The Bitcoin Papers: To Tether Or Not To Tether… Continued

The Bitcoin Papers: To Tether Or Not To Tether… Continued

This article is a continuation therefore I advise you to first read the first part of the story if you haven’t done so already:

The Bitcoin Papers: To Tether Or Not To Tether

The Bitcoin Papers are a series of articles published for the sole purpose of informing all potential cryptocurrency investors about troubling questions left unanswered that could sooner or later backfire. Those entitled have avoided to answer those questions thus far causing major concerns around the crypto-sphere. I can only guess why they refuse to prove their claims, nevertheless, I will try to be as objective as possible avoiding any direct accusations. The reader will ultimately be the judge, at least till the questions are properly answered.

I do NOT deserve your praise for what you are about to read. The people – journalists or just simple cryptocurrency enthusiasts – who thoroughly researched such sensible topics before us deserve ALL the praise. I only collected information from such hard-working sources, aggregate and reorganize it so my readers can easily understand the nature of the problem. I will make sure to mention all the sources inside and at the end of each article.

If those entitled answer the pressing questions I am about to ask, I will update the articles or write new ones as soon as I am able.

What? Who? How? Why?

The what and the who were just a glimpse of how far the rabbit hole can actually go in Tether’s case. Yet, to truly understand the danger USDT poses to the cryptocurrency market as a whole, we have to try to search the answers for two more questions: how and why?

How Do Tethers Work?

As mentioned in the first part of our case study, Tethers are used on exchanges to buy Bitcoin and other cryptocurrencies. Exchanges and traders alike treat USDT as real US Dollars. This wouldn’t be a problem if it was indeed the case. However, several events from 2017 raised serious questions about the legitimacy of the company behind USDT, Tether Limited.

Let’s start with the most important event of 2017 that triggered a massive Tether issuance. In April 2017, Tether Limited, just like cryptocurrency exchange Bitfinex experienced banking issues that disconnected the two companies from the Fiat system.

On April 17, 2017, Bitfinex released a statement mentioning:

Beginning April 18, 2017, all incoming wires to Bitfinex will be blocked and refused by our Taiwan banks. This applies to all fiat currencies at the present time.

Bitfinex Banking Issues April 2017

Five days later, Tether posted an important announcement on the official site saying:

Since April 18, 2017, all incoming international wires to Tether have been blocked and refused by our Taiwanese banks.

Tether Banking Issues April 2017

In the very next phrase, Tether Limited gave reassurance to all customers about the total supply of USDT:

…we do not expect the supply of tethers to increase substantially until these constraints have been lifted.

According to CoinMarketCap data, at the time of the announcement, the total supply of USDT was 50 million (since CoinMarketCap assumes 1 USDT is 1 USD, $50 million in market cap means 50 million USDT were in circulation at that time).

Tether April 2017 Market Cap

Worth noting is that for the most part of 2015 and 2016, the total supply was fairly constant at around 10 to 15 million USDT. In 2017, in the first three months, the supply tripled and the company experienced banking problems. Nevertheless, what happened in the next six months pales compared to the first quarter of 2017.

As seen in the image above, after the announcement, the issuance increased exponentially, despite their ‘expectations.’ At the time of the article (December 4, 2017), the total market cap of USDT is at $844 million, as per CoinMarketCap data. In other words, there are 844 million USDT currently in circulation; that’s a 1.600% increase compared to April 2017!

Interestingly enough, as first mentioned by Bitfinex’ed in one of his many blogs about the case, there seems to be a direct correlation between the Bitcoin price and Tether issuance. New Tethers entering the market is more often than not followed by a Bitcoin rally to new all-time highs.

USDT BTC Correlation chart

Not showing in the image is the latest 50 million USDT issuance on December 1 and 2, 2017 and yet another all time-high reached on Sunday at around $11,800. In November 2017 alone, Tether Limited printed a whooping 325 million USDT. Coincidence or not, towards the end of November, Bitcoin passed a major psychological barrier: the $10,000-mark.

Overall, compared to the beginning of the year, Bitcoin increased by over 1.000%. Tether total supply increased by 1.600% compared to the first quarter of 2017.

BTC Price USDT Market Cap Correlation

In the image above, Bitcoin price is shown in green, Tether total supply in blue.

Why Does It Matter Anyway?

And that analysis leads us to our last question: WHY? Why does it matter? Why the FUD? What is the real problem here?

Where should I start? How about with the beginning? Tether aka USDT is part of the cryptocurrency market but is it a cryptocurrency? What makes a cryptocurrency valid? First, decentralization. Tether is NOT decentralized. Yes, the cryptocurrency is issued on the Bitcoin blockchain via the OMNI Layer protocol. Yet, only one company has the authority to issue USDT: Tether Limited. There is no hard code behind it, no limited supply like in Bitcoin; Tether Limited can issue USDT almost at will IF the company desires to do so.

Moreover, USDT are mostly used by exchanges and infrequently used by traders. Most rational traders, when they want to close their position and profit, they exchange their Bitcoins in real US Dollars, NOT USDT. The only true Tether purpose is to buy Bitcoins and other cryptocurrencies. Who does that since traders aren’t quite interested in USDT? Most likely exchanges.

Most importantly, a cryptocurrency is an open-source project that can be verified by anyone with such capabilities. As shown in the Who Owns Tether? sub-chapter, the company behind Tether is quite opaque. They do not provide the customers with much details concerning their business other than a Transparency page with current balance, issuing address, and the top addresses holding USDT.

