Tether Fined $41M for Lying About Reserves

No, but apparently they can tell people "this is worth $1" and people will believe them, even if there's nothing backing it. On a long enough timeline what you say might be true, but in the short term it seems that most people haven't gotten the memo.

tdeck4• 5 years ago

I don't understand why this is something they can settle rather than something that gets them completely shut down.

300bps• 5 years ago

Or why outright lying that every Tether was backed by a U.S. dollar is termed “misleading”.

It’s incredible - they had 4x as much Tether as dollars backing it and lied about audits taking place that never happened.

BbzzbB2• 5 years ago

More than 7x ("at one point")

BitwiseFool3• 5 years ago

I'm not saying they shouldn't be shut down, but I genuinely wonder how that process would work. People don't have an account with Tether itself, so how would they be able to compel people to "return?" the Tethers and get their cash back?

skybrian• 5 years ago

In theory, by announcing a changeover period and a deadline for turning them in? If they don’t, it’s on them.

A similar thing was done when upgrading national currencies to the Euro: https://europa.eu/european-union/about-eu/euro/exchanging-na...

WalterSear3• 5 years ago

* They don't need to? If Tether, the company, disappeared, the market can decide what to do with the, now entirely unbacked, Tether cryptocurrency.

* Tether, the company, can freeze specific Tethers they have issued, making them unusable as currency. Whoever shuts them down might be able to force them to do this en masse.

_3u102• 5 years ago

The SEC is in the business of protecting investors not destroying peoples savings over a few inaccuracies.

Why would misleading statements ever result in a shutdown of a company instead of a fine?

wmf• 5 years ago

It's debatable whether Tether has a few inaccuracies or massive fraud.

tdeck4• 5 years ago

Because the "misleading statement" (i.e. deliberate lie) is the entire basis of Tether's business. The service they claim to provide is fiat backing for their cryptocurrency and they didn't do that. That's not "a few inaccuracies", it's fraud.

toofy2• 5 years ago

“Misleading statements” is doing a lot work here.

When we’re talking about organizations who exist solely in the realm of toying with people’s finances, a “misleading statement” is nothing more than a lie. They were misleading people. There is a reason some things come along with incredibly complex language to explain the nuances of what is actually happening as accurately as possible.

We can’t attempt to downplay “misleading statement” in an effort to misdirect away from why they were misleading people.

paulgb• 5 years ago

I'm more surprised that anyone still holds Tether, unless they're stuck with it. The company has been caught in lies several times before, it's not as if a $41M fine will turn them honest.

knownjorbist• 5 years ago

Lending rates for USDT on the major decentralized lending platforms are more favorable than other stablecoins.

ur-whale2• 5 years ago

I'm more surprised that anyone still holds Tether,

The price BTC shooting up right now (it is around $61k as I write this) is probably because lots of USDT holders are starting to realize what a bad idea that is.

If you were in their shoes ... what would you be doing right now?

Nasrudith• 5 years ago

Really any large reserve of stagnant cash is a flat out attractive nuisance for fraud and theft - while also failing to invest it properly. Of course their whole shtick is warmed over gold-bug fallacies.

norswap2• 5 years ago

I haven't looked into it, but it looks like they lied about being backed by cash (or at least, somehow implied it).

Now they claim to be backed by cash and cash equivalents, namely a lot of "commercial paper" (short term debt obligations), which is widely believed to be in Chinese markets.

For some reason though, they won't reveal exactly what it is they hold. It could be that they think the market will not react kindly to the kind of assets they hold, or that they entered some kind of weird agreement no to reveal them.

I highly doubt they're not backed by assets whose face value adds up to the total UST distribution, because multiple auditors have said they were fully backed. But it is possibly that some of these assets are junk that won't (or have a high risk not to) redeem at face value.

Even in very bad scenarios, UST could fall to 0.8$ if 20% of Tether's asset default (and they burned through profits). Problematic but not quite such as a risk as it going to zero, which is why people still hold it.

honksillet2• 5 years ago

Does anyone “hold” tether? As a stable coin isn’t it something you just use on the very short term?

