The "Cat and Mouse Game" in the Crypto World: Tether and the Mystery of Its $69 Billion Reserve
Original title: "The Mystery of Tether's $69 Billion Reserve"
Written by: Zeke Faux, Source: Bloomberg, Editor: Nanfeng
In July, U.S. Treasury Secretary Janet Yellen convened a meeting with the chairman of the Federal Reserve (Fed), the head of the Securities and Exchange Commission (SEC), and six other top officials to discuss Tether. It is impossible for them not to realize the absurdity of the situation: US inflation is rising, the aggravation of the new crown epidemic threatens economic recovery, and Yellen wants to discuss a digital currency Tether, which was shot in the movie "The Mighty Ducks." Invented by the former child star who conceded a penalty. But Tether has grown enough to put the U.S. financial system at risk. It's as if a playground snowball fight escalated so wildly that the Joint Chiefs of Staff were called to avert a nuclear war.
Tether is known in the financial world as a "stablecoin" because each Tether (USDT) is supposed to be backed by a $1 reserve. But it's really more like a bank. The company that issues the currency, Tether Holdings Ltd., receives dollars from those who want to trade the cryptocurrency, and in return the company will credit an equivalent amount of Tether to their digital wallets. Once in possession of Tethers, one can send them to cryptocurrency exchanges and use them to bet on the price of Bitcoin, ETH, or any of the thousands of other cryptocurrencies.
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Source: Bloomberg Businessweek, October 11, 2021
Exactly how Tether’s launch was backed up, or if it was actually backed up, has been a mystery. Over the years, critics have argued that despite assurances, Tether Holdings does not have enough assets to maintain a 1:1 exchange rate, meaning its Tether issuance is inherently fraudulent. But in a world of Crypto, where joke coins based on dog faces can reach market caps in the billions and scammers routinely make their fortunes from ludicrous-sounding schemes, Tether seems like just another oddity .
This year, Tether Holdings began issuing large quantities of the digital currency. There are currently 69 billion Tethers (USDT) in circulation, 48 billion of which were issued this year. That means the company should be holding a corresponding $69 billion in real money to back these digital currencies — a figure that would make the company more than a million dollars if it were a U.S. bank rather than an unregulated offshore company. The company ranks among the 50 largest banks in the United States.
On Twitter, on commercial television, on the trading floors of hedge funds and investment banks, everyone started asking why Tether was minting so many coins and whether the company really had the reserves it claimed. An anonymous anti-Tether blog titled "The Bit Short: Inside Crypto's Doomsday Machine" went viral, while CNBC host Jim Cramer also told viewers to sell their cryptocurrencies, warning: "If Tether crashes, then it Will destroy the entire cryptocurrency ecosystem.”
As far as regulators are concerned, the dollar reserve assets needed to back up Tether are too large, and even if the company does have enough dollar reserve assets, it is still dangerous. That's because if enough traders immediately demanded their dollars be redeemed, the company might have to liquidate assets at a loss, triggering a "run" on the non-bank. Those losses could flood the regulated financial system, causing credit markets to crash. If these anti-Tether voices are right and Tether is a Ponzi scheme, it will be bigger than Bernie Madoff's scheme. [Editor's note: Madoff is the instigator behind the largest "Ponzi scheme" in the world's financial history, with tens of thousands of victims and a fraudulent amount of up to US$65 billion. ]
So earlier this year, I set out to solve this mystery. The firm's financial footprint stretches from Taiwan to Puerto Rico, the French Riviera, mainland China and the Bahamas. A former banker who worked at Tether told me that the company’s executives put their reserves at risk, reaping profits for themselves that could run into the hundreds of millions of dollars. “It’s not a stablecoin, it’s a high-risk offshore hedge fund,” said John Betts, who runs a bank in Puerto Rico that Tether has used. “Even Tether’s own banking partners don’t know how big their reserves are, or if they have any.”
