Tether sued for $3.5 billion for liquidating Celsius loan collateral

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The administrators of the bankrupt Celsius Network have sued to recover billions of dollars worth of “preferential and fraudulent transfers” of customer assets to Tether before Celsius’s lights went dark.

On August 9, the Celsius Debtors filed a civil suit in the U.S. Bankruptcy Court in the Southern District of New York, seeking to reclaim tens of thousands of BTC tokens that Celsius sent to Tether as collateral for loans of the latter’s USDT stablecoin. Tether ultimately liquidated the collateral as Celsius went bankrupt in July 2022.

Celsius is seeking the return of 57,428 BTC worth nearly $3.5 billion, as well as $100 million in damages, “additional damages to be determined at trial,” legal fees and other costs.

As far as its customers knew, Celsius was a digital asset lender, accepting tokens deposited by customers then lending these tokens to third parties to generate revenue with which to pay interest on its customers’ deposits.

But a bankruptcy court-appointed examiner concluded that Celsius was a Ponzi scheme from its inception. Celsius founder Alex Mashinsky used the sums raised from Celsius token sales to line his own pockets, so when the financial squeeze began with the mid-2022 onset of ‘crypto winter,’ Celsius had no assets with which to make good on its financial obligations.

Celsius struck a ‘token agreement’ with Tether in February 2020, allowing it to borrow USDT by posting BTC as collateral. The parties amended this agreement in January 2022 to change the strategy by which Celsius could be required to post additional collateral if the value of its original collateral fell below a specified threshold.

Celsius also secured a guarantee from Tether that if the value of its collateral exceeded its loan obligations at the time this collateral was liquidated, the excess would belong to Celsius, not Tether.

At the start of April 2022, Celsius owed Tether $512,330,000 in USDT, for which it had posted 16,505 BTC tokens. But as the value of BTC began to slide, Tether demanded collateral top-ups that ultimately totaled 16,737 BTC. Celsius also borrowed an additional $300 million in USDT, for which it posted another 10,700 BTC, of which 2,228 BTC was excess collateral.

By June 2022, Mashinsky was reaching out to Tether for “help squeezing [Celsius] short sellers,” but the suit claims Tether instead asked Celsius for additional collateral. Despite the amended agreement giving Celsius a 10-hour window in which to satisfy this demand, Tether embarked on “a fire sale of Celsius’s collateral,” fully liquidating the BTC Celsius had provided to Tether, including the top-up transfers.

This allowed Tether to “extinguish its entire exposure to Celsius, at a time when other creditors (e.g., customers) could not get access to any of their deposits held by Celsius.” Coming as they did within the 90-day window pre-bankruptcy, the transfers count as ‘preferential’ under the Bankruptcy Code and are allowed to be clawed back by administrators.

The bankruptcy administrators claim that if Celsius had been given the opportunity to put up the additional collateral demanded by Tether, no liquidation would have been necessary and Celsius “could have retained pledged [BTC] worth more than $2 billion today.”

Celsius further alleges that Tether applied the BTC against obligations owed to it for an average of $20,656 per token rather than the $22,487 going price at the time. Celsius alleges that this was a result of Tether selling the lot over a period of just a couple of hours, while “established market practices” would have allowed Tether to get the full price for each BTC sold.

No good grift goes unpunished

Tether’s official response called the “baseless” suit a “shake down” that “relies on an obvious misapplication of the law, ignores the numerous defenses that Tether has to the claims asserted against it and raises substantial jurisdictional questions.”

Tether expressed amazement that the bankruptcy administrators would make the allegations contained in the suit, given Tether’s view that the BTC that Celsius sent Tether as collateral was “liquidated at Celsius’ direction and with Celsius’ consent at June 2022 prices.”

Tether claimed the suit “proves the adage that ‘no good deed goes unpunished’” and insisted that the company “will never fall prey to shameless litigation money grabs. We will vigorously defend ourselves against the unwarranted allegations made against us, and we expect to prevail in this litigation.”

There’s another controversial angle to this lawsuit, which illustrates how Tether issued USDT in exchange for BTC. This is an express violation of its own terms of service, which states that Tether “will not issue Tether Tokens for consideration consisting of the Digital Tokens (for example, bitcoin); only money will be accepted upon issuance.”

Tether’s ‘loans’ to third parties—including ‘related parties’—have always been controversial, but the Celsius revelations turned that spotlight even brighter. In December 2022, Tether publicly pledged to eliminate these loans but Tether’s most recent ‘attestation’ of the reserves backing issued USDT showed these loans growing by 40% ($1.9 billion) in just the past three months.

Odd, it

While it issues quarterly attestations, Tether has never submitted its reserves to a full-fledged independent audit, despite pledging that one was in the works as far back as 2017. Tether execs, including CEO Paolo Ardoino, have occasionally repeated these empty promises but this mirage unfailingly evaporates as one gets closer.

