Tether at centre of Dept of Justice bitcoin market manipulation probe

News that the US Department of Justice is investigating Tether and Bitfinex as part of a bitcoin market manipulation investigation, has added to crypto’s woes.

There have been persistent accusations that the stablecoin Tether is not in fact backed one-to-one by the US dollar.

The company behind the coin, Tether Ltd, has never had its books audited, although there have been lawyers’ letters to “verify” holdings and the occasional release of information regarding banking facilities.

There has been a flurry of stablecoin launches in competition against Tether. Circle’s USD Coin has been gaining traction.

Both traders and academics have charged that Tether Ltd has been operating a sort of fractional reserve banking model.

In particular its relationship with sister company the Bitfinex exchange, has been criticised for lacking transparency. There are accusations the exchange is being used to issue unbacked Tether.

Bitfinex issuing unbacked Tether?

Issuance of unbacked Tether (USDT) would have the effect of artificially inflating prices. For example, yesterday 50 million USDT were issued.

Last year the Commodity Futures Trading Commission (CFTC) subpoenaed Tether and Bifinex, seeking information about their market operations.

The Justice Dept and the CFTC are co-ordinating their enquiries, with sources telling Bloomberg that investigators are homing in on Tether and Bitfinex. It is not known whether criminal charges are possible.

A vocal critic has been the author of the Bitfinexed blog on Medium.

Other critics include John M. Griffin and Amin Shams University of Texas’s Department of Finance wrote a paper entitled Is Bitcoin really Un-Tethered? which is worth a read.

The abstract to the academic paper puts the case against Tether succinctly:

“Using algorithms to analyze the blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. Less than 1% of hours with such heavy Tether transactions are associated with 50% of the meteoric rise in Bitcoin and 64% of other top cryptocurrencies. The flow clusters below round prices, induces asymmetric auto-correlations in Bitcoin, and suggests incomplete Tether backing before month-ends. These patterns cannot be explained by investor demand proxies but are most consistent with the supply-based hypothesis where Tether is used to provide price support and manipulate cryptocurrency prices.”

Must clean up act before any ETF approval

Why does all this matter?

Market manipulation if proved would set back the prospects for institutional adoption and in the near-term, the approval of a bitcoin exchange traded fund.

The sooner the crypto markets are cleared up the better. But for now that means adding to the bearish pain even though a more strident SEC, CFTC and DoJ, should be welcomed by consumers and investors in need of protection and a level playing field in the markets.

DoJ investigators are thought to have been in touch with the University of Texas academics.

About the Author

Gary McFarlane
Gary has been writing about cryptocurrencies since 2013 and currently works as the cryptocurrency analyst at interactive investor, the UK's second-largest online investment platform. Gary contributes for Coin Intelligence News in a personal capacity and none of his commentary should be considered investment advice. Gary is the winner of the ADVFN International Financial Awards 2018 Cryptocurrency Writer of the Year. Contact Gary on twitter at: @gary_mcfarlane

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