Kyle Nazario

Although I dislike cryptocurrency, I am fascinated by Tether. I can’t believe a company so insanely shady is a foundational part of the web3 ecosystem. Tether is, as Bloomberg crypto reporter Zeke Faux memorably put it, “practically quilted out of red flags”.

Here are some of those red flags, as best I understand them. Please @ me if I got something wrong ¹, since I am not a crypto expert.

As a Tether skeptic, I can objectively say that despite my constant criticism, I’m truly fascinated by the business.

It’s the biggest fraud of all time or the most successful, misunderstood business ever. There’s no in between.

*Tether is a fraud btw.*

- @NotChaseColeman

Red flags

The company

• No one can find the offices of Tether’s parent company, iFinex. ²
• Tether is run by Giancarlo Devasini, a former plastic surgeon who was once fined for selling counterfeit Microsoft software. According to Number Go Up, “Tether has said Devasini was unaware the software was unlicensed.”
• In 2008, a factory Devasini owned stopped being profitable. It was shortly destroyed by a fire.

“He basically built a power plant in the back and it went up in smoke,” [Devasini’s former business partner Marco] Fuxa told me. But a newly unprofitable factory burning down in a mysterious fire struck me as a potential red flag.

- Zeke Faux, Number Go Up

• According to Number Go Up, Devasini wrote “almost admiringly” about Bernie Madoff in a 2008 blog post.

Legal risk

• The two most reputable U.S. crypto exchanges, Coinbase and Bitstamp, do not support Tether, likely because no American bank will do business with Tether.
• Tether does not have significant anti-money laundering / know your consumer programs, allowing users to do things like donate to Hamas. The U.S. government fined Binance $4 billion for AML/KYC violations.
• Tether used criminal money launderers to access the banking system so they could accept dollars for tethers and vice versa. This launderer skimmed millions from customers.
• Even a crypto-friendly U.S. senator is calling for the Department of Justice to investigate Tether.
• Tether has bragged on its company blog that it helps users break the law and avoid capital controls.
• Official Tether documentation instructed users to lie on wire transfers, so as not to alert banks they were dealing with crypto.

“It’s not about one report,” Sen. Elizabeth Warren (D-Mass.) told us Monday night. “It’s about the whole structure of crypto that attracts some of the worst people around the world to move value around in a way that they cannot do through the ordinary banking system.”

- Brendan Petersen, Punchbowl News

Reserves

• Tether has never undergone a full, independent audit of its reserves.
• Tether has been caught lying several times about the composition and amount in their reserves.
• For example, they claimed their reserves did not include Chinese commercial paper. When Bloomberg and CoinDesk filed a public records request to obtain information on this subject, Tether fought them in court. The records revealed Tether lied.
• Tether required recapitalization at least twice in 2022 and did not disclose it.
• In 2019 and 2020, Tether issued huge numbers of new tethers whenever their court case with the New York attorney general went badly.
• Tether issues new tokens in blocks of suspiciously round numbers, implying demand is not genuine.
• Tether gives lots of tethers to offshore crypto exchanges. The exchanges give these away as freebies to entice new users to sign up. The volume and ease with which the exchanges hand out tethers implies they value them at less than $1 apiece.
• According to Number Go Up, Tether was cut off from the banking system by U.S. and Taiwanese banks in 2017. It literally could not accept dollars for the entire summer. During this time, it issued 200 million new tethers.
• Former Celsius CEO Alex Mashinsky (since charged with fraud) revealed Tether prints new tethers and loans them to other crypto businesses in exchange for crypto collateral. If Tether’s reserves were really as good as they claim, these loans make no sense.
• Tether, according to its own attestations, is massively leveraged and has taken on huge amounts of risk.

Conclusions

Three things seem clear.

One, Tether has been backed and unbacked at different points in time. They hide the contents, location and composition of their reserves so we can’t know when they’re in trouble. I don’t know if they are backed as of writing this.

Two, I have no idea when or if Tether will fail. It should fail. But, Tether’s proven adept at buying time, and stranger things have happened.

One note on that subject. I am not excited for Tether’s fall. I have little sympathy for crypto boosters who knew what they were getting into, but it’ll also hurt regular people whose only crime was falling for the hype.

For example—if you want to have a bad time—read the letters to the judge from Celsius creditors.

I am a 69yo, widow, who deposited my crypto into Celsius. BTC 4 [~$91,300 on date of filing], Eth 15 [~$24,300 on date of filing], Polygon 2200 [~$2,000 on date of filing], etc., I understood the risk that the value could go down. The volatility of crypto currency is apparent. I didn’t sign up to be scammed, in a structured Ponzi scheme. I will never be able to accumulate any wealth at my age, I’m old. I will have to go back to work, if I can find work, if I can manage my health to be able to work. I cannot survive on $1500 a month social security check. The importance of this investment, would bridge the gap in my income for survival in high inflation and recession. The devastation to my life situation is irrepairable, its despair, hopelessness, its failure, a slow death, that eats at you every minute of every day. It takes your heart, mind, soul and body. I have become a shell of a person and obsess on how to fix it. Maybe I should go to the southern border and get a job. It’s crazy, I have never crossed to the dark side, but desperation can make you do and think strange things, especially when you are alone and in despair.

- Doc 653, via Molly White

People would lose college savings, money from their family, retirement funds and even life savings. It would be devastating.

It would substantially damage crypto as a whole, because tethers are so deeply embedded in the ecosystem.

If you believe [an] asset is riskless for long enough it will find itself in the infinite variety of structures which need a riskless asset, and when those structures suddenly have a hole where their riskless asset should be, calamity quickly follows.

- Patrick McKenzie

Anyway. The third thing that seems clear is the U.S. government will go after Tether. Tether is permissionless money. Governments hate that! They want to make sure you’re not a drug cartel or money launderer or tax cheat or doing business with a party they dislike, like Hamas or North Korea. If you’re a crypto fan and think that’s unfair, well, buy more senators.

I think the DoJ will do something, even if it’s just a fine. They’ve dithered for years investigating Tether, but things have changed. Regulators are mad as hell after FTX. Crypto’s lost too many allies in American government, and tethers have funded one too many terrorist groups.

Recommended reading

• The first, second and third posts on Tether by Patrick McKenzie, a former Stripe employee and financial writer. Makes a convincing case Tether has been under-capitalized several times in the recent past.
• Number Go Up by Zeke Faux. Faux uncovers some truly eyebrow-raising details about the Tether founders, like the factory fire.
• Matt Levine on Tether’s “loan” business.
• “The Bit Short: Inside Crypto’s Doomsday Machine”: Take this with a grain of salt, as it’s anonymous and unconfirmed. It sketches a convincing theory Tether is printing unbacked tokens to hold up the price of Bitcoin (which Tether confirmed).
• Faux’s 2021 Bloomberg article exploring where exactly Tether keeps its holdings.