
Tether says its cryptocurrency is worth $2B–but its audit failed - jmkni
https://arstechnica.com/tech-policy/2018/02/tether-says-its-cryptocurrency-is-worth-2-billion-but-its-audit-failed/
======
koolba
> But those "frequent professional audits" have been slow in coming. The
> accounting firm Friedman LLP had been working on an audit of Tether and
> Bitfinex—a cryptocurrency exchange that is closely linked to Tether—since
> May. But last Saturday, Tether admitted to Coindesk that its relationship
> with Friedman had "dissolved."

In the normal business world it's a _very_ bad sign when your auditor fires
you as a customer.

> So it's possible Tether is keeping the identity of its bank secret to avoid
> attracting scrutiny from local regulators. This could also explain why some
> of Tether's funds are being held in the personal account of a Tether
> associate—perhaps the bank would have refused to open the account if it had
> known it was really for Tether.

When this finally blows up it's going to blow up big. How pervasive is parking
money in tether in the crypto world? Is it bitfinex specific? I'm curious how
bad the shock waves will be across the industry.

~~~
simias
What surprises me most is that despite all these red flags USDT still holds
its peg mostly well. Right now it trades less than a cent below the dollar on
kraken for instance. It seems like cryptocurrency traders are paradoxically
pretty trusting.

~~~
panarky
I agree that the audit failure makes Tether look super shady.

But when traders continue to buy and sell within 1% of parity, that's a signal
that maybe there's more going on here.

I don't buy the concept that Bitfinex can somehow rig the price on other
exchanges. If traders are all selling Tether, while simultaneously new Tethers
are getting printed, then the price should tank.

When the price doesn't tank, that should tell us there's more to the story.

~~~
Sangermaine
Yes, gullibility and greed.

------
hluska
'"Given the excruciatingly detailed procedures Friedman was undertaking for
the relatively simple balance sheet of Tether, it became clear that an audit
would be unattainable in a reasonable time frame," a Tether spokesperson told
Ars by email.'

In my mind, this paragraph is the article's money shot. If I was a legitimate
business person issuing a security meant to fill Tether's place, I would pray
that my auditor was excruciatingly detailed.

And frankly, there is no way in hell that a security like Tether could have a
'relatively simple balance sheet' in light of their problems receiving US
currency combined with rapidly issuing more tokens.

This is bad...and the fact that a PR person said that means things are bad
beyond belief.

~~~
arisAlexis
not really. In cryptospace governments want to ban things. Measures need.to be
taken as this is just a centralized tool for the decentralised economy

~~~
JumpCrisscross
> _In cryptospace governments want to ban things_

American regulators default to permissiveness, particularly in the face of new
financial technologies. Their _laissez faire_ comment-and-wait approach to
Bitcoin, ICOs and related events is not particularly jarring. But India's
regulators are of the shoot-first-ask-questions-later variety [1].
Cryptocurrencies are a unique global phenomenon of immense regulatory
_restraint_ , not zeal. (This is probably explained by cryptocurrency's
technical complexity, growth and metastasisation as well as some regulators
having been won over by the pitch.)

[1]
[https://en.wikipedia.org/wiki/Licence_Raj](https://en.wikipedia.org/wiki/Licence_Raj)

~~~
tCfD
The stewards of Bitcoin and cryptocurrency messaging have done a fantastic job
persuading the popular finance and technology influence classes that
cryptocurrency is nothing less than a new internet- scale revolution. The
corollary implication being of course that obstructing it would be tantamount
to banning the internet in the early 90s, with correspondingly dire
consequences for a country's or company's growth prospects. The hitherto
extremely light touch of most regulatory bodies (bordering on enthusiastic
support in many cases) reflects the general sentiment that nobody wants to be
remembered the myopic Luddite Who Banned Bitcoin. This effect is amplified by
the penetration of its more mundane corruptive potential, as a number of
journalists and politicians themselves are materially interested in promoting
state-level cryptocurrency adoption. The highly close-held supply of all
cryptocurrencies has helped perpetuate the narrative of cryptocurrency's
inevitable triumph through extraordinarily centralized domination of liquidity
and thus price and market cap signalling. But eventually even diehard HODLbugs
have to cash in...

------
bhouston
> In the normal business world it's a very bad sign when your auditor fires
> you as a customer.

My wife is a professional auditor and she said that this would only happen if
the client was pushing for the auditor to certify something that the auditor
wasn't comfortable with. Of course she has no direct knowledge of this case.
She said it was a really bad sign and she almost never sees this happen.

~~~
aviv
We also don't usually see a private company literally print money.

