Cryptocurrency: The Bit Short - Tether-USDT

grarpamp grarpamp at
Sun Jul 25 16:27:32 PDT 2021

The Bit Short: Inside Crypto’s Doomsday Machine
by Crypto Anonymous

This is the story of a Bitcoin trade — the most financially impactful
trade I’ve ever made in my life. It’s also the story of the
deep-yet-frantic investigation of the crypto ecosystem that led me to
make that trade. And it’s the story of what’s really going on in
crypto — and what we should do about it.

If you own meaningful amounts of cryptocurrency or you’re considering
buying some, you’re the reason I wrote this. Please do read to the
Prologue: Tether & company

Before I begin this story, there’s a bit of background you need to know first.

There are things in crypto right now called Tethers. To simplify a
bit, Tethers are issued by a crypto company called Tether Ltd. —
meaning that if Tether Ltd. says you own a Tether, then you do.

Tether Ltd. also says one Tether is worth exactly one US dollar. Can
they do that? Well they say they can, because they hold $1 worth of
assets for each Tether. But are those assets actual dollars? No, they
are not. So what if the assets go down in value? Don’t worry; they
will not. Okay, but can we at least see the assets? No, you may not.

Who in their right mind would use something like Tether? Well, the
short answer is that many people use Tethers to buy Bitcoin and other
cryptocurrencies. The long answer, though, is astounding — but more on
that later.

Because Tether sounds exactly like a currency fraud, it may not
surprise you to learn that Tether Ltd. is currently under
investigation by the Office of the Attorney General for the Southern
District of New York. That investigation was announced to the public
on April 25th, 2019.
The trade

Now fast-forward one year. In March of 2020, I bought a large amount
of Bitcoin. At the time, I saw a market dislocation and the likelihood
of significant dollar inflation due to the US Government’s likely
response to the unfolding pandemic.

I suspected Bitcoin would be inflation-resistant because of its
enforced scarcity. To the extent that I thought about Tether at all, I
remembered the OAG’s investigation, assumed Tether was now old news
and would surely have been pulled from the markets, and dismissed it
as a factor in my buying decision.

That was a huge mistake.

For the rest of 2020, my inflationary thesis looked right. Unrest in
the United States, combined with anticipated high levels of lending
and consumer spending post-pandemic, seemed likely to fuel substantial
USD inflation in real terms through the end of 2021. During the same
period, Bitcoin was becoming increasingly scarce on a secular basis.

The market appeared to agree with my thesis. My Bitcoin position
doubled in value, then doubled again. By the end of the year I was
sitting on a 600% gain, and decently wealthy in nominal dollars.

I had intended to hold my Bitcoin for the very long term — it never
even crossed my mind to sell it, regardless of its day-to-day price

And then, in early January, a forum post caught my eye.
The shock

On January 8th, I saw this post on Hacker News about Tether
manipulating the price of Bitcoin. That shook me: I’d assumed Tether
had been purged from the crypto markets, yet apparently it was still
around. But how much Tether could there really be in the crypto
markets? Surely not that much.

Still, I took a look. The answer, I was surprised to see, was a lot:
Source: Coinlib BTC.

The left-hand side of this chart shows which currencies are flowing
into Bitcoin (that is, are being used to buy Bitcoin) across all
crypto exchanges. The right-hand side shows which currencies are
flowing out of Bitcoin (that is, that Bitcoin is being used to buy).
The chart is showing typical numbers for early January 2021.

The upshot: over two-thirds of all Bitcoin — $10 billion worth of it —
that was bought in the previous 24 hours, was being purchased with

What’s more, this pattern wasn’t unique to Bitcoin. I saw the same
thing for all the other popular cryptocurrencies:
Source: Coinlib ETH, LTC, ADA, and BCH.

It seemed I’d been wrong to dismiss Tether. Tether wasn’t just in the
crypto markets — Tether was the crypto markets.
The panic

This worried me. Most of my wealth was exposed in the form of Bitcoin,
and Bitcoin seemed like it might be exposed to Tether. And Tether’s
issuing company was under active investigation. I urgently needed to
find out if this risk was real.

