Exchanges adopting $USDT for $USD valuation should demand a Bitfinex audit

Exchanges adopting $USDT for $USD valuation should demand a Bitfinex audit
on January 25, 2018

When a large exchange, like Bittrex for instance, adopts USD Tether ($USDT) as their US Dollar reference, they must offer investors some guarantee that the adopted benchmark is somewhat accurate.

Bittrex shows “$ Markets”, which really means  Tether, not USD

When you select USDT pairs in Bittrex, the user interface does not show USDT but shows U$ instead, clearly suggesting USDT is the official US Dollar price for coins and tokens. Their Bitcoin summary page (available straight from their home page) also clearly shows “USD” trading for Bitcoin, but when you click through to it, you reach the BTC/Tether trading screen.

We singled out Bittrex because it is US-based, run by pros with a strong resumé and great reputation in Sillicon Valley. It is therefore an exchange with an excellent reputation in our opinion. But the exact same thing happens in exchanges abroad, such as Binance and Bitfinex of course (the latter being the creators of ISDT). In these exchanges USDT is also, implicitly, considered to be the U$ value for a coin and token.

This USDT price is then propagated over to CoinMarketCap.com as USD. From there it is then adopted by thousands of other websites which further propagate this as the canonical USD value for the coin/token. As you can see, this is a bomb waiting to go off.

We’ve already mentioned how most crypto market cap is totally fake, but the Tether conversion takes this to a whole new level of fakery!

See, U$ Tether is not USD as far as we all know. It is not audited and nobody really knows how much U$ they have deposited in Tether accounts out there. There could well be U$ 1.6 billion sitting idle somewhere, but we don’t know that for sure and this money is definitely not directly traded for cryptos. Therefore, it follows the same logic that we raised in the fake market cap discussion: there is not a single dollar being traded for 99% of coins and tokens which are rated in dollars. This is a problem in itself. But freely interchanging U$ and Tether takes it one step further in the high risk derivatives quagmire.

Tether is a U$ derivative. It’s a crypto note that would theoretically pay you U$ 1 in case you ever wanted to trade it for fiat. But nobody ever trades it for fiat, so Tether is not necessarily equivalent to U$ 1. Take that and trade it for other cryptos and you’ve got 2 levels of indirection between the crypto and the US Dollar. There is a virtual middleman called Tether and it just sits there claiming to be worth U$ 1, but it may well disappear and we’ll never know why we considered that particular coin to be worth U$ 1 in the first place.

A lot of people seem to dislike skeptical Twitter accounts which keep “pushing FUD” (according to some comenters). But we beg to differ. Accounts like @Bitfinexed and @bccponzi do the whole community a whole lot of good, in our opinion, by revealing the crazy basis on which people are saying Bitcoins are worth U$. In fact, the latter account warned people about BitConnect for months before the bomb went off.

Regulated derivatives like stock options and other futures are already risky enough. The risk is turned up quite a few notches when you factor in the crypto volatility and the fact that Tether is a derivative and not real U$.

Audit Já!

So, to the point of this article, we think reputable exchanges like Bittrex need to demand Tether to be audited, for their own good. The data obtained from Bittrex is used by thousands of businesses, especially via the CoinMarketCap propagation we mentioned before. Real people who are depositing real money trust this data and they’ll be in for a very bad experience once they find out that Tether may or may not be real.

When Tether based exchanges allow Bitcoin to be traded for Tether and call it US Dollar, they are allowing for a very dangerous phenomenon to happen.

Here is a common everyday example to help illustrate the problem.

LocalBitcoins.com is a service which puts buyers and sellers in contact. They don’t actually perform the transaction. Instead, users take their real world fiat bank accounts and take real world fiat money and transfer that to LocalBitcoins. The seller then transfers cryptos to the buyer, and waits for the buyer to signal receipt. Once acknowledged, the money is freed, minus a commission, and the transaction is done. It is an escrow service of sorts. But here’s the important thing to note: real US Dollars were moved here. Oh wait, but what exchange rate was used for these real US Dollars? You guessed it: Tether exchange rate, not US Dollar.

So common everyday folks are buying and selling relatively small Bitcoin amounts using actual US Dollars based on Tether prices. But Tether’s are freely minted every hour, in fact hundreds of millions of Tethers have been minted just in the past few days. These Tethers are used to buy Bitcoins in compatible exchanges and here get back into the aforementioned loop : Tether is actively shaping transactions in “real” US Dollar price.

Can you imagine what it’ll be like if regulators or users themselves finally find out that Tether did not have a 1:1 U$ deposit? It would be catastrophic, because all those well intentioned folks who paid real money for cryptos will finally ask: “wait, where’s that coin you used to price my purchase!?”. This is why the @bitfinexed Twitter account uses the Wily Coyote as a mascot: everyone’s running off the cliff but they don’t seem to take the fall until they look down, because then you see that the floor is no longer there.