This Week in Startups - Emergency Pod! Tether executives facing DOJ bank fraud probe (via Bloomberg) | E1253

Episode Date: July 27, 2021

Tether executives are reportedly facing a DOJ criminal probe for bank fraud! Jason breaks down Bloomberg's report (1:31), Tether's response (10:34) and assesses potential implications for the wider crypto ecosystem, including if this had anything to do with Sunday night's Bitcoin surge. (16:29)

It's an emergency broadcast. Tether is being investigated by the Department of Justice. I repeat, Tether is being investigated by the Department of Justice, according to Bloomberg. Stick with us. It's time for another R-Crowd deal of the week. Right now, you can join our crowd's investment in Ripple. According to the deal memo, Ripple is an established innovator in the rapidly growing multi-billion dollar dairy alternative market. Ripple offers alternatives to milk, protein shakes, creamer,

and more with proprietary tech that lowers impurities for superior taste and nutrition. You can get in early on Ripple and other unique opportunities by signing up for free at our crowd.com slash twist. By the way, did you know that R crowd investors were able to get into some of the best IPOs of 2019 and 2020? They benefited from companies IPOing like Beyond Meat and Lemonade. And some of our crowd's companies have been acquired by buyers like Intel, Nike, Microsoft, Oracle, and Uber. Yum. With Our Crowd, accredited investors can invest directly and

easily in startups early before they IPO or get bought. As you review deals, you have access to our crowd's investor relations team who you can talk to directly on the phone about your personal investment goals. Again, the Our Crowd account is free. Just go to O-U-R-C-O-W-D.com slash twist. All right, Tether executives are reportedly facing a department. Department of Justice criminal probe for bank fraud. According to Bloomberg, a story published today claims that the Department of Justice is probing tether on whether it's executives committed bank fraud. As you know, you've been doing a Twitter investigation here on the podcast for the past couple weeks, maybe even months now. And slowly but surely, we're figuring out how this stable

coin, a coin, a cryptocurrency that's backed reportedly dollar for dollar with the U.S. dollar, and we found out that they no longer do that. They've got a collection of assets. Well, this is a separate issue, it seems, than their holdings. And this is on top of their top two executives being MIA and the two other executives who are very vocal on Twitter, their general counsel and their CTO being on CNBC last week and never mentioning anything about this. So this is typically what happens in the case of a fraud or people who were playing fast and loose with regulations. We don't know what this is. At the very least, it seems like they're loosey-goosey with regulations here. Obviously, the New York Attorney General had sanctioned previously and come to a settlement with Tether

because they lied about being one-for-one peg to the dollar. They keep brushing that off. But Bloomberg published an article today, which claim that the Department of Justice is in fact probing tether on whether its executives committed bank fraud. And it looks like someone at the DOJ leaked this information to Bloomberg, which cited three unnamed sources, familiar with the matter. Now, again, unnamed sources, but there's three of them, and there's been all this smoke around Tether, and there's, in fact, been fire with the New York Attorney General banning Tether from working with New York residents. So there is actually a fire here, and the question is, how big is the fire?

There's a ton of smoke, and all of the different journalistic entities out there with any kind of an investigative group or sources are starting to ping people. That's typically what happens in these kind of cases that happen with. with the Wall Street Journal and other sources, and these kind of things with Madoff, they go from being on the fringe to becoming mainstream. And we'll see if this ends like Theranos or Madoff or if they just put it behind them and it's a speeding ticket. It doesn't feel like a speeding ticket to me at this point. It feels like something a little more serious, perhaps with the risk of ruin. We'll get into that. But according to the article,

federal prosecutors are not going after tether for any recent crimes. Okay, so this is something historical, according to the article. The DOJ is reportedly, and this is a quote, focused on conduct that occurred years ago when Tether was in its more nascent stages, specifically federal prosecutors are scrutinizing whether Tether concealed from banks that transactions were linked to crypto. This seems like something they would do, I'll be totally honest, in many crypto exchanges. People who are trying to get their money into the crypto economy need an on-ramp. What's the on ramp? Typically, it's wiring money from your bank and then buying that crypto, or I guess you could send a check or do an ACH. Somehow getting your money into this casino is the

issue. Now, banks who are very, very particular about who they do business with here in the United States, because of KYC, know your customer and anti-money laundering statutes and regulations, these things are very acute. They come with the risk of ruin. Banks can be shut down for not following these, and in fact, people can go to jail for money laundering, obviously, and not knowing where their customers are. So, specifically, federal prosecutors are scrutinizing. Again, this is the quote, whether tether concealed from banks that transactions were linked to crypto. Here's the quote, the current focus on bank fraud suggests prosecutors may have moved on from pursuing a case tied to market manipulation. So there's also been this theory that the printing

