds: “Please understand all this could be extremely dangerous for everybody, the entire crypto community,” said Merlin, indicating what could happen if Tether failed to exist. “BTC could tank to below 1k if we don’t act quickly.”

PayPal this month reached 85% of the volume of Binance.US, the U.S. branch of major crypto exchange Binance. Granted the volume of Binance.US is small in comparison with Binance’s main crypto exchange, but you can see where this is going. 

One thought is that PayPal’s move into crypto is a “death sentence” for bitcoin, and that Tether and the exchanges who depend on tethers are working together to pump up the price of bitcoin to lure as much cash into the system as possible while the going is good.  

China’s crackdown on OTC desks

According to news coming out of the country, China’s bitcoin miners may be encountering difficulty selling their bitcoin on over-the counter exchanges.

Since China banned crypto exchanges three years ago, OTC exchanges — where buyers and sellers go to trade directly — have become the most convenient way for the country’s citizens to on-ramp and off-ramp into and out of the crypto world. It’s also the main way bitcoin miners sell their bitcoin for yuan.

Recently, as part of a move to curtail internet gambling and contain capital outflows, Chinese authorities have been targeting OTC desks. If authorities determine that your counterpart (the person on the other end of your trade) is trying to launder illicit funds, you risk getting your bank account frozen. As a result, miners may be having to take more precautions and cash out less frequently, according to The Block (paywalled). 

There is some speculation that this is making it harder for bitcoin miners to offload their bitcoins, leading to a liquidity crisis. In other words, fewer bitcoin are available to buyers, thus driving up demand similar to if hoards of bitcoin were being bought up by Tether.

But ICSI’s Weaver cautions there is no way to think rationally about bitcoin’s price. “The market is completely loony,” he said.

In a rational world, he believes shutting down OTC desks would have no effect on the price of bitcoin — if the rest of the markets were efficient and honest. OTC desks are really about miners’ paying power and Chinese who want to evade capital controls by trading cash for bitcoin and moving that bitcoin overseas, he said. He added that he could envision China’s crackdown on OTC desks driving up the price of bitcoin if it resulted in fewer OTC purchasers selling their bitcoin on banked exchanges. “But really, that doesn’t make sense either,” he said. “How many banked exchanges are left?”

Meanwhile, Tether keeps up the good work

Updated on Nov. 21 to mention that nobody has ever redeemed their tethers, meaning there is no record of anyone having sent their USDT back to Tether and received a bank wire for cash.

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News: BTC moons, Reggie Fowler stiffs lawyers, OKEx withdrawals still frozen, Binance gets piles of USDT

Bitcoin broke $16,000 on Thursday. That’s up from $10,000 in early September. And yet, with all the media outlets rabidly covering the latest “Bitcoin bull run,” the only one mentioning the billions and billions of dollars worth of tether (USDT) entering the market was Cointelegraph

In particular, none of the mainstream press has bothered to mention tether in their writings about BTC’s recent price rise. This is worrisome because retail folks — the ones most vulnerable to risky investments — have little understanding of tether and the risk it imposes on Bitcoin’s price. 

Instead, most media pointed to the election, PayPal’s recent embrace of crypto and huge BTC investments by MicroStrategy and Square as the reasons for BTC’s moon. Mainstream adoption! Institutional money! The truth is, crypto markets are easy to manipulate. And when BTC goes up in value like this, the main benefit is so early investors can cash out. 

In other words, BTC gets passed on to the next bright-eyed, bushy-tailed dupe who hopes the price will continue skyward. History has shown, however, these bubbles are generally followed by a crash, and a lot of people getting hurt, which is exactly what happened in 2018.

Trolly McTrollface (not his real name, obvs) points out in a tweet thread that Tether went into hyperdrive in March to stop BTC from crashing. BTC had dropped to $5,000, losing half its value from two months prior. In fact, March is when BTC entered its current bull run phase.

Remember, if the price of BTC falls too low, the network’s miners — who are responsible for Bitcoin’s security — can’t make a profit, and that puts the entire network in danger.

Trolly believes the current price pump is a coordinated effort between Tether — which has now issued a jaw-dropping $18 billion worth of dollar-pegged tethers — and the exchanges.

Let’s talk about some of those exchanges.

OKEx withdrawals still frozen

Withdrawals from OKEx, one of the biggest crypto exchanges, have been frozen ever since the news came out that founder “Star” Xu was hauled away for questioning by Shanghai authorities more than a month ago.

Xu’s interrogation appears to be part of a broader crackdown on money laundering in China, though OKEx denies any AML violations. 

OKEx is registered in Malta, but retains offices in Shanghai and Beijing, where it facilitates peer-to-peer—or “over-the-counter”—trades. The exchange acts as an escrow to reduce counter-party risk in fiat-to-crypto trades, so you don’t have to worry about someone disappearing with your cash before they hand over the BTC you just bought from them.

As Wolfie Zhao explains for the Block, these OTC trades are the only fiat on/off ramp for Chinese crypto traders—and have been ever since September 2017 when the country banned crypto trading on exchanges.

Effectively, the government made it so the exchanges could no longer get access to banking in the country.

P2P allows two people to transact directly, thus bypassing the Chinese ban, as long as the trades are small in scale. All Chinese crypto-to-fiat is OTC, while crypto-to-crypto trades are still done via a matching order book. (A Chinese citizen simply needs to use a VPN to access Binance, for instance.)

Currently, the OTC desk is the only trading desk that remains open at OKEx All of its exchange trading activity has been ground to a halt. The exchange claims Xu has access to the private keys needed to access its funds, and until he is free, all that crypto sits locked in a virtual vault.

As a result, according to blockchain analytics firm Glassnode, there are currently 200,000 bitcoin stuck on OKEx. The exchange insists all funds are safe, and says, essentially, that everything will be fine as soon as Xu returns. But its customers remain anxious. Did I mention OKEx is a tether exchange?

Huobi, another exchange in peril?

Like OKEx, Huobi is another exchange that moved its main offices out of China following the country’s 2017 crackdown on crypto exchanges.

Huobi, now based in Singapore, continues to facilitate fiat-to-bitcoin and fiat-to-tether trades in China behind an OTC front. (Dovey Wan does a nice job explaining how this works in her August 2019 story for Coindesk.)

Since earlier this month, rumors have circulated that Robin Zhu, Huobi’s chief operating officer, was also dragged in for questioning by Chinese authorities. Huobi denies the rumors.

Meanwhile, since Nov. 2—the day Zhu was said to have gone missing —$300 million worth of BTC has flowed from Huobi to Binance, according to a report in Coindesk. (I still don’t have a good explanation as to why Huobi is doing this. If anyone can fill in the gaps, please DM me on Twitter.)

What’s up with Binance?

If you follow Whale Alert on Twitter, like I do, it’s hard to ignore the enormous influx of tether going into Binance multiple times a day.

Here’s an example: On Friday, in four separate transactions, Tether sent Binance a total of $101 million worth of tethers. The day prior to that, Tether sent Binance $118 million in tethers, and the exchange also received $90 million worth of tethers from an unknown wallet. And on Wednesday, Tether sent Binance $104 million in tethers.

That’s over $400 million worth of dubiously backed tethers—in three days.

Like Huobi and OKEx, Binance also has roots in China. And it has an OTC desk to facilitate fiat-to-crypto trades. Is it a coincidence that the top tether exchanges originate from China? And that China controls two-thirds of Bitcoin’s hash rate?

Reggie Fowler’s lawyers wanna quit

Reggie Fowler, the Arizona businessman in the midst of the Crypto Capital scandal, is running low on cash. His lawyers have decided they don’t do pro bono work, so now they want to drop him as a client.

Last month, Fowler’s legal team asked the court to change his bond conditions to free up credit. But apparently, that isn’t working. Unfortunately, all this is happening just when there was a possibility of negotiating another plea deal. (Read my blog posts here and here.) 

Quadriga Trustee releases report #7

EY, the trustee handling the bankruptcy for failed Canadian crypto exchange QuadrigaCX, released its 7th Report of the Monitor on Nov. 5.

According to the report, EY has received 17,053 claims totaling somewhere between CA$224 million and CA$290 million—depending on what exchange rate EY ends up using to convert the USD and crypto claims to Canadian dollars for disbursement.

EY has CA$39 million ready to distribute to affected Quadriga users, who submitted claims. But none of that money is going anywhere until the Canadian Revenue Agency finishes its audit of the exchange. (Ready my blog post for more details.)

Gensler goes to Washington

Gary Gensler has been picked to lead President-elect Joe Biden’s financial reform transition team. As Foreign Policy notes, Gensler, who was the head of the CFTC during the Obama years, is an aggressive regulator.