I cleared my schedule and started digging. Right away it was obvious
that if Tether flows were partly or wholly fraudulent, that would have
a significant effect on the correct market price of Bitcoin. (Even
though $10B of Tether flows only constitutes 1.4% of Bitcoin’s $700B
nominal market cap, all that really matters is what fraction of
Bitcoin’s daily buying volume Tether accounts for — and that number is
closer to 70%.)

How could I find out if Tether was fraudulent? One quick proxy might
be what kinds of exchanges it traded on. I knew that some exchanges,
like Coinbase, used solid due diligence to curb money laundering,
while many other exchanges weren’t as well-run. Was there a pattern to
which exchanges supported Tether and which didn’t?

There was. Here’s how crypto trades flow through Coinbase Pro in a
typical 24-hour period:
Source: Coinlib Coinbase Pro data.

Notice that the money going into crypto is almost all dollars, Euros
and British pounds — currencies that are subject to rigorous controls
by their countries’ respective authorities.

And here are the flows of crypto trades through Binance, Bit-Z, and
HitBTC — the three biggest crypto exchanges in the world by nominal
Source: Coinlib Binance data. (Note: Excludes Binance US.)
Source: Coinlib Bit-Z data.
Source: Coinlib HitBTC data.

The pattern was obvious. Practically all the crypto sold on these
three exchanges was being bought with Tethers. None at all was being
bought with USD.

And the volumes were huge. Coinbase Pro is responsible for around $4B
in crypto trades each day. But Binance alone accounts for over $50B
worth of crypto volume, and each of the other two exchanges is bigger
than Coinbase. Most of the crypto that gets bought each day, is
getting traded for Tethers on those three exchanges.

Binance, Bit-Z and HitBTC are “unbanked” exchanges. That means they
don’t have direct access to the US financial system — most likely
because no US institution is willing to serve as their correspondent
bank domestically. (Binance US, an affiliate of Binance, does allow
dollar purchases. But its daily volume is only 10% that of Coinbase —
and less than 1% that of its offshore counterpart — so its effect on
the crypto markets is negligible.)

It’s hard for crypto exchanges to get banked, but Coinbase, Bitstamp,
and several other high-quality exchanges manage it by maintaining
strong know-your-customer (KYC) and anti-money-laundering (AML)
controls internally.

But what I found most alarming was that neither of the two most
reputable USD-banked exchanges — Coinbase and Bitstamp — supported
Tether trades at all. If Tether was on the level, there’d be no reason
for them to forego the fees on that trading pair — unless their risk
and compliance departments had deemed the token too much of a
liability to carry.
The deep dive

By now, I was concerned that my Bitcoin position might be too risky to
hold. But I still needed more evidence before I unwound such a big

I had to get more context on Tether — context that was as free of
marketing distortion as possible. I found what I was looking for in
the case docket for the New York OAG’s ongoing investigation of Tether
Ltd. (Note that the inquiry’s respondent is listed as “iFinex Inc., et
al” rather than “Tether Ltd.” on the docket, for reasons that aren’t
worth getting into here.)

I’ll skip most of the content — I strongly urge you to review the
files for yourself — and just list the three biggest takeaways that
jumped out at me:

    On February 26, 2019 — two months before opening its official
investigation — the OAG requests a large number of documents from
Tether Ltd. The purpose of the request is to help the OAG understand
how Tethers are being issued, backed, and accounted for, and how
Tethers are flowing through the crypto ecosystem.
    From the beginning of the official investigation on April 25,
2019, through to July 9, 2020 — a period of nearly 15 (!) months —
Tether Ltd. issues a series of legal challenges to the investigation
that appear designed to delay their response to the OAG’s document
    On July 9, 2020, the New York Supreme Court dismisses Tether
Ltd.’s final challenge on appeal, effectively forcing Tether Ltd. to
comply with the OAG’s document request. What’s more, Justice J.
Gesmer’s opinion eviscerates all aspects of Tether Ltd.’s arguments
(good commentary here), suggesting that Tether Ltd.’s appeal was never
intended as a realistic challenge to the documentation request at all.
But it could, plausibly, have been part of a strategy to delay the
document disclosure by any possible means.

