Tether is under undisclosed SEC investigation, FOIA blocked

https://twitter.com/silvermanjacob/status/1441391317578289153

by bhouston • 5 years ago

130 74 5 years ago

twitter.com

ryanlol4• 5 years ago

Is this not a super standard FOIA response?

ceejayoz4• 5 years ago

Only if there's an active law enforcement investigation the FOIA request touches.

ryanlol4• 5 years ago

I don’t think that your comment acknowledges the reality that FOIA responses are decided by RNG unless you sue.

dragonwriter• 5 years ago

Only if there's an active law enforcement investigation the FOIA request touches.

Right, but that doesn't mean that the named entity is either the target or even a subject of the investigation. Because the FOIA request is for all documents relating to the entity, if there is even one document related to any investigation of anything that mentions the named entity in any capacity, it is going to be withheld for that reason.

ajkdhcb25• 5 years ago

Yes. The tweet crops out a following paragraph that says it should not be taken as evidence that an investigation is underway. So this is fake news.

You can see the full letter here: https://twitter.com/CryptoWhale/status/1429819156052983816

ceejayoz4• 5 years ago

"We can't give you these records because it'd interfere with law enforcement activities, which may not exist" seems like it'd be a pretty big loophole in FOIA if you could use it that way.

bhouston2• 5 years ago

Others are now reporting this such as coin desk: https://www.coindesk.com/policy/2021/09/24/sec-hints-at-teth...

gruez3• 5 years ago

"tether is a fraud/ponzi" claims aside, does SEC even have jurisdiction here? The SEC isn't out to protect all investors, only to protect them from securities fraud. I'm skeptical whether a stablecoin could even count as a security. From bloomberg:

The rule in the U.S. is that an “investment contract,” meaning “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” is a security

https://www.bloomberg.com/opinion/articles/2021-09-08/lendin...

Under that definition, are stablecoins even securities? You buy it at $1 and the best you can hope for it is that the value remains at $1. There's no expectation of profits.

mywittyname• 5 years ago

Well, the other half of Securities & Exchange is exchange. Tether is owned and controlled by Bitfinex, who does claim to be a cryptocurrency exchange.

josefx2• 5 years ago

Your link only says that a "investment contract" is a security, not that all securities are "investment contracts".

gruez3• 5 years ago

not that all securities are "investment contracts".

If you search around people do seem to think that "investment contracts" are "security" (eg. https://www.investopedia.com/terms/h/howey-test.asp) although I can't find someone saying "investment contracts iff security". If that's not the case, can you list what else counts as securities, and why do you think stablecoins meets those definitions?

abduhl• 5 years ago

Securities are defined under 15 USC 77b(a)(1)

(1) The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

ARandumGuy• 5 years ago

My understanding is that, in the US at least, "securities" is a broad category that applies to any financial asset or product that isn't regulated under other rules. However, this is pretty uncharted territory, and until there's some judicial precedent, it's impossible to be completely sure.

ryanlol4• 5 years ago

My understanding is that, in the US at least, "securities" is a broad category that applies to any financial asset or product that isn't regulated under other rules

This is incorrect. Many financial assets are not securities, tether being a particularly good example.

coremoff• 5 years ago

Gary Gensler thinks crypto is part of their remit:

The SEC has a three-part mission — to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets in between them. We focus on financial stability as well. But at our core, we’re about investor protection.
If you want to invest in a digital, scarce, speculative store of value, that’s fine. Good-faith actors have been speculating on the value of gold and silver for thousands of years.
Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West.
This asset class is rife with fraud, scams, and abuse in certain applications. There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information.
If we don’t address these issues, I worry a lot of people will be hurt.

(taken from one of Matt Levine's emails talking about the SEC and Crypto)

blitzar2• 5 years ago

Reminder: #Tether is registered and regulated under FinCEN as all the centralised competitors. Strict KYC/AML is applied to all Tether direct users, as the other main issuers are doing. Less regulated is just FUD. Ask yourself who benefits from spreading such misinformation?

