This weekend, the Wall Street Journal quoted Matt Ballensweig, co-head of trading and lending at ‘crypto’ brokerage Genesis Global Trading, saying around a dozen hedge funds had recently discussed short sales of Tether. While many of these funds eventually opted against moving forward with these trades, others—including Fir Tree Partners and Viceroy Research—did place ‘substantial’ bets that Tether will lose its 1:1 peg with the U.S. dollar.
Fir Tree’s short wager was first revealed last month by Bloomberg News, which noted that previous efforts to short Tether by other hedge funds found no takers. The fact that Fir Tree and others are now able to find willing counterparties suggests that skepticism around Tether’s stated asset reserves is on the rise.
Kevin Kang, founding principal of one of the funds (BKCoin Capital) the previously tried to short Tether, told Bloomberg that the downside of betting against the stablecoin “is limited because Tether won’t go much higher than $1 at any given point. But if they do break the peg, then the upside is unlimited.”
One short-seller told the WSJ that an affiliate of Deltec Bank & Trust, the Bahamian bank with which Tether conducts business, had reportedly sought to invest ‘billions’ in outside hedge funds. The short-seller believes these are Tether’s funds the bank is gambling with, meaning Tether would have difficulty accessing these funds should a sufficient volume of its customers simultaneously seek to redeem their USDT for actual U.S. dollars.
A Tether spokesperson told the WSJ that the short trades were being made by those “leveraging on disinformation with the end goal of collecting a management fee.” The spokesperson—likely either CTO Paolo Ardoino or general counsel Stuart Hoegner, since nobody else seems to work at Tether—went on to say that Tether’s reserves were a solid portfolio of “conservative, diversified, liquid assets” that exceeded their liabilities.
This defense didn’t sway Fraser Perring, founding partner at Viceroy Research, who told the WSJ that Tether could have nipped this controversy in the bud long ago by agreeing to “publish exactly each line item” in its reserve investments. The fact that Tether continues to insist that the financial world should simply take it at its word only fuels the perception that the company has something to hide.
The accounting firm of smoke & mirrors
It’s often said that if one enjoys eating sausage, it’s best not to watch it being made. Tether has taken this maxim to its illogical extreme, suggesting that not only should one not watch how new Tether tokens (USDT) are made, you aren’t entitled to even read the ingredients on the label.
For nearly five years now, Tether has been promising to conduct a full and completely independent audit of the reserves backing the $82b (and growing) USDT supply. In reality, no public accounting of any type was forthcoming until last year, when the New York Attorney General exposed an ‘in-out’ scheme in which Tether ‘borrowed’ money from its sister company Bitfinex to cover its shortfall just long enough for a sketchy accounting firm to confirm that the money was in Tether’s accounts. The borrowed cash was then returned to Bitfinex the very next day.
In a display of chutzpah not seen since Donald Trump declared himself a ‘very stable genius,’ Bitfinex declared itself entirely exonerated by the NYAG. This, despite the NYAG reporting that Tether “for periods of time held no reserves to back tethers in circulation.”
Later that year, the U.S. Commodity Futures Trading Commission (CFTC) hit Tether with a $41 million penalty for making “untrue” and “misleading” statements and “omissions of material fact” in its claims to control sufficient assets to back the ever-growing mountains of USDT circulating in the wild.
As part of the NYAG settlement, Tether agreed to release quarterly reports detailing its asset reserves. However, these attestations by a third-tier accounting firm are paper-thin and remarkably free of independently verifiable data, and set off even more alarm bells due to the significant volume of reserves allegedly backed by commercial paper of dubious origin.
The release of those quarterly reports only fueled the fire of skepticism surrounding Tether’s reserves, but Tether has gone to court to keep its financials locked in its black box. Tether has even claimed that simply revealing the name of its chief investment officer would “constitute an unwarranted invasion of privacy.”
Faith in Tether’s goodwill is further undermined by the fact that the company’s supposed braintrust – CEO Jan Ludovicus van der Velde and CFO Giancarlo Devasini – make fewer public appearances than Halley’s Comet. That leaves Ardoino and Hoegner to publicly cast aspersions on anyone who dares question if USDT is backed by anything other than hot air.
Here be manipulative dragons
While there are some in the digital asset space who will cheer on the short-sellers for calling Tether’s bluff, others are warning that Tether’s opacity—and its deep integration with many of the sector’s major players due to USDT’s ability to prop up utility-free tokens like BTC—allows it to play dirty.
Long-time Twitter critic Bitfinexed has previously accused certain Tether-friendly exchanges of allowing Bitfinex shareholders to ‘wash trade Tether for free,’ allowing the price of USDT to spike to absurd levels for extremely brief periods, albeit long enough to liquidate any open short positions. When the WSJ story broke, Bitfinexed warned that “Tether will literally print tethers out of thin air, loan them out to Genesis, who will then charge you a premium. When your trade is successful, you’re not getting paid.”
While it remains to be seen how successful any Tether short will prove, those ‘crypto’ influencers who understand Tether’s critical role in artificially pumping value into BTC and other tokens will continue to dismiss Tether critics as cynically spreading ‘FUD’ (fear, uncertainty and doubt). But it’s telling that the group who slavishly adhere to the doctrine of ‘Don’t Trust, Verify’ all start singing ‘Don’t Worry, Be Happy’ when it’s Tether’s turn under the microscope.
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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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