He is also well familiar with the world of crypto. He taught a course on blockchain at MIT Sloan. He suspects Ripple is a noncompliant security, and he told me in an interview for Decrypt that the SAFT construct—a once-popular idea for launching an initial coin offering—will not spare a token from securities laws. (He also thinks 99% of all ICOs are securities.)

Libra Shrugged author David Gerard said in a tweet that Gensler was excellent in the Libra hearing last July. Gensler also “helped clean up the 2008 financial crisis, he knows literally all the possible nonsense,” said Gerard.

Clearly, this is good news for bitcoin.

Nov. 15 — Before I said that OKEx offered the only fiat-to-crypto on/off ramp in China. That is inaccurate. P2P OTC exchanges *in general* are the only fiat on/off ramps for crypto traders in China and have been since Sept. 2017.

Nov. 16 — Previously, this story stated that Quadriga’s trustee has CA$30 million available to distribute to claimants. It’s been updated to correctly reflect that EY has CA$39 million (US$30 million) to distribute.

Confirmed: Reggie Fowler can’t pay his lawyers

Reginald Fowler’s lawyers confirmed that money is indeed at the center of a conflict between them and their client — and the main reason why they want to withdraw from the case. 

The news was revealed Friday in a telephone status call attended by Assistant US Attorneys Jessica Greenwood, Sheb Swett and Sam Rothschild; Fowler’s defense team, James McGovern, Michael Hefter, and Sam Rackear of Hogan Lovells, and Scott Rosenblum of Rosenblum Schwartz & Fry; and Fowler himself.

Fowler, a former NFL investor — who resides in Chandler, Arizona, and is free on bail — is accused of setting up a shadow banking service that has been linked to Crypto Capital, a Panamanian firm at the center of the New York Attorney General’s investigation into crypto firms Bitfinex and Tether.

As I wrote earlier, Fowler’s defense counsel have been careful about disclosing details on why they want to ditch their client, who they have been working with since Fowler was indicted in April 2019.

District Judge Andrew Carter began the call: “Defense, can you give me a little further elucidation regarding the grounds for your seeking to be relieved without getting into any privileged or confidential materials?”

Fowler’s attorney McGovern said the matter involved privileged and confidential information but added: “I think it is fair to say that it is of the nature that the government assumes in their filing, of a fee-based nature.” 

Judge Carter cut straight to the heart of the matter: “So it is fair to say, without getting into the details, this is about lawyers not getting paid?”

“Yes,” McGovern answered, but added it was “a little bit more than that.” He then suggested that his team file an ex-parte submission setting out the nature and specifics of the request to withdraw. “That way, we’ll provide the court with a substantial amount of information that will provide color for the entire discussion,” he said. 

Fowler is represented by two legal firms. Carter asked if the nature of the conflict was the same for both firms. “Yes,” responded Rosenblum, Fowler’s attorney at the second law firm.

Federal prosecutors have argued that Fowler’s defense can’t simply withdraw from the case without giving some type of explanation.

US Assistant Attorney Greenwood reiterated that argument, telling the judge that “there are significant portions of a fee arrangement that are not potentially privileged.” She suggested Fowler’s attorneys provide details in an ex-parte and then allow the government to access the non-privileged portions “so we can appropriately respond to the motion to withdraw.”  

Judge Carter agreed to allow Fowler’s defense team to file a submission under seal. “Once I receive those materials,” he said, “I will make a determination as to whether or not the document will remain under seal or whether or not there are portions that can, in fact, and should, in fact, be redacted and other portions that should be made public.”

The defense counsel said they would submit the document on Nov. 18.

So where is Fowler’s money?

Fowler has been having money problems for a while—problems that extend back to when the US Department of Justice froze his bank accounts in late 2018, leading to the collapse of the Alliance of American Football, a new football league that he cofounded and was a major investor in.

From there, things seem to have gotten worse.

Recall that in January 2020, Fowler rejected a plea deal that would have required him to forfeit $371 million. It was the forfeiture requirements that blew up the deal. Prosecutors hit back with a superseding indictment that added a new count: wire fraud.

On October 15, Law360, reported that Fowler’s legal team might be open to exploring for a second time potential options to resolve the charges, even though the new wire fraud charge complicated things.

And then, on October 23, Fowler’s defense team went to the court seeking to modify conditions of his bond so that he could pay for his defense. (Here is the original May 2019 bond conditions; here is their request for a change.)

Specifically, they wanted to change the bond conditions to enable Fowler to take credit out on properties he had acquired prior to February 2018 “when the alleged conspiracy began” without approval from pretrial services. And to remove the five properties posted as security for the $5 million bond.

Those properties, based on a rough estimate of looking at them on Zillow, are probably only worth around $1.5 million total.

Whatever happened after that — it clearly wasn’t enough to satisfy his attorneys.

Updated Nov. 14 to add the bit about Fowler’s accounts getting frozen in 2018 and the AAF.

Reginald Fowler’s lawyers want to quit. Did he neglect to pay them?

Reginald Fowler, the Arizona, businessman allegedly linked to hundreds of million of dollars in missing Crypto Capital funds, is about to lose his defense team. Did he neglect to pay them?

And knowing who their client was, did his lawyers ask for a large enough retainer in the event that something unexpected like, say, a superseding indictment might extend their work?

Crypto Capital is the payment processor that Tether and Bitfinex—and several other cryptocurrency firms—used to shuttle money around the globe as a workaround to the traditional banking system. Fowler allegedly helped out by opening up a network of bank accounts for them.

We can only guess the real reason Fowler’s lawyers are keen to drop their client at the moment, but court docs may offer clues. Here is the backstory:

Earlier this week, Fowler’s attorneys—James McGovern and Michael Hefter of Hogan Lovells US LLP—asked a New York judge for permission to withdraw from the case. (Here is their motion to withdraw filed on Nov. 9.)

(Fowler is also represented by Scott Rosenblum of Rosenblum Schwartz & Fry PC, though Rosenblum’s name is not on the motion.)

The lawyers claim they initially told Fowler their reasons for wanting to quit on February 26—coincidentally, just five days after the government added a fifth charge against Fowler in its superseding indictment and a month after Fowler forfeited on a reasonable sounding plea bargain.

In the months follower, the legal team informed Fowler both “orally and in writing on multiple occasions” of their grounds for wanting to withdraw. Now, after much back and forth, they have had enough: they are asking the court for permission to drop him.

McGovern and Hefter don’t offer a specific reason for wanting to quit in their motion, citing attorney-client privileged. But they argue the case has had “limited pertinent discovery,” Fowler has had ample time to find new counsel, and essentially, the case should go on just fine without them.

Federal prosecutors are not convinced. In a letter addressed to Andrew Carter, the Southern District of New York judge overseeing the case, they argue the defense counsel has’t presented enough facts for the court to decide on the motion. (Here is their response filed on Nov. 12.)

Specifically, they dispute the “limited pertinent discovery” claim, saying the government has so far produced over 370,000 pages of discovery, much of which they have already discussed in detail with the defense counsel.

Further, they argue that if this is about a “fee dispute,” the court needs to weigh other factors, such as “nonprivileged facts” about the fee arrangement, including whether a “more careful or prudent approach to the retainer agreement might have avoided the current problem”—i.e., McGovern and Hefter should have insisted on more money up front.

Finally, they claim that if Fowler’s lawyers’ leaving further delays the trial, the court should not allow it. After two postponements, the trial is currently scheduled for April 12, 2021. (It was originally slated to begin on April 28, 2020, and then got moved to January 11, 2021, before the current trial date.)

“Now, approximately five months before the current trial date, defense counsel seeks to withdraw from this matter based on facts they claim were discussed with the defendant as early as February 26, 2020—nearly nine months ago and before both prior adjournments in this case,” federal prosecutors said. “The current motions should be denied if allowing counsel to withdraw at this late stage would further delay trial.”

Read Part II: “Confirmed: Reggie Fowler can’t pay his lawyers

And Part III: Reggie Fowler, man linked to missing Bitfinex funds, hoodwinks his own defense team

(This story was updated on Nov. 13 to note that Fowler is also represented by Scott Rosenblum.)

News: Bitmarket CEO turns up dead, Bitfinex to NYAG: ‘Yeah but no but,’ more weirdness from Tron

human-figure-outline-imprinted-on-grass-picture-id177395889It’s no fun when the money’s all gone. Two weeks after Polish crypto exchange Bitmarket shut down due to “lack of liquidity,” the lifeless body of its CEO, Tobiasz Niemir, turned up in the woods. It’s not clear if he fell in with shady characters or he put that bullet in his head all by himself.  

