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Here's a recent headline from Coindesk
If true, what does it mean for USDC? Let's take a look.
Key facts about Tether's legal structure:
- Ownership: iFinex (BitFinex parent)
- Legal Entity: Hong Kong-Based Ltd. (Tether Limited)
- Legal Jurisdiction (Country): British Virgin Islands
- Regulatory Status: Money Service Business with the Financial Crimes Enforcement Network of the US Dept. Of Treasury
- Country Location — HQ / Primary Team: London / Distributed
iFinex, created in 2013, is the parent company to both Bitfinex and Tether, operating as a lender, stablecoin issuer, Venture Capital fund, and trading desk. It has a parent company, the Hong Kong-registered DigFinex. It’s difficult to pinpoint the exact country iFinex, Bitfinex, and Tether all call home. The three entities are a conglomerate of shell companies located in the British Virgin Islands, Hong Kong, Switzerland, and other jurisdictions.
There have been many regulatory orders related to Tether ranging from late 2017 through 2019 involving fraud, audits, and unlicensed money transmitting.
In December 2017, the US Commodity Futures Trade Commission sent Tether, Bitfinex, and former auditor Friedman LLP a subpoena of which the requested information was undisclosed. Although it's clear Friedman performed a preliminary audit for Tether in September 2017 that depicted full cash reserves of USDT. Additionally, a report published in January 2018 revealed Tether’s relationship with Friedman had dissolved. A company spokesperson emailed a statement claiming, “It became clear that an audit would be unattainable in a reasonable time frame.” While it’s unclear the true subject matter of the CFTC’s subpoena, it may have been related to the integrity of Tether’s audit and their ability to hold full cash reserves.
Most notably, a lawsuit filed by Attorney General Letita James in the New York Supreme Court cited fraud violations to iFinex Inc., the operator of Bitfinex and Tether, in April 2019. More specifically, James' investigation determined they (Bitfinex and Tether) hid losses of $850 million of commingled client and corporate funds. Reportedly, subpoenas issued to Bitfinex and Tether in November 2018 uncovered these funds had been sent to Panamanian payment processor Crypto Capital Corp. without any written contract or assurance. According to the filings, Bitfinex had been taking millions from Tether’s reserves to hide undisclosed losses and their inability to service customer withdrawals.
Seemingly, a conclusion was ultimately reached in February 2021 when Tether and Bitfinex reached a settlement with the New York Attorney General’s Office. Under the terms of the settlement, Tether did not have to admit any wrongdoing but did pay an $18.5 million fine. The investigation took over two and a half years and for Tether to come out of the matter with only a small fine can only be viewed as a win for the project. However, in July 2021, another report surfaced that the US is conducting a probe into alleged bank fraud carried out by Tether team members. The US is investigating whether Tether personnel hid certain business information to ultimately secure banking partnerships. The investigation is currently ongoing. If the alleged allegations prove true, it would have major implications for USDT in the US but would not stop its use globally.
In a related case, Reginald Fowler, an operator of Crypto Capital Corp., was indicted in April 2019 for running an unlicensed money-transmitting business. Crypto Capital Corp. facilitated fiat onramps for Bitfinex, Kraken, and the discontinued controversial exchange QuadrigaCX. Fowler is believed to be the source that failed to return the $850 million of investor money to Bitfinex and Tether.
As mentioned in the Vulnerabilities section, the very idea of stablecoins or “crypto dollars” has come under attack from US regulators as the STABLE Act was proposed in December 2020. The STABLE Act was written with “the intent to prevent abuse, opacity, and the potential rise of a stablecoin-based shadow-banking system.” However, the obligations that stablecoin issuers would have to abide by in order to avoid breaking the law are incredibly cumbersome and/or restrictive.
Firstly, any stablecoin issuer would be required to obtain a federal banking charter. In addition, any stablecoin issuers would be required to obtain the approval of both the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) six months before issuance. Finally, the stablecoin issuers would either need to obtain FDIC insurance or deposit dollar reserves directly at the Federal Reserve.
Private stablecoin issuers like Tether will draws scrutiny from U.S. regulators because they are infringing on the government's and government-approved banks' privilege to issue dollars. They are benefiting from the strength of the U.S. dollar while not being held to the same level of regulagtory-oversight as a bank. Additionally, the government is not likely to be happy that "real" USD is being exchanged for USDT thereby exiting the "real" economy for the crypto economy.
So the goal of anti-stablecoin regulation in the US becomes two-fold. First, the government wants to take a pie from the success of private stablecoin issuers by claiming that these issuers are already functioning as banks. This can be seen in the example of the report produced by the PWG from November 2021. In this report, stablecoin issuers are labeled as “systemically important”, the same designation used to describe financial institutions in the wake of the 2008 crisis. Second, by impeding the growth of stablecoins through regulation, the US government strategically aims to limit the most valuable liquidity source of the overall crypto economy. This effectively prevents any cryptocurrency from growing to a large enough market and user base that may threaten the reserve status and dominance of the US dollar.
Additionally, in November 2021, the President’s Working Group (PWG) on Financial Markets released a report outlining its position on stablecoins. The report stated the key use cases for stablecoins are trading, lending, and borrowing other digital assets in high-value payments/transfers. The onchain data supports this with the average transfer size being ~$55K (in November 2021). The chart below shows the percentage breakdown of daily transfers of USDT (Tether, on Ethereum) by transfer size, as well as the average transfer size by the day.
Source: CoinMetrics
Outside of court investigations, Tether has extensive terms of service and clearly states its restrictions in Cuba, North Korea, Iran, Pakistan, Syria, Venezuela, Crimea, and the US. In addition, despite USDT representing the value of a dollar on public blockchains, it is treated by the IRS as property. Essentially, this means exchanges of stablecoins, such as USDT, should be reported as it represents a taxable event.
Tether and stablecoins, in general, will remain a popular topic for politicians in the near term, especially in the US, as the Federal Reserve will release a report in September 2021 on the potential for a digital US dollar (CBDC), stablecoins, and cryptoassets in general. Additionally, Secretary of the Treasury Janet Yellen has also convened the President’s Working Group on Financial Markets (PWG) and other agencies to discuss stablecoins.
