The past of Tether (USDT) under the magnifying glass of the US Department of Justice

By: Bharggavi Ssayee

The past of Tether (USDT) under the magnifying glass of the US Department of Justice

August 6, 2021 4:42 AM

Stablecoins are a vital cog in the crypto ecosystem. The recent bull market has reignited a long-standing debate about whether these fiat-backed tokens were based on anything other than promises. In May 2021, Tether revealed the composition of its reserves for the first time in its history. But that was not enough to reassure investors and regulators alike. However, the latest case does not appear to impact either USDT or Bitcoin, which did not falter when a new Tether investigation was announced.


Tether (USDT) caught up with shady past

The United States Department of Justice (DoJ) has reportedly opened a new investigation into the company Tether, the issuer of the USDT stablecoin. The purpose of the investigation is to determine whether Tether's executives committed bank fraud. If the lawsuit were to come to fruition, this would be the first criminal case against the company.


In the space of a few years, USDT has established itself as one of the pillars of the digital asset ecosystem. Since the start of 2021, its capitalization has grown by more than 100%, from 30 billion dollars to more than 60.


Nevertheless, the prosecution would relate to facts dating back several years. Indeed, federal prosecutors are investigating whether Tether concealed from banks that certain transactions were linked to cryptocurrencies. According to information revealed by Bloomberg, the DOJ sent several letters to Tether executives alerting them that a procedure could soon be engaged if the charges were justified. In contrast, the DOJ has not made any official comments.

Market shares of different stablecoins - Source: The Block


By 2017, relations between Tether, Bitfinex and their bank Wells Fargo had deteriorated sharply. So much so that the 2 crypto operators sued the bank for blocking transfers requested through Taiwanese banks. During the lawsuit, Tether and Bitfinex said Wells Fargo knew, or should have known, that the transactions were used to obtain dollars so that customers could purchase digital tokens. Nevertheless, the 2 complainants quickly withdrew their complaint and the case was closed.


In addition, the DoJ has been looking for several years to determine whether USDT is being used to manipulate the price of Bitcoin. While Tether is not directly involved in the manipulation investigation, prosecutors may have shifted their focus in the absence of evidence.


Finally, in February 2021, Bitfinex and several Tether affiliates agreed to pay $ 18.5 million to end the charges in New York state. The companies had concealed large losses and lied about the USDT's backing to the dollar. The companies thus struck a deal without admitting or denying the allegations.


Tether doesn't care about the DOJ investigation

As soon as the Bloomberg article appeared on Monday, July 26, Tether issued a response press release:


USDT is used to trials and FUD (fear, uncertainty and distress). During the various cases, the price of the USDT has already been strongly impacted, especially in 2018 when it fell to 90 cents. Nonetheless, the announcement of the DoJ's investigation does not appear to impact the price of crypto-enthusiasts' favorite stablecoin. As you can see below, the USDT registered a drop on the release, but the price quickly recovered to $1.


"Tether regularly maintains an open dialogue with law enforcement agencies, including the United States Department of Justice, as part of our commitment to cooperation, transparency and accountability. […] Business continues as usual at Tether, and we remain focused on how best to meet the needs of our customers. "

Beyond the fraud charges, the US Treasury Department and Federal Reserve are concerned that stablecoins could threaten the country's financial stability. In fact, USDT and USDC together represent nearly $ 90 billion in reserves. And as the various audits reveal, these reserves are made up of short-term debt securities which, in the event of a financial crisis, lose much of their value and could therefore put the entire crypto ecosystem at risk.