A US judge has ordered Tether to produce all documentation necessary to prove that all USDT put into circulation have proper hedges.
The request came as part of the hearing for case 1:19-cv-09236-KPF being held in the US District Court for the Southern District of New York.
In response, Tether issued the following statement:
“The order that was issued yesterday in the case captioned In Re Tether and Bitfinex Crypto Asset Litigation, is a routine discovery order and does not in any way substantiate plaintiffs’ meritless claims.
We had already agreed to produce documents sufficient to establish the reserves backing USDT, and this dispute merely concerned the scope of documents to be produced. As always, we look forward to dispensing with plaintiffs’ baseless lawsuit in due course.”
The case is between Leibowitz and iFinex, with plaintiffs Benjamin Leibowitz, Pinchas Goldshtein, Jason Leibowitz, David Leibowitz, and Aaron Leibowitz v. BFXNA Inc, Tether International Limited, Ludovico Jan van der Velde, Tether Holdings Limited, iFinex Inc, Philip G. Potter, Tether Limited, Crypto Capital Corp, Reginald Fowler, Tether Operations Limited, Giancarlo Devasini, DigFinex Inc, Global Trade Solutions AG and BFXWW Inc.
The case has been going on since October 2019, when the plaintiffs accused Bitfinex and Tether of manipulating Bitcoin’s market in late 2017 to boost its value.
Tether’s financial backing through time
Although it has now been somewhat proven and accepted that the Bitfinex exchange did not manipulate the Bitcoin market in late 2017 by using USDT issued by Tether, it has nevertheless also been established that there was a period in 2018 during which it was possible that not all of the USDT issued in the market were actually backed by sufficient funds.
Therefore, over time the issue has shifted from one of market manipulation to one of lack of hedging, which is precisely why Judge Katherine Polk Failla explicitly ordered Tether to produce all documentation necessary to prove that right now all USDT existing in the market are adequately hedged by funds of equal or greater value.
It is, however, somewhat curious that this order was given three years after the lawsuit began, and after Tether recently announced that it was seeking larger audits regarding the funds backing USDT.
According to the latest audits, in fact, Tether’s funds backing USDT would be more than they should be, and the company is preparing for the release of new audits from more reliable sources than those used in the past.
Arguably, however, the key point for the judge is precisely this, which is to get to the point of being certain that all the funds exist without having to rely on third-party companies of dubious reputation.
In the official document in which Polk Failla orders Tether to produce the documentation, the judge states that the plaintiffs have asked to be able to verify the existence of the funds backing USDT, and agree to this request.
For this reason, he required the company to submit all documentation necessary to establish the true amount of funds backing USDT, and not just audits provided by companies chosen by Tether.
The three potential scenarios for Tether
At this point, the possible scenarios seem to be only three.
Either Tether submits all the documentation, and this proves that the values already disclosed by previous audits are correct.
Or Tether submits all documentation, but this shows that the actual values differ from those already disclosed with previous audits.
Or Tether does not submit the full documentation risking the wrath of the judge.
As far as is known, the first scenario, which would put an end to a years-long issue, would seem more plausible. But should the third, or even worse the second scenario occur instead, it could spell trouble for the crypto market.
It must be said that since the publication of the news of Judge Polk Failla’s order, the price of USDT has not changed significantly. The markets therefore seem to believe that the most likely scenario is one in which Tether submits documentation, and this proves that the values disclosed with the previous audits were correct.
Not least because over the course of 2022, USDT in circulation has fallen from the 83 billion reached in May to the current 68 billion, and this may also have helped Tether, should it need it, to get back any excess issuance.
In addition, it appears that the $15 billion reduction in USDT’s market capitalization corresponds to as many dollars given back by Tether to those who returned USDT tokens, and this has convinced a great many investors and speculators that Tether is solvent. Returning $15 billion in about two months, without notice, is really a sign of good health and careful management of funds.
Doubts about Tether’s management of USDT began in late 2017.
Tether is accused of market manipulation in 2017
After the halving in July 2016, a large bullrun was triggered during 2017 that took the price of BTC from $1,100 to $20,000. In particular, between October and December, a real speculative bubble was triggered that took it from below $4,000 to a peak of $20,000 in just over two months.
That bubble by some was understood as an artificial bulge in Bitcoin’s price, but by late 2013 it had already happened, when USDT did not yet exist and the first halving had just occurred. Indeed, the speculative bubble in late 2013 was proportionately enormously larger, and no one was accused of artificially inflating it.
Instead, in late 2017, after the bubble burst, some among those who had bought BTC during the bullrun had decided to blame Tether for the bubble, perhaps to find a scapegoat to justify behavior that was not particularly effective.
Since then, the false myth began to spread that the 2017 speculative bubble, although it had been lower in percentage terms than that of late 2013, had been artfully created by Tether, as though it might not have formed in the absence of a deliberate plan by the company.
At the time even university researchers attempted to prove this manipulation, but over the years it became quite clear that there had been no real manipulation of the Bitcoin market by Tether. In short, the late 2017 speculative bubble was spontaneous, just as the late 2013 bubble had been four years earlier. The 2021 bullrun, triggered after Bitcoin’s third halving, was also in some ways similar, that is, spontaneous.
However, the lawsuit against Tether for market manipulation brought to light a funds management problem that emerged in 2018, when it was speculated that for a certain period of time not all of the existing USDT in the market were backed by sufficient funds.
Tether was later able to solve that problem, but to this day this issue still holds sway especially within court proceedings where plaintiffs accuse the company of something.
And so over the next few years, Tether decided to start increasing the level of transparency about the way it manages funds to back USDT, but relying on audits done by companies of questionable reputation.
Because of this, many questioned whether the data published within those audits were reliable, eventually prompting Tether to decide to rely on more reputable sources.
The June report on Tether’s transparency
The latest report was published in late June 2022, and was prepared by BDO. However, even this did not dispel all the doubts of all those who believe that Tether creates USDT out of thin air. Therefore, further reports by even more credible companies are awaited.
If Tether were to succeed in presenting Judge Polk Failla with complete documentation showing the existence of sufficient funds to back all USDT, the matter could finally be considered closed.