"Crypto Bank"
On the company's website, a green pentagon with a white T represents Tether, which it claims is "Digital money for a digital age." The logo doesn't look like much, but it's probably the most normal thing about Tether Holdings, a company that's weird in almost every way imaginable. LinkedIn lists just a dozen employees, a tiny number for a company with $69 billion in assets under management.
Tether’s website is also touting its settlement with the New York Attorney General’s office, but the announcement of the settlement makes it look like the company is on to something terrible. U.S. Attorney General Letitia James said in a statement that Tether Holdings has been "operated by unlicensed, unregulated individuals and entities trading in the darkest corners of the financial system."
Elsewhere on the site, there's a letter from an accounting firm saying Tether has reserves to back the stablecoin it issues, along with a pie chart showing about $30 billion of the company's holdings in U.S. dollars Invest in commercial paper—that is, short-term loans made to businesses. That would make Tether the seventh-largest holder of such bonds, behind Charles Schwab and Vanguard Group.
To check this claim, a few colleagues and I asked some Wall Street traders to see if anyone knew what Tether was buying (commercial paper). No one said they knew about it. "It's a small market and a lot of people know each other," said Deborah Cunningham, chief investment officer for global money markets at Pittsburgh-based asset manager Federated Hermes. "If there's a new entrant, it's usually pretty obvious."
It is unclear which regulator is in charge of overseeing Tether. A representative of the company said on the podcast that the company is registered with the British Virgin Islands Financial Investigations Agency. But Errol George, the head of the financial institution, told me in an email that the agency does not regulate Tether. "We don't and never have (regulated Tether)."
The company’s current CEO, JL Van der Velde, is listed on Tether’s website as a Dutch national living in Hong Kong who does not appear to have been interviewed or spoke at meetings. The chief financial officer (CFO) is Giancarlo Devasini, a former plastic surgeon from Italy who was once described on Tether's website as the founder of a successful electronics business. The only mention of him in a search of Italian newspapers showed that he had been fined for selling pirated copies of Microsoft software. He doesn't respond to emails or Telegram messages, where he goes by the nickname Merlinthewizard.
Tether’s lawyer, Stuart Hoegner, told me on the phone that Van der Velde and Giancarlo Devasini prefer to avoid the spotlight. He called Tether's critics "jihadists" who want to destroy the company. “We maintain a clear, comprehensive and sophisticated risk management framework to safeguard and invest reserves,” he said, adding that no client request to redeem dollars has ever been turned down.
But when I asked where Tether kept the money, he refused to answer. I didn't reassure myself when he told me that the company had enough cash to make the largest payment ever made in one day. A bank run can last more than 24 hours. Hoegner then responded to follow-up questions in an emailed statement, saying my reporting was "nothing more than a compilation of innuendo and misinformation shared by disgruntled individuals who were not involved with or had direct knowledge of the company's operations." He added: "(Tether's ) success speaks for itself.”
It's unbelievable that people are sending 69 billion real dollars to a company that actually seems to be full of red flags. But every day, on cryptocurrency exchanges, traders buy and sell Tethers as if they were as good as dollars. On some days, more than $100 billion in Tether changes hands. It seems that the people with the most assets in the cryptocurrency market trust Tether, and I wonder why. As luck would have it, 12,000 people gathered in Miami this past June for what has been billed as the largest cryptocurrency conference in history.
At Mana Wynwood's convention center, I spotted the usual embarrassing crypto symbols. Models walked around the floor, with the Bitcoin logo painted on them. "F*** Elon," screamed a podcast host, while a bin full of Venezuelan bolivars read "Cash is trash." It's full of people holding Tethers. Sam Bankman-Fried, the 29-year-old billionaire founder of cryptocurrency exchange FTX, told me he buys billions of dollars in Tether, which he uses to facilitate trades in other cryptocurrencies. "If you're a crypto company, banks are nervous about working with you," he said.
