Hacker News Reader

Comment by koolba | Hacker News Reader

> But those "frequent professional audits" have been slow in coming. The accounting firm Friedman LLP had been working on an audit of Tether and Bitfinex—a cryptocurrency exchange that is closely linked to Tether—since May. But last Saturday, Tether admitted to Coindesk that its relationship with Friedman had "dissolved."

In the normal business world it's a very bad sign when your auditor fires you as a customer.

> So it's possible Tether is keeping the identity of its bank secret to avoid attracting scrutiny from local regulators. This could also explain why some of Tether's funds are being held in the personal account of a Tether associate—perhaps the bank would have refused to open the account if it had known it was really for Tether.

When this finally blows up it's going to blow up big. How pervasive is parking money in tether in the crypto world? Is it bitfinex specific? I'm curious how bad the shock waves will be across the industry.

View on HN

I think you're right that this is a mess, my only uncertainty is whether it's garden variety incompetence or active bad faith. For an auditor to fire you, either you have to not be paying your bills for a long time or you have to be deeply uncooperative or insanely demanding.

That said, the consensus I've heard from my audit colleagues (I work in public accounting) is that no one has the slightest freaking clue how to audit crypto. So I could see the audit taking exceptionally long, causing friction in the relationship which eventually blew up into a full on breakdown. If that's the case, Tether's leadership probably had a poor understanding of the complexities involved. Sometimes that's the client's fault, but sometimes it's the accounting firm making too aggressive of a pitch to sell the work.

But the bank account issue makes me think bad faith. That shows a willingness to disregard rules and mislead fiduciary business partners, which is pretty much an auditor's nightmare client.

> no one has the slightest freaking clue how to audit crypto

This is a fair statement. Auditor resignations are a red flag, not a conviction. Given the background scumminess of the cryptocurrency space [1], Bitfinex/Tether's management's evasiveness and structure's murkiness [2] and the $2 billion with a "b" figure, heightened skepticism is warranted. In that light, the Tether spokesperson blaming the "excruciatingly detailed procedures Friedman was undertaking" for the auditor's resignation, with no corroborating statement from the auditor, is unsettling.

[1] https://www.reuters.com/article/us-ico-ernst-young/more-than...

[2] https://www.bloomberg.com/news/articles/2017-12-05/mystery-s...

> That said, the consensus I've heard from my audit colleagues (I work in public accounting) is that no one has the slightest freaking clue how to audit crypto.

Shouldn't the crypto part be trivial for Tether? You'd just need to check how many Tethers were issued on the blockchain. The hard part ensuring that those Tethers are backed by real Dollars - and that should be a regular accounting task that doesn't have anything to do with crypto.

The whole thing should be fairly trivial if the Tether folks would let the auditors or even the public see their accounts and balances. I suspect they won't because they are not what they are supposed to be.

Though that could be for reasons other than the money being missing - maybe when Tether couldn't open an account directly they opened one through a shell company and don't want the bankers to know or something along those lines. My guess is that when they couldn't hold usd they held btc instead and then tried to prop that up.

What surprises me most is that despite all these red flags USDT still holds its peg mostly well. Right now it trades less than a cent below the dollar on kraken for instance. It seems like cryptocurrency traders are paradoxically pretty trusting.

I agree that the audit failure makes Tether look super shady.

But when traders continue to buy and sell within 1% of parity, that's a signal that maybe there's more going on here.

I don't buy the concept that Bitfinex can somehow rig the price on other exchanges. If traders are all selling Tether, while simultaneously new Tethers are getting printed, then the price should tank.

When the price doesn't tank, that should tell us there's more to the story.

Yes, gullibility and greed.

Tether presumably maintain the price by buying and selling USDT within 1% of parity, probably automatically using software, and probably mostly by trading BTC/USDT rather than USD/USDT given the difficulty of moving actual USD.

It's not really rigging the price in a bad way - it's kind of how the thing is supposed to work.

My favorite theory is that they're currently solvent if you take their cryptocurrency assets at current fiat prices into account.

