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Tether’s use of Signature Bank for USD transactions a touchy subject

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Tether has likely provoked New York authorities after it was revealed that the world’s leading stablecoin used the state’s Signature Bank for U.S. dollar transactions.

On Tuesday, Bloomberg reported that Tether Holdings Ltd instructed customers looking to purchase USDT stablecoins to send USD to Tether’s Bahamas-based banking partner Capital Union Bank. The USD transfers were made via Signature’s 24/7 digital asset settlement mechanism, Signet. This relationship was reportedly still in place last month, when Signature was taken over by government authorities due to insolvency fears.

While Bloomberg cautioned that such activities weren’t necessarily illegal, Tether’s ties to Signature could be of interest to the federal authorities probing suspected money laundering by Signature’s crypto clients. In January, Signature belatedly turfed the controversial Binance exchange after online sleuths revealed that Binance—a major recipient of issued USDT—was accessing Signet under the guise of a shell company.

More recently, the Wall Street Journal reported that in 2018, Signature closed accounts linked to Tether and its sister company, the equally controversial Bitfinex digital asset exchange, based on suspicions that the companies were up to no good. Signature later opened but almost immediately closed an account belonging to a major Tether/Bitfinex shareholder after concluding that the account was receiving “huge inflows” from Bitfinex.

At the time of Signature’s closure, Tether’s CTO/spokesman Paolo Ardoino claimed the company “doesn’t have any exposure to Signature Bank.” Ardoino routinely cites Tether’s lack of exposure to other financial firms, crypto-related or otherwise, particularly whenever a firm experiences solvency issues. (Tether appears to operate in a magical fiscal biosphere that doesn’t rely on any outside relationships, even with its alleged customers.)

On Tuesday, Tether responded to Bloomberg’s “irresponsible reporting” by claiming that Tether “didn’t have an account with Signature Bank” but the report “would lead the average reader to believe that this was somehow false.”

Paging Letitia James

Tether may not have had a Signature account under its own name but its roundabout use of Signet to facilitate USD transactions has likely lit a fire under New York Attorney General Letitia James. In 2021, James led the Office of the Attorney General (OAG) investigation into Tether and Bitfinex that resulted in an $18.5 million settlement for “illegally trading virtual currencies in the state of New York.”

As part of that settlement, Bitfinex and Tether were ordered to “discontinue any trading activity with New Yorkers.” While it may be open to interpretation that using New York financial institutions might not necessarily constitute ‘trading activity,’ a 2020 New York court ruling held that both companies “are still subject to OAG jurisdiction if doing business in New York.”

The OAG settlement required both companies to maintain “prohibitions against the use of its products and services by New York persons and entities,” with ‘entity’ defined as any group that is “incorporated in, has its headquarters in, regularly conducts trading activity in, or is directed or controlled from, New York.”

This prohibition didn’t extend to entities providing “commercial services unrelated to the purchase, sale, or exchange of virtual currencies.” Capital Union Bank may have other operations besides its crypto clients, but the OAG may not view any Tether-related financial transfers as having any purpose other than buying, selling, or exchanging USDT.

Reserves are but a dream

With the same potent cocktail of hubris and denial that fuels Binance’s eternal optimism, Tether declared this week that it is “a leader in reserve transparency.” Tether neglected to mention that it was effectively frog-marched towards transparency as a result of its New York lawbreaking.

The OAG settlement required Tether to publish quarterly ‘attestations’ of the reserves backing the billions in issued USDT for a period of two years. The stipulation was due to Tether and Bitfinex’s habit of treating funds under their respective control as one big slush fund, including covering each other’s liabilities when either needed to temporarily demonstrate solvency.

That need was never greater than in 2018, when around $850 million that Bitfinex had entrusted to sketchy shadow banker Crypto Capital Corp (CCC) was frozen by U.S. and European authorities. Tether made an emergency nine-figure ‘loan’ to Bitfinex without either company disclosing the transactions. (Interestingly, former CCC boss Reggie Fowler will be sentenced on April 20 after pleading guilty to multiple felonies, including bank fraud, one year ago.)

The OAG’s two-year reporting requirement has now concluded, meaning Tether no longer has any obligation whatsoever to publish half-baked snapshots of assets the company claims to possess. That said, Tether has never produced a proper third-party audit, despite having promised nearly two years ago that an audit was coming in “months, not years.”

This week, Tether offered fresh justifications for its audit-free existence, claiming that it has “continually sought after the most highly regarded auditors that it could find.” Tragically, “major audit companies are not providing full audits to companies in the crypto industry … due to accounting and regulatory uncertainties.”

Those uncertainties include crypto firms’ unwillingness to let accounting firms examine their accounts any longer than one (1) verse of ‘Row Row Row Your Boat.’ Accounting firms foolish enough to accept such restrictions were horrified to discover crypto companies publicly declaring these ‘proof of assets with no corresponding proof of liabilities’ to be full-fledged audits. Wary of guilt by association, accounting firms declared a full-fledged moratorium on further dealings with crypto operators.

Transparently criminal

Speaking of transparency, the Russian division of Transparency International (TIR) issued a report last month detailing how oligarchs and other criminal types are using Tether to evade economic sanctions. The report detailed the ease with which Russians could exchange rubles for USDT with Moscow-based OTC brokers, then exchange the USDT for pounds sterling in cash in London.

TIR’s experiments typically involved sums ranging from 13,000-17,000 USDT. The transfers typically charged commissions of between 1-3%, with delivery in London the same day or the day after. The London-based couriers who delivered the money in person all spoke fluent Russian.

At no time did any of the parties involved ask for proof of identity. A customer simply sent an image of a banknote via Telegram with the serial numbers visible. The banknote was to be presented to the courier in London before the cash was handed over. Tens of millions of USDT have been exchanged in this fashion, according to TIR’s research.

DeFi(nitely not)

Tether’s Tuesday blog post advocated for USDT to take a central role in the so-called decentralized finance (DeFi) space, which is currently dominated by Tether’s stablecoin rival USDC. USDC’s credibility took a hit last month after Silicon Valley Bank collapsed, temporarily freezing $3 billion of USDC’s reserves, and Tether clearly senses the opportunity for a DeFi power grab.

Tether claims that “jurisdictional concentration is an existential risk to a fully reserved stablecoin,” and it views USDC’s “concentrated exposure to U.S. banking risk as compromising its own promise of decentralization.” By contrast, Tether boasts “layers of international banking partners,” even some that aren’t run by people who used to handle banking for FTX fraudster Sam Bankman-Fried.

Frankly, on this score, we agree with Tether. Given DeFi’s immense appeal to criminal hackers and scammers, we can think of no better financial lingua franca for DeFi than USDT. There is the minor matter that Tether’s own terms of service give it the right to refuse to redeem your USDT for cash “for any reason (or for no reason) at any time.” So even if your DeFi protocol isn’t hacked, the USDT contained within might not be worth anything. But other than that, what could possibly go wrong?

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple,
EthereumFTX 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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