Tether’s Change of Heart

I have struggled for years to parse Tether’s behavior. It is very difficult to determine which of their inexplicable actions are motivated by incompetence, by negligence, by desperation, or by malice. Were they unbacked because they were taking advantage of their users, because they thought they had no better option, or because they didn’t realize that their disclosure was inadequate? More recent reporting has started to bring it into focus for me, but this post is going to be much more speculative than is my usual ilk. Take statements of fact as that, but when I speculate on the intent of Tether or its executives be sure to keep the appropriate amount of salt handy.

First, recent reporting by Bloomberg Businessweek (archive) has given us a new window into the period where Tether leaves Noble Bank and Phil Potter leaves his role as Chief Strategy Officer. They discuss how John Betts of Noble Bank insists that when Tether banked with him (you should probably read about the period right before though) Tether always had “in excess of 98% of their cash reserves and [Noble] received and validated monthly statements from their other account.” (The other account was in Stuart Hoegner’s name if you were not aware) They also go on to claim that Giancarlo Devasini wanted to invest Tether’s reserves so that they could earn a higher return and that Phil Potter disagreed. The end result was apparently Phil Potter being bought out in June of 2018 for $300 million. (For context the Tether marketcap was ~$2.5 billion at this time)

This period in June of 2018 is when we begin to see some extraordinarily interesting behavior from Bitfinex and Tether. Crypto Capital Corp was not responding to Bitfinex requests for withdrawals so Bitfinex ‘borrowed’ hundreds of millions of dollars from Tether, and in exchange credited Tether with inaccessible funds held at Crypto Capital Corp. This started a pattern of behavior that would eventually result in their investigation (and eventual settlement) with the NYAG. However, that is not all they were doing.

Giancarlo Devasini, the Chief Financial Officer of Bitfinex and Tether, in partnership with Silvano di Stefano, the Chief Investment Officer of Tether started a cryptocurrency hedge fund called BlueBit several months before this in December of 2017. A strange side gig for the Chief Financial Officer of two multi billion dollar companies, but perhaps makes sense if you are building up the infrastructure too much more aggressively invest with the funds that your clients have entrusted you with.

https://twitter.com/ExkrementKoin/status/1409981893907472387

Furthermore, he was not the only c-level Tether executive who was diversifying his employment. Paolo Ardoino, the Chief Technical Officer for Bitfinex and Tether became a director for Delchain, the cryptocurrency focused offshoot of Deltec, where Tether was banking. Delchain then launched Fugur Alpha (archive) (after Paolo was no longer a director) a cryptocurrency focused hedge fund who Bitfinex touted when they were onboarded. Paolo even said (archive) ““It is really rare that a fund of this size chooses to trade almost exclusively in a single location. The onboarding of Fulgur Alpha cements Bitfinex’s position as the go-to venue for major crypto funds, market makers and arbitrageurs.”

None of this is definitive evidence of wrongdoing by Bitfinex or Tether. However, it reads to me that many of their countless errors may have been well-intentioned incompetence, or perhaps even more simply acts of poor judgement and negligence. However, it seems that when Phil and Giancarlo came to this moment in the summer of 2018 the overall tack of the organization seems to change to be much more aggressive, and very distant from their original promise to ALWAYS be backed 100% by cash.

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3 thoughts on “Tether’s Change of Heart

  1. Hi Bennet, thanks for these blogs which are very interesting. The fog is starting to lift on Tether but there are still some material question marks. I think it is reasonable that a company that manages multi billion $ want to invest these assets conservatively with a small yield. $60bn of capital invested in a duration mix of US Treasuries yielding a blended say 1% is a VERY profitable business for the owners and that is surely a reasonable business model behind a stable coin. HOWEVER any thing more aggressive than that is, if not illegal, then at least quite misleading and disingenuous vs the stated backing and intention of the stable coin. This can all work when the markets are supportive and keep going up but there is a reason normal banks are not allowed to invest all their customers deposits in high growth stocks…. If/when there are some big draw downs or defaults on their commercial paper position this looks like a disaster waiting to happen.

    BUT this still does not really address the two key questions I am STILL left with:
    1. Did Tether really receive $68bn in CASH from customers wishing to use their stable coin? If so it should be very easy for Tether to demonstrate that these proceeds flowed through their accounts before being invested into bonds, commercial assets etc.
    2. WHY is there such a huge demand for the use of Tether? It is quite baffling to see that more than 60/70% of all BTC and ETH transactions are done in Tether. Why on earth is that? The regulated exchanges like Coinbase and Kraken have a MUCH more limited use of Tether. So clearly it is to do with being able to transact in crypto in offshore exchanges. BUT if these off shore exchanges have difficulties getting FIAT on/off ramps i.e. justifying the need for tether then where did the cash to buy the tether in the first place come from?

    My gut feeling is that these two questions are intraclinked and are to do with the extreme leverage still being offered on many off shore Exchanges. I don’t believe for a second Tether has ever received $68bn in cash. Instead I suspect they are extending tethers as credit to a range of these off shore Exchanges i.e. they are printing tethers in exchange for commercial paper owed by the Exchanges; no actual cash is changing hands. The Exchanges hold collateral over the crypto purchased by their customers on leverage (use to be 100x but even the 10x now is extreme), but tether itself can claim they are holding “commercial paper”. So far they have managed to avoid a complete collapse of this when there have been major drawdowns (by printing more tether perhaps…?) but I do suspect this will eventually blow up and drag the whole industry with it. Meanwhile someone somewhere is finding a way to onshore a load of crypto bought on offshore exchanges with fictitious (sorry, borrowed) tether and converting that into a lot of cash or other crazy things like NFTs….

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    1. 1. No. We know for certain that sometimes they were setting up secured lending agreements and the like to issue tethers.
      2. It is a useful tool for cross-exchange arbitrage, allows many exchanges to exist without needing to find banking, and is a tool for more illicit uses like capital flight, money laundering, and online gambling

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