October has not been a good month for Bitfinex or Tether. External investors and observers are calling into question the very nature of both enterprises and challenging each to be more transparent. At the heart of the problem is the fact that both companies share the same management and investor base. Bitfinex is a Hong Kong-based exchange, while Tether is a cryptocurrency issuer of a “StableCoin” that goes by the call sign of “USDT”. StableCoins are a unique form of digital currency that is pegged to a national fiat currency, in this case, the U.S. Dollar. Back on 15 October, the value of one USDT fell beneath $0.90, causing consternation far and wide in the industry.
In principle, every USDT in circulation is supposed to be back 1:1 by cash reserves of U.S. Dollars in auditable bank accounts. If such is the case, why would its value crash in such a way? The inter-connectivity of the two companies has been an issue. Word on the street was that Bitfinex was having “banking complications”, and, with that brief disclosure, the weak-handed investors of USDT tokens rushed to their computers to convert to safer territories, namely Bitcoin, the avowed “safe haven” of cryptocurrencies.
Asset managers that specialize in the digital space were suddenly asked to share their opinions, but many were ambivalent. Thejas Nalval and Kevin Lu of Element Digital Asset Management, a Santa Monica-based cryptocurrency trading and asset management firm, were troubled by unanswered questions, and, as a result, they were unable to “rule out the worst for both Tether and Bitfinex.” The firm’s report concluded: “The lack of transparency and Tether’s inability to produce a truly independent audit of their reserves prevents us from ruling out the possibility that Tether does not have sufficient reserves or that Bitfinex is insolvent. The available public information, however, is consistent with the explanation that Tether and Bitfinex are experiencing problems securing a stable banking relationship.”
In early October, Bitfinex went so far as to publish a statement, well before the later incident, that said, “There have been ups and downs along the way, with complications scrutinized by watchful ‘investigators’ eagerly anticipating and predicting the industry’s collapse.” The company then added that it “is not insolvent.” Critics, however, were not pleased a few weeks later when rumours of insolvency rose again. These same critics are now arguing that Tether does not have the reserves to back its “StableCoin”, USDT.
Manu Andorra, the founder of Block0, issued a news release stating that “We have seen a prolonged period of uncertainty around Tether’s operations and with the introduction of competitors such as the Paxos Standard and TrueUSD, the market is moving towards the alternatives that put transparency at the forefront of their operations. Is Tether telling the truth when it says that each of its digital coins is backed by one U.S. dollar?”
To compound matters further, Tether announced this week that it had “destroyed 500 million USDT tokens that were held in the Tether Treasury wallet controlled by the company.” It further explained that “Tether Limited is the only party who can issue tethers into circulation (create them) or take them out of circulation (destroy them). This is the main process by which the system solvency is maintained.” There still remain 2 billion of USDT in circulation, supposedly backed 1:1 with USD reserves.
While outside observers and interested parties grope for answers and transparency, the flow of funds to Bitcoin has increased its case for being viewed as a stable store of value and a “safe haven” within the cryptocurrency market. Observers, however, are beginning to wonder if they are witnessing a breaking point for both Tether and Bitfinex.