of tethers was occurring, maybe out of sync with. reality in some way, and then that was being used in a coordinated way to raise the price of Bitcoin. I believe that Bitcoin has been manipulated many times. If you are looking at an anonymous cryptocurrency or a pseudo-anonymous one, it's really easy to paint the tape and create order flow that's not real to boost up the attention of this particular currency. And in fact, there is a group on Telegram where they pump crypto assets, you know, on a weekly or monthly basis and everybody's supposed to buy at the same time and hold forever. And you know how this goes. It's a standard pump and dump nonsense. So maybe this isn't about tether manipulating the price of

Bitcoin or Ethereum. And maybe it's not about their holdings in commercial paper, maybe from China, maybe some Fugazi paper, who knows what's going on there because they won't simply tell us if Tether had nothing to hide, they would simply say, here's our commercial paper. They on CNBC said they have international paper, but they wouldn't specifically say it's China. We've had people on the program talk about they think it's Chinese paper. Who knows? But if it is Chinese paper and China's coming apart right now in terms of entrepreneurship, in terms of IPOs and the government closing ranks, I mean, what if the government in China just says, hey, yeah, your commercial paper is not worth anything here? Or what if they were buying

commercial paper that was, you know, worth 10 cents on the dollar, but it appears to be a hundred dollars, but they paid $10 for it. You get the idea. There's all kinds of weird stuff that occurs if your mind wanders to places when you don't disclose the holdings that they have. So I said last week on episode 1250 after we saw the CNBC interview that I felt that the general counsel and CTO, they did not seem like they were being, this is just my read on it as a poker player, they didn't seem like they were super confident or being

upfront about it. So I think they might be in a cleanup process. I also have a question that I would have asked, which is to the CTO, are you involved in the purchase of commercial paper? Have you ever been involved in the purchase of a commercial paper? Have you ever seen the commercial paper held by Tether? Yes or no? When is the last time you had access to that commercial paper? It may turn out that the CTO is the fall guy. Maybe the CTO has never seen. any of this paper. And they're putting him out there to take the daggers and to take the bullets, take the arrows for the, you know, CEO and CFO who nobody's seen because they are media shy, according to the CTO and general counsel when they were on CNBC. They're like, yeah,

they don't like to be in the limelight. Trust me, if my company or any normal person's company was under this amount of scrutiny, DOJ, New York Attorney General, Jim Kramer, Financial Times, Bloomberg, you know, CoffeeZillah, myself, everybody asking these questions constantly, the CEO would of course come forward and say, I'm the CEO, here's what's going on at my company. I am the CFO. The buck stops at my desk. Here is what's happening with our company. If the CFO and the CEO will not talk to the press and to their customers publicly

and address these issues, that kind of, for me, that's the end of the line. I would never participate in any of these financial systems if the CEO and the CFO are are, you know, in the worst case on the lamb and afraid of getting arrested, which, who knows, maybe this DOJ is the reason they're not talking and the reason nobody knows where they are or their location seems to be a mystery because maybe they're in a jurisdiction where they don't have an extradition treaty. Who knows? Again, when you have this kind of opaqueness in, you know, a serious situation, it's pretty clear to me what's going on. If anybody in my family or anybody who was a friend said, should I do business with a company that the New York Attorney General

has banned from New York, that's under DOJ investigation, that will not answer questions, that will not just tell you what's going on in their CEO and CFO, are MIA, press shy, on the lamb, who knows what the accurate description here is? I'd say, absolutely not. And so I think that's what's at work here. And we didn't see at any time during that CNBC interview last week that we talked about. Them say we're under DOJ investigation. They said that they were the leaders in transparency. And so this is just more fuel to the fire. It's hard to be charitable at this point with a group of people who are attacking anybody who asks a reasonable question. Which is the sign of a fraud, by the way. When you have a fraud in your hands, the people involved in the fraud

either go missing, which we have two of the four are missing in action, or they attack the messenger and they say they're spreading fear and certainty and doubt. So if Bloomberg's report, are accurate, the DOJ is not looking into this market manipulation, but maybe the banking history, or maybe they go after the banking history, and then they go over the next two or three things, and then they find out that there's market manipulation after they figure out what happened with this bank manipulation. So Tether responded with a statement on their website. Their website went down, actually. So if you're a cryptocurrency and you can't keep your website up, I'm not sure if you should be running a stable coin, but let's put that aside. Here's the quote. I mean,