In this theory, the regulatory suppression of their banking relationships forced them to hold the crypto assets they were taking in return for USDT, and they have made out like bandits -- on paper, for now -- from the crazy demand for cryptocurrency over the last 6 months.

If that's the case, it might be possible to estimate how far the current crash would have to go for them to hit insolvency, from the history of USDT releases.

On the other hand, hopefully they've been diversifying the holdings they're prevented from liquidating into other price-stable commodities like gold and oil, via in- kind trades.

If any of this is true, I can see how it would make them shy about an audit. It's very precarious, even if there's no theft intended by it.

It would also still be fraudulent, given their claims to be backed by USD...

I think bitfinex is holding the peg on where you can see it (kraken). Nobody else can buy /sell tether. Even a guy saying tether probably has the money on twitter was only willing to buy at 45% premium.

Now, bitfinex looks super solvent though, so its not like the exchange can dissolve like mtgox.

How is Bitfinex involved with Kraken?

I think the idea is that Bitfinex might have enough money to prop USDT up as long as the trading volume is low enough. Just buy on kraken when the peg starts to break.

Similarly they can probably afford to actually exchange the USDT for USD up to a certain limit, the question is how deep their pockets are. Do they actually have the full amount in their accounts? $1 billion? 100 millions? 10 millions?

We'll know that for sure when there's an actual audit or when there's a bank run and they collapse because they don't have the money to pay for the USDTs.

I don't think Bitfinex is directly involved with Kraken. Bitfinex is a shady offshore operation [1] and Kraken is a fully US regulated company with their main office in SF.

Kraken is however about the only place you can actually trade USDT for real USD. Or indeed short the things.

[1] >[people] have attempted to visit the company’s registered address in Hong Kong only to find an accounting company which served as a registration agent for the company

>most of the executive team is distributed across the globe.https://medium.com/@cadammitchell/bitfinex-has-a-true-workin...

it's actually because they are probably solvent. be critical when everyone is sure about something without insider knowledge

You're bizarrely reversing the burden of proof here. If they're solvent, it should be a simple matter to prove it. If "insider knowledge" has the answer, they should easily be able to assuage all doubts.

they have huge incentive not to disclose exactly where their accounts are offshore due to potential government crackdowns on crypto. that is why their previous audit was difficult, attested the amounts but ultimately was cancelled. you can see the amount of panic and fanatism by the downvotes on my previous comment. be sure to bookmark this chat for the future :)

The simpler answer is that counting on the other party to do right when you have absolute information asymmetry has always been a sucker's game.

Yes, this time it may be different. But even the classic Nigerian scam is based on the premise that you cannot verify the claims – you cannot involve the government, the police or any other third-party, you just have to trust the relative of the disgraced kleptocrat to receive your millions.

comparing the biggest crypto exchange by volume to a nigerian scam is kind of extreme imo. The tech is there and they have always delivered. Yes they don't have an audit and I hope they produce it but govs do crack down lately.

you can even see the fanatism of downvotes to such a simple comment I made

Sure, but I’m not sure why you’d want written proof of your gullibility and credulousness.

> So it's possible Tether is keeping the identity of its bank secret to avoid attracting scrutiny from local regulators

The whole purpose of Tether is to trade USD after Bitfinex lost USD banking relationships.

No naturally, if banking relationships were public, they would be at risk.

More likely, these aren't traditional bank accounts at all. These are probably dollars pledged by corporations and hedge funds but held in bank accounts of those corporations and hedge funds, not in Bitfinex's name.

> The whole purpose of Tether is to trade USD after Bitfinex lost USD banking relationships

This is willful money laundering. If true, everyone who ever beneficially owned USDT would be subject to federal money laundering charges. AML law doesn't care about intent or knowledge, just actions.

> if banking relationships were public, they would be at risk

Any bank which holds electronic U.S. dollars reports, directly or indirectly, to American regulators. Large deposits owned by foreign institutions with possible connections to Americans trigger FATCA filings. American financial regulators are somewhat forgiving when it comes to mistakes; less so when those "mistakes" are willful. If a bank is hiding its direct or indirect relationship to Bitfinex, they are betting the bank on Bitfinex. At that point, laundering drug money is probably a better reward for the risk being taken. (Disclaimer: None of this is legal advice. Do not launder money.)

