The digital counterfeiters have provided an unprecedented insight into their own fraudulent scheme, but their supporters are still too clueless to be concerned.
In my article on the Coinbase direct listing, I gave a run-down on the enormous counterfeiting scheme being run by Tether Limited, the shady company behind the enormously popular stable-coin USDT. For those who aren’t up-to-date, I’ll try to make a long story short:
Tether Limited is “minting” billions of dollars worth of USDT, a crypto “stable-coin” which is ostensibly a digital dollar. USDT is pegged at a value of 1 USD, and this valuation is only possible because traders believe that Tether Limited possesses physical assets which amount in USD value to the total amount of outstanding Tether. When Tether Limited “mints” two billion USDT to send off to a crypto exchange, the minting is supposedly preceded by an influx of $2 billion of real assets into Tether’s reserves. This is categorically false, and the people behind Tether have been enriching themselves and their conspirators by wantonly printing a dollar-equivalent token without backing. They are digitally counterfeiting US dollars without any capacity to redeem them for their customers, and those make-believe dollars have been the primary driving force behind the enormous crypto bull run we’ve seen so far in 2021.
Until 2019, Tether Limited claimed to issue USDT tokens only upon receiving real USD, so that there was a 1–1 backing of US dollars for ever Tether issued. This, of course, was a lie, and as the New York AG noted at the end of their investigation, there were times when Tether didn’t have any USD liquidity at all, even as their liabilities ballooned into the billions. In 2019, Tether finally distanced themselves from the years-long promise of 1–1 USD backing. No one would ever believe their Bahamian bank account held enough USD to back the billions of digital USD they were printing, so they began the more believable lie that they had unnamed “assets” which exceeded their liabilities. What those assets consisted of, nobody knew for sure, at least until now.
The wait is finally over, and the verdict is in. On May 13th Tether Limited released a breakdown of their reserves, and, wow, is it a doozy.
The first, most obvious eyebrow-raiser in these deliberately vague pie charts is the fact that only 2.94% of Tether’s reserves are in cash. For a company that spent years claiming 100% cash backing, the true figure of 2.94% is a sadly hilarious joke.
If all of Tether’s clients tried to cash out at once, a maximum of 2.94% would be able to redeem their digital dollars for real dollars, which is probably why the company has changed their Terms of Service to say that they have no obligation to redeem issued Tethers for real dollars.
But while this 2.94% figure is an obvious cause for alarm, it might be overlooked if the other assets were substantial and encouraging. Gold, for instance, would be an encouraging stand-in for a dollar in an ostensibly dollar-backed currency, but “precious metals” only account for an undisclosed fraction of 10% of the reserves. It may as well be .0001%, since it is vaguely lumped together with “Corporate Bonds” and “Funds.”
As one Twitter user notes, Tether’s lawyer Stuart Hoegner swore in a 2019 affidavit that the company possessed 2.1 billion dollars in reserve, backing their 2.1 billion issued USDT. Now, in their asset breakdown (for March 31st, when the market cap was $41 billion), we find that Cash and Treasury bills account for… exactly 2.1 billion. In the process of printing 39 billion digital dollars, Tether Limited did not add any dollars to their reserves. Yikes.
But that’s still not the biggest self-own in this attestation. The real heart of the so-called reserves is actually “commercial paper,” which accounts for 50% of Tether’s backing. What is “commercial paper” you ask? It’s essentially an IOU — a promissory note from one institution to another in which one party is obligated to pay the other in a predetermined amount of time. So 50% of the backing of Tether is in limbo — it consists of assets that they don’t have but are owed by other companies. That information alone should be enough to make someone wary, but people seem to be missing the true insanity of this statistic. People on Twitter (like laser eyes @CaitlinLong_) have raised concerns about the inherent risk of using third party obligations in lieu of hard backing, particularly when the unknown companies on the the other end might have horrible credit. A valid concern, sure, but it completely misses the real point:
If Tether Limited is owed $30 billion from other companies, the only asset they could have loaned that much of is Tether itself, which they have been openly doing in their massive transfers to Bitfinex, Houbi, Binance, and others. These companies receive, let’s say, 100,000,000 USDT at a time and agree to later pay back Tether Limited in assets amounting in value to 100,000,000 USD (which as long as the peg is maintained can just be USDT again). This sort of obligation likely comprises the entirety of the “commercial paper” referred to in Tether Limited’s disclosure. This means that, with almost complete certainty, USDT is 50% backed by value created by minting and distributing USDT — in other words, nothing.
The only thing preventing the collapse of Tether’s dollar-peg is the collaboration of the same crypto exchanges which receive the USDT, and these exchanges are heavily incentivized to keep the scheme running and to bring as many dollars as possible into the market, even if those dollars are digital counterfeits printed out of thin air.
Any rational, financially-literate person would be floored by this news, but many supporters of Tether and of the crypto market at large have mostly been smug and satisfied, applauding the company for what CTO Paolo Ardoino has called “unrivaled transparency.” This announcement, for many crypto traders hoping for never-ending gains, represents an end to the “FUD” and a triumphant “I-told-you-so” to the skeptics.
Now, as crypto prices plunge and many Binance US traders find themselves unable to make withdrawals (see also this, and this, and this), we will begin to see how much Tether’s phony money has really dominated the market… and what happens when counterfeiters are called upon to pay their debts.
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