I'm all in on the concept that Tether is a fraud. However, isn't it slightly premature to file a lawsuit over losses? The latest price charts still have tether at $1~=1USDT. If you have Tether and are worried about its liquidity, shouldn't you just sell Tether to someone who wants it in exchange for something else?
Or is there some kind of problem with doing that transaction that I'm not aware of? Maybe some limitation that's not reflected in the price charts?
Edit: I see that this is not actually about Tether's liquidity at all. Instead, the accusation is that Tether was used to pump and dump Bitcoin, and those who suffered damages under this theory are people who bought Bitcoin at the top.
> isn't it slightly premature to file a lawsuit over losses
People bought, and Tether sold, USDT on assurances of being 100% backed by U.S. dollars. Tether is now admitting that not only is it not 100% backed, it isn't even entirely backed by U.S. dollars . That's enough to allege fraud.
> The latest price charts still have tether at $1~=1USDT
Tether is under criminal investigation by the United States and New York State for, among other things, market manipulation. Taking Bitfinex's word that one's USDT has suffered no losses, all while they delay and unreasonably condition withdrawals , is like trusting Adam Neumann's on WeWork being worth $47bn.
Sure, it might be criminal fraud, but a lawsuit like this is civil. And in a civil lawsuit, you generally have to show actual damages. People that lost on the Bitcoin bubble burst caused in part by tether may have a stronger case though.
> People that lost on the Bitcoin bubble burst caused in part by tether may have a stronger case though
The complaint  seeks to certify precisely this class.
"Plaintiffs and members of the Class have suffered actual damages and injury in fact due to artificial prices to which they would not have been subject but for the unlawful conduct of the Defendants as alleged herein" (¶ 260). This is par for the course when it comes to "part-fraud, part-pump-and-dump, and part-money laundering" (¶ 2) schemes.
Note that the defendants are various, from Tether to its affiliates, including Bitfinex.
OK, so, I don't have a strong position on this -- I'm purely asking a question. No need to go all ham with hyperbolic similes.
Also, am I taking Bitfinex's word when I look at the exchange-derived price of Tether? I'm not sure. I would have thought that I was trusting the price discovery mechanism in general. If I'm trusting Bitfinex on this at all, it's only to the extent that Bitfinex would be backstopping the price of Tether on all other exchanges. Right? I mean, they can lie about how much a Tether is worth, but they can't lie about how much it's trading for on exchanges they don't own.
The problem is: the Tether-USD pairing, which is the one that is supposed to always be at 1:1, is really exotic on exchanges. The only major one coming to my mind is Kraken, and even there the volume on the pair is anemic compared to the Tether market cap.
Or at least it was this way last time I was really active in cryptos, which I‘m not really at the moment. But a quick scan of Coinmarketcap didn’t really indicate that this has changed.
Thank you for providing this additional context. If the pairing is exotic and doesn't have much liquidity, can you still compute the expected value of tether by doing Tether->BTC->USD? Maybe not, because maybe BTC->USD is inefficient or illiquid itself?
You can compute the market price, either by taking the USD/USDT pairing on Kraken directly or by taking the ratio of BTC/USDT on Bitfinex against BTC/USD on Coinbase. They usually give the same answer modulo exchange fees (i.e. within about half a percent or so). When there was a run on Tether in May and it dropped to about $0.93, there was roughly a 7% price premium (several hundred dollars) on Tether-based exchanges like Binance and Bitfinex.
The confusion is because in theory, the market price should be tracking Tether reserves. Bitfinex admitted in a court filing that only 73% of outstanding Tether was backed by dollars. In an efficient market, that should imply that the price of Tether would fall to $0.73. Instead, it went back up to about $1. The implication is that traders either figured Tether would somehow be able to make up the shortfall, or that it just didn't matter.
Interestingly, people who shorted Tether expecting the market to be efficient got rekt, and the people who were actually correct (so far, at least) were the ones who were irrational. I wonder what this says about rationality and efficient markets today.
> I wonder what this says about rationality and efficient markets today
There isn't an efficient market around Tether.
The exchanges that trade it are predominantly controlled by its backer. Fraud investigations in play make a short's gains at risk for clawback. (Or at the very least, creating a legal headache for their owner.)
There is no assurance that the end game isn't a crash in value, but no value, which makes closing out a short position difficult or even impossible.
I have traded securities my entire career. It's been pretty obvious, from the start, that Tether is a scam. I wouldn't short it.
Disclaimer: This is not securities advice. Don't buy or sell securities or currencies based on Internet comments.
> I wonder what this says about rationality and efficient markets today.
