OCTOBER 18, 2018
Available public information is consistent with the explanation that Tether and Bitfinex are experiencing problems securing a stable banking relationship, but fears that tether does not have sufficient reserves or that Bitfinex are insolvent are still just speculation at the moment.
Tether has historically traded within a tight range around $1. Although the lack of transparency from Tether and Bitfinex has fueled rumors about the legitimacy of Tether’s claim that each token is backed by one U.S. dollar, market participants have for the most part kept prices close to $1. On October 1, however, fresh speculation arose as news broke that Noble Bank had lost Tether and Bitfinex as clients and was seeking a sale. Over the next few days, speculation continued to mount as users reported that fiat deposits were temporarily disabled and fiat withdrawal were experiencing heavy delays. Tether began trading at a significant discount to its dollar peg and at one point reached $0.85 on October 15. Finally, on October 16, Bitfinex announced a new method for depositing fiat currencies and news was disclosed that Tether was now banking with Deltec Bank in the Caribbean. Despite these positive announcements, Tether has continued to trade at a 2 to 4 percent discount on most exchanges.
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The lack of transparency and Tether’s inability to produce a true independent audit of their reserves prevents us from ruling out the possibility that Tether does not have sufficient reserves or that Bitfinex is insolvent. The available public information, however, is consistent with the explanation that Tether and Bitfinex are experiencing problems securing a stable banking relationship.
One, Bitfinex addressed public rumors of its insolvency on October 7 denying the rumors and pointing to bitcoin, ethereum, and EOS cold wallets which contain crypto valued at several hundred million dollars. Bitfinex customers appear to be rapidly withdrawing crypto from these wallets as they respond to these rumors, but there are no indications that customer funds are compromised. This is an important distinction to make since the evidence available so far does not point to a Mt. Gox-like failure where customer funds were lost.
Two, Bitmex previously reported that Tether was using Noble Bank in Puerto Rico. According to data from Puerto Rico’s financial regulator, there was a sharp increase in the deposits from international financial entities in late 2017 which coincide with the increase in Tether’s issuance. It is difficult to draw firm conclusions from this data, but it is evidence pointing in favor that Tether at least holds substantial reserves.
Three, although Bitfinex temporarily paused fiat deposits, they continued to allow fiat withdrawals. This behavior is consistent with a bank deciding to close Bitfinex and Tether’s bank accounts. In these situations, a bank would immediately begin to reject new deposits to the account but would still allow the client to continue to withdraw for a nominal period of time. The bank would give Bitfinex and Tether a period of time to remove all money from the account.
Although there is evidence that withdrawals have been heavily delayed (see the many posts on the /r/bitfinex subreddit) and fear that users may never get funds, there is anecdotal evidence that some customers have been able to successfully withdraw. The delay in withdrawal can be explained by the high volume of requests by users as they react to the widespread rumors.
The inability to secure stable banking relationships may also explain why Tether is not able to produce an independent audit of their reserves. Bitfinex’s newest deposit system strongly encourages customers to keep the banking details a secret because public disclosure of any banking relationship now jeopardizes the banking relationship. It is strongly suggested that Bitfinex works with banks using intermediaries so that the bank itself does not know the true purpose of the funds or who they are servicing. For the same reason, an independent audit would require public disclosure of the banks that Tether is working with.
Four, Bitfinex itself has quietly acquired a large portion of Tether tokens and transferred them to the Tether Treasury, effectively removing these tokens from circulation. Since October 3, Bitfinex has sent a total of 690 million Tether tokens from Bitfinex’s Tether wallet to the Tether Treasury. This has reduced the circulating supply from about $2.8 billion to $2.1 billion in a short time. Thus, Bitfinex has spent considerable resources to defend the Tether peg and in the absence of this buying pressure, it is likely that Tether could have flash crashed even further and caused even more selling in the broader cryptocurrency market.
The fact that Bitfinex is willing to acquire so much Tether and remove Tether from circulation has several explanations. The malicious explanation is that Bitfinex is doing all that it can to maintain the illusion that Tether is legitimate in a last ditch attempt. The other explanation is that Bitfinex is taking advantage of the significant discount in Tether’s price and can redeem or credit itself for a full dollar via Tether. This explanation, if true, would serve as strong evidence that Tether is fully backed by reserves. A final explanation is that Bitfinex is in the beginning phases of unwinding Tether because it serves as a continual source of legal and regulatory risk.
Tether’s systemic importance to the crypto market may be overstated. Fear surrounding Tether’s reserves and Bitfinex’s solvency are running at the highest levels in recent history. Yet the market has remained surprisingly resilient. As Tether’s peg to the dollar has wavered, crypto prices quoted in Tether have risen as market participants are willing to pay a premium for crypto in order to eliminate their exposure to Tether. What is surprising is that the markets denominated in fiat currencies, such as USD, also experienced an increase. This suggests that the fear surrounding Tether and Bitfinex, in its current moment, have not caused market participants to move capital out of crypto and into fiat in substantial numbers. Furthermore, although Tether did trade at a significant discount, the flash crash down to $0.85 was quickly reversed as buyers of last resort like Bitfinex and perhaps other speculators were willing to come in to the market.
Now that the Tether Treasury holds nearly 30 percent of all printed Tether, we may see a situation where Tether begins to slowly unwind in an orderly manner. At the same time, many other stable coins that are more transparent and regulated are gaining market share, including TrueUSD, Dai, Paxos Standard Token, USD Coin, and Gemini Dollar.
Thanks for reading everyone. Questions or comments, just let us know.
Portfolio Management Team
Thejas Nalval | Kevin Lu
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