Teetering Tether

As the new year begins, the bitcoin story winds ever onward. At face value, the price has ticked upward enormously. Even after falling from the heights of 20000 USD, when compared to previous years the value of investors’ bitcoin stashes are significantly higher. But it’s about the technology, right? Allow me to roll my eyes. The bad news for bitcoin believers and investors alike is that the calamity of routine price volatility is nothing compared to the coming storm.

Bitfinex has volume. It has a deep order book that can handle whales and the orders they place to swing the market. Bitfinex has no transparency, so the order book is at best an approximation of current orders, real or imagined, as Bitfinex sees them. It has no audits, so it is anyone’s guess if customers are routinely scammed. Bitfinex has banking issues. It can’t seem to appease KYC/AML requirements to the level required for large banks. Most essentially, Bitfinex has Tether. It is tied at the hip to the success of Tether, and when one half of the duo sinks so too will the other.

Tether is sinking. Or perhaps Bitfinex is sinking and Tether is bailing water. The routine claim put forward by the Tether website and those who maintain faith in Tether is that USD reserves back Tether 1:1. Possible, but improbable. The idea behind Tether was clear to see, essentially a version of Hawala banking to avoid using large banking institutions. A user desiring to buy on Bitfinex could send dollars to Tether and receive an equal amount, dollar to Tether, and then move their new fun tokens to Bitfinex and trade. What can go wrong? A lot. The unclear legality, lack of any audit to back up Tether’s claims, and the inclusion of a line in the Tether terms of service that basically says they don’t have to give anyone any actual dollars. Tether is a one way street – once you trade in your dollars, you’re on the Tether train for better or worse.

Recent events cast significant doubt on the USD reserves claimed by Tether. In recent days hundreds of millions of Tethers have been “printed”, adding massively to the total amount in circulation. This appears to be in reaction to the huge price drop experienced by bitcoin and the need for Bitfinex to prop up the price, errr, I mean enable trading. So did Tether received hundreds of millions of dollars from buyers in the span of a few days? It beggars belief that anyone, be they billionaires or banks, would commit hundreds of millions of dollars to Tether. Due diligence and rational investing would scream bloody murder. Tether is entering a dangerous phase of obvious and destructive market manipulation.

The largest concern is the awareness of investigators, growing proportionally to the dollar amount Tether claims to own and process. To government regulators with limited time and resources, a scam in thousands may not be worth their focus. But a scam reaching into billions of USD? Careers are made on such headlines. Tie in the dark net, bitcoin, and unregulated exchanges, and the basket of criminality is an inviting target. Tether is making itself an easy and obvious target. Bitfinex may be teetering, and printing Tethers out of necessity, but the scrutiny it invites and the inevitable path they now find themselves on is only a losing proposition. How long can they hang on?

Image credit – Public domain image by Web-dev-chris