Good News For Tether

USDT "market cap"

The good news for Tether is shown in this graph, with two huge surges in "market cap" this year. One of about $15B early in the year, and another of about $6B recently. It looks like the euphoria over the prospect of spot Bitcoin ETFs has solved the Greater Fool Supply-Chain Crisis with the cryptosphere experiencing a massive inflow of around $20B actual dollars. As one might expect from injecting $20B whose only uses are to HODL or to buy cryptocurrency into the market, the result has been a massive bubble in cryptocurrency "prices".

BTC "price"

Bitcoin has gone from about $16K at the start of the year to around $42K recently. Ethereum has merely doubled, from about $1.2K to about $2.4K.

So all is well with the world; Tether gets to keep the interest on another $20B, which at say 4% is an extra $800M/year on their bottom line, and the Bitcoin HODL-ers see their investment gamble return a 160% gain. Is all really well with the world? Follow me below the fold.

Did hordes of retail investors gamblers really send $20B in cash to Tether? No, because Tether only deals with authorized institutions, and only in amounts over $100K, Did institutions send Tether $20B in cash? It seems unlikely. At various times over its history Tether has been caught minting USDT in return for things other than cash, such as loans to mysterious Chinese companies, or even thin air. It has never been audited, and has been described as being "practically quilted out of red flags". Matt Levine says "I feel like eventually Tether is going to be an incredibly interesting story, but I still don’t know what it is."

Part of the story was revealed by Dirty Bubble Media in Tether’s Secret Agent:

When people talk about the leaders of Tether, a few names typically occupy the conversation. Paolo Ardoino, recently promoted from CTO to CEO of the company, is the public face of Tether on Twitter and in the media. Giancarlo Devasini, the failed plastic surgeon, then failed software pirate, now billionaire CFO (how’s that for a career trajectory?), is widely regarded as the de facto leader of the company. And people often joke about Tether’s absentee former CEO, JL van der Velde, asking whether he even exists (he does, and he also was a serial failure before joining Tether).
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We have been puzzled by Tether’s leadership for some time. The massive success of the company and the complexity of its operations seem beyond the abilities of a small-time scam operator and repeat failure (Giancarlo), an inexperienced and sweaty front man (Paolo), and another failed businessman and absentee executive (JL). Notably, none of these guys had any significant prior experience in finance, and it is unlikely that any of them had the sorts of business and political ties that would be essential for keeping a controversial company like Tether afloat.

Harborne?

But Dirty Bubble Media identifies someone else involved:

His name is Christopher Charles Sherriff Harborne, AKA Chakrit Sakunkrit. Styling himself a “digital nomad,” Mr. Harborne’s busy hands reach across continents, industries, and political movements. The scope of Mr. Harborne’s activities and the apparent wealth backing his activities is staggering. Among those many diverse interests, it appears that Tether has become one of his most important interests. And Mr. Harborne has been far more than a passive investor in the company. Indeed, the available evidence suggests that Mr. Harborne’s involvement in Tether is far more significant than generally recognized…

The details of Harborne's career are fascinating:

Mr. Harborne has major ownership interests in other notable companies. Through a Delaware corporation he is the largest minority shareholder in QinetiQ, a major British defense contractor; this stake is worth around $200 million at present. He is also the sole owner of IFX Payments, a British fintech company specializing in moving large sums of money around the globe (hm). In total, over a dozen corporate entities spread across the globe have been linked to Mr. Harborne, with many more likely still hidden.

He was a major funder of the disastrous Brexit campaign and the UK's second worst recent Prime Minister, Boris Johnson. He owns "around 12% of Tether and a similar percentage of equity in Bitfinex". After the Crypto Capital Corp seizure they lost access to the US banking system, and Harborne was apparently critical to rescuing them both. The details of this are the subject of a lawsuit Harborne filed against the WSJ. Dirty Bubble Media updated the post:

Note: On February 28, 2024, Mr. Harborne sued the Wall Street Journal regarding alleged defamation. Mr Harborne alleges that the Journal misrepresented his opening of a bank account at Signature Bank as attempting to assist Bitfinex during a time of crisis. The Journal removed this portion of the article several days prior to the suit being filed. Mr. Harborne’s attorneys subsequently contacted Dirty Bubble Media requesting parts of the article referring to the Journal’s story be removed; while the case is pending we have acquiesced to their request. Additionally, we have added clarification regarding Mr. Harborne’s role as a “principal” at Bitfinex.

With a cast of characters this sketchy, skepticism is warranted, and in Bitcoin goes up! Can 5 billion unbacked tethers kickstart a fresh crypto bubble? Amy Castor and David Gerard supply some:

Bitcoin is over $44,000! In just the last week, the invisible hand of the market suddenly decided that bitcoins are really good now!

By complete coincidence, Tether has printed five billion USDT stablecoins in the past month out of thin air as “loans” — backed in the Tether reserve only by the “loans” themselves.

How high can you pump a number with five billion fake dollars to deploy?
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In just one month, from November 5 to December 5, Tether’s issuance climbed from 85 billion to 90 billion.

And the printer is still going. Molly White reports that Tether mints itself a $1 billion Christmas present:

On December 25, Tether minted 1 billion of its USDT dollar-pegged stablecoin. CEO Paolo Ardoino announced on Twitter that the mint was an "authorized but not issued transaction, meaning that this amount will be used as inventory for next period issuance requests and chain swaps". This seems to be a recent trend for Tether, as similar language was used for a $1 billion mint in September.

