The Breakdown - The Most Conservative Regulator in America Just Settled Its Case Against Tether: Can We Move On Now?

Episode Date: February 24, 2021

On today’s episode, NLW breaks down the final settlement of the New York Attorney General’s case against Tether. He argues that the outcome is extremely positive for the industry, discussing: Why Tether risk became a major source of FUD in 2021 How conspiracy theories overtook legitimate concerns The history of the NYAG’s case against Tether Specific findings of the NYAG’s case around two times that Tether was not backed 1-to-1 by U.S. dollars held in Tether bank accounts  Why there was never any accusation of Tether printing USDT out of thin air to manipulate markets  The specifics of the settlement Why this conclusion clears risk from institutional investors -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

You have, on the one hand, clear articulation of specific issues and general malpractice on the part of Tether and Bitfinex. You simultaneously have no accusation that USDT was printed out of thin air to manipulate prices. And finally, as a cherry on top, we get quarterly disclosures of the reserve asset backing for at least the next two years. This is a win for the industry. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, February 23rd, and today we are talking about the New York Attorney General's settlement with Tether.

To do this story justice, we have to put it in the context of 2021's FUD cycle. I've described a couple times on this show the concept of a wall of worry. A wall of worry refers to a set of fud or a specific concern that people have to push through before they can allow the market to fully take hold. I've said a couple of times that I see a few different fuds competing to be this cycle's wall of worry. There's a little bit of resurgent boiling the oceans, environmental concerns, particularly post-Elon. There's the government shutdown concern, which seems a little bit relevant in the context of things going on in India and Nigeria.

And then there's Tether. Now, I've done fudge shows with Dan Held and Travis Kling to discuss all of these different concerns, what might be legitimate, what the proper critiques are. With Travis in particular, I went deep on a different way to think about these risks. Basically, his argument is that you should be adjusting return profiles for that risk, but not throwing the baby out with the bathwater because of it. Travis's primary frustration with the critiques we've seen over the last few weeks is that they've really all come down to what he feels like are bad faith arguments. A good faith argument would be something along the lines of, there is a pretty serious risk of X, so you should maybe think about that or consider it before

you size or price your position. Instead, what he was arguing is that, what we're seeing is people saying, because of X, the whole thing is a scam and don't allocate anything. That sort of move from rational to irrational is something I'm going to talk about a lot today. Coming back to the different fuds competing to be this wall of worry, one of the most persistent or perhaps rejuvenated has been Tether Fud. Now, the argument around Tether since 2017 or even earlier has followed a sort of standard conspiracy rabbit hole, where the first couple layers are pretty legitimate, and then at some point it crosses over into the realm of the absurd.

Here's what that rabbit hole, what that flow looks like for tether. First layer, boy, the processes of tether and bitfinex, the company that it's connected to, sure are opaque. A second layer? There was a pretty weird loan between Bitfinex and tether that causes me to have some serious misgivings about how this whole operation is run and the backing of all these tethers that they're reporting. So far, if you're following along, we're in pretty legitimate territory. But then we get into some weirder questions. Layer 3. What if Tether isn't backed by anything?

Layer 4. And if it's not backed by anything, what's to stop them from just inflating the supply infinitely to buy Bitcoin and artificially increase the price of every crypto asset in the market? Layer 5. Actually, that's exactly what's happening. It's super clear that Bitcoin's price is manipulated by Tether. It's pretty much just a big grand cabal. This year's crop of FUD has not been layer one or two. The tether processes are opaque, and there's this weird loan that makes me have some pretty serious misgivings about how the companies are run. This year's crop of fud landed all the way from three to five. What if tether isn't backed by anything? If it's not backed by anything, what's to stop them from just inflating the supply to manipulate the price of Bitcoin to, actually,

that's exactly what's happening. This year's crop of fud was also propelled most recently by a medium post by an anonymous author who made a variety of errors suggesting that they don't really understand how crypto markets work, and that was enough for the Wall of Worry army in this cycle to pick it up and try to wield it like a sword to justify their consternation about Bitcoin. Anyway, as I've said numerous times, I really wish that people could separate the first two types of critique. The very legitimate, this is opaque, and there's some concerning things that I wish we're dug into a little bit more. Two, this is all manipulation, and this is the best explanation for why Bitcoin's price has been going up. That latter part has driven me nuts because I'm a pretty big,

fan of the most obvious explanation is usually the right one, and we've been watching a seemingly never-ending wave of institutional buyers line up at this space at the same time as PayPal and cash app are providing incredible retail and consumer demand, which to me seems like a much more obvious explanation. But back to that what I'm calling much more legitimate critique or concern, there is another actor in this space that has been very interested in those points one or two as well, and that is the New York Attorney General. About two and a half years ago, the NYAG started to look into tether. Specifically, they were interested in the relationship between Tether and BitFinex and that

