In July, Treasury Secretary Janet Yellen summoned the chair of the Federal Reserve, the head of the Securities and Exchange Commission, and six other top officials for a meeting to discuss Tether. The absurdity of the situation couldn’t have been lost on them: Inflation was spiking, a Covid surge threatened the economic recovery, and Yellen wanted to talk about a digital currency dreamed up by the former child actor who’d missed a penalty shot in The Mighty Ducks. But Tether had gotten so large that it threatened to put the U.S. financial system at risk. It was as if a playground snowball fight had escalated so wildly that the Joint Chiefs of Staff were being called in to avert a nuclear war.
Tether is what’s come to be known in financial circles as a stablecoin—stable because one Tether is supposed to be backed by one dollar. But it’s actually more like a bank. The company that issues the currency, Tether Holdings Ltd., takes in dollars from people who want to trade crypto and credits their digital wallets with an equal amount of Tethers in return. Once they have Tethers, people can send them to cryptocurrency exchanges and use them to bet on the price of Bitcoin, Ether, or any of the thousands of other coins. And at least in theory, Tether Holdings holds on to the dollars so it can return them to anyone who wants to send in their tokens and get their money back. The convoluted mechanism became popular because real banks didn’t want to do business with crypto companies, especially foreign ones.
Exactly how Tether is backed, or if it’s truly backed at all, has always been a mystery. For years a persistent group of critics has argued that, despite the company’s assurances, Tether Holdings doesn’t have enough assets to maintain the 1-to-1 exchange rate, meaning its coin is essentially a fraud. But in the crypto world, where joke coins with pictures of dogs can be worth billions of dollars and scammers periodically make fortunes with preposterous-sounding schemes, Tether seemed like just another curiosity.
Then, this year, Tether Holdings started putting out a huge amount of digital coins. There are now 69 billion Tethers in circulation, 48 billion of them issued this year. That means the company supposedly holds a corresponding $69 billion in real money to back the coins—an amount that would make it one of the 50 largest banks in the U.S., if it were a U.S. bank and not an unregulated offshore company.
On Twitter, on business TV, and on hedge fund and investment bank trading floors, everyone started asking why Tether was minting so many coins and whether it really had the money it claimed to have. An anonymous anti-Tether blog post titled “The Bit Short: Inside Crypto’s Doomsday Machine” went viral, and CNBC host Jim Cramer told viewers to sell their crypto. “If Tether collapsed, well then, it’s going to gut the whole crypto ecosystem,” he warned.
As far as the regulators are concerned, the size of Tether’s supposed dollar holdings is so big that it would be dangerous even assuming the dollars are real. If enough traders asked for their dollars back at once, the company could have to liquidate its assets at a loss, setting off a run on the not-bank. The losses could cascade into the regulated financial system by crashing credit markets. If the trolls are right, and Tether is a Ponzi scheme, it would be larger than Bernie Madoff’s.
So earlier this year I set out to solve the mystery. The money trail led from Taiwan to Puerto Rico, the French Riviera, mainland China, and the Bahamas. One of Tether’s former bankers told me that its top executive had been putting its reserves at risk by investing them to earn potentially hundreds of millions of dollars of profit for himself. “It’s not a stablecoin, it’s a highrisk offshore hedge fund,” said John Betts, who ran a bank in Puerto Rico Tether used. “Even their own banking partners don’t know the extent of their holdings, or if they exist.”
A green pentagon emblazoned with a white T represents the Tether coin on the company’s website, which promises “Digital money for a digital age.” The logo doesn’t look like much, but it’s probably the most normal thing about Tether Holdings, which is weird in almost every way imaginable. Only a dozen employees are listed on LinkedIn, a tiny number for a company with $69 billion under management.
Tether’s website also touts a settlement with New York’s attorney general, but the announcement of that settlement made it sound like the company had been up to some horrible stuff. Tether Holdings had been “operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system,” Letitia James, the attorney general, said in a statement.
Elsewhere on the website, there’s a letter from an accounting firm stating that Tether has the reserves to back its coins, along with a pie chart showing that about $30 billion of its dollar holdings are invested in commercial paper—short-term loans to corporations. That would make Tether the seventh-largest holder of such debt, right up there with Charles Schwab and Vanguard Group.
To fact-check this claim, a few colleagues and I canvassed Wall Street traders to see if any had seen Tether buying anything. No one had. “It’s a small market with a lot of people who know each other,” said Deborah Cunningham, chief investment officer of global money markets at Federated Hermes, an asset management company in Pittsburgh. “If there were a new entrant, it would be usually very obvious.”
It wasn’t clear which regulatory body is responsible for overseeing Tether. On a podcast, a company representative said it was registered with the British Virgin Islands Financial Investigation Agency. But the agency’s director, Errol George, told me in an email that it doesn’t oversee Tether. “We don’t and never have.”
The chief executive officer listed on Tether’s website, J.L. Van der Velde, is a Dutchman who lives in Hong Kong and seems never to have given an interview or spoken at a conference. The chief financial officer is Giancarlo Devasini, a former plastic surgeon from Italy who was once described on Tether’s website as the founder of a successful electronics business. The only reference to him that turned up in a search of Italian newspapers showed he was once fined for selling counterfeit Microsoft software. He didn’t respond to emails or messages on Telegram, where he goes by Merlinthewizard.
Tether’s lawyer, Stuart Hoegner, told me by phone that Van der Velde and Devasini prefer to avoid the limelight. He called Tether’s critics “jihadists” set on the com pany’s destruction. “We maintain a clear, comprehensive, and sophisticated risk management framework for safeguarding and investing the reserves,” he said, adding that no customer had ever asked for money back and been refused.
But when I asked where Tether was keeping its money, he declined to say. Nor was I reassured when he told me the company had more than enough cash to cover the most money it had ever had to pay out in a single day. Bank runs can last longer than 24 hours. Hoegner later responded to follow-up questions with an emailed statement saying my reporting was “nothing more than a compilation of innuendo and misinformation shared by disgruntled individuals with no involvement with or direct knowledge of the business’s operations.” He added: “Success speaks for itself.”
It was hard to believe that people had sent $69 billion in real U.S. dollars to a company that seemed to be practically quilted out of red flags. But every day, on cryptocurrency exchanges, traders buy and sell Tether coins as if they’re just as good as dollars. Some days, more than $100 billion in Tether changes hands. It seemed the people with the most at stake in the crypto markets trusted Tether, and I wanted to know why. Luckily, in June, 12,000 of them were gathering in Miami for what was billed as the biggest crypto conference ever.
At the Mana Wynwood Convention Center, I found the usual cringey crypto signifiers. Models walked the floor body painted with Bitcoin’s logo. A podcast host screamed, “FElon.” A dumpster full of Venezuelan bolivars was labeled “cash is trash.” The place was full of people who held Tether. Sam Bankman-Fried, a 29-year-old billionaire who was in town to rename Miami’s basketball arena after his crypto currency exchange, FTX, told me he’d bought billions of Tethers, using them to facilitate trading other coins. “If you’re a crypto company, banks are nervous to work with you,” he said.
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