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Investigating the Charge "Bitcoin Price is Dependent on $60 Billion Accounting Fraud"

The charge relates to Tether, a stable coin allegedly fully backed by US dollars.
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Spotlight Tether 2021-05-22

Is the Money Really There?

I took a look at Tether on October 17, 2018 in Tether's Mysterious Crash: Is the Money Really There?

I did not believe the money was there then, and I certainly don't believe it now. 

Tether Liquidity

In 2018 I noted "Tether has represented as much as 80% of bitcoin trading volume, according to research site CryptoCompare. When the year began, it accounted for about 10% of bitcoin trading volume."

Tether still accounts for 80% of Bitcoin volume today.

Bernie Madoff Comparison

Tether allegedly held $2.5 billion then. It allegedly holds $60 billion now.

That as big or bigger than Bernie Madoff's Ponzi scheme originally pegged at $50 billion but later upped.

What's going on? 

A Tweet chain by Stephen Diehl, @smdiehl has the explanation. It's lengthy so I reduced it to bullet points, emphasis mine.

  1. Stablecoins are virtual currencies that are always supposed to have the same real-dollar value. People that day trade cryptocurrencies often want shift their unstable tokens to safe real currencies (like the dollar) because wild market fluctuations make it unsafe to hold. 
  2. However when a company transacts in dollars they have to follow the rules of the bank that holds them and by proxy the rules US govt imposes on the bank. If you're trading crypto, then you probably don't like those rules since you're probably doing something shady.
  3. The crypto exchange ecosystem has major problems getting access to normal banking. So enter Tether or USDT, a surrogate crypto dollar that theoretically has the same value as a dollar, but can be traded without following regulation on dollars.
  4. The model is simple, you give the company a real dollar, they store that real dollar and give you one tether. You trade that tether for whatever you want, and at any point you can redeem that tether back for one dollar. Simple enough.
  5. It's a simple pitch: Have dollars, buy tether, do shady things, redeem tether, get dollars. "The virtual dollar for regulatory arbitrage."
  6. However this depends on one centralised point. The company that runs this service needs to keep an accounting book of all the money that flows in and out. Every dollar in has to be matched with a tether issued, every tether redeemed a real dollar that flows out. 
  7. The real dollars held in the so-called "reserve" has to be precisely equal to the number of tether dollars issued. If that's not the case, (i.e. unbacked tethers) then a certain percentage of holders of this coin can't actually redeem because the money is not there. 
  8. What is clear is that the company has allegedly issued $59 billion virtual dollars. At that scale, it is highly unlikely any bank in the entire world would those reserves on behalf of a crypto company. Not even the dodgiest banks would take on that insane level of risk.
  9. So where is the money? Most financial journalists have speculated that the company is engaged in some opaque accounting skulduggery where instead of matching tethers to inflow dollars, they produce *vast* amounts of tethers that aren't backed by anything.
  10. Now the company that issues these products is notoriously opaque and set up shop in the tax haven of British Virgin Islands to avoid any regulation and reporting obligations. So we really don't know much. What we do know comes from lawsuits and investigative journalists. 
  11. In 2020 the New York Attorney General investigated the US entity associated with trading Tether and indeed found massive amounts of misrepresentation in their findings. In the AGs words
  12. "Tether's claims that its virtual currency was fully backed by dollars at all times was a lie. These companies obscured the true risk investors faced and were operated by unlicensed and unregulated entities dealing in the darkest corners of the financial system." 
  13. "Tether made false statements about the backing of the 'tether' stablecoin, and about the movement of hundreds of millions of dollars between the two companies to cover up the truth about massive losses."
  14. Last Wednesday [May 12], we finally got the court-mandated disclosures of what's actually in the reserves. And not surprisingly when the vault is opened, the money isn't actually there. 
  15. What we see is a lot of "commercial paper". Which is a form of short-term debt, a company-to-company unsecured loan. It's put on the books for the face value of the loan, but in reality that value depends on the credit risk of the other counterparty to the loan. 
  16. If the counterparty isn't good for the value of the paper then it's worthless, just an accounting trick. And we don't know who the other parties are. Every Tether is backed by a giant pile of IOUs to strangers. And that's worth exactly what you think it is. 
  17. A mere 2.9% of Tether treasury is actually in real dollars held by a bank. So for every 1 USDT there is $0.03 real dollars.
  18. Now this is a huge problem because by volume Tether is BY FAR the most traded cryptocurrency in the entire world. Surprising every other token by a significant margin.
  19. Also the most traded cryptocurrency FOR bitcoin. 80% of bitcoin volume is where one party is trading Tether for bitcoin. If price of bitcoin is quoted in dollars, and sold in tether, that price isn't reflecting the the vast risk/value differential between the two.
  20. It's widely suspected that many exchanges are receiving large deliveries of unbacked tethers, using them to wash trade with themselves for bitcoin to drive up demand, and thus the synthetically inflate the price. This is illegal in other markets.
  21. A significant portion of bitcoin price formation is therefore quoted in dollars, but paid for in USDT dollars that are only actually backed by three cents. Which would make most of the price formation of bitcoin completely synthetic. 
  22. Which leads to the obvious inconvenient truth that most people who look at the crypto space come to understand. Most exchanges are *vastly* undercapitalised and will never be able to pay out even a tiny fraction of their customers in real dollars. 
  23. Crypto markets are not significantly different than Ponzi schemes. Short-term dollar inflows are used to pay-out short-term outflows and the whole thing stays afloat so long as there's not too many withdrawals. When that day comes, it implodes. 
  24. It seems inevitable that at some point in the near future everyone that holds tethers will see all of their holdings go poof. They'll go from being worth 1.0x a dollar to 0.0x a dollar probably in a very short period of time. 
  25. Some fintech bloggers have described Tether as "the internal accounting system for the largest fraud since Madoff." If that is the case, and the allegedly $800b bitcoin market collapse, that truly will be a scandal for the history books.

