Tether has been in the news lately, as have Bitfinex. This is not the first time. It has long been suspected that Tether doesn’t actually have a 1:1 backing to the USD, which only recently was revealed. They fired auditors, were allegedly hacked, etc, etc. The situation is so fishy and so research in the matter is a necessity.
Now, by no means, is this qualified as exhaustive research. Consider it more of a brainstorming through online research to what factors we may want to pay more attention.
What better place to start than with Tether itself. Tether has printed $2.82B USDT to date.
This is fairly mundane and boring information. Not a lot can be gleaned from it and so it is time to start clicking more links.
Let’s have a look at the “created by” address.
There’s not much there. To be clear, I did a lot more clicking before I got to this. But then I decided to click the hyperlinked “Click here for raw transaction…” and we are met with the following lovely page.
Now there is a bit to unpack here because a several things struck my eye initially. The category, data, propertyname, and subcategory fields were my main focus.
Tether is listed under “Financial and insurance activities” as its category. If I were to try and query this on the search engine of my choosing it would return many irrelevant results. Next, looking down we see the data field.
The data field classifies Tether as “The next paradigm of money.” That doesn’t give us much to go on but it does foreshadow what to expect.
Financial and insurance activities + The next paradigm of money = something I am weary of with trusted third parties.
Next we have the propertyname.
The propertyname field has Tether listed as TetherUS. Essentially, it is evoking the trust of the US Dollar. Scroll a bit further and we get what we came for.
The subcategory field classifies Tether as “Activities auxiliary to financial service and insurance activities.”
Now we are cooking.
This is a unique enough phrase to search on the internet that will yield relevant and specific results we can then use to extrapolate what it is exactly that Tether is up to.
Upon searching the subcategory phrase on DuckDuckGo we find many relevant hits. For example, we are met with a page outlining various SIC (Standard Industrial Classification) Codes. In this instance, we learn this phrasing belongs to the “Hierarchy of Class 6619.”
What activities does the Class 6619 contain?
This class includes activities auxiliary to financial service activities not elsewhere classified, such as:
~ financial transaction processing and settlement activities, including for credit card transactions
~ investment advisory services
~ activities of mortgage advisers and brokers
This class also includes:
~ trustee, fiduciary and custody services on a fee or contract basis
This is helpful but not enough. Onward we go. If we look up SIC code 6619, we find an obscure UK website which links to the UK Standard Industrial Classification of Economic Activities 2007 (SIC 2007).
At this point I’m like, “great…don’t care…they are representing USD and not GBP.” I decided to search US government websites to see if the Class 6619 is a valid SIC code in the US. Now when you search SIC Codes between 60–67, you will not find anything in the 66 division because, and I am assuming here, they don’t recognize unsanctioned auxiliary services that don’t comply with regulation. That’s a wild guess.
On the basis of this assumption, I decided to look up other divisions within that hierarchy of SIC codes. The only section that provides any near parallel to what I discovered in the UK SIC 2007 guide is the 60 division, “Depository Institutions.”
You have to scroll down to where you see “609 -Functions Related to Depository Banking.” Here we can find SIC code 6099 -Functions Related to Depository Banking, Not Elsewhere Classified. Let’s dig in to that.
Industry Examples
Common types of examples within SIC Code 6099 — Functions Related to Depository Banking, Not Elsewhere Classified are:
Automated clearinghouses
Check cashing agencies
Check clearinghouse associations
Clearinghouse associations bank or check
Deposit brokers
Electronic funds transfer networks including switching
Escrow institutions other than real estate
Fiduciary agencies other than real estate or trust
Foreign currency exchanges
Money order issuance
Regional clearinghouse associations
Representative offices of foreign banks, excluding agents and branches
Safe deposit companies
Tax certificate sale and redemption agencies
Travelers’ check issuance
This is starting to look like we are on the right track. Even more important is when we scroll down to peruse the extended SIC codes list of 7-digit SIC codes.
It would appear Tether ticks off at least two of these categories and since they are supposedly tethered to USD they would need to comply with the regulations required of each of the subcategories it represents.