Things were looking bad. But then a question suddenly occurred to me:
did any other significant event happen to Tether on or around July
9th, 2020?

So I looked. And I found something.
Source: Coinmarketcap USDT.

The chart above shows the market cap of all issued Tethers between
January 13, 2019 and January 13, 2021 (the blue curve). Because one
Tether nominally equals $1, the total market cap of Tether in dollars
is always equal to the total number of Tethers. (The numbers on the
y-axis don’t refer to the market cap. But for scale, the highest point
of the blue curve corresponds to about $25B.)

The first red arrow on the chart points to April 25th, 2019: the
announcement of the OAG’s investigation. Notice how, as the
investigation progresses, the issuance rate of Tether begins to rise —
initially in large single blocks, of around $1B, every few months.

The second arrow on the chart is July 9th, 2020: the date of the New
York court ruling forcing Tether Ltd. to begin the process of
disclosing its documents to the OAG. Two weeks after that ruling,
Tether Ltd. issues one more large block of Tethers, nominally worth
about $800M. And shortly after that — on September 1st — the issuance
pattern for Tethers changes completely.

Beginning in September, Tether Ltd. begins to issue multiple large
blocks of Tethers per day. The pace accelerates, with $2.3 billion
worth of Tether issued in the first week of 2021 alone.

This was consistent with the possibility that, as Tether Ltd.’s
various legal challenges failed one after another in the New York
courts, Tether Ltd. was choosing to issue Tethers faster and faster to
maximize the amount of value it could extract from the crypto
ecosystem before being shut down. The pace accelerates closer to
Tether Ltd.’s final disclosure deadline — January 15th, 2021.

I still needed to answer one last question. Did Tether issuance
actually correlate with the price of Bitcoin? A glance at the charts
gave me a clear affirmative answer:
Source: Coinmarketcap BTC.

There are three major periods of high relative Tether issuance on this
graph: 1) April 2019 through July 2019; 2) April 2020 through July
2020; and 3) September 2020 through to the present. All three periods
overlap with visible increases in Bitcoin’s market price. (The red
arrows here point to the same two dates as on the Tether chart above.)

This wasn’t a conclusive pattern: it still didn’t prove that Tether
issuance was causing Bitcoin’s price increases. It was still possible
that retail demand for Bitcoin was driving real USD into Tether Ltd.
through some unknown mechanism; that Tether Ltd. was issuing Tethers
in exchange for those dollars; and that those issued Tethers were then
being used to buy Bitcoin. Under that scenario, Tether’s rise was
being caused by Bitcoin’s demand, and Tether might be fully backed by
dollars after all.

Nonetheless, based on this evidence, I concluded my risk was now too
great. I was long Bitcoin up to my eyeballs; Bitcoin was clearly
correlated with Tether; Tether was clearly being issued at a frantic
rate; and that issuance had a high probability of being backed by
nothing at all.

I made the call: it was time to get out.
The exit

On January 9th, 2021, I liquidated my crypto position for USD. In the
process, I locked in a dollar-denominated gain that — in the interest
of full disclosure — I can only describe as life-changing.

At this point, I still didn’t grasp the entire picture. For example, I
still thought there was a chance Tether could be backed by real
assets. My state of belief was something like: “Of the 70% of Tether
flows into Bitcoin, some fraction is real; some fraction is
real-but-illicit (e.g., buying drugs); and some fraction is pure
fiction. I have no clue what the respective fractions of each are, but
I do know that my personal risk threshold has been exceeded.”

I was still a bit concerned that I’d miscalculated. Tether might yet
be largely real — and if it turned out it was, I’d have missed the

And then, by pure luck, I had a conversation that blew my mind.
The epiphany

I was catching up with my friend Bob (pseudonym) over video chat. I’d
just sold my Bitcoin position and was nervously awaiting confirmation
from my bank that my USD wire transfer out of the exchange had
cleared. Crypto was on my mind, so I asked Bob about it.

The conversation went something like this:

Me: You don’t own any crypto do you? I’m concerned some of the
exchanges in the ecosystem might be fraudulent.