Here is an interview with Niemer done shortly before his death.

You remember BTC-e, the crypto exchange that was shut down in mid-2017? The U.S. is now suing the exchange and its operator Alexander Vinnik to recover penalties of $100 million imposed by FinCEN for allegedly violating the Bank Secrecy Act. Vinnik, a Russian national, is facing extradition requests from both the U.S. and Russia. (Here are the court docs.) 

Binance has been shilling its centralized BNB token. The crypto exchange regularly burns (destroys) large numbers of the token to increase the value of whatever is left. The BNB burn is “meaningless nonsense to fool suckers,” writes David Gerard. “Anyone taking Binance posts about BNB seriously as any sort of trading signal is dumb enough to trade literally any shitcoin they see, and probably deserves to.”

The hearing for Reggie Fowler, the AAF investor tied to Bitfinex’s missing $850 million, has been moved to December. (Here are the court docs.) Also, recall that he was released on $5 million bail secured by several pieces of cheap real estate and two financially responsible people. Who were his wealthy friends? A source tells me it was his ex-wife Lori Fowler and Molly Stark, the director of Spiral Volleyball, a company he owned. It pays to stay on good terms with your exes.

(Update Dec. 22: Lori Fowler and Molly Stark signed the court documents for his release.)

Bitfinex and Tether filed court docs arguing once again that they are not doing any business in New York and tether is not a security. (Here is Bitfinex counsel Stuart Hoegner’s affidavit and an accompanying memorandum of law submitted by the company’s outside counsel). It all boils down to “yeah, but, no, but yeah.” We’ll hear from the judge on Monday, July 29 as to what he thinks. 

Big whoops: Swedish crypto exchange Quickbit says it has leaked the data of 300,000 customers. According to the exchange, a third-party contractor left the data unprotected while upgrading on the exchange’s servers. 

Elsewere in cryptoland 

After bidding an astounding $4.5 million in a charity auction for the privilege to have lunch with billionaire Warren Buffet, Tron CEO Justin Sun cancelled last minute, claiming a bad case of kidney stones. But come to find out Sun’s been on the lam from China since November 2018. He is living in San Francisco now, which was where the lunch was supposed to have taken place. 

Sun was, however, feeling well enough to attend the Tron after-party on July 25, even though nothing actually happened before the party, since lunch was cancelled.

According to Chia founder Bram Cohen, Sun also forgot to make a scheduled payment as part of Tron’s mid-2018 acquisition of file sharing service BitTorrent. Someone needs to explain to Bram that kidney stones can take a lot out of a person.

In other news, the IRS is sending out scary letters to bitcoin holders, reminding them that they need to report any gains in crypto trading and pay their taxes. “Taxpayers should take these letters very seriously, IRS Commissioner Chuck Rettig said. 

How did the IRS get all this info? Previously, a court ordered Coinbase to hand over the personal identifying information of customers who had transactions of $20,000 or more on the exchange between 2013 to 2015.

An MIT fellow thinks the structure of Facebook’s Libra was lifted verbatim from a paper that he and two other scholars published last year. What say you, Facebook? Are you stealing people’s ideas? It’s not like you’ve done anything like that in the past.

On the subject of Libra, one of the big selling points of the project was that it had 27 partners backing the project. But the CEO of Visa reminds us, no companies have officially joined yet. They’ve only signed non-binding letters of intent. 

Telegram is under the gun. The popular messaging service has sold $1.7 billion worth of its Gram tokens to investors. Now it needs to build a Gram wallet into Messenger by October or give all the money back — and we’re sure it doesn’t want to do that.  

Finally, Sergey Ivancheglo (aka “Come from Beyond”), the founder of IOTA and one of the project’s core developers, quit the IOTA Foundation. The two remaining directors are non-developers, but we’re sure they’ll handle everything just fine on their own. Nice bunch of people, really. 

 

News: Former Wex CEO arrested, CFTC probes BitMEX, Facebook’s Libra grilled in Washington

Since I’m now the editor of an ATM website, let’s start with bitcoin ATM news. LibertyX is adding 90 machines to its bitcoin ATM network. It now has over 1,000 machines.

Actually, these are not new machines. They are traditional cash ATMs that are bitcoin enabled. A software upgrade on the machines allows users to buy bitcoin with a debit card. The ATMs continue to dispense cash as well. 

According to CoinATM Radar, there are now 5,200 bitcoin ATM machines on this earth. Who the heck is using them? At least one operator, frustrated by a lack of business, has moved his Bitcoin ATM into his mother’s garage. 

In the exchange world —

Criminal in handcuffsDmitri Vasilev, the ex CEO of defunct crypto trading platform Wex, was arrested in Italy. Wex was a rebrand of BTC-e, an exchange that was shut down in 2017 for being a hub of criminal activity. BTC-e was also linked to the stolen bitcoin from Mt. Gox.  

Economist Nouriel Roubini — aka “Dr. Doom” — has stepped up his attack on crypto derivatives exchange BitMEX. In a scathing column in Project Syndicate, Roubini claims sources told him the exchange is being used daily for “money laundering on a massive scale by terrorists and other criminals from Russia, Iran, and elsewhere.” 

Days after Roubini’s column came out, Bloomberg reported that the CFTC was investigating whether BitMEX allowed Americans to trade on the platform. In fact, we know that crypto analyst Tone Vays, a New York resident, was trading on the platform until November 2018 when his account was terminated.

Regulators are cracking down on crypto exchanges. As The Block’s Larry Cermak points out, the situation is getting “quite serious.”

Elsewhere, Bitpoint, the Tokyo-based crypto exchange that was recently hacked, says it will fully refund victims in crypto, not cash. Roughly 50,000 users were impacted when $28 million worth of crypto vanished off the exchange. Two-thirds of the stolen funds belonged to customers of the exchange. 

U.S. crypto exchange Coinbase has killed off its loss-making crypto investment packages. After shutting down its crypto index fund due to a lack of interest, it closed its much ridiculed “Coinbase Bundle.” The product launched eight months ago with the aim of making it easy to purchase a market-weighted basket of cryptocurrencies. 

Malta-based Binance found itself $775,000 richer when it stumbled across nearly 10 million Stellar lumens (XLM). Turns out, the exchange had been accidentally staking (receiving dividends) on its customers lumens for almost a year. It’s planning to give the tokens away in an airdrop and will also add staking support for customers.  

Tether, the stablecoin issued by Bitfinex/Tether, is now running on Algorand, a new blockchain protocol. It’s also running on Omni, Ethereum, Tron and EOS. Presumably, running on a plethora of networks makes tether that much harder to shut down. It’s sort of like whack-a-mole. Try to take it off one network, and tether reappears on another. 

There are now officially more than $4 billion worth of tether sloshing around in the crypto markets. That number almost doubled when Tether inadvertently issued $5 billion unbacked tethers when it was helping Boston-based crypto exchange Poloniex transfer tethers from Omni to Tron. Oops.

Also interesting —

David Gerard is working on a book about the world’s worst initial coin offerings. He recently uncovered another cringe-worthy project. “Synthestech was an ICO to fund research into transmutation of elements, using cold fusion — turning copper into platinum. Literally, an ICO for alchemy. Turning your gold into their gold.” 

Facebook’s Libra had a busy week.

U.S. Secretary of Treasury Steven Mnuchin gave a press briefing on crypto at the White House. (Here’s the transcript.) He is concerned about the speculative nature of bitcoin. He’s also seriously worried Libra will be used for money laundering. He said the project has a long, long way to go, before he feels comfortable with it. 

Unlike bitcoin, which goes wildly up and down in price, Libra would have a stable value, because it would be pegged to a basket of major currencies, like the dollar, euro, and yen. Although, nobody is quite sure how that will work and what currencies it will be pegged to. Tether has a stable value, too, of course.

After his talk, Mnuchin flew off to Paris, where he met with finance ministers from six other powerful countries at the G7 summit. Everyone there agreed they need to push for the highest standards of regulation on Libra. 

Meanwhile, David Marcus, the head of the Libra project, got a grilling in Congress over privacy and trust issues. (You can watch the Senate hearing here and the House Financial Services Committee hearing here.) Nobody believes Facebook will keep its word on anything.

All of this is happening, of course, just after the social media giant got a $5 billion slap on the wrist for privacy violations following the Cambridge Analytica scandal.

The dumb tweet of the week award goes to Anthony Pompliano, co-founder of a digital asset fund Morgan Creek Digital, who says dollars aren’t moved digitally, they are moved electronically. For some reason, he has 250,000 followers on Twitter. The historic tweet even made it in FT Alphaville.