$850 million loan between the two. That loan, as we'll discuss, was required when a payment processing company used by BitFinex had its fund sees creating a huge shortfall for the company, and the concern was that if the funds Tether loaned them were the promised backing of USDT, theoretically the people using Tether could be put at risk. Today, that lawsuit settled. Let's describe the top line and then we'll get into some details. So at a high level, the investigation, as I said, has been going on for two and a half years. During that time, Tether has shared some 2.5 million pages of documentation with the New York AG.

As per the settlement, Tether is paying an $18.5 million fine. BitFinex and Tether can no longer do business with anyone or any company in New York, including companies that have the New York BIT license. The New York Attorney General has not accused them of issuing tethers without any backing or to manipulate crypto prices. They never have, but this reinforces that. As per the settlement, Tether admits no wrongdoing, and please note this is a condition of the settlement, i.e. the New York Attorney General allowed them to admit no wrongdoing as part of the settlement. And finally, they have agreed to quarterly disclosures of reserve backing for USDT. Spoiler alert, I honestly can't imagine an outcome better for the

entire industry, and that's what I hopefully will convince you of by the end of this show. But let's dig in a little deeper first. Many investors want to be a part of the next bull run. Others seek to build their dream home, finally launch that startup or fund their education. Try Nexos instant crypto credit lines and borrow against any major cryptocurrency with no minimum or maximum withdrawal amounts, no fees whatsoever, no credit checks, and flexible repayment. Not to mention the APR starts at just 5.9%.

Stay on top of your investment game with nexo.io. And remember, it's your crypto, your credit, your choice. Get started at nexo.io. If you read the full report from the AG, there are a few points of actual consternation around Bitfinex and Tether. The first has to do with misrepresentation around where assets were held in mid-2017. There was a lot there, but the long story short is that Tether couldn't get a normal banking relationship for a period of months, and so held assets with their general counsel, who in fact moved them in. to a tether-held bank account at the last minute during a period of review that was supposed to attest

to that backing being available. Here's a relevant quote from the specific report. At no point did Tether inform its clients or the market that from at least June 1st, 2017 until September 15th, 2017, Tethers were not in fact backed one-to-one by U.S.D held by a tether in a bank account. Rather, the funds ostensibly backing tethers had been held in an account under the control of its general counsel and the balance accounted for as a receivable from BitFINX, a little bit more color from the follow-up press release from the New York Attorney General. The Office of the Attorney General's investigation found that starting no later than mid-2017, Tether had no access to banking anywhere in the world, and so for periods of time held no reserves to back Tethers in circulation

at the rate of $1 for every Tether, contrary to its representations. In the face of persistent questions about whether the company actually held sufficient funds, Tether published a self-proclaimed verification of its cash reserves in 2017, that it characterized as, quote, a good faith effort on our behalf to provide an interim analysis of our cash position. In reality, however, the cash ostensibly backing tethers had only been placed in tether's account as of the very morning of the company's verification. Quick interpretation from me, the issue here is where the money that was backing tether was held, not whether there was money at all. Now, the second big issue in the NIAG suit was the one I mentioned above around the loan between Tether and Bitfinex. At the time in question, Bitfinex was

working with a payment processor called Crypto Capital, which was having its account seized by the government of Poland and things. This created a huge liquidity crisis for Bitfinex, which was covered by a loan from Tether. So here's the key line, again, from the suit report. And so, as of November 2nd, 2018, Tethers were again no longer backed one-to-one by U.S. dollars in a Tether Bank account, because a substantial portion of the backing in the Deltech account had been transferred to Bitfinex to make up for the funds taken by Crypto Capital. While the corresponding funds transferred from BitFinex's crypto capital account to Tether's crypto capital account were impaired by CryptoC Capital's actions. A little more color again from the summary press release. On November 1, 2018,

