Tether (USDT) is the OG stablecoin that started it all. But Tether, the company, has also been plagued by scandals, lawsuits and investigations ever since it launched in 2014. Some people even accuse it of being a giant Ponzi scheme that manipulates the crypto market. Yet, Tether remains the biggest and most widely used stablecoin.
This report looks into how that happened:
Tether’s recent announcement that it is buying Bitcoin.
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Tether Accumulating Bitcoin
In May 2023, Tether announced its new strategy of funneling 15% of its net profit into accumulating Bitcoin to “diversify” its reserves, of which the majority are in U.S. Treasury Bills, according to the company. In Q1 2023, that would equal more than $200M, taking the $1.48 billion of net profit generated by Tether into account:
But there is already $1.5 billion worth of Bitcoin on Tether’s reported balance sheet. Why would the company want more?
Because it believes in Bitcoin’s long-term value proposition and its alignment with Tether’s goal of maintaining a secure and reliable stablecoin, at least according to CTO, Paolo Ardoino. But it’s definitely completely different from Terra Foundation buying BTC. Pinky promise:
• Tether Limited Inc., incorporated in Hong Kong in 2014, is the company that launched and operates the Tether platform and issues the Tether tokens.
• Tether Operations Limited, incorporated in the British Virgin Islands in 2017, is a subsidiary of Tether Holdings Limited that provides operational support and services to Tether Limited Inc.
• Tether International Limited, incorporated in the British Virgin Islands in 2017, is another subsidiary of Tether Holdings Limited that provides marketing and business development services to Tether Limited Inc.
Tether tokens are issued and redeemed on different blockchains, such as Ethereum, Tron and others. Tether tokens exist on different token protocols, such as ERC-20 and TRC-20. Tether Limited acts as the issuer of Tether tokens on these blockchains and claims to maintain a 1-to-1 pegging of Tether tokens to fiat currencies or gold, and backed 100% by its reserves.
Every USDT issued by Tether is backed 100% by its reserves. The company claims to back its tokens with cash and cash equivalents, other assets and receivables from loans and also gold and recently Bitcoin.
Over the years and under pressure from regulators and the crypto industry, Tether has decided to become more transparent about the collateral backing its issued stablecoins. It publishes breakdowns of its reserves on its website.
According to the latest report, as of March 31, 2023, Tether had $81.8 billion in total assets and $79.4 billion in total liabilities:
Tether's reserves, according to its own statements, have shifted from commercial paper to mostly short-term duration US Treasury Bills. But questions still remain about the auditing process and some of Tether’s business practices. According to Tether itself, the company is highly profitable.
The Tether Revenues
Tether is making bank. According to its Consolidated Reserves Report, the company held $2.4 billion more assets than liabilities after Q1 2023. It turned a $1.48 billion profit in that quarter alone.
How Does Tether Make Money?
Tether's main source of revenue is the fees it charges for issuing and redeeming its tokens. Every time someone wants to buy or sell Tether tokens, they have to pay a small fee to Tether Limited, which is the issuer of the tokens. These fees vary depending on the blockchain and the amount of tokens involved, but they are usually around 0.1% or less.
Tether's other source of revenue is the interest income it earns from lending its reserves to third parties. Tether lends some of its reserves to other entities, such as exchanges, traders, or institutions, in exchange for interest payments and collateral. These loans are secured by assets that are worth more than the loan amount, and they are subject to margin calls if the value of the collateral drops below a certain level.
Tether's third source of revenue is the gains it makes from investing its reserves in various assets. Tether invests some of its reserves in different types of assets, such as corporate bonds, funds, precious metals, digital tokens, and other investments. These assets generate returns for Tether in the form of dividends, interest, capital appreciation, or price appreciation. Tether also buys and sells these assets depending on market conditions and its liquidity needs.
So where does all this money go?
Tether recently announced that some of the profits would be used to buy Bitcoin. That generated quite a few headlines, but Tether has been no stranger to those, as you are about to see.
Tether Controversies ─ A Long List
Tether says that for every USDT in circulation, there is one US dollar in its bank account. Sounds legit, but not everyone believes that. Tether has been accused of lying about its reserves and printing tokens out of thin air to pump the crypto market. Tether has also been accused of being secretive about its reserves, and has never provided a full audit by a reputable firm but relied on attestation reports and “independent auditors.”
Here’s a little best-of-Tether-controversies:
• The New York Attorney General's Office (NYAG) probe: In 2019, the NYAG accused Tether and Bitfinex of covering up an $850 million loss of customer funds by using Tether's reserves. In 2021, Tether and Bitfinex agreed to pay $18.5 million in fines and stop operating in New York. They also agreed to submit quarterly reports on their reserves for two years.
• The Paradise Papers leak: In 2017, a massive leak of offshore documents revealed that Tether and Bitfinex shared the same owners and executives, namely Giancarlo Devasini and Philip Potter. This raised questions about the independence and transparency of Tether's operations and audits.
• The Crypto Capital connection: In 2019, Crypto Capital, a Panama-based payment processor that handled funds for Tether and Bitfinex, was accused of money laundering and fraud by several authorities around the world. Crypto Capital claimed to have $850 million of Tether's and Bitfinex's funds frozen by various governments, which was the same amount that the NYAG alleged was missing.
• The USDT printing spree: In 2020 and 2021, Tether issued billions of new tokens at a rapid pace, coinciding with surges in the price of Bitcoin and other cryptocurrencies. This led to accusations that Tether was manipulating the market by creating artificial demand and inflating prices. Some critics also doubted that Tether had enough reserves to back all the new tokens.
• The commercial paper mystery: In 2021, Tether revealed that most of its reserves were held in commercial paper, which are short-term debt instruments issued by corporations. However, Tether did not disclose the names or ratings of the issuers, nor did it provide any proof of ownership or verification by a third party. This raised suspicions that Tether was holding low-quality or even non-existent commercial paper.
• The Protos investigation: In 2021, Protos Media published a series of articles based on an extensive analysis of blockchain data related to Tether's transactions. The investigation revealed that only a handful of entities were responsible for acquiring most of the USDT ever issued by Tether, and that some of them were linked to market manipulation and fraud allegations. The investigation also exposed some of the hidden connections and conflicts of interest between Tether and other crypto companies.
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