Apple co-founder Steve Wozniak has joined an energy-focused blockchain startup in Malta. The Mediterranean island nation is gung-ho about blockchain. It is also a haven for money laundering and the place where a female journalist who tried to expose government corruption was blown up in 2017. 

U.S authorities have charged former Silk Road narcotics vendor Hugh Brian Haney with money laundering. The darknet market was shut down in 2013. Special agents used blockchain analytics to track down Haney and seize $19 million worth of bitcoin. 

This clever young man has made a business out of helping crypto exchanges inflate their volume. 

ConsenSys founder Joseph Lubin is being sued by a former employee for $13 million. The employer is alleging fraud, breach of contract and unpaid profits.

Former bitcoin core developer Peter Todd is being sued for allegedly touching people inappropriately.

And finally, bitcoin ransomware Ryuk is steadily making its way into China.  

 

 

News: LEO getting pumped, Cryptopia scrambles to save its data, Poloniex says it’s stopped ignoring customers

This newsletter is reader supported. If you appreciate my work enough to buy me a beer or cup of coffee once a month, that’s all it costs to become a patron. I’m trying to pick up freelance gigs when I can, but one of the joys of writing for my own blog is I can write whatever I want, when I want. On to the news…

Bitfinex and LEO

Screen Shot 2019-05-29 at 5.43.17 PMUNIS SED LEO, the full name of Bitfinex’s shiny new utility token, is in its second week of trading. The price started at around $1, but it’s already climbed to a high of $1.52, according to CoinGecko. I’m sure the price increase is totally organic—not.

There are 1 billion LEO in circulation—660 million issued on Ethereum and 340 million issued on the EOS blockchain. 

Crypto Rank warns that 99.95% of LEO coins are owned by the top 100 holders. Also, Bitfinex still has not disclosed information about the investors. “We consider that the token can be manipulative,” Crypto Rank tweeted.

Given its $850 million shortfall, Bitfinex needs to pull in more money. It recently entered the initial exchange offering (IEO) business. IEOs are similar to initial coin offerings (ICOs), except that instead of handing you money directly to the token project, you give it to the exchange, which acts as a middleman and handles all of the due diligence.

Tethers

As the price of bitcoin goes up—at this moment, it is around $8,730—the number of tethers in circulation is going up, too. There are now more than $3 billion worth of tethers sloshing around in the crypto markets, pushing up the price of bitcoin.

Whale Alert says $25 million worth of tethers were taken out of the supply and put into the Tether Treasury. Kara Haas tells me, don’t worry, $150 million Ethereum-based tethers were just issued, and they more than make up for the difference.

Omni tethers, Ethereum tethers, Tron tethers. Tethers appear to be constantly coming and going, bouncing from one chain to another. It gets confusing. But maybe that is the point—to keep us confused. And to add to the jumble, tethers are now executing on EOS.

In the next couple of weeks, Tether is also planning to issue tethers on Blockstream’s federated sidechain Liquid. And later this year, the Lightning Network.

I updated my recent tether story to note that if you want to redeem your tethers via Tether, there is a minimum redemption of $100,000 worth—small detail. Also, I still haven’t found anyone who has actually redeemed their tethers.

Cryptopia’s data—held to ransom?

Cryptopia filed for liquidation on May 14. Liquidator Grant Thornton New Zealand is now scrambling to save the exchange’s data, held on servers hosted by PhoenixNAP in Arizona. The tech services wants $1.9 million to hand over the data.

Grant Thornton is worried Phoenix will erase the SQL database containing critical details of who owned what on the exchange. It filed for Chapter 15 and provisional relief in the Bankruptcy Court of the Southern District of New York. (Here is the motion.)

According to the motion, Cryptopia paid Phoenix for services through April. But when it offered to pay for May, Phoenix ended the service contract and “sought to extract” $1.9 million from the exchange. Grant Thornton says only $137,000 was due for the month of May. Phoenix also denied the liquidators access to the data.

On May 24, the court granted motion. (Here is the order.) Phoenix has to preserve the data for now, but Cryptopia has to pay $274,408 for May and June as security in the temporary restraining order. 

Meanwhile, Cryptopia liquidators’ first report is out. The New Zealand exchange owes 69 unsecured creditors $1.37 million (these are just the ones who have put in claims thus far) and secured creditors over $912,000, with an expected deficit of $1.63 million.

Turns out January 14, the day Cryptopia suffered its fatal hack was the exact same day Quadriga announced the death of its CEO Gerald Cotten, who, uh, had been dead since December 9. The two defunct exchanges had a few other things in common, which I outline in my first story for Decrypt.

Poloniex 

Living in Cambridge, I found it strange that nobody in the local blockchain community knew anyone who worked at Poloniex, based in Somerville, the next town over. I was told Polo staff kept a low profile for security reasons. But I also wonder if they were trying to avoid pissed off customers, whose inquiries they ignored for months.

When Circle acquired Polo in February 2018, it inherited 140,000 support tickets. Now, more than a year later, Circle says it’s all caught up. Polo’s customer support has been “completely transformed” and 95% of inquiries are now handled within 12 hours.

Coinbase

Yet another executive has left Coinbase, president and COO Asiff Hirji. This is the third C-level executive to leave the San Francisco crypto exchange this year.

Recently, Coinbase said it was offering a crypto debit card in the UK—a Visa with a direct link to your Coinbase wallet that lets you spend crypto anywhere Visa is accepted. Financial Time’s Izabella Kaminska thinks that could open a back door for dirty money.

Coinbase plans to add margin trading. Leveraged trading lets you supersize your trading power, because you are borrowing from the exchange, but it also supersizes your risk.

It is easy to understand why Coinbase would want to get a piece of the margin trading business. BitMEX has been reeling in the profits with its bitcoin derivative products. The company’s co-founder is now a billionaire who has so much money, he is giving it away.

Binance is also talking about putting margin trading on the menu.  

Elsewhere in cryptoland 

Kik, the messaging app that raised $100 million selling its kin token in 2017, thinks decades old securities laws need revamping. It wants to create a new Howey test.

The Canadian startup launched DefendCrypto.org, a crowdfunding effort to fight the SEC. It’s contributed $5 million in crypto, including its own kin token, toward the effort.

Ted Livingston, Kik’s CEO says there was no promise kin would go up in value, like a stock. But that is not what at all what he implied during a presale pitch.

Craig Wright, the self-proclaimed inventor of bitcoin, created a hoopla when he filed registrations for the bitcoin code and Satoshi white paper. Disagreements over the significance of the registration have spilled out into his Wikipedia page. Drive-by editors even tried to change Wright’s name to “Craig Steven Fart face.”

Taotao, a new crypto exchange is launching in Japan. It is fully licensed by the Financial Services Agency, the country’s financial watchdog, and it is 40% owned by Yahoo Japan.

As long as the price of bitcoin keeps going up, that is all that matters to bitcoiners. David Gerard delves into the origin of the phrase “Number go up.”

Geoff Goldberg, well-known for his battles against the relentless XRP armies, has been mass reported for calling out the bots that run rampant on twitter. No good deed goes unpunished, apparently. Twitter has effectively silenced him for seven days.

Finally, the Associated Press has a new entry on crypto—sorry, cryptocurrency.

# # #

Related stories:
Social media startup Kik is kicking back—at the SEC
Turns out, you can make money on horse manure, and tethers are worth just that
“QuadrigaCX traders lost money on Cryptopia on the same day in January”—my first story for Decrypt

 

 

Turns out, you can make money on horse manure, and tethers are worth just that

Screen Shot 2019-05-23 at 9.22.35 AM

Did you know, there is an actual business for horse manure?  

“It’s wild,” one horse farmer told Stable Management. “You can take this stuff that nobody wants and turn it into something of value.”  

You can do something similar in the crypto word. Shitexpress was a service that delivered horse poop anywhere in the world for bitcoin. Now, instead of sending actually poop, you can send tethers, a stablecoin issued by a company of the same name, Tether Limited.  

Tethers are a major source of liquidity in crypto markets. In lieu of the US dollar, you can use them to enter and exit positions in times of volatility. As such, tethers are responsible for the health and wellness of dozens of crypto exchanges, including Binance, Huobi, Bittrex, OKEx, Poloniex and others, that don’t have direct banking.

Inner workings

When Tether first entered the world in 2015, tethers were promised as an I.O.U. For years, Tether assured us that every tether was worth $1—as in, one actual US dollar that Tether had on hand that you could redeem your tethers for.  