In an August 12 interview with Wired, Ardoino continued this dodge, claiming that an audit “is still a high priority.” But Ardoino also offered up his now-standard excuse that ‘Big Four’ auditing firms have been warned by U.S. politicians that “they should be aware of onboarding new crypto customers, especially after FTX,” referring to the Sam Bankman-Fried exchange that imploded under the weight of its own fraud in November 2022.

Pressed by Wired as to whether Tether has actually attempted to hire a Big Four auditing firm, Ardoino said that they’d “had discussions with some of them.” Pressed further, Ardoino claimed Tether had been told “it was not the right moment, basically.” Ardoino spun a conspiratorial tale in which the auditing firms’ banking customers “might not be happy if you have a stablecoin as a customer,” but admitted that “that’s my speculation.”

Wired pressed Ardoino to confirm whether or not Tether had “ever issued USDT tokens that were not backed by dollar reserves.” Ardoino skipped the dollar detail, saying only that Tether “has always been backed.”

Late last week, Ardoino told Bloomberg News that Tether planned to double its current staffing levels by mid-2025, and that many of these new hires will be tasked with regulatory compliance duties. It’s a tacit admission that Tether’s infamously thin payroll doesn’t spend a whole lot of time or money on compliance, which explains why Tether has been routinely penalized by regulators who caught Tether lying about its operations.

Markets in Crypto Avoidance

Wired also quizzed Ardoino regarding Tether’s apparent disinterest in registering under the European Union’s new Markets in Crypto Assets (MiCA) regulatory regime. Ardoino previously expressed reservations about MiCA’s rules regarding stablecoin issuers’ reserve assets and the requirement to store a significant percentage of these assets in cash deposited with local banks.

These rules were apparently acceptable to Tether’s closest rival Circle, issuer of the USDC stablecoin. But Ardoino told Wired that he doesn’t think MiCA’s custody rules are “safe” and that the rules “create additional systemic risks in Europe, rather than reducing them.”

According to Ardoino, “up to 60 percent of the reserve would have to be in cash deposits under MiCA. If you have a stablecoin with, say, €10 billion ($10.9 billion) in reserve, you would need to put €6 billion ($6.5 billion) in the bank. The bank can lend out up to 90 percent of that, keeping only €600 million ($655.4 million). Imagine a customer asks to redeem €2 billion ($2.18 billion), but the bank has only €600 million ($655.4 million). Then you are in a situation in which both the bank and stablecoin go bankrupt.”

Hold that Tiger

Tether has belatedly begun freezing USDT in wallets that law enforcement agencies have flagged as involved in crime, sanctions evasion and terrorism. This isn’t the most welcome news for the criminals, sanction evaders and terrorists who find USDT most convenient for conducting their activities.

A lawsuit was filed against Tether on August 2 in the U.S. District Court of the Southern District of New York by Tiger Mines New York, a corporation that didn’t exist until April 10, 2024. Tiger Mines appears to be operated by Hassan Miah, a New York businessman whose ‘crypto’ interests include the Paybby ‘Web3 bank.’

Tiger Mines claims that Tether froze $160 million worth of USDT in digital wallets that were “assigned to Tiger Mines in April 2024” by an unspecified Assignor. Said Assignor claims to have bought its USDT from the Huione digital marketplace—recently described as a hub for a variety of criminal groups, including many ‘pig butchering’ scammers—that uses USDT as its preferred currency.

The Assignor’s wallets were frozen in August 2021 at the request of Chinese police due to suspected involvement in an online gambling case but Tiger Mines claims the Assignor had nothing to do with this case.

Tiger Mines said it sent Tether a draft of its complaint in April, after which it was contacted by someone in China named ‘Duan’ who claimed to represent the Chinese government. Duan tried to make a deal with Tiger Mines to split the contents of the wallets and gave details that suggested he’d read the non-public draft complaint.

Tiger Mines met with Tether’s attorneys in May, after which they were contacted by a person named Zhang, who also claimed to represent the Chinese government and wanted to make a similar deal regarding the wallets’ contents. Zhang claimed to know that Tiger Mines had met with Tether.

This led Tiger Mines to conclude that Tether “is actively working with the Chinese government or police department by providing updates and information that it received in this case to the Chinese government. In doing so, Tether breached the confidentiality of the settlement negotiations.”

Tiger Mines says Tether last made contact on July 31 to say that it had given the Chinese government until September 30 to “secure a proper order” to freeze the funds. Tiger Mines cites this as proof that Tether’s original freezing hadn’t followed proper procedures and thus should never have happened.

Honestly, we’re not sure who’s right in this scenario, but we have to say, it would be incredibly on-brand that even when Tether tries to do the right thing, it can’t help breaking the rules.

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