Bob: I actually have a whole bunch of crypto on this exchange called
Bybit. Do you know if that’s one of the risky ones?

Me: I’m not sure. Does it let you trade in USD?

Bob: No, but a lot of other exchanges don’t either. In fact, you can’t
even deposit USD directly into a Bybit account.

Me: Really? But then how do you get your money onto their exchange at
all if they don’t accept USD deposits?

Bob: You send your USD to Coinbase and buy Bitcoin with it. Then you
move your Bitcoin onto Bybit and trade with it there.

Me: Hang on. If that’s the case, then why would anybody ever use an
unbanked offshore exchange that trades purely in crypto? What does
Bybit offer you that Coinbase doesn’t?

Bob: Leverage. I personally only use 2–3X leverage, but they let you
leverage your positions up to 100X if you want. You can’t do that on

Me: *Gasps audibly*

Bob: They also do a ton of promotions. They’ve got a bunch of timed
missions where you can earn Tethers for doing stuff like inviting
friends onto the exchange, joining their Telegram group, or trading on
their platform.

Me: HOLY $#!@

Bob: But thanks for the warning! I’ll pull my crypto out as quick as I
can. It might take me a few minutes though, I’ll need to fire up my
VPN first.

Me: A VPN? But why, for the love of God?

Bob: Because I need to spoof a Bolivian ISP to access the exchange.
They’re illegal to use if you’re based in America.

Me: *Head explodes*

There’s a scene in The Big Short where Mike Baum meets a stripper
who’s taken out mortgages on five properties. The stripper doesn’t
think there’s anything wrong with doing that, because her mortgage
broker told her she could always refinance her mortgages when the
prices of her houses went up. And housing prices would always go up.

Up to that point in the movie, Mike’s investigation had revolved
around bonds, mortgage rates, and CDOs. But meeting that stripper
personalizes the market for him: for the first time, Mike sees one of
the human beings who’s on the other side of his mortgage trade. And
that’s what finally convinces him to short the housing market.

For me, that’s what talking to Bob represented: for the first time,
I’d seen what it felt like to be on the receiving end of crypto’s
doomsday machine.
The smoking gun

Talking to Bob changed my perspective on Tether. I no longer viewed
Tether as a source of excessive risk. I now viewed it as a highly
probable fraud.

Part of the reason was incentives. The Tether-denominated amounts that
Bybit, Binance, and other similar exchanges were giving away to people
like Bob seemed inconsistent with the revenue those exchanges could
expect to generate from an average user.

To get a sense of the giveaways, I ran an anonymized Google search for
“Binance promotion”. This returned as one of its top results a page that read, in part, “We have a special
end-of-the-year promotion where we will offer eligible users a Savings
Voucher worth 500 USDT [Tether]!”

On the other hand, a similar search for “Coinbase promotion” returned
zero first-page results hosted on the domain. This
suggested that the offshore exchanges might be more willing to give
away Tethers than Coinbase was to give away dollars, which implied the
offshore exchanges were placing a lower value on Tethers than they
should be.

Now that I knew what to look for, everything started falling into
place. First I found this Twitter thread, pointing out that Tethers
were being issued in exact, perfect-round-number blocks. (In the
screenshot below, “USDT” is the ticker symbol for Tether.)
Source: Travis Kimmel via Twitter.

This is unusual: if demand for Tethers were real, one would expect
Tether Ltd. to combine together multiple USD deposits from investors
into a single issuing block. Combinations like that shouldn’t add up
to perfectly round numbers every time. What’s more, the supposed USD
inputs (e.g., 401,431,056 USD in the top left transaction) are giving
perfectly round Tether outputs (e.g., 400,000,000 USDT in the same
transaction) in every block — regardless of the prevailing exchange
rate or anything else.

By itself, this is implausible. But when you compare it to the issuing
pattern for USD Coin — Coinbase’s own issued stablecoin, which is
backed by regularly audited reserves of real dollars — the difference
is stark. (In the screenshot below, “USDC” is the ticker symbol for
USD Coin.)
Source: Travis Kimmel via Twitter.