~~~
jobigoud
Banks are private companies and they create money all the time when they make
loans.

~~~
LargeWu
There's a major difference between fractional reserve banking and printing
money. The former is a well-understood and well-regulated practice that
actually drives economic activity. The latter is likely what Bitfinex is doing
with Tether, is 100% counter to their stated practices, and serves only to
artificially drive up the price of other assets.

~~~
whataretensors
> The former is a well-understood and well-regulated practice that actually
> drives economic activity

There's a lot of money in convincing people this is true but I have my doubts.

~~~
LargeWu
Care to enumerate your doubts? It's a pretty well established concept in
economics.

------
apo
There are similarities to Mt. Gox. One of the most important is the near-
complete lack of user panic, despite ample warnings, right up to the collapse.

I remember vividly seeing Mt. Gox users warned to leave. They didn't. Somehow,
they discounted or ignored every warning. Then they became angry when their
money was stolen. Then they claimed Mt. Gox was responsible for their loss.

History seems to be repeating itself here. Tether holders somehow don't see,
can't see, or refuse to see the writing on the wall.

~~~
conanbatt
The difference between mtGox and this is that bitfinex is seemingly infinitely
solvent. Some estimates are like 20-30 million revenue per day. Its the top
running exchange. I doubt they would expose themselves to a bankrupcy event
having such a cash cow.

I believe they did market manipulation, and that they are committing fraud
with tether, but I'm not convinced tether is not solvent.

~~~
AJ007
What if they covered up other breaches?

~~~
sushid
We would have seen the losses happen in real time on various blockchains for
ETH, BTC, BCH, etc.

------
sanxiyn
Nobody seems to discuss this, so I want to mention it here: for the first time
in history, Tether was revoked in January 31st. Amount was 30 million.

[http://omniexplorer.info/lookuptx.aspx?txid=24db40680654b8b5...](http://omniexplorer.info/lookuptx.aspx?txid=24db40680654b8b505fda3e96be722ca10f341a129c99260509eb5d84655f1f0)

Specifically, its transaction type is 56.
[https://github.com/OmniLayer/spec#field-transaction-
type](https://github.com/OmniLayer/spec#field-transaction-type)

I don't think this is a strong evidence, but if Tether is issued out of thin
air, it is somewhat strange to make revocation. Does someone have a good
explanation?

~~~
random_rr
Keeping pace with the market. Tether burning coins is an expected and healthy
part of their supply management strategy. Think about how you'd keep a finite-
supply coin pegged to a value - you'd print and burn tokens as needed to
stabilize the value of the coin.

~~~
citricsquid
This is not what Tether is intended to be. Tether is not pegged to the value
of 1 USD. The value of Tether does not need to be stabilized. Tether is a 1
for 1 USD backed coin, meaning it's entirely within the scope of Tether for
the value of 1USDT to reach $1.10, $1.20 or even $1.50 -- if the market
decides that is the value of it.

The point of Tether is that for each USDT there is a corresponding USD in an
account belonging to Tether. If Tether were printing USDT to keep 1 USDT
valued at 1 USD then they would be violating what Tether is publicly stated to
be.

The whitepaper can be found here: [https://tether.to/wp-
content/uploads/2016/06/TetherWhitePape...](https://tether.to/wp-
content/uploads/2016/06/TetherWhitePaper.pdf)

~~~
jellicle
But if you can buy a new Tetherbuck straight from Tether for $1USD, issued in
unlimited amounts, why and how could the value of a Tetherbuck ever exceed
$1USD?

And on the flip side, if Tether redeems any Tetherbuck for $1USD, on demand
and quickly and without solvency concerns, why and how could the value of a
Tetherbuck ever drop below $1USD?

Any deviation from $1USD value means the market disbelieves one of the above
things.

------
Nursie
I think this is going to continue to be interesting to watch.

It seems likely that the tether company is a fraud, given the size of their
January print runs. It seems likely that not only has tether been used by its
owners as a way to prop up crypto-currency prices, but to acquire bitcoin and
other coins under false pretences.

There's no proof either way, but the lack of audit is very, very fishy.

Further, I watched the USDT/USD market on kraken on Friday.All morning there
was downward pressure, buy-walls of millions of dollars were eaten into and
destroyed over the course of a few hours, until there was no bid volume at all
down to about 90 cents.

All of a sudden, in the course of about two minutes, a rapid cascade of very
small trades (a few tens to a few hundreds of dollars) propelled it back to
~98.5 cents. It looked really dodgy.