— Paolo Ardoino (@paoloardoino) December 30, 2020

Paolo Ardoino, Tether's chief technology officer.

It doesnt matter who is/isnt regulating you, once you are claiming to be a regulated instrument publicly to people in the US then the SEC have all the jursidiction they need.

FDSGSG8• 5 years ago

It doesnt matter who is/isnt regulating you, once you are claiming to be a regulated instrument publicly to people in the US then the SEC have all the jursidiction they need.

The SEC does not have unlimited jurisdiction over things which are publicly claiming to be regulated instruments to people in the US.

The SEC regulates securities. According to the "Howey test" provided to us by the US supreme court it appears that Tether is not a security, therefore it does not fall under the jurisdiction of the SEC.

BitwiseFool• 5 years ago

"does SEC even have jurisdiction here?"

In a Machiavellian way, I've come to realize that the Standard Operating Procedure for government/bureaus is that when faced with ambiguity about jurisdiction it's better to ask for forgiveness than permission. In practical terms, who's stopping them?

user-the-name3• 5 years ago

In practical terms, who's stopping them?

Courts? Pretty basic principle of how democratic systems are built.

qeternity4• 5 years ago

when faced with ambiguity about jurisdiction it's better to ask for forgiveness than permission

Genuinely curious what has given you that impression. Regulators have been insanely slow to act on crypto (and there’s no regulatory overreach here).

In general, it’s a meme that regulators are slow to act and often without any teeth.

mannykannot• 5 years ago

Under that definition, are stablecoins even securities? You buy it at $1 and the best you can hope for it is that the value remains at $1. There's no expectation of profits.

True, as far as I know, but this is not the case for Bitcoin. If, as has been alleged, Tether has been used to fraudulently manipulate Bitcoin prices, the question becomes one of whether Bitcoin falls under the remit of the SEC.

trident50005• 5 years ago

This rumor has been debunked. We had a glance at tether financials when the whole bitfinex IOU swap happened. Tether is backed 1:1 but they have reserves in investments, claimed to be mainly A2. Thats what people had a problem with.

If thats a problem ok, but insurance companies invest their payout holdings in commercial paper as well and theres not much of a public outcry.

bohadi2• 5 years ago

You're absolutely right. Gensler has cited the Howey test inconsistently. Well, under that definition, stablecoins are not securities. There's no expectation of profits.

I expect future battlelines being drawn around decentralized stablecoins. Tether is private and carries SPOF risk.

[1] https://www.investopedia.com/terms/h/howey-test.asp

qeternity4• 5 years ago

You're absolutely right. Gensler has cited the Howey test inconsistently. Well, under that definition, stablecoins are not securities. There's no expectation of profits.

Uhh, the Howey test is not a magical test to determine what a security is. For many things, Tether included, we have very simple rules based tests.

The Howey test is to determine things that might not qualify under letter-of-the-law but absolutely are investment contracts in substance.

Crypto (stable coins included) runs afoul of both types of definitions pretty much universally.

silverlake• 5 years ago

Tether is similar to a money market fund and could be regulated as such.

nivertech• 5 years ago

1. USDT is not a DAR (Digital Asset Receipt) like other so called "stablecoins" (i.e. it's not backed 1:1 by physical USD). Instead it's a pooled investment fund claiming to keep NAV (Net Asset Value) around 1 USD.

2. it behaves more like an MMF (Money Market Fund)

3. market participants creating and redeeming large blocks of USDT are getting discount to NAV and/or exchange price.

Each of the points above can be interpreted as "With the expectation of profit" clause in the Howey test.

Additionally there are many regulations about MMFs, like breaking the USD peg by more than 5c, i.e. when NAV goes below 95c - the fund should be terminated.