> These are probably dollars pledged by corporations and hedge funds but held in bank accounts of those corporations and hedge funds, not in Bitfinex's name

This is plausible, trivial to demonstrate (repo and overnight wholesale financing aren't novel concepts), and a different risk model if true (for the lenders as well as Tether). It would also fly in the face of the Tether spokesperson's claim that Tether has a "relatively simple balance sheet."

I'm the last one to defend Tether because it looks as shady as hell, but ...

> This is willful money laundering

Money laundering is the concealment of the origins of illegally obtained money. If the money was legally obtained then it can't be money laundering.

Just creating an alternate way to move clean money isn't prima facie a crime.

> If a bank is hiding its direct or indirect relationship to Bitfinex, they are betting the bank on Bitfinex

Banks probably don't even know about Bitfinex.

If Fuckwit Capital Partners has $100m on deposit with Wells Fargo and pledges 10% of it to buy Ethereum, those dollars stay in FCP's account and the bank has no idea that the funds are pledged.

Upon receipt of the promissory note from FCP, 10m new Tethers get created with the Ethereum as collateral.

> claim that Tether has a "relatively simple balance sheet."

The balance sheet could be very simple, but devilishly difficult to audit.

ASSETS

Accounts Receivable from Investors, $2.4 billion

LIABILITIES

Tethers Payable to Traders, $2.4 billion

If Friedman LLP wanted to prove all the pledged USD to back up the receivables, that could be an expensive and invasive audit of counterparties who don't want their banks get wind of their cryptocurrency activities.

I've been thinking about this for a few months, and then even longer than that going back to Bitfinex's 2016 incident. The only definite conclusion I've come to is that something is going on that they are trying to hide. May be it is solvency based, may be it is regulatory.

At the least I can describe with certainty that Tether is the exact opposite of Bitcoin: centralized, opaque, and trust-based. Ironic.

It is not just parking money. When yoy find that the price of the asset you own has propped up price panic ensues.

A number of exchanges have USDT pairings. https://coinmarketcap.com/currencies/tether/#markets

I used it on bitterex.com

Tether is in the top 20 in cryptocurrencies by Market cap. What generally happens when an altcoin goes bust is that people try to cash out (buy bitcoin with tether and then sell bitcoin or HOLD). Also, miners will stop mining tether and will move to other cryptocoins. I think it will have a large measurable affect but we shall see.

Tether is issued, not mined.

I never ceased to be amazed how people will spend money on things they don't understand, but just think the price will go up before they get to sell.

I mean... are people worried about Dogecoin blowing up? Or any other coin? There is basically no problem here. If you don't believe in USDT... don't buy it.

It's like saying government-issued currencies are going to "blow up" because Zimbabwe keeps printing fat stacks. Don't hold Zimbabwe dollars - problem solved!

Traders want something like USDT for the utility it provides. I don't think most traders care about the backing of USDT or it's potential redeemability for USD. I think most people enjoy the utility of a token that is always ~1USD. There are other tokens that promise to bring the same utility to crypto (DAI, etc). If USDT disappears (as NZDT just did, RIP Cryptopia's bank accounts), another stable coin will fill the void.

So even if Tether explodes, and it's actually been running with 0 financial backing this whole time - uh, well, tell me how that's different from any other cryptocurrency that has exploded and imploded in the last few years? It would seem to me that the healthiest thing for crypto right now is to figure out Tether's financial health (so people can decide if they want to safely use it) - but I don't think the marketplace will feel any "shockwaves" from a possible collapse.

The bigger conspiracy is that Tether might have been used to pump the price of bitcoin and other cryptocurrencies. The theory goes something like this:

- Bitcoin starts dipping.

- Bitfinex/Tether generates millions of USDT out of thin air.