Coinbase issues its USD Coins very differently from how Tether Ltd.
issues its Tethers. The issuing blocks for USD Coin are smaller, and
their size varies more: Tether’s blocks range in size from 150M to
400M Tethers, while USD Coin’s blocks range from ~7M to ~60M USD

The issuing blocks for USD Coin also have random-looking numbers of
coins in them (e.g., 9,374,133 USDC in the top transaction). That
randomness is what you’d expect if Coinbase was pooling real USD
demand from a bunch of unrelated investors together in each issuing

The last nail in the coffin was when I found out about the lack of
visible reserves. If Tether Ltd. really was taking in 1 USD for each
Tether it issued, then it should have as many dollars in its bank
account as there are issued Tethers. And it turns out we can check if
that’s true! Tether Ltd.’s bank is Deltec bank in the Bahamas, and the
Bahamas discloses how much foreign currency its domestic banks hold
each month.

The answer was — at least up to the end of September 2020 — not nearly enough:
Source: Anti-Washing Center via Twitter.

>From January 2020 to September 2020, the amount of all foreign
currencies held by all the domestic banks in the Bahamas increases by
only $600 million — going from $4.7B to $5.3B. (The table is in
Bahamian dollars, but the Bahamian dollar is pegged to the US dollar,
so 1 BSD = 1 USD.)

But during the same period, total issued Tethers increased by almost
$5.4 billion — going from $4.6B to $10B!

The implication was shocking: there weren’t nearly enough dollars in
all the domestic banks in the Bahamas to back the Tethers that were
floating around in the crypto market.

So this was crypto’s big short: Tether Ltd. was short of US dollars —
to the tune of about $25 billion.
The big picture

After this latest round of research, I waited anxiously. I’d sold out
of my Bitcoin position, but my bank wire was still in transit — I’d
still face counterparty risk until I’d fully exited a market I was now
convinced was built on a fraud.

While I waited, I combined what I knew of Bob’s experiences with my
other evidence, which allowed me to build up a mental picture of the
fraud’s core moneymaking engine. Here’s how it would work:

    Bob, a crypto investor, puts $100 of real US dollars into Coinbase.
    Bob then uses those dollars to buy $100 worth of Bitcoin on Coinbase.
    Bob transfers his $100 in Bitcoin to an unbanked exchange, like Bybit.
    Bob begins trading crypto on Bybit, using leverage, and receiving
promotional giveaways — all of which are Tether-denominated.
    Tether Ltd. buys Bob’s Bitcoins from him on the exchange, almost
certainly through a deniable proxy trading account. Bob gets paid in
    Tether Ltd. takes Bob’s Bitcoins and moves them onto a banked
exchange like Coinbase.
    Finally, Tether Ltd. sells Bob’s Bitcoins on Coinbase for dollars,
and exits the crypto markets.

My guess is that Tether Ltd. (through proxy accounts) is only
responsible for a small fraction of the direct buying activity on
these exchanges. But with $50B in nominal value flowing through
Binance every day, even a small slice of the flow represents huge
amounts of revenue. And when your business involves trading fake
dollars for real ones, your profit margins can get pretty high.

In the example above, Tether Ltd. bought Bitcoin from Bob at its
nominal price in Tethers — but that Bitcoin was the cover charge Bob
paid to get access to truly staggering levels of leverage and
promotions from the exchange. And that very leverage, and those very
promotions, are all denominated in Tethers — Tethers that I suspect
Tether Ltd. is handing over to the exchange in huge quantities, to
help it subsidize its user acquisition through more promotions.

This explains how Tether has been able to maintain its $1 USD peg on
the unbanked offshore exchanges. For a given amount of Bitcoin, a
crypto trader gains effective access to far more Tethers than the
public exchange rate would justify. The exchanges then book those
extra Tethers as “leverage” and “promotions”, allowing them to
maintain the fiction that those “free” Tethers aren’t being traded for
Bitcoin at all — even though they are part of the package Bob receives
for the Bitcoin he sells.

Viewed from this angle, the fact that the offshore exchanges don’t
support USD is a feature, not a bug: preventing USD and Tether from
meeting on a transparent market is crucial for ensuring that the true
price of Tether stays opaque — making it hard for an outsider to
dispute its $1 peg.