~~~
flipp3r
>All of a sudden, in the course of about two minutes, a rapid cascade of very
small trades (a few tens to a few hundreds of dollars) propelled it back to
~98.5 cents. It looked really dodgy.

What's dodgy about that? I think everyone here would love to buy a virtual
dollar for 90 cents. Especially given the behavior of the market the past
month.

~~~
Nursie
If you're not seeing it then I'm not going to argue with you, neither of us
has the data to prove any of what might be going on.

However multiple trades of very similar amounts in under a second, after a
long, massive slide in much larger amounts in the morning, looks very dodgy to
me. Especially when these trades appear at the last possible moment, when all
market resistance to freefall has just disappeared.

But sure, whatever. _Could be_ legit.

------
bradleyjg
It's pretty clear that tether is a scam. A more interesting question to me is
whether a legitimate tether could break even. That is, is the risk-free demand
deposit interest rate high enough to support the services that would be needed
for a full reserve cryptocoin? Services which include creation/redemption
facilities, proof of work rewards to drive a blockchain, and third party
audits to ensure that the trusts aren't stealing the reserves.

For reference the current market cap of tether is (allegedly) around $2.2B,
which at the overnight rate would generate around $30 million a year in
interest.

~~~
Ajedi32
Could an actual bank perhaps decide to issue cryptocurrency to its customers
at a $1/coin exchange rate? Wouldn't be full reserve, given that it's a bank,
but the deposits would be FDIC-insured, right?

~~~
JumpCrisscross
> _Could an actual bank perhaps decide to issue cryptocurrency to its
> customers at a $1 /coin exchange rate?_

Banks have to know their customers (KYC) [1]. This requirement is
multifarious; banks have KYC obligations to the justice system, the U.S.
Treasury, systemic financial regulators ( _e.g._ the Fed), specific financial
regulators ( _e.g._ FINRA, the FDIC), _et cetera_.

In the olden days, a discerning gentleman might request an anonymous, numbered
Swiss bank account [2]. Over time, it became clear these "discerning
gentlemen" were politicians hiding graft money or arms and drug runners
storing profits. Anonymous accounts were globally banned and KYC laws were
born.

This is the fundamental flaw of all "stablecoins". They're an overly-complex
instantiation of anonymous (and illegal) bank accounts. Needless to say, over-
complicating something doesn't make it go away.

[1]
[https://en.wikipedia.org/wiki/Know_your_customer](https://en.wikipedia.org/wiki/Know_your_customer)

[2]
[https://en.wikipedia.org/wiki/Numbered_bank_account](https://en.wikipedia.org/wiki/Numbered_bank_account)

~~~
Ajedi32
So does this mean Bearer Deposit Notes[1] are illegal?

[1]:
[https://www.tdsecurities.com/tds/pdfs/Manulife_Bank.pdf](https://www.tdsecurities.com/tds/pdfs/Manulife_Bank.pdf)

~~~
JumpCrisscross
Bearer bonds [1] are intriguing, mechanically and historically. You will note,
under the Restrictions section of your Manulife memorandum [2], that its sale
outside Canada or to Americans is prohibited. This is because the issuance of
such instruments was practically banned in the United States in 1982 [3].

Bearer instruments are, while prevalent, in decline [4]. It is an active area
of global financial regulation [5] where even institutions like the Bank of
England have to work to get their notes issued and treated properly.

TL; DR A reputable offshore bank _might_ be able to issue a bearer token
redeemable for one British pound or Canadian dollar _provided_ they go to
great extents to ensure they don't end up in the hands of Americans or anyone
in the United States. It would be an uphill battle, however, which in turn
necessitates a heavy issuance premium.

[1]
[https://en.wikipedia.org/wiki/Bearer_bond](https://en.wikipedia.org/wiki/Bearer_bond)

[2]
[https://www.tdsecurities.com/tds/pdfs/Manulife_Bank.pdf](https://www.tdsecurities.com/tds/pdfs/Manulife_Bank.pdf)

[3] [https://www.investopedia.com/articles/bonds/08/bearer-
bond.a...](https://www.investopedia.com/articles/bonds/08/bearer-bond.asp)

[4] [https://ftalphaville.ft.com/2016/04/04/2158236/so-you-
though...](https://ftalphaville.ft.com/2016/04/04/2158236/so-you-thought-
bearer-securities-werent-a-thing-anymore/)

[5] [http://www.fatf-
gafi.org/media/fatf/documents/reports/ML%20a...](http://www.fatf-
gafi.org/media/fatf/documents/reports/ML%20and%20TF%20in%20the%20Securities%20Sector.pdf)

~~~
bradleyjg
I looked into the law that banned bearer bonds, TEFRA, and I think maybe the
relevant provisions wouldn't apply to instruments that mature immediately
(which is certainly less than 183 days) and pay not interest (including in the
way zero coupon bonds pay interest).

