Bloomberg’s Tether story doesn’t answer persisting questions

Tether advocates rejoiced on Tuesday after a story by Bloomberg’s Matt Leising seemed to reassure readers that the stablecoin had enough dollars to back each token.

“Bank statements reviewed by Bloomberg News suggest those fears may be unfounded,” Leising wrote. The story’s big contribution to the Tether debate was only that Bloomberg saw four separate months’ worth of Tether’s balances and each exceeded the amount of circulating tokens.

Yet Tether’s bank balances should be expected to be positive at month’s end. As written in the often-cited study by John Griffin and Amin Shams of the University of Texas on alleged manipulation of Bitcoin prices using tethers:

“the strong negative effect on Bitcoin prices in months of Tether issuance, suggest that Tether may induced price effects related to a need to raise month-end reserves. This finding is inconsistent with Tether being just a facilitator technology driven by investor demand because there is no reason to expect a relation between Tether printing and EOM [end of month] returns in that case.”

In other words, some bitcoins bought using tethers may have been sold for dollars to show dollar balances in the bank when needed, usually at the end of the month. That’s the opposite way it’s supposed to work; dollars are supposed to come from customers first, then tethers are issued.

Ultimately, that is the real concern with Tether. It’s not so much whether the cash balances exist, it’s whether issuances were from outside customers or were from those running Tether and its sister company, the Bitfinex exchange.

“To be sure, the bank statements reviewed by Bloomberg don’t show, for example, where the funds originated or where they are now,” wrote Leising. And, since the CFTC and the U.S. Department of Justice are said to be investigating whether tethers were used to move Bitcoin prices around, “even if regulators are satisfied Tether has all the money it says it has, that doesn’t necessarily mean the company — which has declined to comment on the inquiry — has been completely cleared since there’s the separate manipulation probe.”

And the rest of the Leising’s story isn’t a reason to cheer the controversial cryptocurrency. One bit of irregularity was that in September 2017, nearly $61 million that was counted with the token’s assets were held at the Bank of Montreal under the name of Stuart Hoegner, the general counsel for Tether and Bitfinex. It would be as if the Federal Reserve Bank put a chunk of its bond portfolio in Jerome Powell’s name.

But for Tether and Bitfinex, it’s the federal government, not the Federal Reserve, that should be the thing to worry about.