Tether and its sister company Bitfinex, one of the largest crypto trading platforms by volume, are now being sued by the New York Attorney General. As court documents reveal more of the companies’ inner workings, people are asking: What are tethers worth? Is one tether worth a dollar? Less than a dollar? What can I get for my tethers?

For a while, the thinking was, well, maybe one tether is worth 74 cents, because in his first affidavit, filed on April 30, Stuart Hoegner, Bitfinex and Tether’s general counsel, said tethers were only 74% backed. In other words, Tether was operating a fractional reserve, kind of like a bank, but sans regulatory oversight or deposit insurance.

Tether updated its terms of service on February 26, to let you know tethers weren’t fully backed, but if you weren’t paying close attention—i.e., checking the Tether website every single day—you may have missed it. Tether says it can amend, change, or update its terms of service “at any time and without prior notice to you.”

Now, it’s looking like one tether is worth whatever someone gives you for it. If someone gives you bitcoin for a pile of tethers, hurray for you, that is the value of your tethers. If the person who got your tethers can pass them off to someone else for bitcoin, or another crypto of value, then yay for them! It’s called the greater fool theory, and, so far, it seems to be working—Tether is still trading on par with the dollar.   

But if you take those tethers to Tether, the company that, so far, has shoveled $3 billion worth of them onto the markets, and say, “Hey, can I redeem these for dollars, like you have been promising me all these years?,” they will most certainly tell you, “Sorry, no.”

Are you verified?

You can only redeem tethers under certain conditions, such as you bought loads of them directly from Tether—and you are not a US citizen.

In Hoegner’s recent affirmation, filed on May 21, he says you have to be a “verified” Tether customer to redeem tethers. 

“Only verified Tether customers are entitled to redeem tether from Tether for fiat on a 1:1 basis. There is no right of redemption from Tether on a 1:1 basis for any holders of tether who obtained the tokens on a secondary market platform and who are not verified Tether customers; on the contrary, such holders of tether have no relationship with Tether and are expressly precluded from redeeming tether on a 1:1 basis for Tether.”

In that paragraph, Hoegner reminds us three times—just to make sure we understand his point—that whoever you are and however you ended up with your tethers, the company is under no obligation to give you cash back for those tethers.

Per Tether’s terms of service, only those who bought tethers directly from Tether Limited—aka “validated users”—can redeem tethers. Anyone who got tethers on the “secondary market,” meaning, an exchange, is not able to redeem those tethers.

As court docs reveal, from November 2017 to December 2018, you could only buy tethers for cash directly from Bitfinex. Per Tether’s website, as of November 27, 2018, you could once again buy tethers directly from Tether. However, you have to buy a minimum of $100,0000 worth. According to Tether’s definition, Bitfinex is a secondary market.

Also, if you want to redeem tethers on Tether, you have to redeem a minimum of $100,000 worth at a time, and you can’t redeem more than once a week.

Further, if you live in the US, you have zero chance of ever redeeming your tethers for cash. Hoegner says that as of November 23, 2017, Tether ceased servicing customers in the US, and at this time, “no longer provides issues or redemption to any US customers.”

To summarize, if you are a US citizen holding a bag of tethers, Tether will give you nothing for them. If you acquired tether on Bitfinex or some other exchange, Tether owes you nothing. And if you don’t like that, too bad, because Tether also says in its terms that when you buy tethers, you waive any rights to “trial by jury or proceeding of any kind whatsoever.”

Wait, this doesn’t look like a dollar!

If you are one of the lucky few who purchased $100,000 or more worth of tethers via Tether’s website—and you are not a US citizen—and would like to redeem 100,000 or more of them, you may or may not get actual dollars back any time soon.

In its terms of service, Tether says it “reserves the right to delay redemption or withdrawal” of tether in the event of illiquidity—meaning, if they don’t happen to have cash on hand today. The company also says that it reserves the right to pay you “in-kind redemption of securities and other assets” held in its reserves.

Screen Shot 2019-05-27 at 12.06.21 PMBasically, that equates to, you could get shares of iFinex (Bitfinex and Tether’s parent company) or LEO tokens (a new token Bitfinex recently created) or whatever is in the soup bowl that day. And you may end up with something that has as much real world value as horse manure—just not as good for the roses.

Update (May 27): This story has been updated to reflect that if you buy or redeem tethers from Tether, you have to buy or redeem a minimum of $100,000 worth.

 

 

# # #

New York Supreme Court: Bitfinex may not touch Tether’s reserves for 90 days

Screen Shot 2019-05-16 at 8.30.44 PMBitfinex will not be able to dip into Tether’s reserves for 90 days, except to maintain normal business activities, according to a New York judge. The crypto exchange must also “promptly” hand over documents to the New York Attorney General (NYAG).

On May 16, New York Supreme court judge Joel M. Cohen granted Bitfinex’s motion to modify a preliminary injunction obtained by the NYAG. The judge called the original ruling vague, over broad, and not preliminary, meaning it lacked a specified time limit. He also held that the Martin Act—New York’s powerful anti-fraud law—“does not provide a roving mandate to regulate commercial activity.”

Decision and order

NYAG’s original petition consisted of two parts: a directive to Bitfinex and Tether to “produce evidence,” and a preliminary injunction to ensure that the respondents maintain a status quo while the NYAG’s investigation is ongoing.

In his 18-page decision and order, the judge granted the directive—Bitfinex and Tether still have to surrender documents—and agreed to modify the preliminary injunction, so as not to restrict the companies’ “ordinary business activities” any more than necessary.

The modified injunction spells out the following:

Tether cannot loan, extend credit or transfer assets—outside of its ordinary course of business—that would result in Bitfinex having claims on its reserves.  

(In an earlier letter to the court, iFinex, the parent company of Bitfinex and Tether, claims that Tether’s business model depends on it “making investments and asset purchases with the proceeds it derives from selling tethers.” Presumably, since this is an ordinary part of the company’s business, Tether can continue to invest its reserves, though it is not clear how it is investing the funds.)

Tether and Bitfinex cannot distribute or dividend any funds from Tether’s reserves to executives, employees, or agents of Bitfinex—except for payroll and normal payments to contractors and vendors.  

The companies are barred from destroying or altering any documents and communications, including material called for by the NYAG’s 2018 investigative subpoenas.  

If the NYAG wants to extend the 90-day injunction, two weeks before the injunction expires, it must submit a letter to the court. Bitfinex will then have seven days to submit a response. Based on that, the judge will decide whether to hold a hearing.

Victory, for now…

In a post on its website, Bitfinex revels in its victory. The exchange claims the NYAG sought the April 24 order “in bad faith” and vows to “vigorously defend” against the agency’s actions. Bitfinex adds that it remains committed to protecting its customers, its business, and its community against the NYAG’s “meritless claims.”

Most tether holders (the NYAG calls them “investors”) entered into their contracts under the assumption that tethers were fully backed. Each tether was supposedly worth $1—until late February, when Tether changed its terms without actually telling anyone.

Around the same time, Tether made a questionable loan to Bitfinex for $900 million. (Both companies are run by the same individuals, and the same people signed the agreement on either side.) Bitfinex has already dissipated $750 million of those funds. The remaining $150 million appear to be safe—at least for now.

To note, the investigation into whether Bitfinex violated the Martin Act is still ongoing. As a result of today’s ruling, Bitfinex still has to hand over documents and communications about its “business operations, relationships, customers, tax filings, and more.” The NYAG has been requesting those documents since November.

A transcript of the hearing is available here, courtesy of The Block. 

Update (May 19): I updated this story to clarify that there were two parts to NYAG’s original order. Additionally, I noted that Tether can still invest its reserves.

Update (May 21): I added a link to the full transcript of the hearing.

# # #

Related stories:
Bitfinex to NYAG: You have no authority! We did nothing wrong!
NYAG: Bitfinex needs to submit docs and stop dipping into Tether’s reserves
The curious case of Tether: a complete timeline of events

 

News: Money laundering in real time, Binance has you covered, maybe, and Bitfinex ready to IEO with LEO

A lot is going on in cryptoland right now—most of it involves investigations, a New York Attorney General (NYAG) lawsuit and missing funds, but I don’t want to sound negative.

The destiny of all crypto exchanges is to be hacked, apparently. Last year, thieves stole $950 million worth of cryptocurrency from exchanges. So, in many ways, it’s not surprising to hear that Binance, the largest crypto exchange by volume, got hacked a second time.

Binance, all funds SAFU

Thieves looted more than 7,000 BTC from Binance in a single transaction. The hackers, however, are not free yet! They still need to move that $41 million worth of BTC into fiat,  a feat that typically requires layering funds into smaller and smaller amounts (generally using a script of some sort), moving it through coin mixers, and then funneling it through various exchanges until they can exit into cash. 