Nothing new. Markets are more heavily dominated by those with more resources. If these players decide to act irrationally, then you'll go bankrupt faster than they will.
This is why you don't short industries, you only short companies. Industry will eat you alive. There are also strategy and tactics. Musk can fend off the short siege even though they might collectively have more resources than he does. If you want to beat someone in the market, your better bet is to enter it yourself than to try to bet they're going to fail.
Trying to use a short maneuver to expose market irrationality is not for the faint of heart. It never was. Shorts were only ever really useful to try to profit off of stupidity, not irrationality.
Tether promised a guaranteed 1:1 exchange rate with USD. That guarantee no longer exists, even though the rate is still ~1:1 Tether has no way to enforce that. If it's value tanks there is nothing they can do.
Can you spell out (maybe ELI5) why the concept of Tether is a fraud? Why is it not possible to back cryptos to a stabilized "1:1" "medium/currency" (which itself is another crypto it seems) and finally the USD dollar ?
> Can you spell out (maybe ELI5) why the concept of Tether is a fraud?
Tether sold tokens on the promise that 1 USDT would be backed by U.S. dollars. They didn't keep one U.S. dollar for each USDT sold. If they did (or concealed) that willfully, it's fraud.
> Why is it not possible to back cryptos to a stabilized "1:1" "medium/currency" (which itself is another crypto it seems) and finally the USD dollar ?
U.S. dollars can be held as hard cash or in bank accounts. Holding $4 billion physically is bonkers. Banks holding U.S. dollars, meanwhile, have to follow U.S. anti-money laundering law. That requires, among other things, knowing who beneficially owns their deposits.
If an LLC opens a bank account, the bank will ask about its owners. With Tether, the beneficial owners are USDT holders. Since Tether can't identify them, they can't satisfy any bank's compliance questions.
So either (a) Tether's banks are violating U.S. AML law, (b) Tether is lying or (c) Tether is silently restricting and keeping records on who owns every USDT. Given we have contrevidence for (c), one can conclude–based solely on Tether's claims–that there's fraud afoot.
Disclaimer: I am not a lawyer. This is neither legal nor trading advice.
Tether promised that 1 USDT would be backed by 1 USD, and they would always honor a 1:1 exchange rate. Now it turns out that USDT are not backed by USD, and Tether will not exchange between the two. You are reliant on third party exchange services, that don't guarantee the exchange rate.
Traditional banking services are hostile to crypto, so they cut off Tether's ability to trade in USD. And Tethers own interest (widespread use of USDT) is at odds with their inability to provide adequate backing USD. Exchanges all wanted more USDT to provide more liquidity, and so Tether just printed USDT without backing.
A crypto backed 1:1 by USD is a great idea, the trick is finding a way to actually guarantee the backing currency & exchange rate.
A crypto backed 1:1 by USD is a great idea, the trick is finding a way to actually guarantee the backing currency & exchange rate.
It's actually pretty lousy idea, because in practice it's exactly what we already have in normal banking system, where the "bank-USD crypto", that is, the numbers in your bank accounts, are already backed 1:1 by actual government USD, with government regulations backing the companies and the exchange rate.
If you can freely exchange cryptocoins to USD, there's absolutely no reason to ever consider a stablecoin, unless your goal is to evade money laundering, KYC, etc regulations, hence Tether.
Under FDIC, any account less than $100K or so will be redeemed at par, even if the bank is completely and totally insolvent. Your checking account is actually probably backed 1:1 in reserves because your bank needs the cash on hand to match withdrawals at any time; it's your savings account that is less likely to be so reserved.
Furthermore, even in a fractional reserve banking scenario, your bank will have 1:1 assets backing it up, since the money it loans out is counted as an asset, although it needs to be recognized that the loan is valued at less than par because of the risk of default. There is quite a lot of legal regulations on what capital can back up accounts, and the minimum ratios of various kinds of quality of capital.
Bank reserves are 1:1. If a bank's reserves ever dip below that ratio, the bank is insolvent, and is in deep shit.
Only a fraction of those reserves are cash. Hence fractional reserve. The remainder aren't liquid, but they are worth enough to cover the reserves, under best accepted accounting practices.
Tether's non-cash reserves largely consist of "A money launderer stole our money, but pinky swears that they'll give it back." It's not like a fractional reserve bank, it's just a straight up fraud. It's why despite many assurances from Tether, it has still not been independently audited.
> there's absolutely no reason to ever consider a stablecoin
Although Tether's purpose has largely been to avoid regulation, and participate in cryptocurrency speculation, a stablecoin would be superior for actual commerce. Bitcoin has failed for commerce, to some extent because of instability and speculation.