Three Major Objections

I object to this statement made in point #2: "If you're trading crypto, then you probably don't like those rules since you're probably doing something shady"

Perhaps things are shady "by volume" but it's more than a bit questionable to suggest the "majority of people" are doing something shady. 

I also take exception to point 23. Tether is may be a Ponzi scheme but that does not make the entire crypto market a Ponzi scheme. 

Point 23 is thus questionable as well. Only exchanges that deal in Tether are undercapitalized and only to the tune of their Tether holding. 

That could easily collapse everything, but it isn't a certainty.

Inside Crypto’s Doomsday Machine

What started me down this Tweet Chain Path was Inside Crypto’s Doomsday Machine by "Crypto Anonymous" (CA).

It's an article by a HODLer who threw in the towel after deciding in January that Tether is fraudulent.

CA noted Binance, Bit-Z and HitBTC are “unbanked” exchanges. He also comments on the amazing amount of leverage that some exchanges allow.

These unbanked exchanges give away free Tether for using their systems.

CA also noted something mentioned above regarding round amounts: "Tether outputs (e.g., 400,000,000 USDT in the same transaction) in every block — regardless of the prevailing exchange rate or anything else."

So that he can claim authorship at a later date if he wants, CA posted a hash block with his real name padded by random characters.

"Don't be on a Tethered Ship"

Don't Be On a Tethered Ship

I added that caption to an image from a 2018 Medium article How to avoid getting ‘Tethered’.

@StateCommon reports "Saturday at 6am EST a billion $1 Tether coins were printed. A perfectly round number."

Major Tether transactions are in perfectly round numbers. This alone attracts suspicion. 

For comparison purposes Bernie Madoff's alleged earnings were uniform as well. 

Collapsed Guaranteed?

I suspect what happened is someone siphoned off at least $60 billion in this scheme, possibly holding some of it in Bitcoin the rest siphoned off to paper currencies or gold.

The price of Bitcoin could collapse over this and that's what some have concluded. 

But a Ponzi in Tether does not necessarily imply a collapse in Bitcoin even though Tether was used to manipulate the price of Bitcoin higher. 

Settlement With New York Attorney General

RECOMMENDED ARTICLES

On February 23, 2021, Coindesk reported NY AG’s $850M Probe of Bitfinex, Tether Ends in an $18.5M Settlement

The New York Attorney General’s office (NYAG) has settled with Bitfinex over a 22-month inquiry into whether the cryptocurrency exchange sought to cover up the loss of $850 million in customer and corporate funds held by a payment processor. 

The NYAG’s office announced the settlement Tuesday, formally ending the inquiry that kicked off in April 2019. Under the terms of the settlement, Bitfinex and Tether will admit no wrongdoing but will pay $18.5 million and provide quarterly reports describing the composition of Tether’s reserves for the next two years. More significantly, these reports will match information Tether already provided the NYAG about its reserves. The NYAG will bring no charges as part of the settlement.

Settlement does not imply lack of guilt nor does it imply the money is really there. 

Indeed, the conclusion was that it isn't. 

Cryptos Pose Serious Threat

Mr. Whale, @CryptoWhale reports US Treasury says cryptocurrencies pose a serious tax-evasion risk and calls for #crypto transfers over $10,000 to be reported to IRS.

He also reports another $1 billion printed out of thin air. 

Meanwhile at the SEC

SEC chair Gensler Says SEC Should Be ‘Ready to Bring Cases’ Involving Crypto

Excellent Words of Advice

Commercial Paper 

Speculator @TheSpeculator0 notes that Tether has more commercial paper than Amazon, Google, Apple, and Microsoft, only topped by financial corporations. 

Reporting? Where Is It?

Why did Transparency Stop?

Grant Gulovsen, @gulovsen wants to know why transparency reports stopped in February. 

Coinbase and Tether

In January, Crypto Anonymous wrote "Coinbase used solid due diligence to curb money laundering."

On May 3, Coinbase reported Tether (USDT) is now available on Coinbase

Starting today, Coinbase supports Tether (USDT) at Coinbase.com and in the Coinbase Android and iOS apps. Coinbase customers can now buy, sell, convert, send, receive, or store USDT. USDT will generally be available in Coinbase-supported regions, with the exception of New York State. USDT trading is also supported on Coinbase Pro.

If Tether is fraudulent, Coinbase is now a part of the chain.

Employee Count Comparison

  • Tether has 11 employees (per Linked In) and claims 60 billion under management.
  • Tether has no known headquarters
  • Tether claims to have almost the same amount of commercial paper as Vanguard

Twisted World

A Word About Speculation Tolerance

Will They Ban Bitcoin? 

No, why bother?

It's far easier to get support for stopping money laundering or wasting energy. 

Related Articles

  1. May 23, 2021: Dogecoin Approaching Support: Feelin' Lucky?
  2. May 23, 2021: Google Aims for Commercial Quantum Computer by 2029, What Would That Do to Bitcoin?
  3. Jan 7, 2020: Bitcoin Supporters Cannot Answer One Simple Question

Regarding point#3, my question was What would happen to the price of Bitcoin if the US did not allow merchants and banks to make Bitcoin transactions?

My Bitcoin ban tweets dismisses an outright Bitcoin ban but adds mining bans or mining taxes. And similar to the Hunt brothers cornering Silver, authorities could also allow sales but no purchases.

Still feeling Bitcoin is impervious to anything?

Mish