Thanks to blockchain, we can watch this money laundering happen real time. The first transaction out of Binance consisted of of 44 outputs. The hackers have since consolidated the bitcoin into seven addresses of mostly amounts. Now we wait.

After the hack, Binance suspended all deposits and withdrawals for seven days. Traders on the platform can’t dump their bitcoin—or their tether. If bitcoin were to crash, they would be trapped. Fortunately, bitcoin is not crashing—it’s pumping. As I write, bitcoin is now at $6,800, having shot up $1,000 within a week.

According to one expert, the boost is partially due to “a rare alignment of celestial bodies forged in an ancient supernova”—thus, number go up. Makes total sense to me.

Binance says it has an insurance policy—its SAFU fund—to cover losses on the exchange. Nobody knows for certain what is in that fund, because there has never been an outside audit, but Binance’s CEO CZ says they have enough bitcoin to cover the losses. Phew!

In a recent blog post, CZ also said the exchange is revamping its security measures, including its 2FA, API and withdrawal validation processes. Also, withdrawals and deposits should resume “early next week.”

Bitfinex’s legal woes

If you need to get up to speed with the Bitfinex and Tether saga, I covered the NYAG lawsuit in my previous newsletter. Robert-Jan den Haan also wrote a complete timeline of Bitfinex’s history with its third-party payment processor Crypto Capital.

We have podcasts, too. I discuss the Bitfinex drama with Sasha Hodder on HodlCast, and Robert talks about it with Laura Shin on her Unconfirmed podcast.

In response to the NYAG’s court order, Bitfinex submitted a motion to vacate. The NYAG filed an opposition, and Bitfinex responded. At a hearing on May 6, New York Supreme Court judge Joel M. Cohen called the preliminary injunction “amorphous and endless.” The prelim will stand, but he is giving both parties a week to sort it out.

Bitcoin was selling at a 6% premium on Bitfinex—a sign that traders are willing to pay more to get rid of their tether and get their funds off the exchange. The price of bitcoin on the exchange was so off-kilter that CoinMarketCap, a website that aggregates bitcoin pricing from top exchanges, stopped pulling from Bitfinex.

The Bitfinex premium disappeared when Binance halted withdrawals on its platform, Larry Cermak doubts it has anything to do with Binance though. He thinks it’s because Bitfinex started processing cash withdrawals again.

Twitter user “Bitfinex’ed,” disagrees. When bitcoins and tethers are stuck on Binance,  that effectively reduces the supply and makes it that much easier to pump the market, he told me. He think prices will crash when Binance reopens withdrawals.

“I am lion, hear me roar”

Screen Shot 2019-05-10 at 9.39.37 PMBitfinex has a $851 million shortfall due to issues with Crypto Capital. How is it going to fix that? Here is an idea: Why not just print more money?

The exchange’s latest plan is a token sale, or exchange traded offering (ETO), on its own platform. It will be selling a new token LEO—as in lion.

Earlier this week, iFinex, the parent company of Bitfinex, released a white paper outlining the business proposition behind the token offering. Each LEO is worth 1 USDT, which is worth $1 USD. This is not the first time Bitfinex has issued a new token to pull itself out of a financial mess. (It created a BFX token after it was hacked in 2016.)

Bitfinex shareholder Dong Zhao told CoinDesk that iFinex has received hard and soft commitments of $1 billion for the token sale. Perfect. That should definitely eleviate all of Bitfinex’s money problems.

QuadrigaCX

Ernst & Young, the trustee for failed Canadian crypto exchange QuadrigaCX, released a preliminary report describing the company’s assets and liabilities. In a nut, Quadriga has US$21 million in assets, but owes creditors US$160 million.

Elsewhere

Recently, Negocie Coins, a crypto exchange that you probably have never heard of, rose to number three on CoinMarketCap’s top exchange’s list sorted by volume. How is this even possible? Clay Collins, founder of market data company Nomics, made a video, explaining how crypto exchanges use ticker stuffing and volume spamming to game the system.

FinCEN has released a new “interpretive  guidance” for money services businesses using cryptocurrency. If you are not sure if you are a money transmitter, David Gerard breaks it down for you. Sasha Hodder also covers the new guidance in Bitcoin Magazine. And there were several tweet storms—here, here, and here.

The FinCEN document has far reaching implications, such as, it appears Lightning Network (LN) operators qualify as money transmitters. Emin Gün Sirer says he is not surprised “given how similar LN is to hawala networks, and given the role hawala networks played in financing terrorism pre-9/11.”

The US banking committee is concerned about Facebook’s attempt at a cryptocurrency—Facebook coin—and how the social media giant is treating people’s’ financial information. It’s published an open letter with questions for Facebook.

Redditor u/BioBiro, who needed to acquire bitcoin for a totally legal purchase, complains about the rigamarole he had to go through. Among other things, “Now there’s two pictures of me and my driving license on their server for the rest of time, I guess.”

Consensus, CoinDesk’s big money maker conference, kicks off in New York next week. Last year it had 8,500 attendees, pulling in ~$17 million in ticket sales—and that’s before sponsorships. Arthur Hayes, CEO of bitcoin derivative exchange BitMEX, was one of several who rolled up to New York Hilton Midtown in a lambo.

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Bitfinex to NYAG: You have no authority! We did nothing wrong!

Screen Shot 2019-05-06 at 5.42.29 PMBitfinex has filed yet another rebuke to the New York Attorney General’s ex parte court order.

The April 24 order basically tells Bitfinex to submit documents and stop dipping into Tether’s reserves, which it has done, so far, to the tune of $750 million.

Bitfinex filed a motion to vacate or modify the order on May 3. On Friday, the Office of the Attorney General (OAG) opposed the motion. And on Sunday, Bitfinex filed a response to the opposition. The reply memorandum in further support of the motion to vacate or modify the order was filed by law firms Morgan, Lewis & Bockius LLP and Steptoe & Johnson LLP.

In the memo, Bitfinex argues that “nothing in the Attorney General’s opposition papers justifies the ex parte order having been issued in the first place.” It lists a bunch of reasons for this—essentially, a lot of “buts,” which equate to Bitfinex saying, “It wasn’t me, you can’t prove it, and anyway, nobody was harmed by the thing I totally didn’t do.”

Here is a summary—also, I am not a lawyer. 

But, tethers are not a securities!

The OAG claims Bitfinex violated the Martin Act, New York’s anti-fraud law, which grants the agency expansive powers to conduct investigations of securities fraud.

Bitfinex argues that the OAG did not even try to explain how tethers (the dollar-backed coins issued by Bitfinex’s affiliate Tether) qualify as securities or commodities in the first place. In its opposition, this is what the OAG did say, in a footnote:

“The Motion to Vacate wrongly suggests that an eventual Martin Act claim stands or falls on whether ‘tethers’ are securities or commodities. It does not. The Bitfinex trading platform transacts in both securities and commodities (like bitcoin), and is of course at the core of the fraudulent conduct set forth in OAG’s application.”

This looks like an attempt by Bitfinex to pull the OAG into the weeds, and the OAG is not going there. The fact that Bitfinex does trade in securities and commodities (the CFTC considers bitcoin a commodity, and the SEC considers most ICO tokens to be securities) is enough to bring Bitfinex under the OAG’s purview. ‘Nuff said. 

But, this is so disruptive!

The ex parte order is “hugely disruptive,” says Bitfinex, because it freezes $2.1 billion of Tether reserves—what’s currently left to back the 2.8 billion tethers in circulation—prohibiting any investment of any kind, for the indefinite future. 

In other words, Bitfinex feels like it can do whatever it wants with the cash that tether holders gave it for safe keeping. Tether works like an I.O.U., which means Bitfinex is supposed to hold onto that money for redemptions only.  

The big reason Bitfinex wants to bend the rules here is that it is desperate for cash to stay in operation. If it can’t get that cash from somewhere, the exchange is potentially in danger of running aground, or getting into even more trouble with regulators. At this point, Bitfinex is even trying to raise $1 billion in a token offering. 

But, we didn’t do anything wrong!

Bitfinex argues it has not committed fraud. It has taken hundreds of millions out of Tether’s reserves, but that is okay, because it updated Tether’s terms of service to make it clear that reserves could include loans to affiliates. What’s more, Bitfinex says it updated the terms before it drew a line of credit from Tether for $900 million.

(It has so far dissipated $750 million of that loan—which was signed by the same people on either side of the transaction—with access to another $150 million.)

In its memo, Bitfinex says:

“This disclosure gave anyone holding or considering buying tether the opportunity to take their money elsewhere if they chose, defeating any allegations of fraud.” 