His explanation doesn't make much sense if you still think of Bitcoin as a peer-to-peer (P2P) currency, an ingenious way of transferring value without an intermediary. But most people don't use cryptocurrencies to buy things. They trade cryptocurrencies on exchanges, bet on their value, and hope to make a fortune picking the next Dogecoin, after Elon Musk started tweeting about Dogecoin. Following the news, Dogecoin soared 4,191% this year, while Solana rose 9,801% in 2021 for seemingly no reason.
We might as well think of crypto exchanges as gigantic casinos. Many cryptocurrency exchanges, especially those outside the U.S., cannot handle U.S. dollars because banks are reluctant to open accounts for them, lest they inadvertently facilitate money laundering. Therefore, when users of these exchanges want to place bets, they need to buy some Tether first. It's as if all the poker rooms in Monte Carlo and all the mahjong halls in Macau have gamblers go to a central cashier to buy chips.
Some of the biggest traders on these exchanges told me they routinely buy and sell hundreds of millions of dollars worth of Tether and see it as the industry standard. Even so, many people have their own conspiracy theories about Tethers, such as the government allowing it to grow in size so that criminals who use it can be tracked, and so on. I realized that they didn't trust Tether, but they needed Tether to transact and use it to make money. "It could be more volatile, but I don't care," said Dan Matuszewski, co-founder of cryptocurrency investment firm CMS Holdings LLC.
The beginning of stablecoins
In the 19th century, hunters, hunters, and cowboys on the American frontier faced a shortage of money. The U.S. government issued no paper money at the time, only gold and silver coins, because early leaders feared inflation—which, in the words of John Adams (the second president of the United States), was “a continual series of great thefts. ". As a result, some states allow banks to print their own paper money, which can be exchanged for dollar coins when needed. But some banks do not hold corresponding reserves. These institutions came to be known as "wildcats," supposedly because they located branches in remote areas where wild animals were present, thereby discouraging borrowers from bringing notes to exchange.
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Above: Tether co-founder Brock Pierce. Credit: Erick Marciscano/Getty Images
Nearly two centuries later, the same temptation arose for Tether's co-founder Brock Pierce, a former child actor who played a younger version of Emilio Estevez in the "Mighty Ducks" franchise. Now, Pierce wears exaggerated hats, vests and bracelets like Johnny Depp in "Pirates of the Caribbean," and talks charades like Johnny Depp in "Charlie and the Chocolate Factory."
El SalvadorEl SalvadorPromote Bitcoin. "I am the midwife of creation. I only do the impossible."
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Above: Tether’s first CEO, Reeve Collins, source: Tether
The problem is that, like other cryptocurrencies, Tether breaks almost every rule of the banking industry. Banks track everyone who has an account and where they send their money, allowing law enforcement agencies to track criminals' transactions. Tether Holdings checks the identity of people who buy bitcoin directly from the company, but once Tether is in circulation around the world, the stablecoin can be transferred anonymously, simply by sending a code. For example, drug lords could hold millions of Tethers in digital wallets and send them to terrorists without anyone knowing.
This concern is not theoretical. In May 2013, Arthur Budovsky, inventor of the stablecoin Liberty Reserve, was arrested in Spain and eventually pleaded guilty to conspiracy to commit money laundering. Prosecutors say the anonymous online currency has attracted scammers, credit card thieves, hackers and other criminals. “The United States will track Tether in due course,” wrote Arthur Budovsky in an email to me from the Florida federal prison, where Budovsky is currently serving a 20-year sentence in a federal prison in Florida. “(I) almost feel sorry for them (i.e. Tether Corporation),” he wrote.
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Above: Giancarlo Devasini, Tether's chief financial officer. Photo: Alberto Giuliani
Devasini was 50 years old at the time, which was old by the standards of the crypto space. He frequently commutes between Milan and Monaco, and his home overlooks the Mediterranean, property records show. Devasini is pictured as a tall, handsome man with long curly hair and a scarf wrapped around his neck. In 2014, he was modeling for a photo exhibition at an art gallery in Milan, standing in front of a mirror with half a shaving cream on his face (pictured above), looking into his own eyes with an expression on his face that suggested he was no longer Know yourself. In a subsequent interview, he said his turning point came in 1992, when he emerged from his career as a plastic surgeon. "All my work feels like a scam, a whim," he said.
