Tether’s secret loans to ‘crypto’ heavies put under the spotlight

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More light is being shed on questionable loans made by the issuers of the Tether (USDT) stablecoin, prompting additional questions of how great an impact these loans are having on the price of prominent digital assets.

This week, Mike Burgersburg, aka Dirty Bubble Media (DBM), published an article (Examining Tether’s Secret Loan Portfolio) that offers new insights into the billions of dollars worth of USDT that Tether has loaned to major players in the ‘crypto’ space.

A year ago, Tether promised to eliminate these loans from the reserves, allegedly backing its (now) $90 billion in issued USDT. As 2023 got underway, Tether made minor reductions in its roughly $6 billion in loans but reversed this direction in the second quarter by issuing a further $150 million in loans to unspecified parties.

In September, Tether Holdings spokesperson Alex Welch told the Wall Street Journal (WSJ) that the reversal came following “a few short-term loan requests from clients with whom we have cultivated longstanding relationships.” Welch also revealed that the loans were intended “to prevent any significant depletion of our customers’ liquidity or the need for them to sell their collateral at potentially unfavorable prices, which could result in losses.”

Tether’s then-CTO/current CEO Paolo Ardoino responded to the WSJ report by claiming that Welch “is not a Tether spokesperson nor works at Tether, as that person repeatedly said in her correspondence with the tabloid.” Ardoino neglected to specify why Welch was talking to the WSJ on Tether’s behalf if she had no authority to do so. Ardoino also didn’t clarify why he hadn’t pushed back on previous articles by both the WSJ and Bloomberg that identified Welch as a Tether spokesperson and quoted her at length.

This summer, documents related to the bankruptcy of the FTX exchange revealed the existence of a ‘fiat integration and revolving loan agreement’ between FTX and iFinex, the parent company of the Bitfinex exchange (Tether’s sister company). Immediately following this October 2020 agreement, USDT’s market cap shot up as tens of billions of new USDT were minted.

FTX’s affiliated market-maker, Alameda Research, was among the largest recipients of USDT before both companies filed for bankruptcy protection in November 2022. We’d ask how much of the USDT that Tether issued to Alameda—nearly all of which ended up on FTX—was loaned rather than purchased with U.S. dollars, but others have tried without success to pry that information out of Ardoino.

Tether used to insist that USDT could only be issued if its customers put up one U.S. dollar for every new USDT. Ardoino later confessed that Tether sometimes issued new USDT provided customers pledge certain “extremely liquid assets” as collateral.

Ardoino initially claimed only BTC was accepted as collateral until documents from Tether’s dust-up with the New York Attorney General (NYAG) were released this summer. Those documents revealed that Tether had also accepted over 1.1 million ETH tokens as collateral for loans made between June 2019 and May 2021.

Whether it’s BTC or ETH (or whatever else Ardoino has yet to admit), this is actually a violation of Tether’s 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.” (Then again, since nobody believes BTC is the real Bitcoin, perhaps Tether has an out.)

Regardless, Tether’s loans remain a sore spot with Ardoino, in part because the company is making pitiful progress on fulfilling its pledge to reduce the loans “to zero” by year’s end. As of September 30, Tether still had $5.17 billion in loans on its balance sheet.

But with USDT’s market cap having miraculously increased by $6 billion since the last loan numbers were published, perhaps they’ll make it to zero after all. We’ll wait to see what other phantom Tether spokespeople have to say come New Year’s Day.

‘Interest’ in Tether

Getting back to DBM, the article claimed to have obtained “information about Tether’s secured loans operations from a source familiar with the matter.” Specifically, DBM was given addresses on the Ethereum blockchain that were said to process both USDT loan interest and principal payments.

DBM’s source flagged several addresses allegedly used by Tether to issue loans and to receive interest payments from multiple borrowers. Payments to this “interest collection address” tend to “cluster around the first of each month.” Once a sufficient volume of ETH has accumulated, it is forwarded to a “Bitfinex deposit” wallet before moving to the Bitfinex exchange’s “hot wallet.”

DBM compared the information he’d obtained with publicly available data from the July 2022 bankruptcy of the Celsius digital asset lender/Ponzi scheme. At the time of its collapse, Celsius owed Tether around $900 million, prompting Tether to liquidate the BTC collateral Celsius had provided.

Comparing interactions between known Celsius wallets and the Tether-flagged addresses, DBM was able to “conclude with high confidence that Celsius’ loans from Tether were disbursed and repaid via the Tether Treasury address.” DBM also found “an 89% correlation” between the loan balances over time and the monthly payments from Celsius to the Tether interest collection address.