- They use them to buy Bitcoins, sending the price back up.

- Once the price is high enough they can sell a few of these Bitcoins they effectively got "for free" and make a ton of money.

A big proponent of this theory is "Bitfinex'ed": https://medium.com/@bitfinexed

How much Tether out of thin air would it take to do that? There's only $2B tether in total, but BTC alone trades $8B every day. And that's down a lot compared to the last few months.

But that's not 8 billion of new money coming in to the system.

2 billion of new demand (almost a billion in January alone) is a hge deal.

> I mean... are people worried about Dogecoin blowing up?

Dogecoin isn't used by exchanges as a vehicle to allow dollar-pegged ated trading without handling actual dollars, and Doge:BTC prices aren't treated by cryptocurrency price trackers as if they were, at some fixed multiple, USD:BTC prices.

USDT and Doge don't play a similar role in the ecosystem.

That's interesting, my Cryptopia DOGE trading pairs (and LTC) beg to differ. Will there be a crisis of confidence if Doge crashes to 0 on Cryptopia? Of course not.

USDT is one of many trading pairs offered by crypto exchanges. It matters no more or less than NZDT, Dogecoin, Litecoin, Bitcoin, Ethereum, or any other common trading pair in the crypto world.

> That's interesting, my Cryptopia DOGE trading pairs (and LTC) beg to differ.

How?

> USDT is one of many trading pairs offered by crypto exchanges.

USDT is not a trading pair, it's a single cryptocurrency. The issues that give it a special role, both tied to it's USD peg, is that:

(1) It is sometimes treated as equivalent to, and commingled with, USD by exchanges (notably, Bitfinex), and

(2) USDT:<X> trading pairs, on exchanges that don't handle USD lat all, are often treated by the community as if they were USD:<X> trading pairs.

(3) The special role USD has in world markets.

Yes it does, because USDT is (supposedly) inherently pegged to the dollar. It's used as a vehicle for stability when normal banking is not available.

See: binance, liqui.io. These exchanges don't have fiat deposits/withdrawals. BTC is meanwhile taking all alts down with it.

There is basically no problem here?? There is an organization that claims its security is backed by an equivalent number of American dollars (thus promising relatively stable liquidity). Yet, this organization can't get through an audit and it's looking rather unlikely that that security is actually backed by anything more than website copy. And there is basically no problem here?

Tether has a special place in the cryptocurrency ecosystem that makes it completely unlike Dogecoin. This special place means that the types of sketchy things that Tether is doing could ripple through the entire ecosystem.

Clearly there may be a massive problem for Tether. Outside of Tether - I'm not seeing the ramifications, other than exchanges are going to have to use different stable coins. I remember when LTC and FTC used to be legit trading pairs on exchange websites. Whether or not Tether is legit seems pretty uninteresting to me - my trading bots regularly go through thousands of USDT, and I've never once thought to myself "Oh, I can redeem this for 1USD." It's just a utility token, and if it dies, something will fill the void after a brief panic.

To me, this just seems very overblown.

>> Outside of Tether - I'm not seeing the ramifications

Total liquidity in the market is probably a very small fraction of the market cap. If Tether has been pumping in fake liquidity, in effect creating fake demand, there could be a relative demand crash as that leaves the market, and there would be a relative fall in the (apparent) availability of USD.

That would add to the effect of people desperately trying to flee tether to the comparative safety of real US dollars, which is likely to mean the tether/BTC, tether/ETH tether/whatever rates rocket as people try to get out of positions on tether exchanges. Then a fall in the coin prices as said folks transfer to other exchanges and try to cash out to dollars. And given there are now fewer dollars in circulation than was thought, it could be a bloodbath.

If other exchanges are above board in their dealings, and the coins and cash are where they should be, and withdrawals don't grind to a halt, then that could be as far as it goes. If they aren't, and if they have trouble paying out, it could take exchanges down.

Did the Lehman Brothers collapse affect anyone who wasn't their customer or employee?

Tether is big enough that it could send similar shockwaves.

Reply on news.ycombinator.com