Tether Bombshell
The firm released two recent letters declaring that it was cooperating with US financial and sanctions-enforcement authority.
On 15 December, Tether - the cryptocurrency stablecoin giant co-founded by Mighty Ducks co-star Brock Pierce - dropped a bombshell.
The firm released two recent letters declaring that it was cooperating with US financial and sanctions-enforcement authority and ended with a flourish from it's CEO, Paolo Ardoino, who declared that “Tether seeks to be a world class partner to the U.S. as we continue to assist law enforcement and expand dollar hegemony globally".
“Tether seeks to be a world class partner to the U.S. as we continue to assist law enforcement and expand dollar hegemony globally".
Tether is a giant force in modern financial markets. Or at least the crypto iterations thereof. According to Tether’s ‘transparency’ page, the firm stands behind more than $90 billion in issuance of its flagship stablecoin, USDT, commonly just referred to as Tether.
The cryptocurrency world in which Tether operates is of course best known for bitcoin, with its anti-banking anti-debt supposedly radical manifesto – the crypto sphere prefers white paper despite their often-religious devotion. You can find it here, courtesy of the United States Sentencing Commission (which, yes, sets guidelines for prison sentences). Nevertheless, the belief that crypto-currencies like bitcoin present a new fiscal future remains a frustratingly frequent discussion in financial forums, even CNBC has been back at it again recently.
But Tether is by far the most traded cryptocurrency. And whereas bitcoin believers have argued their favored coin could replace the US Dollar and point to its appreciation against the greenback as the strongest argument in their favor, Tether is pegged to the dollar. Tether will never give you more than $1 for 1 USDT, and if the peg breaks –that’s a sign of big trouble (another stablecoin’s de-pegging and helped fuel last year’s crypto bear market, and shamed a famous hedge-funder who had its logo tattooed just weeks before the collapse). .
In fact, Tether’s entire raison d'être is to serve as a dollar, but on the blockchain, for cryptocurrency transactions. And then from crypto-transactions to real dollars (though Tether-to-dollar swaps are actually something most individual crypto-traders cannot do themselves, that’s what exchanges such as Binance or Sam Bankman-Fried’s FTX are/were for). Tether makes precisely this point in claiming that it is better managed than other cryptocurrency entities in its freshly-unveiled 13 November letter to the US Committee on Banking, Housing, and Urban Affairs, and House Financial Services Committee:
Tether’s words: “Another important clarification is that, differently from the most prominent cryptocurrency exchanges that onboard millions (and sometimes tens of millions) of customers, Tether’s primary market customer base is mostly composed of accredited individuals, trading firms, and institutions. Since Tether’s customer base can be counted in the thousands, rather than millions as most prominent cryptocurrency exchanges, Tether performs much more thorough due diligence on all its customers.”
But the really juicy bit is in Tether’s 15 December letter to the same Congressional committee, where Tether confirms that it has “frozen USDT 435 Million (i.e. what it pledges is worth $435m) for the Department of Justice, US Secret Service, and FBI”). That is 0.48% of all the Tether in issuance.
However, it would be extremely premature to take Tether at its word in relation to its subsequent declaration, which proclaims that “Tether has established a new standard in its commitment to security and close working relationships with law enforcement that we hope will be a model for the rest of the industry”.
That takes us back to Tether’s whole reason for existing, i.e. moving money out of poorly regulated crypto-currency markets into the traditional financial system. As a result, Tether and stablecoins like it, are the crucial tool for those seeking to launder their money or avoid sanctions through cryptocurrency transactions, as they offer a way to finish the wash of funds that have been laundered. The astute financial writer J.P. Koning recently published a blog post earlier this month on ‘Why Do Sanctioned Entities Use Tether’ that is well worth a read And Tether has indeed been found to have been used in sanctions evasion schemes from Russia to Mexico to Venezuela and to money laundering networks linked to Hamas and North Korea
For Tether to claim that it is now an instrument in expanding “Dollar Hegemony” is thus quite the turnaround. It is precisely the dollar’s ubiquity and the fact that the US government argues it has extraterritoriality that sanctions apply so widely. The legal technicality for this global reach is because any transaction between a financial institution that has a US correspondent bank eventually evolves transactions to be resolved on the books of the respective financial institutions (kind of like a blockchain actually) and thus ultimately causes a sanctions violation back in US jurisdiction even when no US persons are directly involved.
Yet this same technicality has also enabled crypto-institutions to evade sanctions in the past. They lack the same kind of compliance teams and regulatory oversight that banks do. Tether’s statement is the latest indication that the tide has turned.