For some this may be enough, yet for others, this is hardly the case. Why doesn’t the official site show the full team behind the project (we and others before us had to do some good-old ‘digging’ to ‘know’ the actual Tether team)? And how can we know if the Tethers are indeed backed by USD? Is there an official audit? Are the bank ‘issues’ solved? What banks are currently working with Tether? And why the exponential issuance since April 2017?

The Tether Audit

In September 2017, Tether released the details of a so-called ‘audit’ performed by Friedman LLP. You can see it here. The ‘audit’ however is nothing more than ‘an internal memo.’

Tether Audit or Internal Memo?

According to document:

“FLLP did not review the specific terms of the clients account agreements with the bank.”

“We make no representation regarding the sufficiency for your purposes of the procedures selected, and those procedures do not necessarily disclose all significant matters about the Client or reveal errors in the underlying information, instances of fraud, or illegal acts, if any. This engagement does not contemplate tests of accounting records or the performance of other procedures performed in an audit or attest engagement. Our procedures are not for the purpose of providing assurance and are limited to the findings as of September 15, 2017 at 8:00PM EDT. We have not performed any procedures or make any conclusion for activity prior to or subsequent to September 15, 2017 at 8:00 PM EDT.”

“In addition, our services do not include a determination of compliance with laws and regulations in any jurisdictions.”

Furthermore, when explaining the procedures performed, Friedman LLP mentioned in the document:

“FLLP makes no representations about the sufficiency or enforceability of any trust agreement between the trustee and the Client.”

“FLLP did not evaluate the terms of the above bank accounts and makes no representations about the Client’s ability to access funds from the accounts or whether the funds are committed for purposes other than Tether token redemptions.”

“The Creation address is reportedly inclusive of all Tether tokens issued and tokens in the Treasury address are within the control of Client, therefore the tokens in the Treasury address do not represent outstanding customer accounts that can be redeemed.”

In other words, the memorandum doesn’t truly guarantee anything.

No further ‘audits’ have been published since September 2017.

What About The Banking Issues?

Since April 2017, Tether Limited has released only one major announcement concerning the banking issues.

On September 5, 2017, before publishing the Friedman memorandum, the company released an extensive report trying to give reassurance to the whole community about its business.

The company admitted the banking issues were still ongoing at the time of the announcement:

Tether has grown dramatically over recent months, despite banking issues.

Nevertheless, Tether Limited has allegedly found solutions, even though they are ‘uncomfortable’ providing any specific details.

Tether aka USDT Announcement September 2017

They also shared real audits made prior to April 2017, when the supply was fairly constant. You can view them here, here, here, and here. As one can see, the names of the banks were openly provided. With Friedman memorandum however, the company hid the name of the banks for unknown reason. We are unsure as to why ‘it would be a mistake to be too forthcoming about the specifics of any particular money transfer solution,’ as phrased in the September announcement.

Finally, the company wanted to clarify the terms in the Legal page and its solvency:

Tether aka USDT Solvency September 2017 Update

The November Tether Hack

Two months after releasing that announcement, on November 21, 2017, Tether Limited found a specific case where they could exercise the right ‘not to redeem Tether:’ in an allegedly $30 million Tether hack.

“$30,950,010 USDT was removed from the Tether Treasury wallet on November 19, 2017 and sent to an unauthorized bitcoin address. As Tether is the issuer of the USDT managed asset, we will not redeem any of the stolen tokens, and we are in the process of attempting token recovery to prevent them from entering the broader ecosystem,” the PR team said.

Two days later, an update was provided: Tether successfully ‘tagged’ the stolen funds making them unredeemable in a ‘temporary hard fork.’ The company once again gave reassurance ‘every Tether is fully backed by the fiat underpinning it upon issuance,’ and also stated:

Similarly, we will not endanger our customers by revealing our banks. As those of you who are active in cryptocurrency know, there is pressure from large correspondent banks in the U.S. to bully other institutions not to accept the community’s business. We do, however, bank at major financial institutions and will continue to do so.

Again, it is unknown why revealing the names of the banks – as any transparent financial institutions does especially those with ‘significant assets’ – could possibly ‘endanger customers.’

Full Tether Audit Coming Soon?

On December 1, 2017, Tether and Bitfinex PR representative Ronn Torossian promised in a blog a full audit of the Tether Limited ‘books’ will be released ‘as soon as possible.’ Torossian said:

Bitfinex works closely with financial regulators, law enforcement, compliance personnel, and financial institutions to provide the highest possible level of protection and service for its customers. It has hired nationally recognized accounting firm Friedman LLP to conduct a full audit of its books, which will be released as soon as possible. On an interim basis, Friedman released a report showing that Tether had $442,984,592 cash reserves as of September 15, 2017 to fully back Tethers that have been issued.

Hopefully, this time, the ‘full audit’ won’t be just an ‘internal memo’ with the names of the banks scratched NOT to ‘endanger customers.’ And hopefully, transparency, accountability and responsibility will be indeed the ‘keys to running a successful crypto company,’ as PR representative wrote in his blog. And yes, that includes Tether Limited as well.

As soon as other details about Tether emerge, we will make sure to update the story.

Stay tuned.


Bitfinex’ed who covers the Tether and Bitfinex cases extensively on Medium. You can also find him on Twitter here.

A note from Bob on the transparency of Tether

Bitfinex and Communication – Ronn Torossian

Florian Gheorghe

Freedom Evangelist, self-employed for over 8 years, consciously trying to break the status quo one step at a time. Writing is my ultimate escape, action is my only option.

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