The activity has raised more questions around where the real money backing Tether is coming from, and if it even exists at all. Some have argued that these recent Tether mints are being used to artificially inflate the price of Bitcoin, which has been on an upward trend since mid-October.

USDC "market cap"

Amy Castor and David Gerard ask the right question:

You would think, with that kind of totally genuine and organic market demand for stablecoins, USDC’s issuance would also be going up — but no. USDC’s issuance is 24.4 billion, having seen a steady decrease from 44 billion in March 2023.

So where is Tether getting all the dollars to back these tethers?

It isn’t. Tether’s printing press is not fueled by demand. This is Tether issuing loans to some of its biggest customers — printing pseudo-dollars out of thin air, with the only “backing” being the loan itself, counted as an asset. The loans are secured by cryptos held as collateral — not as reserves. No actual dollars flow into the system this way.

Why would crypto-bros prefer USDT to USDC if it is doubtful that it is fully backed? It might have something to do with USDT lacking "regulatory clarity". How do we know Tether is printing USDT out of thin air? Because:

Tether spent years denying that they issued tethers from thin air as loans — then Alex Mashinsky of Celsius Network confirmed in October 2021 that Celsius had been taking out such loans from Tether. It came out in the CFTC settlement later that month that they had been doing this precise thing for a while.

Tether admitted in September that it was making “secured” loans again — after saying in December 2022 that it would reduce its secured loans to zero. [WSJ]

Presumably, during the "crypto winter", there would have been a need for customers to exchange USDT for USD. But did they?:

In mid-2022, after the Terra-Luna collapse, Tether bragged that it had “redeemed” 16 billion USDT. We would assume most or all of that was loans being canceled and the tethers burned. We certainly don’t know of any independently verifiable evidence that a single actual dollar was transferred in return.

For comparison, USDC reserves are held in short-term treasuries and cash in US bank accounts. A USDC appears to have an actual dollar backing it — and now that interest rates are up, Circle has been making a ton of money.

If Tether had billions of real dollars backing its tethers — as it claims — then the folks running Tether could also make a ton of money simply by putting the reserve into Treasury bills. They do not need to be making loans.

In late 2022, CZ from Binance was deeply upset that Sam Bankman-Fried from FTX might destabilize tethers by trying to cash out … $250,000 worth. That’s out of a supposed reserve in the billions. This brings into serious question how many actual dollars are anywhere near Tether — clearly not enough.

What is going on has similarities with Celsius' "flywheel". Castor and Gerard explain:

Crypto institutions — exchanges, hedge funds — use the tethers to buy leverage and pump the price. They post their inflated crypto as collateral to borrow more USDT and keep pumping. [Dirty Bubble]

These crypto-backed loans are the fuel for the pump inflating the cryptocurrency bubble. Dirty Bubble Media concludes:

Based on the current dataset, we can estimate that Tether issued many billions of USDT backed by crypto collateral. The impact is far larger than one might assume just from looking at the loan balances. For example, Tether lent Celsius Network just over $4 billion in total. Our data indicates that other parties like Amber and 3AC similarly received billions in loans, which round-tripped their way through the crypto-conomy without ever touching the real financial system or ever being backed by real money….

Many questions remain unanswered:

• What percentage of Tether’s “redemptions” are actually loan repayments?
• What is the impact of cycling billions of crypto-backed USDT through the crypto markets?
• And, why did Tether’s reported secured loans massively diverge from this data starting in May/June 2022, around the same time as Terra, Celsius Network, and Three Arrows Capital collapsed?

US regulators have been suspicious of Tether for a long time, and they seem to have lost patience:

The US government isn’t entirely happy with Tether’s financial shenanigans. But they’re really unhappy about sanctions violations, especially with what’s going on now in the Middle East.

So Tether has announced that it will now be freezing OFAC-sanctioned blockchain addresses — and it’s onboarded the US Secret Service and FBI onto Tether! [Tether, archive; letter, PDF, archive]

Tether doesn’t do anything voluntarily. We expect they were told that they would allow this or an extremely large hammer would come down upon them.

It looks like Tether has achieved some "regulatory clarity". It isn't just US authorities who can get Tether to freeze wallets. Patrick Tan asks What happens when Tether “freezes” your Tether?, and recounts the tale of The Victim, whose wallet was frozen at the request of Indian law enforcement. Tan concludes:

The Victim’s transactions are at very most 3 hops away from known bad actors, so it’s not entirely unreasonable for Indian authorities to require more information and detailed documents, not to mention the backdrop of ongoing scams abusing already stretched Indian law enforcement agencies.

For Tether’s part, it looks as though they received a request from Indian law enforcement and followed it.

But perhaps, and somewhat more significantly, there is also the risk that Tether blacklists the USDT in your wallet, in response to government requests, regardless if those requests are lawful or not.

It’s entirely possible for government officials or authorities with a personal vendetta, to target causes, or political opponents who receive donations or are known to transact in USDT, and for Tether to err on the side of caution and comply.

It’s entirely possible that many “innocent” addresses are blacklisted in such opaque processes, collateral damage in purges.

The Victim might well be collateral damage, but it was essentially impossible to supply the "more information and detailed documents" that law enforcement required to lift the freeze. Such are the risks of operating without "regulatory clarity". But the kind of "regulatory clarity" the US has imposed on Tether isn't likely to help The Victim or others who become collateral damage, it is likely to increase their numbers. An increasing number of users unable to access their funds is a double-edged sword for Tether; the good news is that Tether gets to keep the interest on frozen funds, the good news is that more and more people figure out how risky USDT is.