FDSGSG8• 5 years ago

1. USDT is not a DAR (Digital Asset Receipt) like other so called "stablecoins" (i.e. it's not backed 1:1 by physical USD). Instead it's a pooled investment fund claiming to keep NAV (Net Asset Value) around 1 USD.

But if you buy 1 USDT you do not own a share of that fund. That's the Tether Holdings fund that may or may not be used to redeem your USDT.

There's no indication that your 1USDT will be redeemed for anything less than 1USD even if the value of Tether Holdings's assets sinks below it's liabilities.

2. it behaves more like an MMF (Money Market Fund)

How does USDT behave like an MMF? MMFs distribute excess earnings to shareholders.

In the case of USDT you aren't a shareholder and don't get anything at all. Your USDT token might be redeemed for 1 USD but certainly not more.

Each of the points above can be interpreted as "With the expectation of profit" clause in the Howey test.

The expectation of profit needs to be reasonable. There's no chance you'll make a profit with tether, even in the best case scenario it's guaranteed to lose value to inflation.

tomhunters• 5 years ago

This has been quite the issue for a long time, and I can't think why the authorities are delaying their actions against Tether.

lamontcg• 5 years ago

Regulators don't take actions that risk popping entire markets and creating many billions of dollars of losses on the balance sheets of publicly traded companies like TSLA.

Madoff's Ponzi was pretty obviously a Ponzi and was reported for years as a Ponzi to the SEC and nothing happened until it was finally popped by the market retreating in 2008 and redemptions causing the Ponzi to go completely cash insolvent.

Tether/crypto is going to pop when it pops, and regulators will then step in aggressively afterwards.

mckirk2• 5 years ago

Given the Evergrande development, it might pop rather sooner than later. Tether's 'reserves' are largely backed with commercial paper after all, and it stands to reason that much of that is intertwined with the China debt-bubble in one way or another.

FDSGSG8• 5 years ago

Tether/crypto is going to pop when it pops, and regulators will then step in aggressively afterwards.

Or it might not. Unlike what Madoff was doing, it's perfectly possible for Tether to keep their game up in perpetuity.

Madoff kept his far more ambitious and risky operation going for decades, I think Tether can certainly last for longer if not eviscerated by lawmakers.

Havoc• 5 years ago

Honestly I'd be more surprised if they weren't.

Wouldn't mind if the SEC takes tether down a notch...they're a risk to the entire crypto ecosystem

trident50005• 5 years ago

If tether went belly up what would happen is everyone would sell their tether for BTC and other cryptos (whatever they can get into) and you would have the largest squeeze of all time. We actually witnessed this during the tether freak out saga a couple years ago where BTC on the bitfinex exchange was priced like 10 or 15% higher than the rest of the market. I wouldnt mind just getting it over with. Then we could get that over with an just have USD trading. But what most likely will happen is they will just be forced to comply with certain rules.

rcohngru2• 5 years ago

The thought process here is that if you're stuck holding tether if/when it collapses, you can just sell for a crypto that hasn't collapsed. But who in their right minds would want to trade something of value for something that has just been shown to be worth $0?

trident50005• 5 years ago

For exchanges that use USDT, exchanging for crypto is your only immediate option.

randomopining• 5 years ago

Wouldn't it cause holders to instantly have part of their portfolio be worthless, which would cause them to have to sell liquid BTC etc to cover their positions. Which would depress the price of btc/eth a lot?

chollida1• 5 years ago

If tether went belly up what would happen is everyone would sell their tether for BTC and other cryptos (whatever they can get into) and you would have the largest squeeze of all time

What squeeze could there possibly be? No one is forced to deliver anything here so there is absolutely nothing to be squeezed.

now you may get some people willing to buy tether at 10 cents on the dollar but that would only continue to force down the price of tether as you exhaust the very small amount of tether buyers.

Who do you see being squeezed here?

quickthrowman2• 5 years ago

If tether went belly up what would happen is everyone would sell their tether for BTC and other cryptos (whatever they can get into) and you would have the largest squeeze of all time.