Kranar• 5 years ago

The CFTC doesn't have that authority; a company can only get shut down for a criminal offense and Tether is not accused of any crime. Only the Department of Justice can prosecute or investigate crimes, the CFTC is an independent agency and as such has no authority to do so.

All the CFTC can do is levy a fine, so both parties are fairly indifferent as to whether that money comes from a judgement or from a settlement. There could be some minor benefit of not having to admit any "wrongdoing" for press release purposes, but overall it makes no difference.

RNCTX• 5 years ago

The CFTC doesn't have that authority; a company can only get shut down for a criminal offense and Tether is not accused of any crime.

Fraud is a crime.

hncommenter13• 5 years ago

Not a lawyer, but I'm not sure that's correct.

Per the CFTC's Enforcement website, they can bring civil enforcement actions in court--without the other party present aka ex-parte--seeking to freeze and enjoin the operations of a person or entity they can convince a judge is violating the Commodity Exchange Act.

From [0]: "At the conclusion of an investigation, the Division may recommend that the Commission initiate administrative proceedings or seek injunctive and ancillary relief on behalf of the Commission in United States District Courts around the country. Administrative sanctions may include orders imposing civil monetary penalties, suspending, denying, revoking or restricting registration and exchange trading privileges, and orders of restitution. The Commission also may obtain temporary restraining orders and preliminary and permanent injunctions in Federal court to halt ongoing violations. Other relief may include appointment of a receiver, a freeze of assets, restitution, and disgorgement of unlawfully acquired benefits. The CEA also provides that the Commission may obtain certain temporary relief on an ex parte basis (that is, without notice to the other party). When those enjoined violate court orders, the Division may seek to have the offenders held in contempt. When the Division obtains evidence that criminal violations of the CEA have occurred, it may refer the matter to the Department of Justice for prosecution.

[0] https://www.cftc.gov/LawRegulation/Enforcement/OfficeofDirec...

Here's an example: https://www.investmentexecutive.com/news/from-the-regulators...

JumpCrisscross• 5 years ago

why this is something they can settle rather than something that gets them completely shut down

I'm a Tether sceptic. I wouldn't want to be the regulator (note: not prosecutor, different standards) to shut it down.

There was a moment when I suspected Tether may hold U.S. dollar money market securities. That would mean a collapse could spill to our financial markets. But that doesn't seem to be the case. The only people who would get hurt in its wake seems to be those who choose to keep using Tether despite the screaming warnings.

Those same people would make you public enemy No. 1 for bringing down the house of cards. So given the problem is contained to the people who oppose its solution, there isn't a great argument for allocating regulatory resources to this over anything else.

AlexanderTheGr82• 5 years ago

Tether is not a US-based company. So does US have the authority to shut them down?

35fbe7d3d5b93• 5 years ago

There is an entire branch of the Department of Treasury designed to enforce stiff sanctions and financial penalties against people, companies, and even countries that defy US regulations.

If the federal government decides Tether needs shut down, it won't be a struggle.

throw_m239339• 5 years ago

Tether is not a US-based company. So does US have the authority to shut them down?

You are talking about a country that managed to force foreign banks to rat on US citizens accounts abroad. You are talking about a country that conducts drone assassinations on their own citizens overseas, without trial.

USA has de-facto authority on a lot of country where they feel entitled to (hard power), save maybe from Russia or China and India mainly. Russia because they actually have little ties with USA economically and politically since the war in Libya, China because of the exact opposite as it poses a systemic risk to USA, India because they don't trust the US who are "allied" with Pakistan.

Often when USA and the EU clash, ultimately the EU tend to bend the knee (soft power). The Trump era was a significant exception.

silexia• 5 years ago

I agree completely, the founders should be criminally prosecuted and the fines should be multiple times all time profits from the illicit activity.

satellites• 5 years ago

But crypto coins are so much more trustworthy and secure than traditional financial institutions... /s

robcohen• 5 years ago

I’m pretty sure no one thinks digital IOUs are worth more than the word that’s behind them.

It’s not reasonable to conflate decentralized cryptocurrency with digital coupon IOUs.

jfk13• 5 years ago

See also https://news.ycombinator.com/item?id=28878874, which (currently, at least) has more extensive discussion.

rkagerer• 5 years ago

https://archive.is/eqUP1

danuker• 5 years ago

there was never more than $61.5 million backing Tether, even as more 442 million coins were circulating at one point.