He previously entered the low-end electronics industry, founding a series of technology companies that imported memory chips and set-top boxes. He also ran an online shopping site in Italy. In 2012, Devasini invested in cryptocurrency exchange Bitfinex, a fledgling exchange founded by a young Frenchman who copied the source code from a defunct exchange. Devasini soon became the de facto head of the exchange company. Bitfinex has shown itself to be more reliable compared to other exchanges, which tend to crash after stealing or losing user funds. The exchange compensated users after about a third of the exchange's funds were stolen in a hack in 2016.
Bitfinex and Tether have struggled to enter the regulated financial system from the start. They resorted to a series of not-so-reliable workarounds to keep the company's bank accounts open — "a lot of cat-and-mouse," Potter said in an online chat with traders. But as more people trade on Bitfinex, and other exchanges start accepting Tether, it's getting harder to keep a low profile. As of March 2017, Tether had more than $50 million in circulation. The following month, several Taiwanese banks that Tether and Bitfinex had been using closed their accounts, leaving Devasini executives so desperate they even considered chartering a plane and taking a stack of them, according to people familiar with the matter. Stacks of cash airlifted out.
Eventually, they found a financial institution in Puerto Rico called Noble Bank International LLC that was willing to work with them. I met the company’s founder, John Betts, in Manhattan, and he explained that Tether was a legitimate business, or at least it was when he was the company’s banker: At the time, our bank held more than 98% of their cash reserves and received and verified monthly statements from their other accounts."
Tether's connection to Bitfinex
From the beginning, cryptocurrencies have attracted skeptics who are as enthusiastic as the crypto supporters I met in Miami. In April 2017, these skeptics began targeting Tether. That month, an anonymous critic on Twitter (under the pseudonym Bitfinex'ed) claimed that Tether had no backing at all. He asked on Twitter where the Tether company kept the money and why it did not issue audited financial statements. Bitfinex'ed tweeted: "They are literally Dave & Busters/Chuck-e-Cheese tokens." Tether has been investigated by the Trade Commission (CFTC) and the Federal Bureau of Investigation (FBI).
Meanwhile, cryptocurrency trading has boomed, and the Tether stablecoin has grown in popularity, with a market capitalization of more than $1 billion by the end of 2017. According to investors, Bitfinex made a profit of $326 million that year. Devasini's stake was worth more than $100 million at the time. That makes Tether and Bitfinex Noble Bank's largest clients, but Noble Bank founder John Betts believes Devasini has put the bank at risk by allowing rumors about Tether's reserves to spread. Betts told me that he had urged Devasini to hire an accounting firm to produce a comprehensive audit report to appease the public, but Devasini said Tether didn’t have to respond to outside criticism that way.
Devasini may have a reason for being so secretive. Tether’s website has long promised that “every Tether is backed 1:1 by traditional currencies held in our reserves.” But Betts said Devasini wants to use those reserves to invest . If Tether really had $1 billion in reserves at the time, as it claims, and assuming a 1% return on investment, that would be an annual profit of $10 million.
Betts sees this as a conflict of interest for Devasini, since any investment proceeds will go to Devasini and his partners, but if the investment fails, Tether holders could lose everything. When Betts objected, Devasini blamed him. "Devasini wanted a higher rate of return," Betts said. "I begged him repeatedly to be patient and to do this work with the auditors."
Tether leaders want to divest Noble Bank. But Phil Potter disagreed, so Devasini and other partners bought Potter's stake in Tether for $300 million in June 2018. That same month, Betts resigned from Noble Bank for health and family reasons. His partners later accused him in court of using company funds for high-end hotels and private jet travel; the trips, he said, were for work. Regardless, Devasini got his wish and withdrew his savings from Noble Bank, which soon collapsed.