and these folks are just poor writers and terrible communicators. Today, comma, Bloomberg published an article based on unnamed sources and years-old allegations patently designed to generate clicks. Okay. So they're saying Bloomberg's, which is a money printing machine that makes money from subscriptions to terminals, is only a tagging, poor, tether because they need extra clicks. Bloomberg does not need extra clicks. Newsflash. They charge like five or ten grand a month for those crazy terminals. Their headquarters is filled with boulillon and diamonds and money sloshing all over the place. They don't need the

clicks. Continuing the quote from the tether team. This article follows a pattern of repackaging stale claims as, and then in quotes, news. Okay. So number one, yeah, there are unnamed sources. That is an issue. Yeah, okay. Years old allegations. Okay, open investigations tend to take years. And we don't think it's designed to get clicks. I mean, no more so than any other article. I mean, it's kind of attacking the messenger technique. And then follows the pattern of repackaging stale claims as news. So now they're saying that Bloomberg is not a good judge of what's news and what's not?

I don't know if anybody buys that. I'll be totally honest. And you say the same thing about the Financial Times or Jim Kramer or any number of people who've covered this issue. The continued efforts, I'm quoting again, to discredit tether will not change our determination to remain leaders in the community. So that's the indignation and we are the good guys and we're going to ride this out. But, you know, that is just terrible PR right there. And here's, we'll continue with a quote from Tether. Tether routinely has open dialogue with law enforcement agencies, including the U.S. Department of Justice as part of our commitment to cooperation, transparency, and accountability.

Wow. Talk about saying nothing. We are proud of our role as industry leaders in promoting cooperation between industry and government authorities in the U.S. and around the world. Again, it's just a word salad. There's nothing here about the actual charges. There's no accountability. Just do the audit. Stop telling us there's going to be an audit and just do your damn audit. And can we stop talking about this?

I'm actually annoyed that I have to keep talking about this stupidity. I wish Tether would just do the audit and be on the up and up or say, you know, our holdings are riskier than the U.S. dollar or U.S. D.C. circles Tether, circles Tether competitor or co-existor, or Terra and Luna, you could just say, like, hey, here's the risk profile of our company. But here is a clip supposedly from Tether's co-founder, Phil Potter, who has also been MIA since 2019, according to sources, in 2017, about solving banking problems, which was tweeted out by BitFinext, the anonymous account that has been obsessing over everything Tether for a long time now and who was on our program, or

first and only anonymous guest to date. And let's listen to this clip from Tethers co-founder talking about solving banking problems. Interesting solution here. You know, we've, we've had banking hiccups in the past. We've just, we've always been able to route around it or deal with it, open up new accounts or what have you, shift to a different corporate entity. There's been lots of sort of cat and mouse tricks that everybody in the Bitcoin industry has to avail themselves of. All right, listen, the first 20 seconds tell you everything you need to know about these characters. I mean, oh my lord, we've always been able to route around and deal with it, cat and mouse tricks. There they are on record saying they're doing this shell game to get around regulations. And I think that's a lot of

people in crypto. They believe that if they can route around regulations, they're going to do it. We start with ICOs. We just had on the program on Friday, that Indrisen Harowitz company that has a class action suit. You're going to see this over and over again where people are trying to reinterpret the laws or route around them, and then they claim that they're the victims. And, uh, okay, maybe, but I don't buy it. A quote from Bloomberg, in recent months, and then in parentheses, federal prosecutors sent letters to individuals alerting, parentheses again, tell their executives that they are targets of the investigation. The notices signal that a decision on whether to bring a case could be made soon with senior justice department officials ultimately determining

whether changes, charges are warranted. Okay, this means they're going to do. it. I mean, honestly, when you see this level of investigation, I think nine times out of 10, they don't take on these cases is my understanding. I listen to Prepar's podcast and, you know, he gives you a really good inside baseball about this. I also listen to the Lawfare podcast. Generally, these kind of prosecutors do not go after targets unless they really feel confident that they're going to bring charges. And certainly this information doesn't get leaked unless, I think there's a really strong chance that there's going to be charges. Now, who leaked it? It might be people from the DOJ.

It could be lawyers who maybe didn't get paid in between. It could be a paralegal. It could be somebody who's friend of a friend. Who knows, you know, who's involved in this, who's ratting them out? It could be that in exchange, you know, that Tether works with got a bunch of, got interviewed, got a bunch of document requests, and they then leaked it to Bloomberg because they don't want to be on the hook. Maybe they're doing some CYA. You get the idea.