Ah, pulling the classic "fractional reserve" I see.

pfisherman2• 5 years ago

<insert crypto rant> fiat <more crypto rant > debasing the currency.

What I find ironic is that the crypto ecosystem still ended up with something like central banks, only in this case their mandate is make money for its owners, and they have no accountability or obligation to serve the general public.

DennisP• 5 years ago

Play centralized games, win centralized prizes.

OneLeggedCat• 5 years ago

crypto ecosystem still ended up

It's decades from its final form.

dylan6042• 5 years ago

their mandate is make money for its owners,

Isn't this pretty much the description of every company? I understand feduciary responsibilities blah blah, but if the company didn't think they could do both then they wouldn't be running the legitimate buisness. If it was started to intentionally dupe people that's an entirely different thing.

ChainOfFools• 5 years ago

decentralization is at best nothing more than a polite name for the transition period from one centralized regime to another.

like all mirages, it dissolves when you get too close.

dragonwriter7• 5 years ago

What I find ironic is that the crypto ecosystem still ended up with something like central banks, only in this case their mandate is make money for its owners, and they have no accountability or obligation to serve the general public

So, like private currency-printing banks before government monopolies (and like private banks, which subject to central regulation still create money though they don't print currency), not like central banks.

bko• 5 years ago

The difference is I can choose not to hold Tether. Removing my exposure to dollars as a US citizen is a lot harder. Not to mention people that are on a fixed income like my parents. So debasing fiat is a lot worse

matheusmoreira6• 5 years ago

Yeah, it sucks. The problem is USD though. It taints everything it touches but people are still forced to use it. People use cryptocurrencies as an investment and convert to fiat in order to transact. They refuse to transact directly in cryptocurrencies.

They would work if some country was crazy enough to sell barrels of oil for cryptocurrency, indirectly setting the price of everything else. That will probably get them invaded and destroyed by the US military for threatening the hegemony of the petrodollar.

lmkg• 5 years ago

On the initial headline I thought that $41 million would be negligible compared to the central role they have in the crypto ecosystem. But apparently that fine is 2/3 of their backing reserves.

boole1854• 5 years ago

Correction: it is 2/3rds of what their reserves were back in 2017. The amount of Tether in circulation has increased over 150-fold since then, so presumably their reserves have increased as well.

SandB0x2• 5 years ago

This is simply insolvency, not fractional reserve.

AlexandrB• 5 years ago

And yet, they're still operating. This is the kind of thing that makes me think the whole cryptocurrency ecosystem is a house of cards. Cryptocurrency advocates seem to be really bad at spotting and punishing incompetent and malicious actors in their markets.

tom-thistime• 5 years ago

Insolvency would be a better metaphor than fractional reserve. But I'm guessing* Tether doesn't actually offer to settle up in any reserve currency.

*I think it's a pretty good guess, based on the fact that Tether is still in business.

SilasX4• 5 years ago

I think that would be illiquidity -- having only assets that need to be converted, rather than dollars themselves -- rather than insolvency, right?

mortehu• 5 years ago

If you read the order, it's clearly about cash reserves (in the financial sense) specifically, and not total underlying assets.

FireBeyond6• 5 years ago

Hah. At one point Tether was claiming, during the days where they were holding on to the "1:1 backing!" that they were banking $2 billion A WEEK.

And yet the cryptofans were telling us we were curmudgeons for not buying into the hype (or in this case, the bullshit).

bonestamp22• 5 years ago

Some of us who like crypto also knew it was bullshit.

zomglings2• 5 years ago

There has always been a healthy amount of skepticism about Tether in the crypto community. Your cryptofans narrative does not accurately reflect reality.

Kiro• 5 years ago

I've never seen a cryptofan defend Tether.

tastyfreeze• 5 years ago

From their website: "Every Tether token is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”)."

