Tether to pay $41m for claiming its stablecoins were fully backed by dollars


Tether, the world’s largest issuer of stablecoins, has agreed to pay a $41m penalty to resolve a US regulator’s claims that it had falsely represented that its digital tokens were fully backed by dollars.

The Commodity Futures Trading Commission on Friday alleged that Tether — whose digital tokens are pegged to fiat currencies such as the dollar — made misleading statements from at least June 2016 to February 2019 about having sufficient dollar reserves to back each of its stablecoins in circulation.

The legal action against the company, which represents about half the total stablecoin universe, is the latest regulatory challenge to the crypto sector, as US authorities intensify scrutiny of this ballooning industry.

Stablecoins act as crypto-native dollars and a bridge between crypto and traditional financial worlds. They allow traders to more easily hop in and out of cryptocurrencies including bitcoin, and are supposed to have a fixed price and be backed one-for-one at all times.

Tether has issued more than $69bn worth of stablecoins as demand has soared, and critics have repeatedly questioned if its reserves are fully backed.

The CFTC order found that Tether held sufficient fiat reserves in its accounts to fully back tokens in circulation for only 27.6 per cent of the days from September 2016 to November 2018.

The commission also ordered the cryptocurrency exchange Bitfinex to pay a civil penalty of $1.5m, finding that it had carried out illegal retail commodity transactions from at least March 2016 to December 2018. The CFTC said it also failed to register as a “futures commission merchant”, a type of futures broker.

“This case highlights the expectation of honesty and transparency in the rapidly growing and developing digital assets marketplace,” said Rostin Behnam, CFTC acting chair.

Tether settled the case without admitting or denying liability, according to the order. It claimed in a statement that there was “no finding that Tether tokens were not fully backed at all times — simply that the reserves were not all in cash and all in a bank account titled in Tether’s name, at all times . . . [Tether] has always maintained adequate reserves and has never failed to satisfy a redemption request”.

It added that no alleged violations linked to Bitfinex, whose owners also control Tether, emerged after December 2018.

The CFTC order found that Tether relied on unregulated and third-party entities to hold funds, including reserves. The regulator’s order also found that Tether transferred reserves to Bitfinex, including when the exchange was experiencing what its chief financial officer described as a “liquidity crisis”.

The commission said that on one occasion in September 2017 Bitfinex transferred $382m to a newly-opened Tether bank account in advance of an independent review of the stablecoin issuer’s reserves.

The two groups previously agreed an $18.5m settlement with the New York state attorney-general, who accused them of deceiving clients over their reserves after suffering a serious loss of funds when their payment processors’ accounts were frozen.

The growth of stablecoins has attracted fresh scrutiny from global banking and markets regulators that the tokens’ operators could trigger contagion in credit markets if they were forced for any reason to unwind their reserves.

Gary Gensler, the Securities and Exchange Commission chair who has called the cryptocurrency sector a “wild west”, last month said stablecoins were “acting almost like poker chips at the casino”.

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