CFTC orders Tether to pay $42.5M, tells it not to break the law again

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The U.S. Commodity Futures Trading Commission (CFTC) has slapped Tether with US$42.5 million in penalties, saying it made “untrue” and “misleading” statements and “omissions of material fact” in its management of the USDT stablecoin over several years.

At the heart of the case were Tether management’s public claims that each “tether” digital asset unit was backed by one unit of its corresponding fiat currency (mostly USD, but also EUR and others). The companies had maintained that balance just 26% of the time between 2016 and 2018, the CFTC found.

Tether had also regularly shuffled reserve funds between unregulated partner entities, the Bitfinex exchange and other third parties, and “backed” its tokens with a mixture of fiat currencies and some decidedly unstable reserves including unsecured receivables, loans and other digital assets. Despite early promises to audit its holdings the companies had never done so satisfactorily, and at least 29 of the arrangements it made with other parties “were not documented through any agreement or contract.”

That Tether engaged in all the above activities has been an open secret in the digital asset world for years, but the CFTC’s order represents official confirmation and includes details of some of the facts.

Another common claim is that much of the speculative market value bestowed on major digital assets (including BTC and ETH) comes from excessive issue of USDT, and not “real dollars” entering the digital economy. Observers who track large tether issuances have noted they often correspond with big price gains in those assets.

Tether has essentially been running a private, unregulated fractional reserve financial system using digital dollar-tokens it created out of thin air. Without the words “cryptocurrency” or “blockchain” attached, it’s difficult to imagine any company of the past doing that for a prolonged time.

Though Tether’s corporate group has always claimed to have redeemed tether tokens for fiat currencies upon request, it could not support a large run of these claims.

Breaking the law

The CFTC’s order, filed and settled on October 15, found Tether violated the Commodity Exchange Act (CEA) and ordered it to cease and desist from any further breaches of the Act and other CFTC regulations in the future.

It ordered the group consisting of Tether Holdings Limited, Tether Limited, Tether Operations Limited, and Tether International Limited to pay US41 million in civil fines, after the parties agreed the decision would be final. Separately, it issued an order for iFinex, BFXNA Inc., and BFXWW Inc. (companies related to the Bitfinex trading exchange) to pay US1.5 million for engaging in “illegal, off-exchange retail commodity transactions in digital assets with U.S. persons,” and not registering its activities with U.S. regulators as required by law.

As part of the agreement, Tether may not claim double jeopardy should any future legal charges arise from the above actions.

The settlement amounts represent just a fraction of the close to US$1 billion Tether and its related corporate partners have lost over the years in hacks, seizures and other penalties. The amounts include the now-infamous “Tether hack” of November 2017, which saw US$31 million in authorized (but unissued) USDT tokens disappear from its accounts.

This is Bitfinex/Tether CFO Giancarlo Devasini in 2014.

Here's what he thinks of audits.

This company has had $850 million USD seized, due to criminal bank fraud charges, and $61 million in civil fines for lying about reserves, they claim to have $69 billion today. No audits. pic.twitter.com/8eUNzulEWW

— Bitfinex'ed 🔥🐧 Κασσάνδρα 🏺 (@Bitfinexed) October 18, 2021

Yet BTC still pumps

Despite the BTC market reportedly relying on new tethers to sustain its price pumps, the CFTC’s ruling didn’t impact its value. BTC has continued to rise and is now valued above US$62,000, $3,000 higher than when the order landed last Friday. Trading pairs between various digital assets and USDT continue to be among the most popular on major markets.

Given the common belief that Tether’s managing entities were basically printing their own dollars, that risk is already priced in to digital asset values to some extent. Alternatively, they may simply not care. Nothing short of a complete Tether shutdown would have damaged trading values, though it will be interesting to see if major digital assets can sustain the same level of growth in the coming years, with regulators keeping an eye out for any future shenanigans.

Tether was originally launched in 2014 as the blockchain industry’s first “stablecoin”—ostensibly backed by one fiat unit each, they offered traders a way to “park” the value of their sales in USD-equivalent units to avoid volatility risk. Another less-advertised benefit was the ability for traders and exchanges to move large amounts of USD-denominated assets internationally and outside international reporting systems. This proved handy for unregulated exchanges that could not handle actual fiat currencies, or which had experienced problems with banking partners.

Like 2021’s stock exchange environment and fiat currencies themselves, Tether staggers along as a system that users “trust” as long as it still works… and hope that situation lasts as long as their own money is there. Rather than the new world economy BTC and blockchain promised a decade ago, it’s a less-secure, less-stable facsimile of everything wrong in the existing one.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple and 
Ethereum—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.