They don't claim 1:1 USD backing. They claim that every tether is backed by 1 USD of value. So, when their crypto holdings go up in value, TADA!, more reserves to print tether against. The problem here is they never explain what happens when the value of their backing assets goes down.

trident5000• 5 years ago

Depends what that means. Dollar reserve could be low because investment reserve is high. Would need to see the numbers.

sneak2• 5 years ago

I'm sure that the 68.5 billion-with-a-b tethers they have out there now must be backed, though, right?

Surely they learned their lesson when they only had 442 million tethers issued and only 61.5 million dollars in the bank.

ceph_• 5 years ago

442 million

Current market cap is up to 70 billion! 90% of which has been printed in the last 2 years, and wasn't even covered by the report. Looks like they're going on a last ditch printing spree

kangnkodos• 5 years ago

What is the average daily net inflow of US dollars into Tether? How many days of net inflow is $41M?

FireBeyond6• 5 years ago

At times they've claimed that it is in the billion dollar a week range.

But their cash backings say that that was most likely always bullshit, even as they move to "other instruments" (cough Chinese junk paper cough).

nickff4• 5 years ago

The CFTC claims to be helping end-customers by doing this kind of thing, but it is really taking money that could have been distributed off the table. Fining (and perhaps requiring the dismissal of) Tether's corporate officers would likely instill more discipline, but fining the company just hurts the customer.

klyrs2• 5 years ago

No. This teaches scammers and customers alike that this is a risky business. Fining the corporate officers is almost certainly off the table, because Tether appears to be some form of limited liability corporation (but I don't know anything about the law in HK). Play stupid games, win stupid prizes. I'd hope the founders end up in jail for what appears to be blatant fraud... but chances are, they'll just move on to the next thing after Tether crumples.

nickff4• 5 years ago

The CFTC mission statement is:

"The mission of the Commodity Futures Trading Commission is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation."

I don't see how punishing customers accomplishes that goal.

tdeck4• 5 years ago

It would be better to confiscate Tether's entire reserve, force them to allow tether holders to cash out (for fractional amounts), and punish the execs directly.

nickff4• 5 years ago

That would make sense to me, though it may be possible (and less disruptive) to allow tether to continue under new management.

FireBeyond6• 5 years ago

perhaps requiring the dismissal of) Tether's corporate officers

That's okay, they'll just go to work for Bitfinex. Remember when the two claimed they were independent? And then Bitfinex loaned Tether $800M, and we'll call the two people who signed the loan contract for Bitfinex "Corporate Officer A" and "Corporate Officer B". Meanwhile, on the other side of the contract, we'll call the people who signed on behalf of Tether uhh... "Corporate Officer A" and "Corporate Officer B".

Or they'll go work for Deltec. Whose Deputy CEO will give interviews saying that "they can see the flow of all the Tether, because we are in the system and can see every transaction". Another legit, arms-length financial relationship, evidently...

buhrmi• 5 years ago

Probably paid in USDT.

sneak2• 5 years ago

They don't need to; they can print USDT, swap it for Ether, and take Ether to any normal, above-board exchange and get Real Dollars.

roywiggins• 5 years ago

Don't think the USG accepts USDT as legal tender...

mensetmanusman• 5 years ago

They will have to spin up 41,000,000 more Tethers to pay for this!

dylan6042• 5 years ago

But when they submit the payment, they print out the hashes for the coins in 6pt font double spaced in a script style font.

singularity2001• 5 years ago

And pay their fine with it

gws5• 5 years ago

Don’t really get you guys saying Tether should be shut down… the big banks get routinely fined with much bigger fines for much bigger crimes, are we gonna shut them all down then? At least Tether did not steal from nor defraud anyone. Just as a random example: https://www.justice.gov/opa/pr/jpmorgan-chase-co-agrees-pay-...

ceejayoz2• 5 years ago

Tether did defraud people. They lied on their website, claiming a) audits (which they never completed a single one of) and b) 1:1 backing of each Tether with a dollar in the bank (which they didn't have).

gws5• 5 years ago

You are right, they lied, and people could have been harmed if there were a “bank run” on Tether. But in practice there was not and nobody suffered any damage, zero, nada, nicht. While big banks got fined for actually taking money illegally out of people’s pockets and nobody said let’s shut them down

tootie• 5 years ago

I think the difference is this is Tether's entire reason for existence. It's equivalent to Bernie Madoff.

gws5• 5 years ago

Still there have been zero redemption issues in getting USD back from USDT

zhoujianfu• 5 years ago

I had a thought… what if Satoshi Nakamoto was… Bernie Madoff?