I’d like to know who you think would be buying Tether if it was collapsing, you can’t sell if there’s no bid!

postalrat• 5 years ago

"If tether went belly up what would happen is everyone would sell their tether for BTC"

What do you mean by "tether went belly up"? Even when it's "belly up" it still has value to trade for BTC?

quickthrowman2• 5 years ago

Who would be buying the tether? Every trade on an exchange has two sides, who is going to buy USDT that isn’t worth anything?

For example, the $449 strike SPY call expiring in 27 minutes has a bid of 0.00 and an ask of 0.02, meaning nobody will buy if you try to sell the call, but a market maker will sell you one for 0.02. If tether was worthless, the same situation would happen, people would be willing to buy for 0.00 and sell for a bit more than 0.00

kangnkodos• 5 years ago

If Tether's USDT went belly up, there would be a loss of confidence in the Coinbase exchange, a run on the market, and a collapse in the price of Bitcoin.

Right now, everyone who has an account at Coinbase believes that if they liquidated their Bitcoin tomorrow, they would eventually get genuine US Dollars equal to the amount of money in their account. Under normal operating conditions, this is true. But if Tether's USDT goes down in price significantly, all bets are off.

Under normal operating conditions, when a client sells Bitcoin in their Coinbase account, Coinbase trades Bitcoin for Tether's USDT, the USDT sits in the user's account for a while, and eventually the user get US Dollars.

Where do the US Dollars come from?

Tether has a reserve of some US Dollars, and other non-crypto assets that can be quickly traded for US Dollars. Let's just consider this whole bucket as US Dollar reserves in order to simplify this discussion. The important thing to remember is that Tether's US Dollar reserves are only a small fraction of all outstanding Tethers.

Also, Tether is constantly gathering more US Dollars. On an average day, Tether receives more US Dollars than go out.

If for some reason, everyone decided at the same time that a USDT was worth less that one US Dollar and the price continued to drop over time, everything would change. In this dropping USDT price scenario, anyone who held USDT would go to Tether at the same time and ask for their US Dollars back.

Tether would have a few options at this point, but one option they would not have is giving everyone their US Dollars back. Remember that Tether has limited US Dollar reserves. Assuming they kept trying to refund every request with a full US Dollar, they would blow through their reserve and hang up a closed sign on their window. Tether doesn't have any bankruptcy insurance, and there isn't a government that is likely to bail Tether out. They're not too big to fail.

Oh, Tether would try some tricks to slow down the process. But they may not be able to stop the run on the bank/exchange.

So now, let's assume Tether is worth zero. What happens to Coinbase and it's clients?

Buying Bitcoin would not be a huge problem. Coinbase might have to change their procedures, but they could still find people willing to accept US Dollars in return for Bitcoin.

The trouble would be selling Bitcoin. On a normal day, they just trade Bitcoin for USDT, and if necessary, go to Tether and trade the USDT for US Dollars. But if the normal system doesn't work because a USDT is worth zero, Coinbase would have trouble selling Bitcoin in a timely manner.

People would flood Twitter complaining that they can't get their money out of Bitcoin through Coinbase, and this might trigger a second run. All Coinbase customers might lose confidence at the same time, and try to sell their Bitcoin in their Coinbase accounts at the same time. The price of Bitcoin would crash. Perhaps people would not trust exchanges such as Coinbase for a long time after, and prices might stay low for a long time.

This is all just a wild guess. What do I know?

PretzelPirate• 5 years ago

Do you have documents that show Coinbase sells Bitcoin for USDT and not USDC or simply USD when you sell through their system?

mckirk2• 5 years ago

I think you are confusing Coinbase with another exchange. Coinbase, as far as I can tell, tries to stay away from USDT and rather deals in USDC.

bhouston2• 5 years ago

Another article on the topic: https://www.coindesk.com/policy/2021/09/24/sec-hints-at-teth...

Tether is under undisclosed SEC investigation, FOIA blocked

Related Stories