US Judge Orders Tether to Prove What Backs USDT

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  • Tether’s lawyer argued the request was bur­den­some and unreasonable
  • The judge said the doc­u­ments request­ed are “undoubt­ed­ly impor­tant” to assess the stablecoin’s backing

A US Judge has ordered Teth­er to prove what backs its sta­ble­coin as part of a mar­ket manip­u­la­tion law­suit alleg­ing USDT arti­fi­cial­ly inflat­ed cryp­to prices. 

Judge Katharine Polk Fail­la in a Tues­day court order asked Teth­er to pro­duce “undoubt­ed­ly impor­tant” doc­u­ments relat­ing to the assess­ment of USDT’s back­ing with US dol­lars. The court believes the evi­dence is nec­es­sary to sub­stan­ti­ate Tether’s claims of main­tain­ing a trea­sury that ful­ly backs its stablecoin.

Teth­er will now be required to pro­duce doc­u­ments to estab­lish its USDT reserves, includ­ing account state­ments of banks and oth­er insti­tu­tions linked to its funds. Oth­er doc­u­ments would include gen­er­al ledgers, bal­ance sheets, income state­ments, cash-flow state­ments and prof­it and loss statements. 

Teth­er didn’t return Block­works’ request for com­ment by press time. 

USDT is the largest sta­ble­coin by mar­ket cap­i­tal­iza­tion in the world and the third biggest dig­i­tal asset over­all, after bit­coin and ether, with almost $68 bil­lion in cir­cu­la­tion. The ques­tion of what exact­ly backs each token has dogged the project for years; Teth­er ini­tial­ly claimed that every USDT token was backed 1‑to‑1 with US dollars.

Last year, the New York Attor­ney Gen­er­al (NYAG) end­ed an inves­ti­ga­tion into Teth­er and its par­ent com­pa­ny Bitfinex with an $18.5 mil­lion set­tle­ment agree­ment. The NYAG found they com­min­gled com­pa­ny and cus­tomer funds to obfus­cate $850 mil­lion in loss­es result­ing from police action on one if its pay­ment proces­sor part­ners, Cryp­to Cap­i­tal Corp.

Accord­ing to the NYAG, this meant USDT was not ful­ly backed for a peri­od of time fol­low­ing Novem­ber 2018. Teth­er now claims that USDT tokens are “100% backed by its reserves,” and part of the set­tle­ment demands Teth­er sub­mit quar­ter­ly reports detail­ing its reserves to the NYAG, which are also pub­lished on its web­site

Tether backs USDT with commercial paper — but from which companies?

Still, Teth­er weath­ered a run on its reserves ear­li­er this year as mar­kets rushed to redeem bil­lions of dol­lars in USDT for cash amid tum­bling prices. The com­pa­ny claims to have nev­er denied pro­cess­ing any redemp­tions, par­tic­u­lar­ly as a result of lack­ing liquidity.

How­ev­er, while its attes­ta­tions and oth­er reports do pro­vide a gen­er­al skele­ton for Tether’s reserves — split between assets such as US and oth­er Trea­surys, cash and bank deposits, mon­ey mar­ket funds — the spe­cif­ic make­up of Tether’s com­mer­cial paper (short term cor­po­rate debt) hold­ings has nev­er been revealed via a com­plete finan­cial audit, mak­ing the recent court order for detailed infor­ma­tion all the more interesting.

The court not­ed alle­ga­tions that Teth­er issued USDT “com­plete­ly unbacked and print­ed out of thin air,” and that this “unbacked USDT” was used to inflate bitcoin’s price by being trans­ferred to Poloniex and Bittrex.

Teth­er rep­re­sen­ta­tive Elliott Green­field of Debevoise & Plimp­ton had request­ed the court to deny the “untime­ly and unrea­son­able” request, say­ing the plain­tiffs have “shown no good cause” to ask for doc­u­ments. Accord­ing to Green­field, the “over­broad” requests were bur­den­some as they relat­ed to all cryp­to trans­ac­tions asso­ci­at­ed with Poloniex and Bittrex. 

“Plain­tiffs offer no jus­ti­fi­ca­tion for such extra­or­di­nary requests, mere­ly stat­ing that they must assess whether the trans­ac­tions were strate­gi­cal­ly timed to inflate the mar­ket,” the lawyer added.

But the judge denied Tether’s attor­ney, say­ing the court agreed that the doc­u­ments sought by plain­tiffs address the core of the allegations.

David Canel­lis con­tributed reporting.


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  • Shali­ni Nagarajan

    Block­works

    Reporter

    Shali­ni is a cryp­to reporter from Ban­ga­lore, India who cov­ers devel­op­ments in the mar­ket, reg­u­la­tion, mar­ket struc­ture, and advice from insti­tu­tion­al experts. Pri­or to Block­works, she worked as a mar­kets reporter at Insid­er and a cor­re­spon­dent at Reuters News. She holds some bit­coin and ether. Reach her at [email pro­tect­ed]

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