Being able to use something equivalent to cash to transact digitally, with client-side security seems like a desirable technology to me.
Superior to bitcoin, surely, but no superior to dollars. I have absolutely no difficulty with using my dollars to pay for anything I want.
The biggest reason one might not want to use dollars is to conceal one's identity, and while I admit that there exist valid uses for that, most of the market for anonymous commerce is illegal activity.
Online shopping is instant, and I will have my physical goods within a week or two in most countries around the world, and my digital goods instantly. And there are several layers of fraud protection on top of that.
The currency exchange rate is a minor price to pay for such a convenience.
Meanwhile with <insert literally any cryptocurrency here> it’s just a simple <convoluted 20-step process not even guaranteed to work and with no consumer protection>.
Is it a great idea? Or does it not reliably exist for a reason: because it's in tension with banking regulations, and anyone who tries to do it without applying all the same KYC and AML regs that motivate stablecoins in the first place are going to be frozen out the same way Bitfinex was, to the point where they too will end up pitifully reliant on money laundering firms opening fleets of fraudulent accounts at tiny banks?
Loss leader to get you to trade more. The existence of USDC makes it easier to move in and out of crypto positions, and to send crypto to other exchanges without taking on exchange-rate risks. Coinbase's business model is to take a fee whenever you transact. The more transactions you make, the more money they make.
It's similar to Google's "make the web faster" efforts (Chrome, V8, AMP, mod_pagespeed, hosting JQuery & other AJAX libs, developer education). If the web is faster, you visit more pages. If you visit more pages, you search more. If you search more, you click on more ads, which makes Google more money.
Because there really aren't substantial hard assets behind Tether. Even Tether now admits this. What keeps this going is a net inflow of cash into Tether. If that ever switches to a net outflow, the Ponzi scheme collapses.
Since Tether can't back the 1/1 USD in an actual bank (due to banking regulations), they have to park that money somewhere.
If they are parking it in other cryptocurrencies, then they have to ensure that the value of that particular cryptocurrency does not fall below the average price they had to buy it at (to ensure they can redeem).
So if, for example, Tether has had to buy Bitcoin and the average of all those purchases came out to $7,500/BTC, they have to ensure that BTC doesn't fall below $7,500 now because otherwise they end up net-negative.
It's entirely possible to have a stablecoin and indeed others exist.
The key to a stablecoin however, is trust. Users have to trust that their holdings are actually backed by real fiat currency as that's the promise of the stablecoin.
That trust can typically be bolstered by things like 3rd party audits, which is something Tether promised for many years and did not deliver.
With Tether the problems are that they have avoided scrutiny and audit, made statements on their website that subsequently turned out to be false and have a somewhat murky corporate structure. None of these, should , engender trust.
Stablecoin do not need to be backed by fiat. They can be backed by crypto as well an be stable against fiat or anything of value. This way trust can mostly be removed. No 3rd party audit needed because you can lock up crypto in a way it's public verifiable for everyone.
There are some trust issues that are still problematic like for example someone needs to provide a price feed against which the value will be stabilized. Whoever is in control of that price feed could of course damage the system to the point where people loose all their money.
But in the real world such a price feed could come from a DEX so its not controlled by someone but instead by what people buy and sell. In a closed system this could however cause a "runaway" of the price due to price feedback loops.
> I have a hard time understanding how a stablecoin could be backed by crypto.
If you had a coin backed by a basket of other cryptocurrencies, it would likely be relatively stable in that the distinct individual volatility of each of the backing coins would be mitigated. OTOH, the overall volatility of the cryptocurrency market (which often moves rapidly and in the same direction) would not, so it wouldn't be very stable.
You should totally watch the video above ;)
In short you can earn money if you re-collateralize with crypto so if the price goes down it produces demand for that crypto to re-collateralize. Some people get liquidated of course because they are unable to throw more money in. This is the risk you take if you participate. It only makes sense to participate if you are long or if you just buy up the ones who get liquidated. For the users of the stablecoin however this is totally irrelevant they want to avoid the volatility by using stablecoins. Therefore they wont profit on price gains but also wont lose on price drops. They kinda gave away that risk/opportunity. "Gave away" as in someone else has it now. And that's why it works. Someone actually will lose if the price drops. Someone has to. Unless everyone would hold enough reserves to actually cover the drop. But people are greedy and will risk more than they can cover. To good part is that they should lose before they can harm the system. Its basically like with trading where the exchange will liquidate your position before you actually go below zero.
