Tether Now Admits It’s Not Fully Backed By Dollars

In a development everyone paying even the slightest bit of attention should have seen coming, the crypto “stablecoin” Tether has amended its public claims about the assets that guarantee the coin’s value.

Tether’s website has publicly stated for years that “every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USDT is always equivalent to 1 USD.” That claim has been replaced by the following word salad:

“Every Tether 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, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.”

In response to a request for more details, a Tether representative provided the following statement to BREAKERMAG, largely echoing the updated statement on its website:

“From time to time, Tether reviews its Terms of Service and Risk Disclosures to ensure that they remain appropriate and up to date. Our most recent revisions were intended to update our disclosures to reflect Tether’s growth and operations and to be consistent with the types of disclosures used by other institutions.

“These changes were made several weeks ago and were directly communicated to Tether’s customers logging into the site. This was done by way of scrollwrap with new terms of service that required active consent.

“Tethers remain completely stable and 100% backed, so Tether’s reserves always equal or exceed the number of issued Tethers. The only change is that the composition of the assets that provide that backing includes a combination of cash, cash equivalents, and may also include other assets or receivables from loans issued by Tether.”

Despite claims that Tether notified customers “weeks ago,” the change came to public attention yesterday, in part thanks to Twitter user @CasPiancey. It’s possible Tether’s claims about backing were changed in response to a probe launched recently by the U.S. Justice Department.

Those new to the Tether saga might need a quick catchup. Tether is currently the ninth-largest cryptocurrency by market cap, and runs on the Omni layer on top of the bitcoin blockchain. The token has been issued by Tether Limited since 2014. Tether Limited claimed for more than four years that every Tether in circulation was backed by a dollar in the company’s bank accounts. But the company has repeatedly failed to provide a formal audit of those holdings, leading many to speculate that its claims of backing were fraudulent.

Related: Tether’s Dollar Peg Is Breaking. Here’s How It Hurts Bitcoin

Tether was also recently revealed to be affiliated with the exchange Bitfinex, and an analysis by University of Texas researchers argued that it was being issued in patterns that suggest it was being used to prop up the price of bitcoin. And for long stretches of time, actually redeeming Tether for dollars from Tether Limited was difficult or impossible.

Now Tether Limited seems to be admitting that at least some of those allegations are and/or were true. Tether used to claim it had bank accounts holding actual U.S. dollars equal to the number of Tether coins in circulation. Now, it says that it has . . . stuff . . . worth the equivalent of the $7.3 billion face value of Tether coins currently in circulation. But it doesn’t say exactly what that stuff is, and nobody but Tether Limited is determining that stuff’s value. Instead of continuing to promise a formal audit, the Tether site now simply states that “The value of our reserves is published daily.”

So what might make up the $7.3 billion dollars in value backing Tether? There’s at least some “currency and cash equivalents.” There are also “receivables from loans made by Tether to third parties”—that is, money people owe to Tether Limited, and will in theory be paid back … sometime.

But what about those “other assets”? Those could include literally anything, and jokesters on Twitter have been eager to speculate. It could be watches. It could be cars. It could even be a boat!

Humor aside, the real question is what this means for crypto markets. Tether isn’t even making claims about what amount of its holdings are cash, so this shift could get big holders looking to unload their Tethers. That could generate a crypto-bank run when people can’t redeem or sell Tether they’re holding, and the market value of Tether coins could crash. That, in turn, would drag down the value of bitcoin and other cryptos.

We’ve sent a request for further comment to Tether, and will update with anything we receive, though the team has historically been uncommunicative. In January, however, staff writer Jessica Klein spoke with Tether co-founder William Quigley, who left the project in 2015, about ongoing questions regarding Tether’s reserves.

Klein: A lot of people don’t believe that there are actually the U.S. dollars in a bank to back up tether.
Quigley: Let them believe that. I don’t know what to say. I mean, okay, then you think those guys are criminals I guess?
Klein: So you’re aware of this money actually being in a bank somewhere?
Quigley: I was aware of it when I was involved with it, but once my partners were no longer involved with it I have no proof that for every Tether being issued there’s $1. I would be quite surprised if the people doing it have decided to commit what would seem to be big fraud. So I would be surprised if that happened.
Klein: So you trust that it’s there?
Quigley: I guess what I would say is, I use Tether. And I have faith that there’s dollars backing it up. Am I stupid? Well, maybe you can call me stupid, but you know what? I can tell you I have no idea if there’s any fucking gold in Fort Knox.

We will continue monitoring this story, and will provide any details we can find about the holdings of Tether Limited and/or Fort Knox.