(Bloomberg) — Of all the legal actions U.S. regulators and prosecutors have taken against cryptocurrency companies in the past year, none threatens to shake up the digital asset industry as much as a potential crackdown on Tether Holdings Ltd.
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Tether is the issuer of an eponymous token known as USDT, designed as a digital replacement for the US dollar, with a market capitalization of around $120 billion. It is the third largest cryptocurrency by value and is the most traded token daily due to its role as a replacement for the dollar in markets where traders cannot use traditional currencies for transactions.
“For the crypto industry and crypto broadly, I think Tether is too big to fail,” Hilary Allen, a law professor at U.S. University who studies digital assets, said in an interview Thursday, a day before the Wall Street Journal reported. about US investigations into the token that also raised the possibility of sanctions from the US Treasury Department. “If Tether were to go to zero tomorrow,” Allen added, “it would be disastrous for the crypto economy.”
Tether CEO Paolo Ardoino immediately went on the defensive after the Journal report, posting on X that “as we told the WSJ, there is no indication that Tether is under investigation. WSJ repeats old news. Point.”
So far, like other times when disturbing news about Tether broke, there are no signs of it going to zero. Although the token fell in the report, it only fell to around 99.69 cents. Other more volatile tokens reacted more strongly to the report, with Bitcoin and Ethereum each falling more than 2%.
For years, questions and controversy have swirled around this cryptocurrency, which was created in part by a former child actor famous for playing a character who missed a penalty in The Mighty Ducks.
While the investigation originally focused on whether the company actually had enough assets to support the value of its $1 token, federal prosecutors in Washington warned top Tether officials in 2021 that they could be indicted for allegedly defrauding banks used them to move cash, Bloomberg previously reported. The investigation was later moved to the U.S. Attorney’s Office in Manhattan and two years passed without indictments or other enforcement action.
Still, the Wall Street Journal said Friday that the US has not given up its investigation into Tether. Federal prosecutors in Manhattan are investigating whether the money was used to finance illegal activities such as drug trafficking, terrorism and hacking, or to launder the proceeds, the Journal said. An earlier Bloomberg report published in March said the US and Britain were reviewing more than $20 billion in transactions on Moscow-based Garantex, a crypto exchange run by the US and Britain. was sanctioned on suspicion of facilitating financial crimes and illegal transactions in Russia.
In an emailed statement, a Tether spokesperson said the company is not aware of any U.S. investigation into the company.
“These stories are based on pure speculation, despite Tether confirming that it is not aware of any such investigations into the company,” a spokesperson said in a statement. The company has “well-documented and extensive contacts with law enforcement to address bad actors” seeking to misuse Tether and other tokens, according to the statement.
In addition to the attorney general’s investigation, the Treasury Department is considering sanctioning Tether due to the token’s widespread use by U.S.-sanctioned individuals and groups, the Journal reported. This includes Russian arms dealers and Hamas, which has been designated a terrorist group by the US.
If the Treasury Department’s Office of Foreign Assets Control adds Tether to its list of Specially Designated Nationals and Blocked Persons, it would be “devastating,” John Paul Koning, author of the Moneyness blog, wrote on X.
And the fallout would extend beyond the digital asset market to one of the best-known firms on Wall Street: Cantor Fitzgerald LP, which last year took on Tether as a client to handle the company’s nearly $100 billion in government bonds say. it owns the value of its stablecoin.
“Given that Cantor Fitzgerald would have to block Tether’s billions in government bonds, it is difficult to imagine how the redemption mechanism would continue to function and the peg would remain in place,” Koning wrote, referring to USDT’s $1 value . Cantor Fitzgerald did not immediately return a request for comment on the Journal’s report.
In recent months, Cantor CEO Howard Lutnick has defended the company when it comes to lingering questions about whether Tether actually has enough reserves to support the $1 peg should a loss of investor confidence lead to a decline in the number repayments.
Speaking at the Bitcoin 2024 conference in July, Lutnick said that after several years of due diligence, he determined that Tether “had every penny, but they had it in what I would call pretty godforsaken places,” including Chinese commercial paper. Cantor Fitzgerald agreed to take Tether on board, he added, on the condition that when that commercial paper and other investments matured, Tether would send the money to the company to buy government bonds.
The relationship with Cantor has made Tether, if not quite a whale, still a standout player in the US debt market. Tether has also been working to expand its influence beyond the crypto markets in other ways.
The stablecoin issuer is exploring lending some of its billions in profits to commodity trading companies, Bloomberg reported in October, a move with the potential to shake up an industry that typically relies on traditional banks for credit. In a new push in commodities markets, Tether has also appointed government officials in Turkey to use blockchain technology to create digital tokens representing borate minerals, which are typically used in the production of ceramics, detergents, fertilizers and glass.
Ardoino has also begun investing billions of dollars – and the influence it wields – in a range of projects, from brain implant technology to artificial intelligence data centers and wind farms. He is also making inroads into the global payments sector, trying to end the decades-long reign of banks as the main channel for sending money in emerging markets, from Venezuela to the Philippines.
Regardless of the new uncertainty surrounding Tether’s future, some crypto market veterans remain unfazed. After all, the so-called FUD – fear, uncertainty and doubt – is nothing new when it comes to this particular cryptocurrency, or even all of them.
“Tether FUD has always been around in one form or another,” said Edward Chin, co-founder of crypto investment firm Parataxis. “I can’t imagine Tether disappearing.”
But for Allen, the US university professor, the greater interconnectedness of the crypto and traditional financial systems – highlighted by the launch of spot Bitcoin exchange-traded funds this year – makes potential problems for Tether a concern that goes beyond the realm of crypto traders.
“I don’t think we’re at the point where this could bring down our entire financial system, but I can’t say that unequivocally anymore,” she said. “I am no longer optimistic that crypto errors will remain under control.”
–With help from Todd Gillespie and Ben Bain.
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