There’s an $814 Million Mystery Near the Heart of the Biggest Bitcoin Exchange

Among the many mysteries at the heart of the cryptocurrency market are these: Does $814 million of a digital token known as tether really exist? And what is tether’s connection to Bitfinex, the world’s biggest bitcoin exchange?

This is the state of crypto in late 2017, where questions about the companies behind the currencies are multiplying with the profits. While cryptocurrencies appeal to people who lack faith in governments and banks, the digital assets often require a blind trust in companies about which few facts are available.

Take tether. The currency, which started trading in 2015, is described as a stable alternative to bitcoin’s wild price swings. A restaurant owner who accepts bitcoin but fears its volatility could shift bitcoin into tether, which can be easier to do than exchanging bitcoin for dollars. Its price has stayed near $1 for most of its life because Tether, the company behind the digital token, says that every tether is backed by one U.S. dollar held in reserve. Since there’s $814 million of tether circulating, there should be $814 million parked in bank accounts somewhere.

Not everyone believes there is.

“Is there anything backing this?” said Tim Swanson, who does risk analysis for blockchain and cryptocurrency startups. Swanson, also director of research at Post Oaks Labs, said he fears problems with tether could hobble exchanges that trade it. “If these aren’t backed 1-to-1, then what is the contagion risk if one of these exchanges goes down?”

Some wonder whether tether has helped pump up the price of bitcoin, which recently surpassed $11,000 after beginning the year below $1,000. Charlie Lee, creator of Litecoin, the world’s seventh-largest cryptocurrency, wrote in a Nov. 30 Twitter post, “There’s a fear going on that the recent price rise was helped by printing of USDT (Tether) that is not backed by USD in a bank account.”

Little public information exists about how tether is created, fueling questions, said Barry Leybovich, a product manager at IPC System who creates risk and compliance products for financial institutions interested in blockchain applications. The market believes that each tether is worth $1, even if they’re not actually backed by that money, and trades of tether for bitcoin at Bitfinex are helping drive up the price of bitcoin, he said.

No Guarantee

Tether’s website makes a claim that’s unusual among cryptocurrencies: “every tether is always backed 1-to-1 by traditional currency held in our reserves.” The site also says each tether can be redeemed for $1. But its terms of service say: “There is no contractual right or other right or legal claim against us to redeem or exchange your tethers for money. We do not guarantee any right of redemption or exchange of tethers by us for money.”

On Dec. 2, Bitfinex released a quarterly report announcing it would no longer serve U.S. customers because it’s too expensive to do business with them. This followed Wells Fargo & Co.’s decision earlier in the year to end its role as a correspondent bank through which customers in the U.S. could send money to Bitfinex and Tether’s banks in Taiwan. Bitfinex and Tether filed suit against Wells Fargo, but later withdrew the case.

‘Clear Challenges’

“We continue to experience banking bottlenecks for some customers, but are proceeding to open accounts around the world,” according to the quarterly report. “While we have some clear challenges, please note that tens of millions of dollars continue to flow in and out of Bitfinex daily. Although not available to everyone, these fiat flows have been sufficient to keep our market in alignment with other exchanges as we continue to gain market share.”

Bitfinex and Tether identified four Taiwanese banks in the Wells Fargo lawsuit. However, Ronn Torossian, a spokesman for Bitfinex and Tether, refused to identify their current banks unless a reporter signed a non-disclosure agreement, an offer that wasn’t accepted.

Polish Bank

Documents posted online show Bitfinex directing prospective customers to Poland’s Bank Spoldzielczy in Skierniewice. Torossian wouldn’t comment on whether the documents are authentic.

Wladyslaw Klazynski, the bank’s chief executive officer, wouldn’t confirm if any accounts have been opened by Bitfinex clients, citing Polish financial law that forbids revealing client data. “We are in touch with the Polish financial market watchdog in order to explain media information” about the situation, he said in a phone interview, adding that his firm isn’t “financially engaged” with any company trading bitcoin…

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