Maybe Bernie Madoff and Hal Finney working together?

xtracto• 5 years ago

Right, in my view HSBC laundering scandal was 100 times worse and they are still operating all over the world.

Marciplan• 5 years ago

Why aren’t you against both big banks and Tether doing it?

FireBeyond6• 5 years ago

Big banks operate under regulation and oversight, not from financial havens, don't have CEOs (sorry deputy CEOs) who give interviews from gaming chairs and who aren't aware on what banking license their bank holds (actual quote: "There are actually two banking licenses here, one is... I forget the name, but that's the one I think we have. The other is the one everyone is talking about. We might also have that, too."

matheusmoreira6• 5 years ago

Yeah. The truth is the entire banking system is running the exact same scam ad Tether. The only difference is the governments think banks are too important to allow the consequences of their actions to catch up with them. So whenever there's a bank run and there's no money in the bank, the government bails them out.

They should just bail Tether out too.

pama• 5 years ago

This suggestion runs counter to the US system of finance. The secret service was created to protect the value of the dollar against attempts like those made by tether. Why would the government today want to do a 180 and give up the power of the dollar? If there was another major collapse by messing with the crypto too abruptly, it would probably help establish the dollar for a while longer. I don’t think that such an event would be a bad thing for the global economy either.

iammisc3• 5 years ago

Tether defrauded almost 380 million dollars worth of peoples assets by claiming the rockets it issued could be redeemed for dollars.

And most of the banks should have been shut long ago.

gws5• 5 years ago

Will reply here rather than in all the sub-threads: I’m not saying lying is good, I’m pointing my finger at the paradox that on one side everybody is scandalized that Tether is not shut down, on the other everybody is happy to keep their money with big institutions that are proven to be even worse.

system2• 5 years ago

I am blown away. 61.5 million dollars for $68,536,825,819 (68 billion dollars.) Maybe not the same in 2017 but damn, how does this even work without anyone panicking?

inopinatus• 5 years ago

It doesn’t, but that’s bubbles for you.

matheusmoreira6• 5 years ago

Banks do the same thing. How do banks work without anybody panicking? Liquidity injections. The government will literally print money and give it to banks so they can fulfill withdrawals during bank runs. If the governments didn't bail them out, they'd be insolvent.

They should just do the same for Tether.

jakeinspace2• 5 years ago

Banks do not have enough cash on hand to meet their liabilities (deposits), but they are for the most part net-positive over all assets and liabilities. They aren't just burning depositor's money, they're putting it into mortgages and riskier loans. So while they cannot afford a quick payout above 10% of total deposits, the assets are there in the form of loans and securities.

mkr-hn• 5 years ago

Banks (in the US) pay fees to the FDIC to insure deposits well past what most people have and are subject to reserve requirements.

loeg2• 5 years ago

It was something like ~400 million tether at the time, not 68 billion. The recent run-up post-dates the period of this malfeasance (and is probably also fraudulent in some way).

thaumasiotes• 5 years ago

Problem: Tether has less money than they're supposed to have in order to back their obligations.

Solution: take some of their money away.

bagels2• 5 years ago

Is it possible to short tether effectively to profit when the whole scam collapses?

vkou• 5 years ago

Sure, if you'd like to collect your winnings in bottle caps and IOUs.

And if the exchange you are shorting it on doesn't wipe your position out through a margin call, in one of those strange moments where due to a mysterious glitch, tether breaks the USD peg for a few seconds.

If you're looking for easier money, I'd recommend card-counting at a speak-easy ran by the mob, before I'd recommend getting into this business.

bagels2• 5 years ago

Yes, this is why I said effectively. That does not sound very effective.

iammisc3• 5 years ago

The executives should be in jail if they knew of the fraud and did nothing. Why are they getting off on a fine?

Tether Fined $41M for Lying About Reserves

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