When these things come apart, it's every man, rat, woman for themselves. Everybody's racing for the exits trying to get some cheese and eat cheese on their co-conspirators, if that's in fact the case here. We don't know that yet. There's a very interesting claim made in the Bloomberg article. It doesn't have an attribution, but this is the quote, the token's importance to the market is clear. Tethers in circulation are worth about $62 billion, and they underpin more than half of Bitcoin trades.

So that's interesting. Obviously, we know Tether is super. super popular. But, you know, this all happened the day after Bitcoin's price spiked yesterday. And it went up from like 34 to 40K. You know, and then these kind of jumps are not unprecedented for Bitcoin, but they are certainly not common. You know, this level of a jump. This is a big jump here. Talking about, you know, jumping $6,000, $7,000 in a couple of hours or a day. And there's a bunch of theories around this jump. One was, you know, there was a Sunday night rumor that Amazon was going to be announcing Bitcoin payments and that they might

create their own cryptocurrency. Well, Amazon actually denied these rumors today, also denying that they would launch an Amazon coin in 2022, but said it will continue to explore crypto according to a spokesperson. You know, if they were, in fact, working on a secret project to have Amazon coin, which doesn't seem unfathomable, or if they wanted to hold some Bitcoin or let people pay in it, I don't see why they wouldn't do that or, you know, maybe as an experimental project, but it's certainly if they were working on it in earnest with a major project, you probably know about that already because they would have been hiring people. And when they interview people, typically the way these stories like the Apple car story, it's very hard to hire 100 engineers for a project and not

find out about it. The way Steve Jobs figured out that Google was going to launch Chrome, the Chrome browser was they were interviewing Safari team members, the Safari browser, obviously, by Apple. So when you start recruiting in earnest for a project, that's when this stuff leaks because people who get interviewed don't sign NDAs. They might use a handshake agreement to not talk about it, but they'll leak it. If they can get some currency out of it, sure, some people will leak it. And that's how a lot of big projects like AR at Apple as well. The reason people know there's a lot going on with AR and cars and previously the watches because they were hiring tons of people to work on wearables and to work on cars and to work on cars and to on self-driving and mobility. But according to an article by CoinDisc,

Desk speculating on Bitcoin's Sunday run-up, here's the quote, experts say a short squeeze of heavily leveraged traders may have added to upper pressure on prices. Okay, so we've been hearing about this. This is called defy centralized finance. People are taking their crypto holdings and they're getting levered against them. What does that mean? They're getting a loan. Just like high net worth individuals might be able to have, if they had $100 million in Facebook shares, they might be able to borrow 50% of that as a loan, and banks typically provide this to rich folks. Now it's coming down to anybody with crypto. You can borrow against your crypto.

But if the price changes radically either way, if you're shorting it, if you're long it, whatever, you make it liquidated. So supposedly a lot of people got liquidated. So the prevailing theory amongst pro-Bitcoin people, I think, is the rumors of Amazon, which would be in the category of Tesla, buying a bunch of Bitcoin, just, an incredible, incredible checkbox to get Amazon on board the Bitcoin train. But that turned out to be false. And I think it's false because we're not hearing any jobs being posted about this or, you know, a bunch of people being recruited. So I doubt it that, you know, Amazon's any more inquisitive than any other company. But it caused enough of a price increase. That little Amazon, you know, maybe got some people off the fence, which then created the short squeeze, if that makes

sense. But the probe Bitcoin crowd is also, I think, downplaying the Tether DoJ probe. I could see the Tether DOJ probe being leaked yesterday amongst people who are insiders, like, let's say, exchanges. And then if you were on these exchanges, especially the offshore ones that use a Tether, if you saw people cashing in their tether for Bitcoin, which would be the smart thing to do, if you think Tether is going to collapse or they might get arrested, et cetera, and it all gets frozen, well, you would want to not have your money frozen because it could be frozen for five or ten years. Just like when poker sites assets got seized, you know, you were just out of luck for years. You eventually were able to claim that you had some assets in there, but you had to jump

through hoops. So any person hearing my voice right now who owns tether and who's been listening for the last month must be trying to get out of tether and move their tether into Bitcoin or Ethereum, you do not get the stability or supposed the stability of a stable coin, but you do have something that you can download and put into your own wallet, put in cold storage, and get off of these crazy, you know, exchanges that could also get seized. Tether could get shut down and these exchanges can get seized and everybody could lose everything where people can abscond with your money. So you got to get your coins into a wallet, into cold storage, off of these services, unless it's maybe Coinbase or something that runs in the West and you feel

