Ethereum

Tether is not a scam, but a concern – Bitmex investigation

In recent months, the community has returned to discussing the issue of Tether and the USDT tokens issued by the company amid the volatility of the cryptocurrency market, the attention of American regulators and a number of other events. The researchers of the Bitmex trading platform decided to intervene in the discussion and conducted their own investigation, having more resources and opportunities for this than most experts who tried to analyze the situation before them..

At the start of the post, they debunk some of the main rivals of Tether’s opponents while advocating for other ideas..

“There is a certain amount of skepticism associated with Tether due to the assumption that the system is not backed up with sufficient reserves. We believe this skepticism is misplaced. We found possible evidence in published financial data that Tether could have a tangible impact on the Puerto Rican banking system. Tether is likely to face, or is already facing, regulatory challenges. We believe that this fact should be of concern to long-term Tether holders. “.

Thus, the researchers do not support the opinion formed in the community that Tether retains a partial reserve, however, USDT tokens are unlikely to become more reliable from this..

Analyzing the November Tether hack, which resulted in $ 31 million of tokens stolen from the company, Bitmex writes: “The hacking incident demonstrated that Tether has virtually complete control over the ledger, as they can hard fork and return any transaction. Hence the question, why would Tether even host its database on the Bitcoin and Ethereum blockchains. It would be much cheaper to create your own public database and not pay commission to miners “.

The researchers admit that Tether is not transparent, adding, “Lack of transparency is not an indicator of fraud.” At the same time, analysts suggest that this feature of the Tether system can play a cruel joke with the company, since its product can theoretically be used for money laundering and other criminal activities..

“These characteristics can attract criminals to Tether, just like Bitcoin. Regulators are unlikely to be too happy about this fact, and banks are likely to be skeptical of Tether. Tether is forced to use banks to maintain the dollar reserve needed to back Tether. Many banks will be very prudent given these specifics, as working with Tether as a client would violate anti-money laundering procedures. “.

At the same time, analysts themselves doubt that a significant part of transactions with Tether are of a criminal nature, since these tokens are primarily used for market speculation..

Bitmex notes that about 85% of Tether holders are known. These are mainly large cryptocurrency exchanges.

“Most likely, there should be some mechanism that allows large holders to exchange Tether directly for USD,” they write..

Tether Token Distribution in USD million for February 2018. Photo: blog.bitmex.com

According to Bitmex calculations, the rise of cryptocurrencies allows Tether to earn $ 10 million per day. Thus, if something happens, the company is unlikely to have problems in fulfilling its financial obligations. The authors of the report suggest that all of Tether’s fiat reserves are located in Puerto Rico, where banks have traditionally been more loyal to dubious money. Although not the most ideal set of circumstances, it, if it is true, refutes the view that Tether tokens, contrary to the company’s obligations, are not backed by fiat currency..

At the end, the researchers provide a brief overview of dubious financial schemes closed by US regulators in the past, including Liberty Reserve and e-Bullion, and give a recommendation to the company: “We believe that Tether has two options: 1. Change its system in such a way to include KYC / AML procedures in it, which would allow the operator to freely block transactions or freeze funds. 2. Continue to work according to today’s scheme and risk losing your business one day as a result of the actions of the authorities “.

“If Tether shuts down, as history shows, there is a risk that some users could lose access to their funds, possibly temporarily. Thus, we do not recommend holding Tether for an extended period, “they conclude..

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