Forget the activity on the offshore exchanges for a moment, and just
think of a simple mental picture. Imagine you could stand at a
metaphorical booth, where Coinbase’s exchange connects with the US
financial system. If you could do that, you’d see two lines of people
at the booth. One line would be crypto investors, putting dollars in —
and the other line would be crooks, taking dollars out.

An hour after I finally wrapped my head around the whole, colossal
mess, I got a notification from my bank. My wire transfer from the
exchange had cleared.

I was out of the trade.
Epilogue: In the land of the blind

In my day job, I’m the founder of a fairly successful startup. As a
result, my experience on Twitter is heavily weighted towards seeing
posts by other founders and venture capitalists. By and large, these
folks are well-meaning, highly intelligent, and deeply competent in
their understanding of markets.

And yet, this selection of crypto tweets from the startup community is
pretty typical:

These are well-respected members of the community. I’ve met a few of
them personally and have always come away impressed — by their
goodwill as well as by their insights. What’s more, I must admit I’ve
expressed similar sentiments about Bitcoin myself in private, during
this latest bubble.

So what’s going on here? What could be blinding our community to fraud
on such a scale?

Part of the answer, I believe, is illiquidity.

An illiquid market is one you can’t cash out of quickly. The startup
ecosystem is very illiquid: it takes years to decades for founders to
cash out of the businesses they build. Startup founders — and the VCs
who back them — mostly have experience dealing in illiquid markets.

Crooks don’t like illiquid markets. Crooks like being able to cash out
fast: the longer they stay in one place, the higher the chance they’ll
be caught and arrested, because they are crooks.

Since illiquid markets repel crooks, the illiquid startup ecosystem
turns out to be largely (though not completely!) free from crooks.
That’s part of what makes it such a pleasure to work in, but it also
means that the community has never developed a great collective radar
for fraud: it hasn’t needed one.

But the startup community has a fantastic collective radar for things
that 1) start small; 2) grow fast; 3) challenge the status quo; and 4)
are broadly misunderstood. Those are the features of a promising
startup! And the community has learned that it’s expensive to miss out
on one of those.

Unfortunately, those are also the features of a fraud. But the startup
community doesn’t encounter much fraud, so it tends to discount the
possibility — and in crypto, that’s a grave mistake. Unlike startups,
crypto is a highly liquid market — exactly the kind that attracts
crooks, and crooks like to do fraud. And that means that many things
in crypto that look like promising startups, are actually frauds.

But it’s more than that: on top of everything else, crypto really is a
promising technology. There’s value to decentralization and censorship
resistance; there’s value to trustless enforcement of contracts; and
there’s value to having a Schelling point for a scarce asset. The
startup community is, correctly, recognizing that this potential value
exists. But without good fraud radar, it has no way to estimate how
much of that value is real today.

I believe the startup community is about to have its fraud radar
recalibrated. That recalibration — and the exorbitant fee the market
will charge for it — will be mandatory for anyone who holds a
meaningful amount of crypto.

So where does all this leave us? There are a few remaining questions.
Can we break this fraud right now?

Is there a way for us to collapse this fraud quickly, so fewer people
get hurt by it? I believe there is.

The legitimate crypto exchanges, like Coinbase and Bitstamp, clearly
know to stay far away from Tether: neither supports Tether on their
platforms. And the feeling is mutual! Because if Tether Ltd. were ever
to allow a large, liquid market between Tethers and USD to develop,
the fraud would instantly become obvious to everyone as the
market-clearing price of Tether crashed far below $1.

Kraken is the biggest USD-banked crypto exchange on which Tether and
US dollars trade freely against each other. The market in that trading
pair on Kraken is fairly modest — about $16M worth of daily volume —
and Tether Ltd. surely needs to keep a very close eye on its
movements. In fact, whenever someone sells Tether for USD on Kraken,
Tether Ltd. has no choice but to buy it — to do otherwise would risk
letting the peg slip, and unmask the whole charade.