------
paulie_a
tether is a slow moving train crash that is fascinating to watch

------
dingo_bat
I am piling up the popcorn. Cannot wait for the conclusion of the USDT saga.

------
everdev
This is the moment when many in the cryptocurrency space predicted the next
big selloff.

Bitcoin down 10% this morning.

~~~
sschueller
A lot seem to be selling bitcoin for Tether...

------
arisAlexis
misleading article. No audit "failed"

~~~
pmlnr
What does, in your read, mean 'auditor backed out from auditing'?

~~~
arisAlexis
nobody knows who fired who, the author is speculating.

------
qwerty456127
Every currency is only worth what people believe it is, nothing else, it
doesn't really matter what did it actually cost to make it. Even if that's
true, trying to convince people it's not backed the way it was meant to is
nearly as questionable ethically as issuing unbaked coins probably was. If
people keep believing nobody will get hurt, if people stop believing the
results can be catastrophic. Of course this is a slippery idea itself yet the
matter is too serious to just ignore it.

~~~
Nursie
People have already been hurt - if it's not backed, bitfinex have helped
themselves to two billion dollars worth of crytocurrency though fraud.

Other people have paid more for crytocurrency than they might have had to
because this fraud would have pushed up prices.

You're begging us to let criminal activity carry on.

~~~
qwerty456127
I am not begging you anything but think twice. I personally am not an
interested party, I have no blockchain-related assets but I think about all
those people who has and I see 2 possible outcomes: if it gets publicly
confirmed that the coins were not backed many innocent people will loose their
legitimate investments and if it's doesn't they won't, and this doesn't depend
on whether the coins actually were backed or not. I don't advocate scam but
punishing them may be not really worth the global consequences for people who
were not consciously involved. I am not telling what should the people
investigating this should choose, I am only telling they should consciously
consider all potential results of their decisions. I personally believe that
it usually is more important to save what we still have than to revenge what
we have lost and that we should always think about the people who happen to be
in a less advantageous position than we ourselves are at the time. In fact I
love to speak unpopular and "inappropriate" things aloud and question
"unquestionable", somebody has to anyway.

~~~
Nursie
It's not revenge, it's revealing the truth about the market, without which the
market cannot function correctly. You are asking for continuation of the lie
of overvaluation, which can _only_ continue if more people continue to pump in
more money under false pretences.

I'm sorry for people who were caught by this - they've been scammed.
Pretending they haven't isn't going to help in the long term but make it worse
and for more people.

~~~
qwerty456127
Don't get me wrong, I am not really arguing or trying to attach a moral label
to whatever the side and convince you, but I am curious, perhaps there is an
idea I can't get (I am a mediocre mind and didn't sleep well, that's
possible). I feel like playing hide-and-seek trying to find it :-) Would you
be so kind to confirm that you understand the rational (albeit questionable,
possibly wrong, sure) side of my logic and try to explain if there are
rational morality-free reasons other legality/justice/order (incl. preventing
further market manipulations, unjustified profits and simple lie) to blow such
a bubble up? I am just trying to view the situation from somewhat like a game
theory point of view.

~~~
Nursie
>> explain if there are rational morality-free reasons other
legality/justice/order (incl. preventing further market manipulations,
unjustified profits and simple lie) to blow such a bubble up?

You probably want to start looking into market theory. My understanding of it
is imperfect but...

What you're effectively asking is for a market to be protected from bad news
because investors who invested in good faith stand to lose out. In this case
the bad news is news about (potential) fraud and large-scale fake liquidity.
The consequences, outside of the morality of the continual diversion of a
large amount of honest money to bad actors, is that price discovery is
destroyed and the asset is no longer really tied to any underlying value or
sentiment. Such a market could collapse at any moment - if the bad actor stops
funneling fake fluidity into the market, for instance, then if that's not
replaced with new 'real' money the price will still collapse because the
support for the price was a fiction.

In a well regulated system the restitution for the (apparent) criminal
activity would be by the state - the perps would get charged with fraud, their
assets confiscated, and the state and/or market authorities would endeavour to
make good the innocents, either by unwinding trades or paying out from
insurance or something. In the cryptocoin space... well yeah, regulation bad,
insider trading good.

Markets function well when there is transparency and honesty. Without it they
distort and bad actors find ways to capture the profits.