At the beginning of November 2023 Sam Bankman-Fried was found guilty of a host of US fraud charges, despite running his exchange FTX and intertwined crypto-fund Alameda out of Hong Kong and then the Bahamas. On 21 November the founder of Binance, Changpeng Zao, known as CZ, agreed to plead guilty to money laundering and step down as head of his exchange. Although he had not travelled to the United States in years, he prostrated himself before the US courts for sentencing, flying in from the United Arab Emirates, and agreed a $50 million personal fine as well as $4.3 billion in fines for Binance.
The core argument of the sanctions experts Henry Farrell and Abraham Newman, authors of the new book Underground Empire: How America Weaponized the World Economy, is that the overlap between US authorities and key 'choke points' in global economic infrastructure are what enables Washington to use sanctions so broadly, even when close allies oppose them (for example the Trump Administration's unilateral 2018 withdrawal from the 'Iran Deal' and subsequent reimposition of wide-ranging sanctions on Tehran). They term these ‘choke points’. Tether appears to be pledging to become exactly that key choke point for the crypto industry in its 15 December announcement.
If Tether really does live up to its word, then it could indeed be a powerful tool in sanctions, justice, and regulatory authorities cracking down on cryptocurrencies’ ability to dodge the long-arm of American law.
If Tether really does live up to its word, then it could indeed be a powerful tool in sanctions, justice, and regulatory authorities cracking down on cryptocurrencies’ ability to dodge the long-arm of American law.
But Tether living up to its word to US Congress would also eliminate a large part of its use case. There are other dollar stablecoins of course, including one operated by Binance itself, but all are clearly now going to come under pressure from US authorities. CZ’s plea and declarations from Binance that it plans to cooperate with US authorities going forward, even if they are not as dramatic as Tether’s, mean sanctions-evading crypto-users will also likely be wary.
I would not trust any major crypto-player to live up to their word, however. Tether and its related exchange Bitfinex have repeatedly skirted the intent if not the letter of a 2021 settlement with the New York Attorney General’s Office that required it to better disclose the assets that underpin its peg.
I would not trust any major crypto-player to live up to their word.
Tether has indeed improved these, or at least their appearances, with a report on its stated holdings available on its ‘Transparency’ page’s reports section. But while the share of US government bonds and Triple AAA assets has indeed increased, Tether has faced continued accusations of dubious auditing practices. It also relies heavily on small banks in the Bahamas, the largest of which is headed by friend of the company, and co-creator of Inspector Gadget, Jean Chalopin.
The idea that Tether was holding assets riskier than those it claimed to hold, and thus riskier than US Treasuries and AAA rated bonds that underpin other more traditional financial institutions, is one that essentially has greed at its heart. During the zero-interest rate era, by buying slightly higher riskier instruments, Tether – which has not released its internal financial anywhere then or now – could juice profits for its owners. The incentive to do so has arguably decreased as interest rates have risen, and in particular of late as the baseline Fed rate exceeds inflation (meaning that so-called real returns can be earned just from holding short-term US government paper).
Should not all of the regulation that applies to banks therefore apply to Tether and its kin?
This is where regulators face their own challenge in determining their relationship with stablecoin providers such as Tether going forward. The relationship between their stablecoins such as Tether and ‘deposits’ of real dollars is essentially that of a bank. Should not all of the regulation that applies to banks therefore apply to Tether and its kin? I would certainly argue that is the case. But that would probably kill off such stablecoin firms very quickly. Tether has shown no intent (until now) to accept the expense that would incur or challenge its own business model. The declaration Tether is now dedicated to “dollar hegemony” could be the beginning of a change.
But regulators may be interested in doing so slowly. After all, if Tether really does hold the $68.8 billion in US Treasuries that it claims, a rapid sell-off of the stablecoin would require Tether to swiftly liquidate this position, potentially spreading panic from cryptomarkets into the wider financial market.
Maybe it is better to let Tether die a slow death, even after its apparent decision to turn-coat on the crypto-sector’s more nefarious actors. Gradual withdrawals as compliance ramps up would mitigate the risk of a sell-off percolating across. Those who switch sides and fail are rarely honored.
Britain took in the traitor Benedict Arnold after his treason failed to help London hold on to the United States in the Revolutionary War. Today he is buried in a small church on the wrong side of the Thames. Though his name is a byword for perfidiousness in the US, he is wholly unknown on this side of the Atlantic, his a tomb bedecked only by the children who stumble across it in their church nursery.
Photo From https://www.changesinlongitude.com/burial-location-of-benedict-arnold-in-london/