Tether publicized and their self-proclaimed verification of its cash reserve, this time at Deltech Bank and Trust Limited of the Bahamas. The announcement linked to a letter dated November first 2018, which stated that tethers were fully backed by cash at $1 for every one tether. However, the very next day on November 2nd, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tethers bank account to Bitfinex's accounts. And so, as of November 2nd, 2018, one day after their latest verification, Tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account. The rest of the report kind of goes on to talk about all the times that Bifanex and Tether misrepresented their exact

position in what was going on behind the scenes. So let's be clear about a couple of things. First, this does not paint Tether and Bitfinex in a favorable light. Everyone who said this company was operating seriously opaquely, had some shady practices going on, and had a tendency to misrepresent things to put them in the most favorable light. These people are absolutely vindicated. These are not the type of actions you want to take if you're a company who wants to reinvent finance. That said, the people who aren't vindicated are those who jumped from the above to the argument that because of said shadiness, it must be the case that, one, all tethers are backed by nothing, and two, not only are backed by nothing, but they are specifically printed to manipulate market prices. There is nothing

in here about that. Zilch. The NYAG never accuses them of anything like that at all. And let's be clear, this is the most aggressive crypto-conservative regulator in the country. Their bit license has driven tons of companies out of the state. Most new crypto services available in the rest of the country aren't available in New York. If there was more to be dug into around Tether being printed out of thin air to manipulate market prices, you can believe they would have gone after it. There is also another dimension of this that is super important. If you are inclined to see things from Tether's side, which, as I've said, feel free not to, there's another part of the story. I don't particularly think that Tether and Bitfinex's first choice was to work with these backwards,

terrible companies like crypto capital. They were sort of forced into it because banks haven't been allowed to work with crypto companies. Crypto Cobain put it crisply in a tweet saying, my takeaway, corrupt banking system fucking over crypto companies, pushing them to be unbanked and relying on fringe services is bad. In other words, there is a clear self-fulfilling prophecy here, i.e., banks say, crypto is for shady things. We're not going to bank you. Crypto companies forced to work with shady institutions. Shady institutions do shady things, get caught. screw it all up. Crypto company forced to do shady things themselves to say solvent. Again, I'm not at all saying anyone needs to take this interpretation or give Tether and Bitfinex the benefit

of the doubt, but it is very clear that the lack of good banking relationships has a part in this story. This is why the shifts made by the Office of the Comptroller of the currency over the last year that actually allow real regulated financial institutions to work with crypto companies and specifically stablecoin issuers are so important. So what's my takeaway and what do I think happens from here? Well, my takeaway, I said it on Twitter. I said, I seriously don't understand how anyone could not like this tether outcome. You have, on the one hand, clear articulation of specific issues and malpractice on the part of tether and bitfinex. You simultaneously have no accusation that USDT was printed out of thin air to manipulate prices. And finally, as a cherry on top, we get quarterly disclosures

of the reserve asset backing for at least the next two years. This is a win for the industry. In terms of what happens next, let's turn to a few others for that. Alex Kruger tweeted, Tether and the NYAG settled. Consequences just a fine. Tether is not bringing Bitcoin in all crypto markets down as fudsters have insisted since 2017. This will allay misplaced concerns across new institutional coiners and the macro community about tether risks. Recall misinformed idiots and various cell-side research joints have been bent on getting everyone to panic because of tether. Just because tether messed up doesn't mean the whole thing is a sham and crypto prices are sustained and manipulated by fake tether issuance. Travis Kling says the removal of tether risk in its

entirety is not just about what Bitcoin's price will do today or tomorrow. This was a massive risk for institutional capital. J.P. Morgan dedicated an entire section to tether risk in a recent report. This is a step change in institutional investability. Finally, Nick Carter says, based on the amount of tether belly aching I've heard from the largest pools of institutional capital, this is the best news possible. Nominal settlement and most importantly ongoing reserve attestations. Can't overstate how much of a derisking event this is. So I had two questions and tweets this morning. The first was, will the Tether Truthers be satisfied? The answer is almost certainly no, as Tether has taken on the mantle of a holy war, and Holy Wars by definition can only end in complete annihilation.

Expect many of them to do victory lap saying, see how shady this company is, just like we told you, rather than looking at the fact that their real critique was systemic market risk from large-scale market manipulation, which wasn't ever the case and was confirmed to not be the case here. By the way, for those tether critics out here who kept their critique to look at how shady this company is, we probably shouldn't have this be a key part of the infrastructure for this industry, but didn't fall into the trap of saying that Bitcoin was only priced the way that it was because fake tethers were being issued. Congrats. But my other question was, can we move on now?

And frankly, this is much more likely to be a yes, at least for the rationalists. It simply becomes massively harder now after settlement to point to tether as some large-scale systemic risk. And even more, we're getting reserve attestations. Like I said, this is a huge win. The industry that you're a part of, if you're listening to this podcast, got much better today. That's the real story here. So don't worry about the 20% price dip or whatever it is now. This happens along the way to new highs.

Focus on the fact that a key piece of fud was debunked, and the real problems with the company in question are actually being addressed going forward. Anyways, guys, I hope that you enjoyed this show. I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.