Tether [USDT] red flags you must know about

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July 19, 2018 by
Tether [USDT] red flags you must know about

Tether is a stablecoin pegged to U.S. dollars in a ratio of 1:1, which means that the value of each Tether coin can be matched to a U.S. dollar. But the cryptocurrency has attracted a number of controversies, with many raising questions as to whether the coin is a scam or an actual stablecoin. Few of the controversies are listed below.

Can Tether be trusted?

A recent research from the University of Texas indicated that the virtual currency has been used to manipulate Bitcoin prices, because of which Tether can not be trusted. The study found that as and when the supply of Tether in the market increases, its prices go up simultaneously. Though the research did not confirm price manipulation, it did mention suspicious patterns and correlations.

There have been reports that Bitfinix, a crypto exchange based in Hong Kong, has bought the stablecoin in order to keep its price up. Many have also flagged concerns over the connection between the digital asset and Bitfinex. The digital currency is operated by the same people who run one of the world’s largest crypto exchanges in the world.

Tether claims that the company creates and destroys tokens on the basis of the deposits and withdrawals they receive. This raises the concern that the firm can simply print more tokens, which can then be converted into Bitcoin, thereby driving up its price. To tackle these concerns, a certified audit is required. The company claims that its reserve account is frequently audited, which is untrue. Interestingly, Tether had fired its auditor saying – “Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame.”

Tether’s conflicts of interest

Tether has engaged Freeh Sporkin & Sullivan LLP (FSS), a law firm, to review the company’s financial accounts. The law firm confirmed that as of June 1, the company had enough U.S. dollar reserves in two bank accounts to back its tokens in circulation. It is important to note that this does not qualify as an audit since the review was carried out by a law firm and not an accounting firm.

FSS further clarified that its report does not constitute evidence of Tether compliance in any legal jurisdiction. The report merely serves as a confirmation that USDT was matched with the appropriate U.S. dollar reserves as of June 1. Tether’s lead legal advisor claimed that there were too many barriers to conduct an official audit of the company’s finances. However, TrueUSD – an alternative stablecoin – does not seem to have these barriers.

The main reason as to why questions have been raised regarding the coin’s legitimacy could be its corporate governance dealings. Eugene Sullivan, a senior partner at FSS, is an advisor to Noble Bank International – one of the banks where the U.S. dollars were held in reserve. This again raises concerns, especially since the webpage mentioning Sullivan’s advisory role in this particular bank has been taken down.

Noble Bank International is a reserve bank, which offers real-time post-trade services for institutional clients. This means that the bank does not offer fractional banking and does not typically offer loans. This raises red flags regarding Tether’s profitability and its relationship with the bank.

Compounding to these issues is thefact that the company has multiple conflicts of interest and corporate connections. Brock Pierce, one of the initial founders of Tether, is also the co-founder of Noble Markets – which controls Noble Bank International. Pierce claims to have since sold his position in Tether.

It is important to note that Pierce and John Betts – CEO of Noble Bank International – had dealings with the Mt. Gox scandal and Sunlot Holdings. The scandal involved the collapse of what was once the world’s largest Bitcoin exchange – Mt. Gox, which led to 774,000 Bitcoins disappearing in early 2014. Sunlot Holdings, a Cyprus-registered company, had tried to buy most of the defunct exchange to resurrect it, but the plan fell through. Sunlot was previously advised by Louis Freeh, one of the co-founders of FSS. Though none of these people have been found to be guilty of any crime, it still raises concerns regarding the legitimacy of Tether.

Is Tether a scam or a real stablecoin?

While there is no conclusive proof that Tether is a scam, there is significant evidence to suggest that the company has many murky dealings and has not been transparent, owing to the fact that it has not yet been fully audited. Seeing as how unanswered questions keep piling on, many believe that this coin is not to be trusted.

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