For some time there have been doubts if the tether tokens are really covered by money. With the confirmation of a law firm, Tether wanted to take the wind out of the sails of the speculators. Now it appears, however, that lawyers, Bank and Tether are interwoven alarmingly closely.
Tether has long been an issue. The token on the blockchains of Bitcoin and Ethereum is completely covered by dollars, according to the company Tether. It is used on cryptocurrency exchanges such as Bitfinex, Bittrex or Poloniex as a replacement for dollars, which has the big advantages that it flows faster through the network and you don’t need a bank that stands between sender and receiver.
However, there have been fears for some time that tether is not or only partially covered by dollars, and that the tokens are arbitrarily generated to support or manipulate the exchange rate of bitcoin and other cryptocurrencies upwards. If this were true, it would have frightening consequences. After all, tether with bitcoin is the most traded currency on the markets and already controls most crypto dollar currency pairs. A collapse of tether would massively deprive the markets of liquidity.
In recent weeks, these fears have been supported on the one hand by a scientific analysis and on the other by an examination by a renowned Washington law firm. Now, however, there are doubts about the validity of the certificate of the law firm FSS (Freeh, Sporkin and Sullivan).
FSS has written confirmation for Tether that as of June 1, 2018 the two bank accounts together have sufficient funds to cover the circulating tether. The attorneys issued this confirmation after inspecting a large number of documents and holding discussions with representatives of Tether and the banks. However, there are some parts of the report as well as some details about the personal details behind it, which lead a hobby investigator on an interesting track, which he has summarized in a blog post.
The Bank of Tether
The interesting detail is above all that the former federal judge Eugene R. Sullivan, a partner of the law firm, is a member of the supervisory board of one of the banks using Tether. This is stated in the report, albeit rather incidental. Bennett and others have now done the obvious – they have tried to find out which bank it is: “Several of us have used Google and dug deep into the search results to find something. I even spent hours digging through the Panama / Paradise Paper hoping to find a connection.” It wasn’t until a tweet on June 22 that it went on.
The tweet referred to a cached version of a bank’s website. This page was deleted shortly after the report was published, but remained in Google cache for some time. “If you check the cached version of the site, you’ll learn that Eugene Sullivan was a consultant at Noble Bank in Puerto Rico.” I can’t check the information. The latest versions of this page on waybackmachine and archive.is are from June 21; the content is already deleted on them.
However, BitMEX already pointed out in a post in February that the Noble Bank in Puerto Rico is probably Tether’s partner bank. This also sounds plausible because Brock Pierce, one of the founders of Tether (his exact role is unclear) wants to build a “crypto city” on Puerto Rico. A further analysis of BitMEX shows that there is a strong correlation between bank deposits on Perto Rico and the boom in cryptocurrencies in 2017. This in itself should be a strong indication that the tethers are in fact covered by dollars or other Fiat money.
So there is a lot to suggest that Noble Bank is indeed Tether’s partner bank. Bennett is now taking this as an opportunity to dig deeper.
In the Centre of the Network
His first observation is that the Noble Bank is a “Full Reserve Bank”. This means for every dollar in their accounts they have either one dollar in the vault or as a sight deposit at a central bank. This means that they cannot lend money and thus cannot earn money through interest on loans. This could be a problem, as Tether earns interest on bank deposits, according to the white paper. However, it is conceivable that the transformation of dollars into tethers is lucrative enough for customers to pay fees; as generally the tether founders and the exchanges that use tethers benefit so much from the dollar tokens that the question of how tether earns money is likely to be secondary.
Much more interesting is the weave that Bennett uncovers. Brock Pierce is probably at the centre of it. The former board member of the Blockchain Foundation, who has invested with his investment companies Blockchain Capital and Block One in more than 70 start-ups and is mainly behind the EOS ICO, is also the founder of Tether – he has allegedly sold his share in the meantime – and now it’s getting crazy: Noble Markets, the owner of Noble Bank. “Well,” summarizes Bennett, “one of the founders of Tether is also the founder of the bank they use, and it has a consultant who is also one of the lawyers who published the memorandum. What we are seeing here, in my opinion, are serious conflicts of interest that force us to seriously question the nature of the relationships active here.”
But there’s more. Bennett still finds a connection to Mt. Gox, the former world’s largest Bitcoin stock exchange, which imploded in a legendary collapse in early 2014, marking the start of Bitcoin’s longest bear market to date. “There was a group called Sunlot Holding that had proposed a rehabilitation plan at the time. Both Brock Pierce and John Betts were partners of Sunlos Holding, and John Bett is now founder and CEO of Noble Markets. Sunlot Holdings was advised by Louis Freeh, one of the founders of the law firm FSS LLP, who wrote the report on Tether’s bank accounts.”
Not illegal, but dubious
All this is not illegal, but it points to a close link between Tether, Noble Bank and the lawyers. It is not very trustworthy if the tether tokens are issued by more or less the same people who own the bank that owns the dollar assets that are to cover the tokens, and if the assets are then checked by a law firm that belongs to the same group. The actual need to separate interests and people, especially during audits, is being scandalously violated here.
The blog post also makes some other strange connections and observations. For example, the CSO of Bitfinex, Phil Potter, who also stands behind Tether, has left the company to do something else – just at the time when Bitfinex and Tether are being investigated more and more thoroughly. Or that the law firm FSS has ties to a casino in Hong Kong charged with money laundering and human smuggling, and that Eugene Sullivan was accused of trying to turn his position into money as a federal judge and defended Ukrainian oligarchs. And a lot more.
Let us leave it at this point that the tether question leads into a somewhat dubious network which, on closer inspection, is smaller and more centralised than one might expect. All this does not mean that the tethers are not covered. On the contrary: thanks to BitMEX’s research, this even suggests that they are at least to a large extent covered. But it still means that the dollar tokens stand on somewhat uncertain feet and depend on the continued existence of a corporate conglomerate in the jurisdiction of the US government.