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?”

Paradise Papers

Phil Potter is a Tether director, according to documents -- dubbed the Paradise Papers -- recently leaked by the International Consortium of Investigative Journalists. He’s also the chief strategy officer at Bitfinex. A graduate of Yale University, Potter worked as a derivatives analyst for Morgan Stanley and then moved to the private client services unit at Bear Stearns Cos., where he worked on technology infrastructure and software design. He’s given many interviews that can be found on YouTube, including Q&As after Bitfinex was hacked last year.

Bitfinex incorporated in Hong Kong in 2013, but then changed its name to Renrenbee Ltd. a year later, according to Companies Registry in Hong Kong. Giancarlo Devasini is listed as a director at Renrenbee by Companies Registry. He’s identified as a Tether director in the Paradise Papers.

Torossian said van der Velde, Potter and Devasini weren’t available for interviews.

Oguz Serdar said he tried tether, but came away disappointed. When Turkey banned PayPal last year, he began using bitcoin to pay contractors working with his advertising technology company, then started investing in it on his own. When he feared bitcoin was poised to drop, he said he shifted funds into tether. “It’s a way to park your gains,” he explained in a telephone interview. “It’s what you do temporarily.”

He said that in early November he tried to cash out $1 million of tether, a request Tether refused.

On Dec. 3, Bitfinex said it had hired law firm Steptoe & Johnson LLP because of “false claims and related activity by various parties,” according to an emailed press release. “To date, every claim made by these bad actors has been patently false and made simply to agitate the cryptocurrency ecosystem,” Stuart Hoegner, counsel for Bitfinex, said in the statement.

Serdar says he eventually traded his $1 million tether stake for bitcoin. “I don’t think they have even $100 million or $200 million in a legitimate country,” he said. “It’s the elephant in the room, but a lot of people don’t want to talk about it because they’re invested in it.”

https://www.bloomberg.com/news/articles/2017-12-05/mystery-shrouds-tether-and-its-links-to-biggest-bitcoin-exchange