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In the past, Bitfinex representatives have insisted to Alphaville that the expansion of tether supply is entirely linked to authentic buying interest. In some cases, however, tethers are also originated into reserves in anticipation of demand as well.

Although crypto speculation surely increased after the social media giant's announcement, bitcoin's recent rise might also have something to do with another digital token, Tether, a US dollar-pegged unit commonly used to trade bitcoin on exchanges that lack banking partners. Tether is issued and redeemed by a company of the same name.

Centralization is a well-known problem of crypto markets. People often referred to as whales control a fifth of some markets and have the strength to promote manipulation whenever they want to. Tether, however, seems to be facing an even worse situation: only 318 crypto addresses actually control 80% of the circulating supply of Tether.

When you see a large Tether print it means a handful of wealthy clients have essentially preordered batches of Tethers, days in advance, to then dump on the market-often before it's begun to surge. Buying significant amounts of USDT also allows whales to make trades on deeply liquid crypto exchanges that do not transact in fiat currencies.

Tether is to stablecoins what Bitcoin is to altcoins, but whereas bitcoin's dominance stands at 62%, Tether is capturing 98% of all stablecoin volume, despite the numerous, and some say more trustworthy, alternatives.

Blockchain forensic company Chainalysis today announced that Tether is now using its AML compliance solution dubbed "Know Your Transaction Token." The solution monitors the full lifecycle of a token from issuance to redemption. This is interesting, because we have yet to learn of one person who has actually redeemed their tethers for cash, but let's put that aside for now. "

Hackers have threatened to release sensitive company documents supposedly belonging to USDT stablecoin issuer Tether unless the firm sends a 500 Bitcoin (BTC) ransom to a specified address. Hackers purportedly threatened to leak documents that would "harm the Bitcoin ecosystem" if their ransom demands are not met. Tether has already stated that it will not pay the ransom.

"The question remains as to why Tether management still refuses to provide more transparency. If indeed the company has nothing to hide, putting all questions to rest is astonishingly easy: move the money to a select pool of large well-known banks, and have the statements properly audited by a select pool of large well-known auditing firms. Commit to performing and documenting funds certification for example quarterly and that's it, you're done. If Tether wanted to go a step further it could also disclose the investment strategy (or lack thereof) it pursues with the cash under its responsibility. In my mind there can be only one reason why the firm doesn't follow those very simple steps."

This is a great summary of the potential systemic risks around Tether by Timothy Massad, ex-Chairman of the US Commodity Futures Trading Commission. He calls for a strengthening of the regulation of crypto-assets generally and in particular stablecoins. He seems supportive of the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, introduced in Congress last December, that would require that stablecoins be issued by a bank and would impose certain standards.

Regulators have waited too long to act on so-called stablecoins, to the point where exposure to schemes like that being run using Tether has infected the entire digital asset industry-and even beyond it. This is thanks to a network of exchanges which surround and rely on Tether and who perform a vital role in Tether's ability to mint new USDT and get them to market, all while maintaining a paper-thin illusion that the so-called stablecoins are backed by anything at all. In return, the exchanges get to sell the apparently value-less USDT in exchange for BTC."

"Tether is very nearly the same size as the 25th largest mutual fund or ETF. At their average rate of printing for 2021 it will take approximately 20 days until Tether would be larger than entities on this list."

According to Tether's General Counsel, Stuart Hoegner, the commercial paper held as USDT reserves are mostly investment grade, but with no independent verification of his statement. However, Tether's terms of service says that if Tether is unable to raise the cash to meet USDT redemption requests, it can either delay redemption or redeem USDT by in-kind redemptions of securities and other assets held as reserves. So the liquidity or quality of reserve assets doesn't matter since Tether will never have any significant need for cash.

iFinex Inc, the parent company of Bitfinex and Tether, has asked the New York Supreme Court to push back its trial date again, and another 30 days to produce the documents demanded by the Office of the Attorney General (NYAG). The document production process was originally supposed to be completed by December 16, 2020, which was subsequently extended to January 15. The new request noted that a "substantial volume" of material had already been handed over to the OAG, but that there remained "supplemental agreed-upon items" that still had to be sourced. The legal battle extends back to April 2019, when the NYAG alleged that Bitfinex had attempted to cover up the loss of $850 million of customers' funds by taking illegal loans from Tether.

Bitfinex has repaid its sister company Tether the remaining loan balance of $550 million. In 2018, Tether opened a credit line worth $900 million for Bitfinex, of which $750 million was used by the exchange. Bitfinex repaid $100 million each in 2019 and 2020. That loan is at the heart of an ongoing legal dispute with New York's Attorney General.

"This isn't just a story about a tiny fraudulent company. As I'm writing this, Tether is now valued at nearly $63 billion, which would rank it amongst the largest financial crimes in history. It's a ticking time bomb, and this article will provide a quality summary of why Tether is a systemic risk you shouldn't overlook, or ignore."

A Tether confidence crisis would likely result in a black swan event and a re-shuffling of the market. While there's a chance that large players would counteract the crisis by buying back large amounts of USDT to restore the peg, or by successfully reassuring the market that all USDT can be redeemed at par, there's no way to be sure that this will happen, unless you put a whole lot of trust in Tether and its affiliates.

A U.S. Department of Justice (DoJ) probe into Tether is homing in on whether executives behind the USDT stablecoin committed bank fraud, a potential criminal case that would have broad implications for the crypto-asset market. The DoJ is scrutinizing whether Tether concealed from banks that transactions were linked to crypto-assets.

In its terms of service, Tether says it "reserves the right to delay redemption or withdrawal" of tether in the event of illiquidity. The company also says that it reserves the right to pay you "in-kind redemption of securities and other assets" held in its reserves.

In a court transcript Tether admits that it invested some of its reserves in bitcoin. David Miller, an attorney for Bitfinex said: "Tether actually did invest in instruments beyond cash and cash equivalents, including bitcoin."

"This is far from an exhaustive look at Tether (I'm working on a book with CasPiancey for that), but hopefully you have a better understanding of the context surrounding the claims of fraud that frequently follow Bitfinex and Tether."