In fact, Tether did update its terms of service on its website on February 26, 2019, but it did so silently. It was not until two weeks later, when someone inadvertently stumbled upon the change, that the news became public. In contrast, a bank would totally be expected to reveal such a move—at the very least, to its regulators.  

The OAG also claims that in mid-2018, Bitfinex failed to disclose the loss of $851 million related to Crypto Capital, an intermediary that the exchange was using to wire money to its customers. Bitfinex argues that, as a private company, it had “no duty to disclose its internal financial matters to customers.”

If Bitfinex were to go belly up all of a sudden, traders could potentially be out of their funds, but apparently, that is none of their business. Also, Bitfinex went beyond not disclosing the loss. It even lied about it, telling its customers that rumors of its insolvency were a “targeted campaign based on nothing but fiction.”  

The OAG’s opposition to Bitfinex’s move to vacate, literally has an entire section (see “Background”) that basically says, “We’ve caught these guys lying repeatedly, here are the lies,” which Bitfinex does not even address in its memo.

But, nobody has been harmed!

The OAG’s job is to protect the public, but Bitfinex says “there has been no harm to tether holders supposedly being defrauded, much less harm that is either ongoing or irreparable.” Particularly now, it says, after it made the details of its credit transaction—the one where it borrowed $900 million from Tether—fully public.  

“Holders of tether are doing so with eyes wide open,” Bitfinex says. “They may redeem at any time, and Tether has ample assets to honor those requests.”

Ample assets, that is, as long as everybody doesn’t ask for their money back all at once. Bitfinex’s general counsel Stuart Hoegner already stated in his affidavit, which accompanied the company’s move to vacate, that tethers are only 74% backed.  

Tether’s operation fits the definition of a fractional reserve system, which is what banks do, which is why banks have a lot of rules and also backing and deposit insurance.  

But, “the balance of equities favors Bitfinex and Tether!”

Bitfinex and Tether would be fine, if the OAG would just go away. The agency is doing more harm than good, Bitfinex argues. 

The exchange argues that a preliminary injunction would not protect anyone, but would instead cause “great disruption” to Bitfinex and Tether—”ultimately to the detriment of market participants on whose behalf the attorney general purports to be acting.”

It maintains that it needs access to Tether’s holdings because it needs the “liquidity for normal operations.” That is, Bitfinex admits it does not have enough cash on hand, without dipping into the reserves.

But, what’s good for Bitfinex is good for Tether. “For its part, Tether has a keen interest in ensuring that Bitfinex, as a dominant platform for Tether’s products and known affiliate, can operate as normal,” the company says. 

Besides, the OAG has no business “attempting to dictate how two private companies may deal with one another and deploy their funds,” says Bitfinex.

It maintains the OAG’s actions have actually done harm. In the weeks leading up the order, the crypto market was rallying after an extended downturn. In its court document, Bitfinex writes: 

“This rally was halted by this case, which resulted in an approximate loss of $10 billion across dozens of cryptocurrencies in one hour of the April 24, 2019 order becoming public.”

Not only that, but Bitfinex itself was harmed by the publicity brought on by the OAG’s lawsuit. The exchange says the balance of it cold wallets “have fallen sharply, an indication that customers have been drawing down their holdings.”

It is likely that Bitfinex is going to have to surrender the documents the OAG is asking for at some point—and that may be what it is trying to avoid. Its attempts to vacate the OAG’s order appears to be an effort to buy time, while it scrambles to figure out how to come up with the nearly $1 billion it needs to stay afloat—a token sale may be just the thing.

Update:

On May 6, New York Supreme Court judge Joel M. Cohen ruled that the OAG’s ex parte order should remain in effect, at least in part. However, he thinks the injunction is “amorphous and endless.” He gives the two parties a week to work out a compromise and submit new proposals for what the scope of the injunction should be.

On May 13, iFinex, the parent company of Bitfinex and Tether, submitted this letter and this proposed order to the court. Among other things, iFinex is asking for a 45-day limit on the injunction and to replace three paragraphs—one of which would allow Tether employees to get paid using Tether’s reserves.

For its part, the OAG submitted this letter and this proposed order. The OAG is not opposed to Tether’s employees being paid, but it wants Tether to to pay its employees using transaction fees—not reserves.

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What happened next?
NY Supreme Court Judge: Bitfinex may not touch Tether’s reserves for 90 days

Related stories:
NYAG: Bitfinex needs to submit docs and stop dipping into Tether’s reserves
The curious case of Tether: a complete timeline of events

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NYAG: Bitfinex needs to submit docs and stop dipping into Tether’s reserves

Screen Shot 2019-05-05 at 1.09.10 PMBitfinex was not happy with the New York Attorney General’s April 24 ex parte court order, which demanded that the crypto exchange stop dipping into Tether’s cash reserves and hand over documents that were requested in November 2018. It struck back with a strongly worded motion to vacate, or overturn the order.

On May 3, the Office of the Attorney General (OAG) submitted an opposition to that motion. The agency argues that Bitfinex violated the Martin Act, New York’s anti-fraud law, widely considered the most severe blue sky law in the country.

Legally, Tether and Bitfinex are separate entities, but they are managed by the same individuals. To note, the OAG’s order does not prohibit Bitfinex from operating. Nor does it prohibit Tether from issuing or redeeming tethers (USDT) for U.S. dollars.

The order simply prohibits Bitfinex from helping itself to anymore of Tether’s funds. This, of course, poses a problem for Bitfinex, because it desperately needs cash to stay afloat. (It’s latest effort to fill the gap is a token sale, but that is another matter.)

There are currently 2.8 billion USDT in circulation, and each of them is supposed to be backed 1:1 with the dollar, but as of now, they are only 74% backed.

The alleged fraud

The OAG began investigating Bitfinex late last year. If there is any question as to how Bitfinex allegedly committed fraud and misled its customers, the OAG spells that out clearly in its memorandum. I’m paraphrasing some this. 

Bitfinex failed to disclose to its clients that it had lost $851 million of “wrongfully commingled” client and corporate funds to Crypto Capital, an overseas entity, which it used as an intermediary to wire US dollars to traders on its platform.

Bitfinex knew in mid-to-late 2018 that Crypto Capital’s inability—or unwillingness—to return the funds meant it would have problems filling out client requests to withdraw cash off the exchange. Nevertheless, it told the public that rumors of insolvency were a “targeted campaign based on nothing but fiction.”  

In November 2018, Bitfinex tried to cover up the loss by moving (at least) $625 million from Tether’s legitimate bank account into Bitfinex’s account. In return, Bitfinex “credited” $625 million to Tether’s accounts with Crypto Capital. OAG says the credit was “illusory,” because the money at Crypto Capital was lost or inaccessible.

(In its motion to vacate, the OAG notes that Bitfinex contradicted itself by saying the “credit” Bitfinex gave to Tether was $675 million—a $50 million discrepancy.)

Bitfinex later shifted to a new strategy. It engaged in “an undisclosed and conflicted transaction” to let Bitfinex dip even further into Tether’s reserves. The exchange took out a $900 million loan from Tether, secured by shares of iFinex—the parent company of both Tether and Bitfinex. OAG says there is little reason to believe the iFinex shares have any real value, especially in the event iFinex itself defaults.

In March 2019, $900 million represented almost half Tether’s available reserves at the time, but Bitfinex and Tether did not disclose this to its customers. In fact, up until February 2019, Tether telling its customers that USDT was fully backed. Bitfinex told the OAG that it has already dissipated $750 million of Tether’s funds.

Bitfinex demonstrates “a pattern of undisclosed, conflicted, and deceptive conduct” that its customers would “find material, and indeed, essential to buying tethers and trading assets, like bitcoin, on the Bitfinex platform,” the OAG said.

In its motion to vacate, Bitfinex argues that the Martin Act stands or falls on whether tethers are securities or commodities. It does not, the OAG says. In fact:

“The Bitfinex trading platform transacts in both securities and commodities (like bitcoin) and is of course at the core of the fraudulent conduct set forth in the OAG’s application.”

Related events

The OAG points to other events that underscore the need to maintain the status quo.

Since the original order, two individuals, Reginald Fowler and Ravid Yosef, were charged with bank fraud in connection with their operation of a “shadow bank.” Fowler was arrested on April 30, while Yosef is still at large.

The operation processed hundreds of millions of dollars of unregulated transactions on behalf of numerous cryptocurrency exchanges and associated entities—“several of which,” the OAG says, are at the center of its own investigation. 

This appears to indicate the OAG’s is looking into other exchanges, which makes sense, given it sent out a questionnaire to more than a dozen cryptocurrency exchanges in April 2018, requesting they disclose key information about their operations.