In the current centralized markets, stablecoins are used as fiat on-ramps, there's no real need there for a crypto backed stablecoin for that kind of role. I'm sure you could have one, but in the case of Tether, that's not what the product is or claimed to be.
Tether claimed to be backed 100% by USD (this claim was walked back in successive stages, but at the time of the 2017 bubble, it was still the claim). To have that, you need $100M - $1B of USD currency sitting in a bank. At that scale, any bank needs to be asking where that money came from to comply with regulations. The goal of Tether, quite literally, is to park money without having to answer those pesky questions, which means no reputable bank is going to take them as a client. Evidently, the "banks" Tether found who could work with them ended up being money launderers who were busy skimming off actual assets Tether was accumulating.
More generally, cryptocurrency carries with it a whiff of KYC/AML regulatory evasion. With the purpose of stablecoins is generally stated as pretending you're trading in USD without actually doing so (and the financial regulations implied by actually doing so kicking in), it is not hard to infer that many, if not most, users are interested solely in evading this rules, which is going to cause banks' compliance officers to look at it very skeptically.
I’m not OP and I’m sure that far more intelligent people than me will take a stab at this.
As I understand it, the issue isn’t with a stablecoin. There would be nothing wrong with backing a token to a currency.
Unfortunately, it looks like Tether didn’t tell the truth. They claimed that they would have one US dollar in their bank account per token in circulation. This was a lie and they release an enormous number of unbanked tokens into the market. The class action claims they created 2.8 billion USDT between 2017 and 2018. At the time, the market believed the tokens had implicit value (as one was backed by a dollar) so the theory is that this made buying crypto a more compelling investment.
>There would be nothing wrong with backing a token to a currency.
I don't know about that. Isn't the entire point of stablecoin to skirt existing regulations? Moving fiat currency isn't hard in and of itself. There is no technical challenge in Paypal sending $100,000 to my friend in Iran.
What makes it hard are the regulations combating money laundering, criminal and terrorism funding and enforcement of sanctions.
The CONCEPT of stablecoin is fraudulent/fantasy because you can't take a stablecoin and look at it and see exactly where the fiat that is backing it is. You can't prove that it's fiat backing exists in any way.
The only reason it exists is because there are a ton of fanboys for anything crypto and they don't have a clue how it works. TONS of people were freaking out about tether very shortly after it became well known.
The commenter you're replying to is "all in on the concept that Tether is a fraud", not "all in on that the concept of Tether is a fraud". Ie they're talking about Tether specifically, not the concept of fiat-backed digital assets.
It all boils down to fractional reserves in an illiquid market. If you're keeping the USD in a bank and issuing a coin representing it, no problems arise, because you'd effectively be acting like a bank.
In Tether/iFinex's case, you have a situation where there was a "pseudo-bank" (Tether) and a crypto exchange (iFinex) that were highly intertwined. Because Tether was more or less controlled by iFinex, which also controlled one of the largest cryptocurrency exchanges by volume, this provided a unique cover for fraud, and different profit motives than a traditional bank would have. Tether did its business by exchanging USD for Tethers. iFinex did its business by pocketing spreads and fees from crypto to crypto trades. Meaning, Tether had a bunch of USD on hand, and iFinex had a bunch of crypto (primarily Bitcoin) on hand. What likely happened in Tether's case was that iFinex instructed Tether to create unbacked Tethers out of thin air, and used these Tethers to pump up the value of iFinex's own Bitcoin holdings. For example, suppose issuing $1M of Tether and spending it on Bitcoin moved the spot price up enough to increase the value of iFinex's Bitcoin holdings by more than $1M. Isn't that basically free money? You've spent $1M and created more than $1M in paper value. All you have to do is sell those Bitcoins at the new, higher price for real USD, and you've made relatively risk-free profit.
Why the hell did this work for so long? First, the market believed Tethers were backed 1:1 with USD and treated the two as functionally equivalent. Some traders would see the Bitcoin price increase on a Tether exchange like Bitfinex, and then buy Bitcoin at nominally "cheaper" prices on non-Tether exchanges like Coinbase, so that they could transfer the coins over to Bitfinex and sell them for a tidy profit. In this way, the Tether exchanges could impact Bitcoin's price even on exchanges that didn't use Tether due to the natural incentive for arbitrage. Second, the crypto markets are quite illiquid, and because orderbooks are thin it only takes a small amount of buying or selling firepower to push prices pretty drastically. The alleged fraud is that iFinex did exactly that, and progressively pushed prices up. Third, as prices swelled, Bitcoin attracted more _real_ investors, and many such investors then spent actual USD on Bitcoin, creating a self-fulfilling prophecy that in theory would have enabled iFinex to totally get away with it - all they had to do was sell off enough Bitcoin to cover for all of those unbacked Tethers they'd issued, and they would essentially become whole.
