Tether published a response to what it described as “a flawed paper” written by John Griffin, a professor of finance at the University of Texas at Austin, and Amin Shams, an instructor the Ohio State University which claimed a single address on the Bitfinex exchange was responsible for manipulating the bitcoin market in late 2017, sparking the bull market. The paper was an update to a version first published in the summer of 2018.
USDT tokens are now fully backed by Tether’s reserves, the stablecoin issuer said Thursday.
Tether pushed back on this claim, saying in Thursday’s statement that “the revised paper is a watered-down and embarrassing walk-back” of the first version.
Perhaps more intriguing, however, was the claim that “All Tether tokens are fully backed by reserves.”
Whether or not USDT is fully-backed has long been a point of contention. The company has promised an audit of its stablecoin reserves (though it has not delivered one, and has since dissolved its relationship with its auditor), produced a third-party report saying it likely had more funds than outstanding tokens, and had a bank write a letter vouching for its holdings. (The latter two reports both acted as snapshots, only assuring the crypto community that on specific days, Tether’s obligations did not exceed its assets.)
Tether’s backing is even the subject of an inquiry by the New York State Attorney General’s office.
Nevertheless, Tether maintained that its tokens were fully backed until April 2019, when general counsel Stuart Hoegner wrote in an affidavit that USDT was backed by “cash and cash equivalents … representing approximately 74 percent of the current outstanding tethers.”
At the time, Tether held $2.1 billion in assets, with 2.8 billion USDT tokens issued on the Omni blockchain. According to a block explorer, this number has fallen since then to 1.775 billion. However, a further 2 billion USDT is in circulation as an ERC-20 token.
Tether’s “Transparency” page says the company currently holds more than $4.6 billion in total assets, including $4.56 billion in U.S. dollars, $44 million in euros and $3.3 million in Chinese renminbi (amounts are converted).
In an email to CoinDesk, Hoegner said the outstanding tokens are currently backed by reserves, adding:
“According to the website and our terms of service, our reserves include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties. The 74% figure refers to particular assets at that point in time, not the aggregate reserves.”
He declined to detail the breakdown between Tether’s actual cash holdings and the cash equivalents, saying “we generally do not share the asset mix.”
‘Lack of understanding’
As for the actual paper that Griffin and Shams hope to see published in the Journal of Finance, Tether’s statement Thursday said “the authors demonstrate a fundamental lack of understanding of the cryptocurrency marketplace and the demand that drives Tether token purchases.”
The paper itself said its analysis “for the single largest player on Bitfinex” found that “the 1 percent, 5 percent and 10 percent of hours with the highest lagged flow of Tether by this one player are associated with 55 percent, 67.2 percent and 79.2 percent of bitcoin’s price increase over our March 1, 2017 to March 31, 2018 sample period.”
The paper went on to say:
“This pattern is not present for the flows to any other Tether exchanges, and simulations show that these patterns are highly unlikely to be due to chance; this one large player or entity either exhibited clairvoyant market timing or exerted an extremely large price impact on Bitcoin that is not observed in the aggregate flows from other smaller traders.”
However, the paper suffers from having incomplete data, including insufficient data on capital flow or transaction timing, Tether said Thursday. As a result, the paper cannot “establish a valid sequence of events” for the claimed manipulation.
“Furthermore, the authors now admit that the patterns of trading they observed could be consistent with the market purchase of Tethers, as opposed to the issuance of unbacked Tethers. Importantly, the authors do not possess or reference any data disputing that Tether has sufficient reserves to back up Tether token issuances in circulation,” the statement said.
While the paper notes that “some in the blogosphere and press” have expressed doubts on whether Tether is fully backed, it adds that “the cryptocurrency exchanges largely reject such concerns.” However, it later says its model and results “are generally consistent with Tether being printed unbacked and pushed out onto the market.”
The paper has received skepticism and pushback from the crypto industry, with Tether skeptic Bennett Tomlin calling it “inconclusive.”