In the summer of 2018, Devasini faced another crisis. His Bitfinex exchange had entrusted $850 million to Crypto Capital Corp., a money-transfer service in Panama, as a workaround to his banking problems, according to documents released after a lawsuit filed by the New York attorney general’s office. But the documents show that Crypto Capital suddenly refused to send money back to Bitfinex, preventing the company from paying customers who wanted to withdraw cash. This is a dangerous situation - if the public becomes aware of it, it could trigger a bank run.
So Devasini found all kinds of excuses for customers, and at the same time asked Crypto Capital to provide some cash. His conversations were made public as part of the lawsuit. In 2018, Devasini wrote to the founder of Crypto Capital: "We are facing a large number of (user) withdrawals, and unless we can transfer some funds, we can no longer face this situation." Another time, "Please understand that all of this can be extremely dangerous for everyone, and for the entire crypto community," Devasini said.
It turns out that Polish prosecutors seized Crypto Capital's account. They later claimed that Crypto Capital laundered money for clients including Colombian drug cartels. U.S. prosecutors will indict one of its chief executives, Oz Yosef, on bank fraud charges, and he has yet to respond to the charges in court. (Hoegner, an attorney for Tether and Bitfinex, said both companies were duped by Crypto Capital into thinking it was complying with regulations.)
Instead of disclosing Bitfinex’s bankruptcy, Devasini appropriated Tether’s reserves to fill the gap, leaving Tether only partially backed by reserves.
In February 2019, Tether revised its 1:1 reserve commitment, changing its website and writing: "Every Tether is 100% backed by our reserves, which include traditional currency and cash equivalents , and may occasionally include other assets and receivables that Tether has lent to third parties, including entities affiliated with Tether Corporation." The change suggested that Tether was using its reserves to make loans, but few noticed at the time at this point. The lending was not publicly known until April 2019, when the New York Attorney General's Office sued Tether in an attempt to force it to hand over documents.
Surprisingly, despite Devasini losing a lot of user money, the cryptocurrency world has not lost faith in him. In May 2019, a coalition of major traders bailed out Bitfinex, investing an additional $1 billion in the company. The exchange used the money to repay the loan provided by Tether Holdings. In 2020, when crypto trading took off during the pandemic, Tether saw exponential growth, with 17 billion Tethers newly issued. So far in 2021, Tether's new issuance has reached 48 billion.
In February, Tether agreed to pay $18.5 million to settle a lawsuit by the New York attorney general's office, but did not admit wrongdoing. Proponents view the settlement as support for Tether — if Tether is a huge scam, will the New York State Attorney General settle with it? But in Washington, the investigation continues. Earlier this year, U.S. Justice Department prosecutors sent Devasini and other Tether executives informing them that they were the target of a criminal bank fraud investigation. The government is investigating whether they tricked banks into opening accounts years ago. "Tether regularly engages in open dialogue with law enforcement agencies, including the Department of Justice, as part of our commitment to cooperation and transparency," the company said in a statement.
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Tether still hasn't disclosed where its funds are being held. The only financial institution I could find that would say it is currently working with the company is Deltec Bank & Trust in the Bahamas. I met Jean Chalopin, the bank's chairman, at Deltec's offices. Deltec's offices are located on the top floor of a six-story building in Nassau (the capital of Panama), surrounded by palm trees. In the past, Jean Chalopin co-created the animated film Inspector Gadget, and there is a painting on his office door of a 1980s robot cop in a trench coat. Magazine covers line the bookshelves, featuring Chalopin's wife, a former model, and daughter who is a singer. Chalopin, 71, has shaggy red hair and round, rimless glasses. When we sat down, he pulled a book on financial fraud, “Misplaced Trust,” from the shelf. "People do interesting things for money," he said cryptically.
He made himself a cup of tea and told me that he sold his first animation studio, DIC Entertainment, in 1987 and moved to the Bahamas. The deal made him rich — he bought a chateau outside Paris and a pink colonial in the Bahamas, which later served as a movie theater in the 2006 James Bond film Casino Royale. The villain's home. He worked at Deltec Bank and later befriended the company's aging founder.