Now, things get interesting when it comes to how iFinex ran its business. iFinex refused to implement KYC/AML checks on their exchange, because nominally they were "crypto-to-crypto" and thus considered themselves to be outside of the US financial system's jurisdiction. In practice they used an indirect relationship via one of Wells Fargo's affiliates for a long period of time until they were found out, and then the US financial system more or less put a moratorium on doing business with them. It turns out that being locked out of the US financial system is extremely damaging when your customers want to withdraw US dollars, so for a period of time, iFinex tried jumping around from bank to bank, trying to stay ahead of regulators who had effectively blacklisted them by having customers making deposits wire their money to pay off other customers looking to withdraw money, and all kinds of other shady practices. Eventually they ran out of options and started doing business with what looks to have been a money laundering shadow bank, Crypto Capital Corp, who then promptly stole a bunch of their money, which then led to the current debacle.
All told, it's one of the most interesting stories in the financial markets by a long shot. It will be fascinating to watch it continue to play out.
Most people who talk about Tether agree it's a scam, yet a lot of people hold money in it. It's an interesting case of mass psychology. How long can you kick the can down the road? Nobody can say they weren't warned.
One of the things I learned in my behavioral finance class during grad school was that there are people who would invest into ponzi schemes knowing it was a scam. They are betting the returns on getting out before the scam collapses and they lose everything.
This suggests that there is no genuine demand for stablecoins
That just suggests that "audited" and "100% reserve" are not the most important features to people using stablecoins. What is more important is having a deep market on Binance, which is where most BTC <-> stablecoin trading happens.
Despite these terrible news articles, which are indeed reporting accurately that there are terrible flaws in Tether, you can still trade Tether for $1 right now. A hundred dollars worth of Tether is still more valuable than a hundred dollar payment made via a credit card.
That's just for interactions with the company behind Tether itself. That isn't how most people exchange their USDT. The most common way to get rid of USDT is to exchange it on Binance, where the market for Tether is very liquid, and the going rate as I write this is right around one dollar. Plenty of other exchanges besides Binance too. See:
> The most common way to get rid of USDT is to exchange it on Binance
Exchange it for what?
If you exchange it for a record entry for anything (whether dollars or Bitcoin) in a Binance (or affiliate's) account, you're exchanging one IOU for another. Given most USDT trades on Binance and its affiliated entities, this loops right back to the withdrawal problem.
A "stable" coin that cannot be readily redeemed and is not fully reserved is a Ponzi scheme with extra steps.
> You can withdraw the Bitcoin from Binance to your own wallet, so you aren't really "exchanging one IOU for another"
Until it's in your wallet, it's an IOU. And Binance has had issues with Bitcoin withdrawals, too. (Not to mention, they seem to lose their cash and coins to hackers  and fraudsters once a quarter.)
There is no independent, trusted marketplace where USDT trades in material volumes. And we now know that Tether previously lied about its dollar reserves. Continuing to trust them is delusional at best.
> A "stable" coin that cannot be readily redeemed and is not fully reserved is a Ponzi scheme with extra steps.
Extra steps, and the delay they introduce, may be all a ponzi needs to sustain itself sufficiently to permit quiet exits. That the market will eventually be consistent is, alas, not the current manipulators' problem.
Exchange it for Bitcoin. What else would you do with it?
People here seem to misunderstand what USDT is used for. It's not to invest in.
It's used to trade against BTC at exchanges which do not have access to USD markets. The gambl^Wtraders there probably couldn't care less about how collaterized it is. The threat model is and has always been that Binance or Poloniex or whatever they're called disappears with your money, tethered or otherwise.
Well, yes. There are huge network effects for stablecoins.
Let's go for a more specific example. Let's say that you hold one bitcoin on Binance, and you believe the price of bitcoin will go down today. You would like to exchange your bitcoin for dollars, and then tomorrow, exchange your dollars back into bitcoin.
Ideally you would just use plain old US dollars. But since it's crypto, you can't. What you can have is a stablecoin.
So which stablecoin should you use? There are two costs to using a stablecoin.
Cost #1 is that when you exchange, you won't get the perfect rate. You'll have to pay some fee, and the precise exchange rate you get will depend on the liquidity of the market.
Cost #2 is the chance that this stablecoin collapses in value while you're using it.
For Tether, in my opinion cost #2 is high. All these dubious stories about the underpinning of Tether are true. That means the risk it collapses tomorrow are higher than the risks that other stablecoins collapse tomorrow.