My guess is that maintaining the Tether peg on Kraken represents the
single biggest ongoing capital expense of this entire fraud. If the
crooks can’t scrape together enough USD to prop up the Tether peg on
Kraken, then it’s game over, and the whole shambles collapses. And
that makes it the fraud’s weak point.

To be crystal clear: every time you sell Tethers on Kraken, you are
forcing Tether Ltd. to pay you in US dollars. If you can manage to
sell enough Tethers for USD on Kraken, then Tether Ltd. will run out
of dollars and this whole machine — which currently undergirds 70% of
all crypto trading flows — will fall apart.

Well-capitalized hedge fund managers may wish to re-read the above
paragraph, and ponder its implications.
How can we stop this from ever happening again?

I have a few suggestions.

The New York OAG should seek an injunction from the courts blocking
any further issuance of Tethers. This should be done as soon as
humanly (and legally) possible. Not only are the livelihoods of
countless people on the line — including those of thousands of
Americans and their dependents — but allowing a USD-equivalent
pseudo-currency to be minted without backing or restriction puts the
nation’s ability to regulate its own currency flows in jeopardy.

To be clear, US authorities should be extremely concerned about this.
To a good approximation, there is currently an unregulated, foreign
entity printing dollars with impunity. There’s a case to be made that
this constitutes a direct, adversarial attack on the USD — and the
longer it goes on, the more it risks impugning the integrity of the
entire US financial system.

The US Treasury should enforce 100% reserve requirements on all
USD-pegged crypto stablecoins, with mandatory audits. There is a lot
of genuine potential in crypto — the startup ecosystem got this part
right! — but that potential won’t be realized if the industry is
riddled with frauds. And while over-regulation is a real concern, the
fact that this racket has gone on for so long and at such a scale is a
clear sign that we need a mechanism to validate the reserves of
stablecoin issuers.

Healthy regulation makes an ecosystem more valuable, not less. Bitcoin
might be trustless in itself, but if it’s being bought for fake
dollars, its valuation in dollars will be fake as well. Whereas once
we can trust that the dollars that go into Bitcoin are real, we’ll be
able to trust that Bitcoin’s valuation is real, too.
Why did I write this?

Before my conversation with Bob, I was thinking about this problem in
the abstract: there was a mystery to be solved; there was money to be
made. But after speaking to Bob, I saw it differently: through the
eyes of a real human being — one who had taken the wrong side of this

There are millions of Bobs, all around the world. Many of them are
leveraged up to their eyeballs in Tether on unbanked exchanges.
Thousands more are buying into the trade every day. And almost all of
them are going to lose their money when it all comes crashing down.

This would be bad enough in ordinary times. But during a pandemic,
it’s catastrophic. Huge amounts of value for millions people will be
wiped out — individuals, families, and the most vulnerable among us
will be ruined at the worst possible time. This isn’t a game: the
human pain will be immense. And the longer the fraud goes on, the more
that pain will grow.

I wrote this to stop it.

Some of the source materials used in my investigation:

    Patrick McKenzie’s excellent blog post gives a clear picture of
the Tether situation up to October 2019.
    Matt Levine dedicated an issue of Money Stuff to Tether.
    Cryptocompare has helpful historical data on the volumes of
different currencies flowing into Bitcoin.
    I found the following Twitter accounts extremely insightful:
@coloradotravis, @Bitfinexed [private], @DrHOSP1, @BennettTomlin,
@patio11. (Note that Twitter appears to be intermittently suspending
certain accounts that raise questions about Tether. There is a small
chance some of the accounts listed here may be, or may become,
temporarily inaccessible.)

The content of this post is my personal opinion and doesn’t
necessarily reflect the positions of any individuals or organizations
I may be or have been affiliated with.

I’ve chosen to post this anonymously, but I may decide to identify
myself at some point in the future. Below is an SHA-256 hash of my
real name, padded with random characters. To claim authorship of this
post, I’ll use an account I control to publish the input string that
yields this hash.


Best of luck to all,

— Crypto Anonymous.

Tether tells us more about the flaws inherent in fiat currencies than
it does about cryptos.
Either way, the societal shift into crypto continues apace.

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