Once this connection was established, DBM was able to identify other entities (some dead, some alive) that interacted with both the Tether Treasury address and the interest collection address. These included ‘crypto’ lenders Babel Finance and Nexo, trading firms Three Arrows Capital (3AC) and Amber Group, as well as addresses associated with the Bitfinex, Binance, BTCTurk, and OKX exchanges.

As of December 1, seven borrowers appear to be paying interest on their USDT loans, including wallets linked to Bitfinex, BTCTurk, and OKX. (DBM qualifies that this doesn’t necessarily indicate that the exchanges have outstanding USDT loans, only that someone used the exchange to pay their loan interest.)

When comparing the interest payments (using average interest rates) with Tether’s reported loan totals, DBM found his estimates “quite close” to Tether’s figures. However, there was a sharp divergence in June 2022, as DBM’s estimates declined to around $1.2-$1.5 billion, while Tether’s official loan total roughly doubled to around $6.2 billion in the space of a few months.

DBM chalks up this discrepancy to one of two factors. First, most USDT is issued on the Tron blockchain, and the inside info DBM received was Ethereum-specific. So, it’s possible Tether was issuing more loans on Tron. But that May/June 2022 time period also saw the collapse of 3AC, Celsius, and the Terra/Luna ecosystem, officially kicking off ‘crypto winter’ and the string of insolvencies that followed.

Sister companies are doing it for themselves

Blockchain sleuths ChainArgos quickly weighed in on DBM’s findings, noting that 95% of the payments made to Tether’s interest collection address in 2023 came via Bitfinex. Furthermore, “almost none of the loan payments came from a Bitfinex wallet until right around the time Terra / Luna collapse.”

By isolating the Bitfinex/Celsius interest payments, ChainArgos identified what appears to be “a steady stream of payments continuing even after Celsius filed for bankruptcy.” ChainArgos suggested two possible explanations: “Did Tether immediately make new loans? Or maybe did someone agree to assume Celsius’s bad debts?”

On Wednesday, ChainArgos suggested that ‘someone’ was Bitfinex. The timing could be coincidental, but while Tether was reportedly liquidating the BTC that Celsius posted as collateral for its USDT loan, someone opened a significant BTC long position on Bitfinex.

It’s worth remembering that the claim of Tether and Bitfinex being wholly separate identities is basically PR. In addition to serving as Tether’s CTO/CEO, Paolo Ardoino continues to serve as CTO of Bitfinex. And Tether was caught loaning nine-figure sums from its cash reserves to Bitfinex in 2018 after U.S. and European authorities froze around $850 million in Bitfinex’s client and corporate funds. Neither Tether nor Bitfinex said anything about that loan until the NYAG brought the hammer down.

Also, recall that around the same time that Celsius et al. were imploding, Tether was ditching MHA Cayman, the threadbare auditing firm that had served as the rubber-stamper of Tether’s quarterly ‘attestations’ of its fiscal reserves. Tether handed MHA’s attestation responsibilities to BDO Italia, the sixth different firm Tether has used in this role in as many years.

For some reason, the BDO attestations dropped a crucial phrase from the itemized list of assets said to be backing USDT. While MHA Cayman’s ‘Secured Loans’ section included the caveat “(none to affiliated entities),” this caveat is nowhere to be found in BDO’s attestations. Curiously, the caveat remains on the Reserves Breakdown section of Tether’s website, but it appears BDO might not have been so comfortable making this assertion.

Untethered to reality

The widely held theory for why BTC’s fiat value has risen by nearly two-thirds over the past three months has to do with the $7 billion in new USDT minted over this same span. This excess USDT is ‘loaned’ to market makers who flood it into heavily leveraged derivative trades, drive up BTC’s price, and then cash out at a profit (usually via USDC, which, unlike Tether, has access to U.S. banking).

As analysts have noted, BTC’s current bulge has little to do with FOMO-filled retail customers pumping cash into their exchange accounts. Ordinary consumers have too many real-world bills to pay and too many memories of getting seriously burned during the last fraud-filled bubble.

Without a steady supply of USDT with which to paint the tape, BTC would be locked into the same stagnant fiat flatline it displayed in the months prior to Tether firing up its money printer in late October.

Remember Welch, Tether’s phantom spokesperson? It seems she earned her non-dismissal-dismissal by revealing the mechanics behind Tether’s decision to issue its loans. As Bloomberg’s Matt Levine observed in September, Welch was only saying what Tether and ‘crypto’ skeptics have long claimed.

“Tether is a form of self-sustaining fractional reserve banking for crypto, and it dynamically prints Tethers in order to prop up crypto prices. At the margin, cryptocurrencies are not purchased by real people putting new dollars into the crypto system, but by crypto hedge funds buying crypto using freshly printed Tethers.”

Here endeth the lesson.

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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.