However, cost #1 is probably lower for Tether than it is for any other stablecoin. Because there are more traders operating in Tether, you get a better exchange rate.
This is why Tether isn't just hype, it is providing real value to people through being the most popular stablecoin.
Would we be better off in a world where the most popular stablecoin also had a solid financial backing? Yeah, I think so. But that isn't the same as saying that Tether has no utility today.
This specific example is why you wouldn't want to exchange your BTC into real dollars. The user doesn't want to withdraw fiat dollars, they just want to exchange Bitcoins into a dollar proxy, then exchange back. Sometimes the cost of a less-liquid exchange is higher than the cost of using stablecoins instead of dollars.
> Ideally you would just use plain old US dollars. But since it's crypto, you can't.
Because unbanked cryptocurrency exchanges are essentially in the business of money laundering. A service that facilitates illegal transactions has obvious value to any libertarian or criminal, but I’m not sure that counts as “providing real value to people.”
Well, clearly Tether will take your $1 and issue you USDT. The problem is that for the most part, you cannot get that dollar back for it.
100 units of USDT is worth $100 only if you can get someone to trade it to for that. For the moment, you actually cannot -- you have to trade it through BTC or one of the other crypto coins that are actually paired with USD first.
That is a San Francisco based exchange with USD deposits and withdrawals. There's been a couple times where tether has been under a dollar during times of high uncertainty (and I think relatively low liquidity of this trading pair), but generally you can trade tether for USD and withdraw here.
Interesting to see that it exists -- I know there was a great deal of controversy over the fact that Tether would not redeem them ever. The order book there is awfully thin for an asset worth the billions USDT is supposed to be though.
If can exchange USDT for BTC at the same rate that you can exchange USD for BTC, that's good enough to make 1-1 the going rate for USDT <-> USD. Yeah, it's inconvenient to exchange USDT into dollars, but the ability to easily exchange into dollars isn't the primary utility of stablecoins.
Admittedly, I believe Gemini released their stablecoin well after the end of the 2017 bull cryptocurrency market. It was much easier to get people to try your shitty new coin in 2017 than it is now, so demand for any new coin will be lower. I agree that Tether was a hype-driven scam, but I don't think the relative unpopularity of the Gemini stablecoin reveals that.
This is purely anecdotal but as a Gemini user I'd use their stable coin if it was accepted on any of the other exchanges I use. I'd actually prefer to use it to buy altcoins than to use a BTC/ALT pair.
It doesn't, exchange data is heavily manipulated in order to game certain resources like coinmarketcap, coingecko etc. I would agree tether is more but nowhere close to as described. Dividing by a factor of 10 wouldn't even be enough imo.
Most cryptocurrency activity occurs outside of the USA, is it any surprise that an American created stablecoin with severe risks due to its American ties is frowned upon by those trading cryptocurrencies? Avoiding the regulatory hell of Americans who think they control the entire planet is one of the primary purposes of stablecoins.
Question: Who was the dumper in this pump-and-dump game?
Tether was clearly the pumper.
Second: The claim that the they are liable for the damages of the loss from the peak is a bit weird. IF it was a pump and dump scheme, and I at least agree with the pump side of things, then the values were all inflated falsely anyhow. There should be punishment, but basing it on the losses from peak is very strange and not realistic.
Largely long-time Bitcoin holders and smart ICOs. Anyone who's a real (not paper) Bitcoin millionaire probably got that way by selling near the peak. Ditto anyone whose salary has been paid by a crypto firm that collected millions in an ICO. Most of the engineers working for companies like Consensys, Brave, Filecoin/IPFS, etc. are indirect beneficiaries of the 2017 Bitcoin bubble.
The ICO boom had an interesting triple-pyramid-scheme structure that accelerated both the rise and the fall. If you bought into Ethereum in the early days, you probably paid with Bitcoin; it wasn't possible to buy ETH direct until ~2017. And similarly, if you bought into ICOs in 2017, you bought with ETH. That meant that the folks investing their money in ICOs weren't actually putting $200M into Filecoin; they were putting ETH that they had spent maybe $20M (in aggregate) in, which was likely purchased from someone who had bought it with $2M in Bitcoin. The eye-popping ICO valuations attracted more people into the market, which allowed smart ICOs to unload their ETH immediately at inflated prices and convert it into a big corporate war chest. Once the bubble popped, this mechanism worked in reverse (a bunch of dumb ICOs that had held onto their ETH all try to sell to capture the tiny pool of inflowing capital, which does nothing except force down the price of ETH), leaving folks who bought at the top of the bubble and ICOs that forgot to sell holding the bag.
