Stablecoins, in addition to being one of the best real world use cases for cryptocurrency, may save America’s bacon. With the bloom off the rose for purchases of Treasuries by the traditional players, crypto enthusiasts are snapping up dollar-backed stablecoins effectively investing in U.S. public debt. However, while stablecoins may be tomorrow’s best bet, investors need to think twice before including Tether’s USD₮ stablecoins in that future.
As ZeroHedge readers have been previously cautioned, “Tether is issued by an offshore entity and is famous for operating in the gray-zone of financial regulation.” That murky gray zone has cast a shadow over Tether from its launch that continue to this day.
In 2018, the Office of the Attorney General of the State of New York initiated an investigation regarding alleged fraud in connection with Tether and its “sister” exchange platform, Bitfinex. From its inception in 2014 through February 2019, Tether represented that every outstanding tether was backed by– and thus should be valued at– exactly one USD. But the NYAG ultimately determined that in 2017, Bitfinex and Tether “misled the market about Tether’s U.S. backing,” and that in 2019, “Bitfinex and Tether misrepresented the status of the Tether reserves after Bitfinex suffered a massive loss of funds.” In February 2021, AG Letitia James, announced a settlement with Bitfinex and Tether requiring the companies to pay $18.5 million in penalties and cease any further trading activity with New York residents.
In 2021, the U.S. Commodity Futures Trading Commission ordered Tether to pay a $41 million penalty after finding that from June 2016 to February 2019, Tether “misrepresented to customers and the market that Tether maintained sufficient U.S. dollar reserves to back every USD₮ in circulation with the ‘equivalent amount of corresponding fiat currency’ held by Tether and ‘safely deposited’ in Tether’s bank accounts.” In truth, the company’s reserves were only fully backed by fiat currency reserves held in Tether’s bank accounts for “27.6% of the days in a 26-month sample time period” between 2016 to 2018. Additionally, the CFTC found that Tether “failed to disclose that it included unsecured receivables and non-fiat assets in its reserves, and that Tether falsely represented that it would undergo routine, professional audits to demonstrate that it maintained ‘100% reserves at all times’ even though Tether reserves were not audited.
Lingering questions about its reserve assets and who holds them continue to follow Tether. S&P issued a risk assessment of eight of the leading stablecoins this past December. With one being the highest rating and five the lowest, S&P awarded Tether a lowly four. The S&P report also states that Tether’s weaknesses include “limited transparency on reserve management and risk appetite, lack of a regulatory framework, no asset segregation to protect against the issuer’s insolvency, and limitations to USD₮’s primary redeemability.
Other questions raise red flags about foreign-owned and operated Tether. Documents disclosed in June 2023 from the New York Attorney General investigation reveal that Tether’s reserves were historically comprised of significant holdings in commercial paper and securities issued by Chinese entities. These holdings included securities issued by major state-owned entities such as China Construction Bank Corp., Industrial and Commercial Bank of China Ltd., and Agricultural Bank of China. While Tether claims that it no longer holds China-related assets, such assurances have not been independently confirmed through an audit.
A JPMorgan report released this February stated that it viewed “increasing concentration in tether over the past year as a negative for the stablecoin universe and the crypto ecosystem more broadly.”
It warned that there is a continued possibility of investigations into Tether and that “tether is mostly at risk given its lack of regulatory compliance and transparency.” The report also indicated that the U.S. Treasury’s Office of Foreign Assets Control (OFAC) could exert some control on Tether’s offshore usage due to Tether’s “dependence on the American market and pending regulations.” JPMorgan analysts found that “indirect measures and international cooperation could potentially hinder the use of Tether.”
This March, Tether reached an impressive $100 billion market cap. Yet that dominance by a company that to this day has never submitted to an audit could impact all stablecoins. As Rajeev Bamra, Head of DeFi and Digital Assets Strategy at Moody’s Investors Service told Reuters “anything going wrong with Tether is going to impact those banking institutions at the end of the day”.
It’s also concerning that Tether has a pattern of avoiding public scrutiny, as the Wall Street Journal reported last year:
[Tether] has never disclosed its ownership structure, the details of how its assets are managed and how it would prevent a wave of redemptions from toppling the cryptocurrency. When questions were raised by investors about its lending programs, it refused to disclose the borrowers or the collateral they posted.
Given its practices, Tether represents a clear and present financial risk to consumers, which is why Consumers’ Research is issuing a Consumer Warning on Tether. We find little security in consumers’ converting their money into a stablecoin that refuses its minimum responsibility to submit to a rigorous independent financial audit. As a sort of neighborhood watchman of the marketplace, Consumers’ Research is committed to calling out bad actors to protect consumers and ultimately contribute to a better functioning markets.
Will Hild is the executive director of Consumers’ Research, the nation’s oldest consumer protection organization.
