Tether admits to not being fully fiat backed
The concession puts price manipulation allegations and Bitfinex insolvency fears back in the spotlight.
Tether has quietly admitted to not being fully backed one to one by US dollars. The admission takes the form of a website update, where it changed a claim of full cash backing to a broader claim of various kinds of backing.
This has several troubling implications.
Refreshed market manipulation concerns
Last year John Griffin and Adam Shams of the University of Texas published a study saying that, based on correlations in market and Tether movements, it's statistically very likely that Tether is being used to manipulate Bitcoin prices.
The clincher is that the study assumes that Tether is not fully backed. Even Tether's chief compliance officer, Leonardo Real, said exactly as much in a recent interview.
"We stand by the fact that all outstanding USDT are backed 1-to-1 by fiat USD," he said. "The entire study relies on the assumption that USDT is unbacked and therefore not sufficiently driven by trader demand."
"To reiterate, the accusation against Tether is based around the assumption that outstanding USDTs are unbacked," Real added, just to really drive the point home.
So, that hasn't aged well.
According to Bloomberg, the authors of the study have been briefing the CFTC on their findings. It's possible that a noose is tightening around Tether somewhere behind the scenes.
Bitfinex and Tether insolvency
The wording of Tether's new claim suggests that its reserves can be composed of just about anything, including cryptocurrency being fronted to Tether by its affiliates such as Bitfinex.
Essentially this suggests that Tether could be backed by cryptocurrency held by Bitfinex. This is concerning, given that Bitfinex's demonstrably enormous cryptocurrency holdings are one of the only things keeping insolvency rumours at bay. If those holdings are meant to be supporting Tether, the situation is quite fragile.
This is all being punctuated by strange coincidences of timing.
Do you remember how the markets seemed to have a spontaneous crisis of faith in Tether's backing from mid to late October last year? It was a wild couple of weeks which also saw Tether's circulating supply shrink by about US$1 billion.
In that same timeframe, Bitfinex's top bitcoin wallet was wrapping up the mass departure of around $750 million worth of Bitcoin before going mostly silent.
Bitfinex was unloading its Tether holdings back to the treasury at the same time. On 8 October 2018 it was the second richest Tether holder with over $260 million USDT. But over the next couple of days it dropped $100 million of that. Now, that Bitfinex Tether wallet is down to only $12.5 million.
And more recently, right as Tether updates its website to explain that it may not be fully fiat backed, Bitfinex also announces that it's introducing BTC/USDT and ETH/USDT pairs.
To a paranoid eye, the timing of it all may seem well beyond the bounds of coincidence, and could suggest that Bitfinex has been putting its crypto reserves against Tether since some kind of crunch last October, and is now cutting back its own Tether exposure by pushing it onto customers to take out into the wider ecosystem.
This is driven home by the fact that Bitfinex's usual premiums are in overdrive right now.
When an exchange is showing higher BTC/USD prices than others, it typically means users can't actually cash out USD. This is really driven home here by the fact that Bitfinex's BTC/USDT pair is trading about $100 cheaper than its BTC/USD.
What does it all mean?
Despite any assurances to the contrary, market forces and countless user reports make it very clear that you're going to have a tough time getting fiat out of Bitfinex. With the QuadrigaCX incident still fresh in people's minds, this should raise some concerns.
Speaking of which, QuadrigaCX's old fiat payment processor, CryptoCapital, still lists QuadrigaCX as one of its customers on its website after all this time. Bitfinex is also believed to be a CryptoCapital customer.
But it's strange that QuadrigaCX would still be listed there, given how quickly CryptoCapital scrubbed Bitfinex from its customer list when someone pointed out that most of the exchanges supported by CryptoCapital were broke.
There's a lot of weirdness out there.
Disclosure: The author holds ETH and XLM at the time of writing.