Ironically, this mechanism holds the basics of a functioning financial system: money was transferred from people who weren't doing anything with it to pay salaries of people doing productive but speculative work. It was transferred pretty clumsily, with a lot of people losing their shirt and a fair bit of waste and scams in the receiving projects, but if any of the receiving projects deliver, it succeeded.
> it wasn't possible to buy ETH direct until ~2017
not even with paper wallets? I realize this would be uncommon given the late start of, ahem, intheoreum, but this should have still been common at meetups and such. Also, mining is essentially paying for ETH with only one layer of indirection, but without passing through Bitcoin.
If you're doing a localbitcoins-style swap, sure. Nothing stops you from finding someone you want to trade with, sending crypto to their wallet address, and receiving cash in hand. Well, other than finding a counterparty to make the transaction.
ETH didn't really get listed on exchanges that also handled fiat currency until around 2016, though.
> There should be punishment, but basing it on the losses from peak is very strange and not realistic.
Isn't this the usual protocol for damage suits in general?
As I understand it, plaintiffs should plan for a 10x or even 100x reduction in damages awarded even under ideal suit outcomes, so you put as big a number on the table as possible (as big as can plausibly be derived from discovered metrics), as it is likely to be decimated anyway.
"Question: Who was the dumper in this pump-and-dump game? Tether was clearly the pumper."
Look at who holds the most crypto holdings AND has the ability to manipulate the market due to sheer size of operations. China. This isn't really a big secret, either. Anyone that can read/write/speak Mandarin knows about this. Just watch their crypto boards and you'll find the manipulation very, VERY easily.
Seriously? Is there any accessible write ups on this with proof?
I think all internet-based stock boards contain scams and minor pump and dumps. I am sort of doubtful that any large scale pump and dumb would be coordinated out in the open, even if it was in Mandarin.
It seems extremely unlikely they will be able to prove much of anything. The Bitcoin markets in particular are extremely complex: lots of disparate exchanges, actors, and entities all vying for a piece of the pie and some of them are not necessarily acting in line with regulations or norms. How can you possibly prove that one entity is responsible for a global phenomenon that happened over a period of several months? How do you even establish evidence that what happened on one exchange affected another?
"It seems extremely unlikely they will be able to prove much of anything"
Proof isn't exactly a requirement in a civil lawsuit as this is demonstrated to be, given the lawsuit title and the demand for a jury trial. In this case, more of a preponderance of the evidence, circumstantial or not, oddball or not, is what is weighed instead of factual elements of any crime (although those are also considered.)
It is up purely to the jury to decide unless they asked for Bench Trial. Proving anything in this case is moot, it depends upon the jury and their thoughts, not what they interpret as law by required element-based prosecution.
If Bitcoin companies maintained an adequate level of know-your-customer/anti-money-laundering compliance, maybe the mainstream banks would work with them. But as it stands, the banks have no reason to take any risks in dealing with them. If people resort to Tether and get burned, it's not the banks' problem.
Indeed. The crypto dream often involves being able to move huge sums of money around the world, with no ability to trace it to real people. This is the opposite of what established financial systems want. Of course they don’t want to legitamize crypto currencies, they’d be introducing a massive vector for crime and tax evasion.
It's frustrating to read these allegations as somebody who has spent the better part of the past year studying various exchange trade execution data feeds, and writing an algorithmic trading bot.
Yes, Bitfinex lead the market a lot of the time in the 2017 Bitcoin bull run.
Yes, Bitfinex "printed" hundreds of millions of dollars worth of tether, which was initially distributed to large players on Bitfinex and Bittrex exchanges, also poloniex I believe was in on the issuance contracts.
But that doesn't mean that Bitfinex fraudulently pumped up the price of Bitcoin.
In fact, that would be impossible, even if they tried to fake the price higher... as they would lose tons of real money to arbitrageurs in the process...
The (nano)second that any one single exchange gets out of line in terms of price, there are trading bots out there that notice that, immediately buy up as much BTC as they can on every other exchange that is below that price, and then immediately dump 100% of what they just bought on the exchange that is out of whack (Bitfinex).
And if they weren't losing real money to the arbitrageurs, (presumably because they restricted USDT withdrawals which has never happened for more than a few days straight at most), then the arbitrageurs wouldn't be buying up Bitcoin on every other exchange that is not Bitfinex and selling it for USDT or USD fiat... they would simply ignore bitfinex as a fake volume exchange.. like 50% of the exchanges listed on coinmarketcap currently are.
There is a reason that Bitfinex was leading the price pumps... they were the main gateway to millionaires the world over buying into the crypto ecosystem.