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Above: Jean Chalopin, chairman of Deltec Bank & Trust. Photo: Rebecca Sapp/Getty Images
He said he was introduced to Tether’s Devasini in 2017 by a client who got rich on bitcoin. Devasini made a risotto for Chalopin, who was impressed by his bluntness. When they discovered that Devasini and Chalopin's mother grew up in the same Italian village, they started calling each other cugino (cousin). Devasini, who bought a house near their Chalopin home in the Bahamas, bought the waterfront lot together and divided it between the two properties. Chalopin told me Tether has been unfairly vilified. "There is no agenda or conspiracy," he said. "They're not Enron or Madoff. When something goes wrong, they fix it with dignity."
Chalopin said he investigated Tether for months before accepting the company as a client of Deltec Bank in November 2018. He signed a letter guaranteeing his assets. To his surprise, critics still insist that Tether is not backed by cash. "Frankly, the most important thing at the time was that people thought 'their reserves didn't exist,'" he said. "We know the money exists! It's here at (Deltec Bank)."
But when I ask Chalopin if he’s sure Tether’s assets are now completely safe, he laughs. That's a difficult question to answer, he said. He only holds Tether's cash and extremely low-risk bonds. But recently Tether has started using other banks to handle its funds. Only a quarter of that, or about $15 billion, is still in Deltec Bank. "I can't say something that I don't know," he said. "I can only control what we can control."
When I got back to the US, I was given a document showing Tether Holdings' detailed reserve accounts. That included billions of dollars in short-term loans to big Chinese companies that money market funds avoided, the documents show. And that was before China Evergrande Group, one of China's largest property developers, started to collapse. I also learned that Tether has also provided billions of dollars worth of loans to other crypto companies, which are backed by Bitcoin.
One of them is the company Celsius Network Ltd., a large quasi-bank for cryptocurrency investors, founder Alex Masinsky told me. The company pays an interest rate of 5% to 6% on the roughly 1 billion Tether loans it borrows, he said.
Tether has denied holding any Evergrande bonds, but its lawyer Hoegner declined to say whether Tether owns other Chinese commercial paper. The vast majority of Tether’s commercial paper is highly rated by credit-rating firms, and its guaranteed loans are low-risk because borrowers must provide bitcoin that is worth more than the loan, Hoegner said. “As we have consistently demonstrated, all Tethers are fully backed,” the company said in a statement posted on its website after this article was published.
The size of Tether’s investments in China and loans collateralized by cryptocurrencies could be substantial. If Devasini took enough risk to earn even a 1% return on Tether's entire reserves, he and his partners would stand to make $690 million in annual profits. But if those loans fail, even a fraction of them, a tether will be worth less than $1. In this case, any investor who holds Tether will have an incentive to redeem Tether; if others redeem first, Tether's reserves may dry up. Bank runs will ensue.
Officials meeting at the U.S. Treasury Department in July were discussing regulating Tether like a bank, which would force Devasini to finally reveal where its reserves are going, or even weaken Tether by issuing an official U.S. stablecoin. . Oddly enough, at least so far, most players in the cryptocurrency market, including some very large and complex operators, don't seem to care about any risk. Just last month, traders bought $3 billion of newly minted Tether, presumably pumping billions into Jean Chalopin’s Bahamian bank Deltec, in exchange for a Tether created by Giancarlo Devasini and already the target of a U.S. criminal investigation. Tether coins managed by Tether executives.
The situation has parallels with the "wild cat" era of US banking. By the early days of the American Civil War, President Abraham Lincoln began printing federal paper money and imposing prohibitively high taxes on other currencies, and the "wild cat" paper money situation was over. These "wildcat" notes, which once powered the frontier city's economy, are now scrapped. Some people give them to children to play with. In the countryside, they are used as wallpaper.
**This article only represents the views of the original author and does not constitute any investment opinion or suggestion.