It is also important to note that SIC code 6099 is correlated with NAICS (North American Industry Classification System) code 523991 — Trust, Fiduciary, and Custody Activities.
Scroll up or ctrl+f to where it says “Hierarchy of Class 6619.” You will see that in that class it includes “trustee, fiduciary and custody services on a fee or contract basis.”
Tether most closely resembles a fiduciary agency.
This is where I get weird, and it shows in my research. Even though I have a vague understanding and could very roughly define the term “fiduciary,” I still like to research its agreed upon definition to see if anything can be gleaned from that.
There were a couple things that stuck out: keywords like trust and custody, “fiduciary relationship” and “undue influence.” When looking up fiduciary relationship I don’t get any new information save for a related term, “fiduciary duty.”
Noun 1. fiduciary duty — the legal duty of a fiduciary to act in the best interests of the beneficiary
This doesn’t give me enough information and going back to “undue influence” didn’t give me much of anything I was looking for either. I decided to search the term “fiduciary duty” and got a great breakdown by Investopedia.
This is important. Tether has a fiduciary duty to act solely in the interest of their principal (beneficiary).
And so who is the beneficiary here when Giancarlo Devasini (Chief Financial Officer of Tether) signs both as borrower for iFinex and as lender for Tether?
We get a hint that we are likely correct in our thinking when reading the following quote from the Office of the Attorney General of the state of New York’s publication “Virtual Markets Integrity Initiative Report.”
In it the OAG finds:
substantial potential for conflicts between the pursuits of the platform, platform insiders, and platform clients.
So again, there is a clear conflict of interest here and the OAG recognizes it. Going back to Investopedia’s description of “fiduciary duty,” we see that:
The party designated as the fiduciary owes the legal duty to a principal, and strict care is taken to ensure no conflict of interest arises between the fiduciary and his principal.
OAG would posit, I would assume, that Tether does NOT have a fiduciary duty to iFinex and instead to its platform clients, as the platform itself and insiders are the one-and-the-same with those of Tether.
Investopedia picks up the ball where we left off.
Elements of a Breach of Fiduciary Duty Claim
In order to prevail in court on a claim for this tort, you must be able to prove the following elements:
Duty: The defendant had a duty or duties to the plaintiff, such as the duty of good faith and fair dealing, the duty of full disclosure, or the duty of loyalty (the exact nature of the duty or duties will depend on the facts of the case).
Breach: The defendant breached this duty in some way, such as by failing to disclose certain information, misappropriation of funds, misuse of influential position, neglect of responsibilities, or misrepresentation with regard to a statement of fact.
Damages: The plaintiff must have suffered damages, for which the breach was the proximate cause; a breach without damages is not actionable.
One could argue iFinex and, by proxy, Tether breached their fiduciary duty to platform clients on all counts. As such, when the tether breaks and the rock crashes into the egg below, we can expect class action lawsuits, indictments, extraditions, and things of that nature. It would be reasonable to assume that at some point it will be determined that Tether reserves barely cover a fraction of customer deposits and so it begs the question.
If Tether only issues tether in exchange for fiat (i.e. “Tether may issue 10,000,000 U.S. dollar tethers to Bitfinex by transmitting that amount from Tether’s digital “wallet” to Bitfinex’s wallet. In exchange, Bitfinex would transfer $10,000,000 to Tether via account transfer or wire.”), and their reserves are standing at $2.8B, and at least $1.1B of tether reserves has not been seized by authorities, and iFinex should have client deposits that exceed that amount, etc, then why is “Merlin” begging Crypto Capital to payout withdrawal requests from platform clients of iFinex?
What is Crypto Capital and, by association, Global Trading Solutions’ involvement in all this?
If paying out withdrawals is such a precarious activity for exchanges what is the bulk of this money moving through crypto, if not client deposits?
And what is with the incestuous relationships with all the various exchanges, payment processors, mining companies, backdoor brokers, and media publications in the wider crypto ecosystem?