Is your USDT safe? A big settlement with the New York State Attorney General still has many hidden dangers

Wu Shuo Author | Tan Shu

Editor of this issue | Colin Wu

On February 23, Bitfinex/Tether reached a settlement with the New York State Attorney General. One of the conditions of the settlement was that Bitfinex/Tether needed to pay a fine of US$18.5 million to the New York State Attorney General. Bitfinex then issued an [announcement](1), in which it claimed that the settlement showed that they did not, as rumored, “print” USDT without actual asset support or manipulate the price of digital currencies.

The legal dispute between the New York State Attorney General and Bitfinex/Tether has a long history, dating back to April 2019, when the New York State Attorney General began investigating Bitfinex because Bitfinex had misappropriated up to $850 million of Tether's funds to handle user withdrawal issues. The reason why Bitfinex misappropriated Tether's funds was that the funds of Crypo Capital, the payment institution it used, were frozen by the police, and it was temporarily unable to meet customers' US dollar withdrawal needs.

Due to the particularity of the cryptocurrency industry, especially the fact that cryptocurrencies were often used in illegal areas in the early days, most traditional banks are reluctant to provide banking services to unregulated exchanges. Take Bitfinex for example. Its company is registered in the British Virgin Islands, its headquarters is located in Hong Kong, and its offices are distributed. It has always been in a gray area from a regulatory perspective. Since its establishment, it has been terminated by many banks, which is why Bitfinex has to use shadow banks such as Crypto Capital.

According to US law, as long as an exchange provides services to Americans, the US government has jurisdiction over the exchange. At the beginning of its establishment, Bitfinex has been providing services to American users, which is why the New York State Attorney General filed a lawsuit against Bitfinex/Tether. In fact, Bitfinex not only provided services to New York users in the early days, but its executive Phil Potter (who left in 2018) lived in New York, which gave the New York State government full jurisdiction over Bitfinex.

Since most unregulated exchanges cannot obtain banking services, USDT actually serves as the banking function for the vast majority of cryptocurrency exchanges. As the issuer of USDT, Tether acts as the central bank of digital currency. According to data from CoinMarketCap, USDT's trading volume in the past 24 hours (March 6) was US$78.4 billion, far exceeding Bitcoin's 24-hour trading volume of US$43.9 billion. The importance of USDT in the field of cryptocurrency is evident.

In the early days, Tether claimed that each USDT issued to the public was backed by one dollar in the bank. After the New York State Attorney General's lawsuit began in 2019, Tether changed the description of the property behind USDT from "cash" to "cash or other cash-like assets." Since Tether has never released a real audit report to the public , it has aroused suspicion from the outside world about the assets behind USDT. Some people even suspected that Tether was "printing" USDT out of thin air to raise the price of Bitcoin, especially in early 2020, when there were only 4.2 billion US dollars of USDT on the market. In just over a year, Tether has issued an additional 32 billion US dollars of USDT.

After nearly two years of investigation, Bitfinex/Tether finally reached a settlement with the New York State Attorney General's Office, which also put the market's concerns about the out-of-throat issuance of USDT to rest. For Bitfinex, the US$18.5 million fine is just a drop in the bucket, and the New York State Attorney General's Office did not make any further charges against it.

However, this does not mean that the risks of USDT have been completely resolved . According to the settlement agreement of the New York State Attorney General, Bitfinex/Tether must publish transparent reports on USDT funds to New York State and the public every quarter in the next two years, and publish the detailed composition of the assets supporting USDT to dispel public doubts. At the same time, Bitfinex or Tether is prohibited from providing any services to residents of New York State.

In the long run, regulation is good for the standardized operation of digital currencies. It can promote the healthy development of the industry and effectively prevent money laundering. However, in the short term, the risks of USDT have not been completely eliminated. The risks are mainly in the following aspects:

First, other states in the United States follow suit: According to U.S. law, other states follow the New York government in filing lawsuits against Bitfinex/Tether and impose huge fines on the company;

The second is Tether's funding problem: If Tether fails to provide a transparent funding report, it may lead to further actions by US law enforcement agencies. The New York State Prosecutor's Office may follow up, and the Department of Justice or the SEC may also intervene. USDT is the most traded stablecoin in the digital currency field. No matter what happens, it may bring some shocks to the entire industry in the short term.

Like the development of Bitcoin, the development of stablecoins also has a process of gradual regulation. Nowadays, the issuance of compliant digital currencies such as USDC and BUSD has been increasing. If USDT solves the compliance problem in the future, or compliant digital currencies replace USDT's market position, it will be beneficial to the long-term development of the digital currency industry.

Author: Uncle Tan

[1]:https://www.bitfinex.com/posts/608