Tether’s USDT Drama Continues

It’s time for a safer alternative.

On November 19, 2017 the startup company Tether was hacked, having $30,950,000 USDT taken from its treasury wallet. Tether converts cash into digital currency, to anchor or tether the value to the price of national currencies like the US dollar, the Euro, and the Yen.

USDT is a cryptocurrency token pegged to the US dollar, which is fully backed by assets in the company’s reserve account, or is it?

Following the recent hack there has been a lot of scrutiny placed on Tether and within days new details began to emerge. Reports from independent journalists as well as mainstream financial sites ran articles last week, detailing Tethers suspicious relationship with cryptocurrency exchange Bitfinex. Allegations of money laundering and other criminal activity currently surrounds the two companies.

Now there are new questions about Tether’s business practices that have investors very concerned.

As pointed out in the last article covering the Tether hack:

“Tether must keep the equivalent amount of dollars as the Tethers they “print” in order for there to be a value correlation of 1:1.”

“Tether has never provided any evidence of this money existing. No one knows where they bank, or if they even have a bank. Within the last 6 months, they have created close to $600 million in Tether, $224 in the last 20 days alone.”

The lack of transparency has led many to believe that Tether may not have a true 1:1 ratio Tether to USD. Now we might actually have proof…

A tweet by @Bitfinexed highlights a reddit conversation in which bfx_drew “admits that Tethers are not being printed based on people buying Tethers… but people converting other cryptos into USDT”.

“Wait, what? Tethers are only supposed to be created on DEPOSITS OF USD. Not ‘cryptos being converted’. Oops.”

This would totally contradict Tether’s public claims and supposed business practices.

A recent “audit” released by Tether, which should have answered questions has just added to the confusion. An article by @Bitfinexed breaks down in detail the many issues within the document.

First of all, the “audit” is not an audit but an internal memo. A memo with the expressed purpose to “assist management” and not to be used by third parties.

Furthermore, the memo, created by Friedman LLP for Tether, does not evaluate the legality of Tether’s dealings, they are merely checking to see if money is in an account.

Here are some of the key takeaways from the rest of the document:

  1. The report redacts the name of the banks where Tether has its money
  2. Friedman doesn’t know if Tether can even access the funds.
  3. Friedman doesn’t know if the funds are in fact for Tether token redemptions or committed to something else (such as margin debt on Bitfinex)
  4. Perhaps most importantly, Tether may not have any legal obligation to honor the redemption of Tethers for money.
  5. Oh, and the audit with Ledger Labs never took place…

What Does All of This Mean?

This essentially means that tethers may be completely non-redeemable. Even if Tether has the money they may not pay you. Even worse, that money could have multiple liabilities against it.

Currently, it appears that Tether’s model is:

  1. Print Tethers
  2. Inflate Bitcoin Prices using the newly printed Tether USDT.
  3. Everyone gets excited, opens coinbase account to buy BTC because “wow prices are going up/FOMO/I heard it was a smart investment/everybody is buying it so I better too”...
  4. Sell Bitcoins bought with counterfeit money for real money.

@Bitfinexed does a good job explaining how this practice could relate to fraudulent activity at Bitfinex.

“Bitfinex can have ‘full reserves’ of Tether, while loaning them all out on Bitfinex, because the money is in the same accounts, but in reality, you have Tether holders and that money being used for lending at the same time.”
“So, despite the fact that “they have all of the money”, there would be more than one claim against it, a Tether claim, and a margin debt on Bitfinex.”

Following the Tether story, it seems that things are beginning to unravel at an ever-increasing pace. Even now, a cadre of cyber sleuths are monitoring the movement of funds from the Tether hack. Putting Tether under the microscope is bringing all sorts of suspicious activity to light.

It is only a matter of time before this story gets blown wide open…

But Wait… There’s More Recent Tether Questionable Activity

There’s been 45 Million More Fraudulent Tethers, printed in just a few hours! 95 Million in just under 2 days. The Tether “scam” is accelerating. 95 Million Tethers issued despite the fact they just got ‘hacked’.

And those tethers are continuing to pump into Bitcoin, whose prices are at an all time high and soaring over $12,000 USD at some exchanges during the time of this writing.

What Can Investors Do to Protect Themselves?

USDT has become a popular token amongst cryptocurrency traders seeking a stable asset to hold profits in between trades. Tether also acts as a dollar substitute that can be moved between exchanges. Many investors and exchanges will be seeking a safe alternative as Tether’s problems continue.

One platform that is offering a safe solution is BitShares. The BitShares platform uses Market Pegged Assets (MPA). Market Pegged Assets are freely traded digital assets whose value is meant to track that of a conventional underlying asset.

Put more simply, MPAs allow the creation of tokens which have a value pegged to another asset. This allows holders of the token to achieve the stability they need while maintaining the properties and advantages of a cryptocurrency.

BitUSD is an MPA pegged to the US dollar and could be used as an alternative to Tether, with a minimum of 200% collateral value of the underlying utility asset BTS securing it’s value. These assets are not limited to fiat and can include commodities like gold and silver. BitAssets can provide stability by anchoring themselves to a stable asset such as the US dollar (bitUSD), the Chinese Yuan (bitCNY), and Euro (bitEURO).

BitUSD and other secure market pegged assets could very well be the solution to the recent Tether crisis. Many exchanges are starting to realize this, and are moving to list bitUSD and bitCNY pairings with popular cryptocurrencies.

To top it all off, these assets can be traded on the BitShares Decentralized Exchange, where the security of funds rests in the hands of the user. Not only can you use MPAs to avoid the risk of volatility, but you can also avoid the risk of leaving your funds on a centralized exchange that is vulnerable to attackers.

BitShares and the BitShares DEX were designed to create a fair and trustless system for the new digital economy. Exchanges and traders may want to consider integrating bitUSD as a substitute for Tether.