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The DOJ’s criminal probe into Tether — What we know
🕑 Added 2021-07-26 19:26:15 +0000 UTC
Early this morning, Bloomberg reported that Tether executives are under a criminal investigation by the US Department of Justice.
The DOJ doesn’t normally discuss ongoing investigations with the media. However, three unnamed sources leaked the info to Bloomberg. The investigation is focused on Tether misleading banks about the true nature of its business, the sources said.
The DoJ has been circling Tether and Bitfinex for years now. In November 2018, “three sources” — maybe even the same three sources — told Bloomberg the DOJ was looking into the companies for bitcoin price manipulation.
Tether responded to the latest bit of news in typical fashion — with a blog post accusing Bloomberg of spreading FUD and trying to “generate clicks.”
“This article follows a pattern of repackaging stale claims as ‘news,” Tether said. “The continued efforts to discredit Tether will not change our determination to remain leaders in the community.”
But nowhere in its post did Tether deny the claims.
Last night, before the news broke, bitcoin was pumping like crazy. The price climbed nearly 17%, topping $40,000. On Coinbase, the price of BTC/USD went up $4,000 in three minutes, a bit after 01:00 UTC.
After a user placed a large number of buy orders for bitcoin perpetual futures denominated in tethers (USDT) on Binance — an unregulated exchange struggling with its own banking issues — bitcoin hit a high of $48,168 at around 01:00 UTC on the exchange.
Bitcoin pumps are a good way to get everyone to ignore the impact of bad news and focus on number go up. “Hey, this isn’t so bad. Bitcoin is going up in price. I’m rich!”
So what is this DoJ investigation about? It is likely a follow-up to the New York attorney general’s probe into Tether — and its sister company crypto exchange Bitfinex — which started in 2018.
Tether and Bitfinex, which operate under the same parent company iFinex, settled fraud charges with the NY AG for $18.5 million in February. They were also banned from doing any further business in New York.
“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” the NY AG said.
The companies’ woes started with a loss of banking more than a year before the NY AG initiated its probe.
Banking history
Tether and Bitfinex, both registered in the British Virgin Islands, were banking with four Taiwanese banks in 2017. Those banks used Wells Fargo as a correspondent bank to process US dollar wire transfers.
In other words, the companies would deposit money in their Taiwanese banks, and those banks would send money through Wells Fargo out to the rest of the world.
However, in March 2017, Wells Fargo abruptly cut off the Taiwanese banks, refusing to process any more transfers from Tether and Bitfinex.
About a month later — I would guess, after Wells Fargo told them they were on thin ice — the Taiwanese banks gave Tether and Bitfinex the boot.
Since then, Tether and Bitfinex have had to rely on shadow banks — such as Crypto Capital, a payment processor in Panama — to shuffle funds around the globe for them.
The companies responded to their loss of direct banking in another way — by furiously printing tethers. In early 2017, there were only 10 million tethers in circulation. Today, there are 62 billion tethers in circulation, and there is a big question as to how much actual cash is behind those tethers.
Crypto Capital
Partnering with Crypto Capital turned out to be an epic fail for Bitfinex and Tether.
The payment processor was operated by principals Ivan Manuel Molina Lee and Oz Yosef with the help of Arizona businessman Reggie Fowler and Israeli woman Ravid Yosef — Oz’s sister, who was living in Los Angeles at the time.
In April 2019, Fowler and Ravid were indicted in the US for allegedly lying to banks to set up accounts on behalf of Crypto Capital. Fowler is currently awaiting trial, and Ravid Yosef is still at large.
Starting in early 2018, the pair set up dozens of bank accounts as part of a shadow banking network for Crypto Capital. Some of those banks — Bank of America, Wells Fargo, HSBC, and JP Morgan Chase — were either based in the US, or in the case of HSBC, had branches in the US, and therefore, fell under the DOJ’s jurisdiction.
In total, Fowler’s bank accounts held some $371 million and were at the center of his failed plea negotiation in January 2020. Those frozen accounts, along with more frozen Crypto Capital accounts in Poland, meant that Tether and Bitfinex had lost access to some $850 million in funds in 2018.
Things spiraled downhill from there. Molina Lee was arrested by Polish authorities in October 2019. He was accused of being part of an international drug cartel and laundering funds through Bitfinex. And Oz Yosef was indicted by US authorities around the same time for bank fraud charges.
Tether stops printing
At the beginning of 2020, there were only 4.5 billion tethers in circulation. All through the year and into the next, Tether kept issuing tethers at greater and greater rates. Then, at the end of May 2021, it stopped — and nobody is quite sure of why. Pressure from authorities? A cease and desist order?
Usually, cease and desist orders are made public. And it is hard to imagine that there would be an order that has been kept non-public since May.
One could argue, you don’t want to keep printing dubiously backed stablecoins when you’re under a criminal investigation by the DOJ. But as I’ve explained in prior posts, other factors could also be at play.
For instance, since Binance, one of Tether’s biggest customers, is having its own banking problems, it may be difficult for Binance users to wire funds to the exchange. And since Binance uses USDT in place of dollars, there’s no need for it to acquire an additional stash of tethers at this time.
Also, other stablecoins, like USDC and BUSD, have been stepping in to fill in the gap.
The DOJ and Tether
You can be sure that any info pulled up by the NY AG in its investigation of Tether and Bitfinex has been passed along to the DoJ and the Commodities and Futures Trading Commission — who, by the way, subpoenaed Tether in late 2017.
Coincidentally — or not — bitcoin saw a price pump at that time, too. It went from around $14,000 on Dec. 5, 2017, the day before the subpoena was issued, to nearly $18,000 on Dec. 6, 2017 — another attempt to show that the bad news barely had any impact on the bitcoin price.
Tether relies on confidence in the markets. As long as people believe that Tether is fully backed, or that Tether and Bitfinex probes won’t impact the price of bitcoin, the game can continue. But if too many people start dumping bitcoin in a panic and rushing toward the fiat exits, the truth — that there isn’t enough cash left in the system to support a tsunami of withdrawals — will be revealed, and that would be especially bad news for Tether execs.
Will Tether’s operators be charged with criminal actions any time soon? And which execs is the DoJ even investigating? The original operators of Bitfinex and Tether — aka “the triad” — are Chief Strategy Officer Phil Potter, CEO Jan Ludovicus van der Velde, and CFO Giancarlo Devasini.
Phil Potter supposedly pulled away from the operation in mid-2018. And nobody has heard from van der Velde or Devasini in a long, long time. Now, the two main spokespersons for the companies are General Counsel Stuart Hoegner and CTO Paolo Ardoino, who give lots of interviews defending Tether and accusing salty nocoiners like me of FUD.
Tracking down bad actors takes a lot of coordination. Recall that the DOJ had to work with authorities in 17 different countries to finally arrest the operators of Liberty Reserve, a Costa Rica-based centralized digital currency service that was used for money laundering. Similar to Liberty Reserve, Tether is a global operation and all of the front persons associated with Tether — except for Potter who lives in New York — currently reside outside of the US.
It may still take a long while to completely shut down Tether and give it the Liberty Reserve treatment. But if the DoJ files criminal charges against Tether execs, that is at least a step in the right direction.
Read more:
The curious case of Tether — a complete timeline
Nocoiner predictions: 2021 will be a year of comedy gold
