Top-ranking stablecoin Tether (USDT) and associated exchange Bitfinex have certainly seen their share of controversy in recent years. Critics have claimed the USD-pegged Tether isn’t backed by adequate reserves, and both Tether and Bitfinex struggled through a prolonged legal battle with the New York attorney general’s office launched in April 2019 that finally resolved in a settlement in February this year.

The fifth largest cryptocurrency and most popular stablecoin by market capitalization, Tether is an easy target for strict regulatory scrutiny. At time of publication, USDT dominates over US$50 billion of the market, followed by Circle’s USD Coin (USDC) in a distant second with a market cap of just under US$11.3 billion.

Tether’s USDT has become a refuge for traders when there’s blood in the streets, providing a relative safe haven in the typically volatile sea of crypto price fluctuation. USDT is the most popular trading pair for top cryptocurrencies such as Bitcoin and Ethereum’s Ether. 

Starting today, USDT will be listed on Coinbase Pro — which will likely provide Tether some much needed legitimacy. But though USDT’s popularity shows the stablecoin is an indispensable asset for many, not everyone is confident of its fundamentals.

New York attorney general demands increased transparency

In a statement announcing the Feb. 23 settlement with Tether and Bitfinex, New York Attorney General Letitia James said: “Bitfinex and Tether recklessly and unlawfully covered up massive financial losses to keep their scheme going and protect their bottom lines.” 

“Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie,” James added. 

James is not alone in her unflattering assessment. Tether has long been at the heart of controversy amongst cryptocurrency traders who claim the stablecoin is no longer backed by sufficient reserves. 

Tether’s initial policy prior to late February, 2019 stated: “Every tether is always backed 1-to-1 by traditional currency held in our reserves.” The policy now states that “Every Tether token is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties…” 

In other words, one Tether being redeemable for one U.S. dollar is no longer guaranteed. This has some speculating that Tether prints off USDT in fractional reserve fashion and that they were keeping reserves in volatile assets such as Bitcoin, a claim that was confirmed by Bitfinex attorney David Miller in May 2019.

Aside from the US$18.5 million in penalties to be paid to the state of New York, Bitfinex and Tether are now required to issue detailed business reports on a quarterly basis. This means that a report for Q1 should be issued sometime in May. According to the settlement:

“Tether must offer public disclosures, by category, of the assets backing tethers, including disclosure of any loans or receivables to or from affiliated entities,” James said. “The companies will also provide greater transparency and mandatory reporting regarding the use of non-bank “payment processors” or other entities used to transmit client funds.”

Tether execs sound off on increased scrutiny

Stuart Hoegner, general counsel at Bitfinex and Tether, took to Twitter Friday to divert the uncomfortable spotlight to other major stablecoins that he claimed were not so severely scrutinized.

“The second-biggest stablecoin issuer doesn’t give a breakdown of their reserves, either,” he tweeted. “Observers should ask why our detractors are pushing one rule for them and another for us.” Hoegner later added: “We will be publishing the same breakdown info that we’re showing to NYAG (and btw that NYAG saw for >2 years).”

Tether’s chief technology officer Paolo Ardoino also did not mince words when taking aim at a popular cryptocurrency news outlet for what he viewed as “clown click-bait articles,” which called Tether’s reserve reporting methodology into question. The CTO quipped that the articles should be turned into NFTs (Non-Fungible Tokens) and that he would “bid 100 SATs” — perhaps referring to Sats, or Satoshis — or one-hundred-millionth of a Bitcoin.

Not all observers were impressed with Ardoino’s explanation, however. As one commenter wrote: “I’m not a tether truther and I love finex, but of course it matters what assets tether is backed by. If crypto and stock markets tank tomorrow, will tether still be fully backed? How can we know?” 

For Tether’s part, Hoegner promised greater accountability. “Stay tuned for more info. We have made great strides in 2021 in terms of transparency. More to come.”

Coinbase Pro adds Tether in midst of regulatory ambiguity

Neither institutional nor retail investors are certain what lies down the road for Tether, and regulatory uncertainty over USDT may have something to do with this. 

The massively successful USDT is now no longer offered to New York residents, and though the company is registered with the U.S. Financial Crimes Enforcement Network (FinCEN) this does not equate to a regulatory seal of approval.

“These two R words [regulation and registration] are quite different,” crypto columnist J.P. Koning notes. “When an institution is registered with FinCEN, this means FinCEN has provided it with an electronic account for uploading suspicious transaction reports (SARs) and $10,000 cash transaction reports (CTRs). As per FinCEN requirements, a registered entity must also implement measures for collecting and verifying the identity of customers.”

Even small enterprises can register, Koning said, and registration as a money service business (MSB) with FinCEN, does not equate to FinCEN approval.

“The inclusion of a business on the MSB Registration Web site is not a recommendation, certification of legitimacy, or endorsement of that business by any government agency,” according to FinCEN.

Tether’s representatives Hoegner and Ardoino have drawn criticism for being unclear and contradictory on the matter, with Ardoino previously maintaining “Tether is registered and regulated under #FinCEN” and Hoegner claiming “we are not regulated in the U.S. by state financial regulators.”

Whether the issue was one of semantics or simple confusion, one thing is certain: Tether remains extremely popular outside the U.S. Testament to this is Coinbase Pro’s recent announcement that the platform will be supporting trading of ERC-20 USDT (Ethereum-based Tether) effective today, April 26. 

“We are gratified by Coinbase’s decision to add Tether tokens (USDT) on ERC-20 to its Coinbase Pro platform,” Hoegner said in a statement to Forkast.News. “This is happening as we near a market capitalization of US$50 billion and represents another step forward as we broaden our community. As the most liquid, stable and trusted stablecoin, Tether is playing a key role in the emerging digital token ecosystem.”