While the OAG does not specifically state that the “shadow bank” is Crypto Capital, it points to the Memorandum in Support of Detention of Fowler, which said that companies associated with Fowler “failed to return $851 million to a client of the Defendant’s shadow bank.” 

The OAG’s investigation is still ongoing.

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News: More Bitfinex drama, Crypto Capital, a dodgy football businessman and a relationship coach

There is so much going on now with Bitfinex. My eyes are burning and my head hurts from reading piles of court docs. Here is a rundown of all the latest—and then some.

The New York Attorney General (NYAG) is suing Bitfinex and Tether, saying tethers (USDT) are not fully backed—after $850 million funneled through third-party payment processor Crypto Capital has gone missing.  

Screen Shot 2019-05-04 at 2.10.08 PMIt’s still not clear where all that money went. Bitfinex says the funds were “seized and safeguarded” by government authorities in Portugal, Poland and the U.S. The NYAG says the money was lost. It wants Bitfinex to stop dipping into Tether’s reserves and to handover a mountain of documents.

In response to the NYAG’s ex parte order, Tether general counsel Stuart Hoegner filed an affidavit accompanied by a motion to vacate from outside counsel Zoe Phillips of Morgan Lewis. Hoegner admits $2.8 billion worth of tethers are only 74% backed, but claims “Tether is not at risk.” Morgan says New York has no jurisdiction over Tether or Bitfinex. Meanwhile, the NYAG has filed an opposition. It wants Bitfinex to stop messing around.

Football businessman Reggie Fowler and “co-conspirator” Ravid Yosef were charged with running a “shadow banking” service for crypto exchanges. This all loops back to Crypto Capital, which Bitfinex and Tether were using to solve their banking woes.    

In an odd twist, the cryptocurrency saga is crossing over into the sports world. Fowler was the original main investor in the Alliance of American Football (AAF), an attempt to create a new football league. The league filed for bankruptcy last month—after Fowler was unable to deliver, because the DoJ had frozen his bank accounts last fall.  

The US government thinks Fowler is a flight risk and wants him held without bail. The FBI has also found a “Master US Workbook,” detailing the operations of a massive “cryptocurrency scheme.” They found it with email subpoenas, which sounds like it was being kept on a Google Drive?

Yosef is still at large. She appears to have split her time between Tel Aviv and Los Angeles. This is her LinkedIn profile. She works as a relationship coach and looks to be the sister of Crypto Capital’s Oz Yosef (aka “Ozzie Joseph”), who was likely the “Oz” chatting with “Merlin” documented in NYAG’s suit against Bitfinex.  

All eyes are on Tether right now. Bloomberg reveals the Commodity and Futures Trading Commission (CFTC) has been investigating whether Tether actually had a stockpile of cash to support the currency. The DoJ is also looking into issues raised by the NYAG.

Meanwhile, bitcoin is selling for a $300 to $400 premium on Bitfinex — a sign that traders are willing to pay more for bitcoin, so they can dump their tethers and get their funds off the exchange. This isn’t the first time we’ve seen this sort of thing. Bitcoin sold at a premium on Mt. Gox and QuadrigaCX before those exchanges collapsed.

Bitfinex is still in the ring, but it needs cash. The exchange is now trying to cover its Tether shortfalls by raising money via—of all things—a token sale. It plans to raise $1 billion in an initial exchange offering (IEO) by selling its LEO token. CoinDesk wrote a story on it, and even linked to my Tether timeline.

Did a sex-trafficking site sparked the Crypto Capital investigation? Also, Decrypt’s Tim Copeland takes a look at the payment processor’s dark past.

Tether wants to move tethers from Omni to the Tron blockchain. Tron planned to offer a 20% incentive to Omni USDT holders to convert to Tron USDT on Huobi and OkEx exchanges. But given the “recent news” about Bitfinex and Tether, it is delaying the rewards program.  

Kara Haas has an article on AccountingWeb and a Twitter thread on the potential accounting implications of Tether’s definition of “reserves.”

Coinbase is bidding adieu to yet another executive. Earn.com founder Balaji Srinivasan, who served as the exchange’s CTO for a year, is leaving. It looks like his departure comes after he served the minimum agreed period with Coinbase. 

Elsewhere, BreakerMag is shutting down. The crypto publication had a lot of good stories in its short life, including this unforgettable one by Laurie Penny, who survived a bitcoin cruise to tell about it. David Gerard wrote an obituary for the magazine.

The Los Angeles Ballet is suing MovieCoin, accusing the film finance startup of trying to pay a $200,000 pledge in worthless tokens—you can’t run a ballet on shit coins.

Police in Germany and Finland have shut down two dark markets, Wall Street Market and Valhalla. And a mystery Git ransomware is wiping Git repository commits and replacing them with a ransom note demanding Bitcoin, as this Redditor details.

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US Government wants man at center of massive ‘cryptocurrency scheme’ held without bail

The U.S. government wants a football businessman linked to an investigation into $850 million of missing Tether and Bitfinex funds to be held without bail.

According to a memorandum in support of detention filed with the District Court of Arizona on May 1, Reginald Fowler poses a serious flight risk due to his overseas connections and access to hundreds of millions of dollars.

The court doc also presents startling new twists in an already tangled plot—a “Master US Workbook,” which details the financial operations of the “cryptocurrency scheme,” fake bond certificates worth billions of dollars, and a counterfeit money operation.

Reggie Fowler

Screen Shot 2019-05-02 at 1.33.58 PMFowler, 60, is a former minority owner of the Minnesota Vikings and the original main investor in the Alliance of American Football —an attempt to form a new football league. The AAF collapsed when Fowler withdrew funding—after the Department of Justice froze his bank accounts in late 2018.

I did a search on Pacer and got a number of hits showing Fowler has been in and out of courts for years. In fact, in 2005, ESPN reported that he had been sued 36 times.

Most recently, Fowler was charged with bank fraud and operating an unlicensed money services business. These crimes relate to his alleged involvement in a “shadow bank” on behalf of cryptocurrency exchanges, in which hundreds of millions of dollars passed through accounts that he controlled in jurisdictions around the world. 

Fowler operated Global Trading Solutions LLC in the US, which provided services for Global Trade Solutions AG, the Zug, Switzerland-based parent company of Crypto Capital Corp, a third-party payment processor. At one time or another, Crypto Capital serviced QuadrigaCX, Bitfinex, Kraken, Binance, and BitMEX—some of the top crypto exchanges.

In October and November 2018, five U.S. bank accounts were frozen—three of them were Fowler’s personal accounts and two were held under Global Trading Solutions. On April 11, Fowler was indicted in the Southern District of New York. And on April 30, he was arrested in Chandler, Arizona, where he lives. 

Fowler is looking at spending the rest of his life in prison—the bank fraud counts alone carry a maximum sentence of 30 years. 

The cryptocurrency scheme was not limited to the U.S. Fowler set up bank accounts around the world and coordinated the scheme with co-conspirators in Israel, Switzerland, and Canada, according to court documents. The scheme involves a “staggering amount of money,” and the government believes that Fowler still has access to overseas bank accounts.  

Master US Workbook

Even more revealing, via email search warrants, federal prosecutors have obtained a document entitled “Master US Workbook,” which details the operations of the scheme. The workbook lists 60 bank accounts. It shows the scheme received over $740 million in 2018 alone. As of January 2019, the combined bank balance was $345 million. Approximately $50 million is held in U.S. accounts. The rest is located overseas. 

Apparently, Fowler had “shown a willingness to help himself to these funds in the past.” In mid-2018, he sent $60 million from scheme accounts to his personal bank accounts, feds said. Scheme members set up a “10% fund” from client deposits, available for his personal use. The government does not know the location of those accounts.

After Fowler’s bank accounts were seized in October 2018, he agreed to cooperate with FBI agents and keep the investigation confidential, which he did not do. When agents sent him emails, he would share those with other scheme members.  

Other illegal activity

Fowler appears to have been involved with other illegal activities, such as wire fraud related to the 10% fund. He also tried to take out loans by presenting banks with fraudulent bond certificates worth billions of dollars. 

FBI agents also found evidence that Fowler was involved in a counterfeit money operation. They found $14,000 in fake bills consisting of sheets of $100 bills in a filing cabinet in his Chandler, Arizona office.

After examining the sheets, a special agent for the U.S. Secret Service “determined that they were undergoing a process common in counterfeiting schemes to turn paper bills into passable currency. In fact, the FBI also recovered black carbon paper from the office, which is often used as part of this process for making believable counterfeit bills.”

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