a little bit more secure in. So I think that is, you know, what we're looking at here is maybe some of that. And it could be a combination of all of these things. Short squeeze, Amazon rumors, DOJ rumors are tether, tether people move into Bitcoin and you get this super storm. Dennis Vino Korov, hopefully I'm pronouncing your name correct. Dennis is the head of research at Synergia Capital, Synergia Capital. He said that Tether News is less of a market negative because it an investigation into executives and alleged practices. He said that that's not as concerning as an investigation of what Tether is, Stablecoin. I don't exactly understand his analysis there, but sure, whatever.

It's all bad news. I mean, if you're any objective person looking at this from the outside, oh, my God, what an issue this is turning out to be. I mean, people are going to look back at this moment in time, whether Tether is on the up and up or not, or Fugazi or a fraud, or just loosey-goose with the rules. or maybe bending rules until they break, whatever they're doing over there, this is terrible for the industry.

It is a just terrible black eye. If you're in the crypto space, you should be absolutely ashamed to share the crypto space with tether. You should absolutely get off of tether as quick as possible. You should not be associated with something with this much heat on it, right?

This is like somebody involved in a heist who then goes and buys a Cadillac and buys a fur coat. You guys ever see Goodfellas where everybody shows up and they've all spent their money from the big heist at JFK or whatever it was. Like, that's not what you do. You're bringing heat to the entire space.

Tether is bringing so much heat and scrutiny to this space that you don't want Tether on your squad. If you're in the crypto space, cut them loose. These guys are going to sink the entire space. Get your dollars out of Tether and put them into, you know, cash, fiat, Bitcoin, buy Bitcoin, sell your Bitcoin, whatever it is. the last place any dollar should sit is in tether at this point until such time as they're audited. And then they claim they're going to get audited and it's not going to be years, it's going to be months.

Who's doing the audit? You know we're going to play this cat and mouse with them, just like we did with Elizabeth Holmes for a year or two, where she's going to go to this conference. She's going to show up. The machine's going to cure cancer. Everybody's going to know, you know, with this pinprick, you know, 300 different measurements of the blood. And she just kept stalling and stalling and stalling until the whole. then collapsed. Is that what's happening here? Sure feels like it. Maybe it's not, but it feels like it. And if it feels like it and you don't clean it up, you're the problem, Tether, your CEO, your CFO, and in fact,

your G.C and your CTO, which I don't think actually have ever seen the commercial paper. I'm going to go out on a limb here and make a crazy prediction. The CTO and the GC, the general counsel, who were on CNBC, I don't think they know what's going on. I think they might be in an information vacuum. That's why they're going on CNBC in public because they have plausible deniability. How can they incriminate themselves? If they go, oh, yeah, we have Chinese paper, the GC could say, well, I just knew we had international paper. I never saw the paper.

That was the CFO's job. And the CEO could say, well, I don't know, the CFO. I don't know where the CFO is. I'm, you know, I'm on some island somewhere. And that's what a lot of these crypto people are winding up doing. There's a reason why they're moving to weird jurisdictions and getting out of Dodge. I think there's a lot of dirty stuff that went on here. And I think the post-mortem on the crypto space is going to be, wow, promising technology,

tons of grifters, tons of scams, and then the promising technology coming out the other side and changing the world. But we're in that middle piece right now, where it's just filled with scam artists, charlatans, and weirdos. And hopefully this all ends and we can all move forward. If you're in the crypto space, distance yourself from tether is my best advice. If you own any tetheres, liquidate them immediately. get Bitcoin, get cash, buy Disney, you know, buy a company you love Google, buy a house you love,

buy a second home, whatever it is. You know, just my best advice is to be diversified, have a great portfolio, and not play stupid games that are going to have a stupid outcome here. All right, we'll see you all next time. If you have any information on the Tether investigation, feel free to DM, TWA startups, and talk to our three researchers and producers, Rachel, Justin, and Nick. and please put hashtag tether investigation. And please share this video or audio file with your friends and on Twitter and social media.

So more people can know what's going on here. And we'll see as this unfolds and we'll keep you up to date. Thanks for tuning in. Bye bye. This week in startups is brought to you by Our Crowd helps you invest early in pre-IPO companies alongside professional VCs. If you're interested in investing, you can join Our Crowd for free at OUR. CROWD.com slash twist.