You had to give iFinex at least $100,000 cash wire in exchange for USDT to get into the game, and there was a waiting list for that "privilege".
Some exchanges shut down their registration page for months because the KYC processing backup was so severe.
There was real demand for Bitcoin back in 2017.
Finance is difficult for most people to understand.
High frequecy traded crypto finance ecosystem with synthetic-USD, USDT, USD, TUSD, USDC, etc. is especially so.
I'm not sure what you're understanding what the article claims - Bitfinex wasn't just increasing the price on their exchange by showing a fake price.
They created money out of thin air and handed this out to players to buy BTC with. Those players then bought BTC in quantities that drove the price up. They created price-inelastic demand out of nothing (you don't care about the price as much if you're buying them for free).
I don't know much about finance but isn't the argument that "USDT isn't really backed by 1usd = 1usdt" therefore whenever you are using USDT is like buying bitcoin with nothing (or close to it)?
That seems a pretty straightforward way to prop up the price if there are not enough checks in place to make sure that every order has a balance to back it up and every balance has whatever asset deposited somewhere to back it up.
Bitfinex would be losing relative to other exchanges but would make a killing anyways.
I'd like to believe they are regulated somehow so that they couldn't get away with something like this. Is there any info available regarding this?
How could there possibly be $1.4t in damages when the market cap of BTC maxed out at around $400b? Also, while I don't deny that there was probably fraud here, just because a security is lightly traded and illiquid that doesn't make its price "fake".
> If anybody asks questions (“Where did all those Tethers come from? Prove to me they’re collateralized”), sell some of your inflated Bitcoins for real US Dollars at a profit, stick those dollars in your bank account, and then say "Look! Here they are! Just like we promised."
This makes no sense. The money has to come from somewhere. Sure it can be fake money in Tether $$ but once you cashed out somewhere (in cash or your bank account) then the money should be real.
Tether market cap right now is $4bn. The proclaimed value created/destroyed is $450bn. The market cap of all crypto at the beginning of 2017 is $18.3bn and the market cap right now is $246bn. The difference is massive (around $220bn).
Now let's look at the market depth, because this is something everyone likes to claim: The order books are thin. This is far from being true. Looking at Gdax, the market bids to a 10% discount is around $12m. From my experience, trading crypto markets, it'll take around three times that much dollars to take the price to these levels. Many things kick off: 1. Hidden buy orders and 2. Bots arbing with other exchanges and 3. Fast bid makers who use neither visible or hidden bids.
That's around $35m that you can dump on a single exchange for a 10% discount. That doesn't take into account: 1. You can use multiple exchanges 2. You can use private sales or OTC and 3. If you are selling $100m of crypto (or even stocks), you'll probably do it over the course of a few days unless you think the instant discount is less than the stretched one.
If Tether created a $300bn market from a $4bn of cash, then that's genius, no? But wait, that's not what the author saying. The OP is saying that these $4bn don't even exist. Then Bitfinex/Tether created a $300bn market out of nothing. Uhh, no. I'm having a hard time believing that.
tl;dr: Dude goes on a lengthy non-sense rant and has no real proof backing his facts.
It makes sense if Tether buys BTC with USDT that it just created out of nothing, then sells those BTC later for real dollars. Those real dollars can be used to collateralize the USDT "after the fact", and if the price went up between the two transactions, Tether keeps the difference.
It's sort of like an uncovered short of USDT - they take a negative position, buy BTC, sell BTC, then cover the negative position. (Except "cover" in this case really means "collateralize the USDT that someone else is holding".)
EDIT: I have no idea if that's what they were actually doing, but that's my interpretation of the author's interpretation of the lawsuit.
this author's argument falls apart upon even slight scrutiny. If tether caused bitcoin's huge 2017 rally, what about 2013 when bitcoin went from $100 to $1000 in the end of the year? Or 2016 when it went from $200 to $600? maybe it was just people buying. Coins that had nothing to do with tether, such as eth and ripple, on other exchanges besides bitfinex, also went up huge. I think tether's contribution to the 2017 bull market was negligible.
USD is printed in necessary quantities to satisfy market demands, and is used by its issuers to buy some privately issued assets on the market, injecting liquidity into the stagnating ecosystem. This is called “quantitative easing”.
Holding a US dollar is a bet on the US economy, the US government, and the US banking system. Those have their flaws, but there's a lot of built-in checks and balances that keep them reasonably accountable.
The other is that the Fed does all of its currency management very much in the public view. Whereas the USDT management has been somewhere between needlessly opaque and flat-out fraudulent.