Clarity and uncertainty
The New York Attorney General’s (NYAG) multi-year investigation into the twinned exchange and stablecoin issuer Bitfinex and Tether’s internal finances has wrapped, with the regulator bringing no formal charges. The firms will pay $18.5 million to settle an inquiry centered on claims that the U.S. dollar stablecoin was not fully backed, but have admitted no wrongdoing.

Tether (USDT) is the largest stablecoin in the crypto economy. In the past year it has grown from $2 billion to $34 billion, and serves a systemically important role for traders, exchanges and virtually all aspects of this emerging financial sector. Since tether’s inception, there have been unanswered questions as to whether this synthetic asset was fully backed by reserves held in a bank account, which Tether claimed.

“Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie,” Attorney General Letitia James said. According to court documents, Bitfinex and Tether “recklessly and unlawfully covered-up massive financial losses,” “obscured the true risk investors faced,” “were operated by unlicensed and unregulated individuals” and, at one point, lacked a bank account.

Tether looks to have gotten off fairly easy. In addition to the aforementioned fine, the firm will provide regular reports on Tether’s reserves for the next two years. The firm is also barred from operating in New York State.

This increased level of transparency is viewed positively by industry commentators. Castle Island Ventures partner and CoinDesk columnist Nic Carter said this was a historic “derisking event” for the industry. According to Carter, one of the largest hurdles for institutions to enter the market was the lack of certainty around USDT, despite its outsized role.

For instance, JPMorgan analysts said just last week a loss of faith in tether could cause a liquidity crisis in crypto. In addition to questions about USDT’s backing, there have been persistent conspiracies that tether is used to inflate the price of bitcoin.

“I think we can put that to bed now,” Charles Cascarilla, CEO and co-founder of Paxos, said on CoinDesk TV Tuesday morning.

There are still questions about the form these quarterly reports will take, and the level of insight they may provide. “[T]he mandatory reporting and transparency requirements are better, although it will depend on the quality and nature of those reports and disclosures, including whether they are independently audited, etc,” Elizabeth Renieris, founder of HACKYLAWYER and affiliate at the Berkman Klein Center, said in an email.

“Obviously the parties cannot be trusted to tell the truth,” she continued. Though the issue is larger than just Tether: “Until some of the other measures around mandatory reporting and transparency requirements become institutionalized and standardized for stablecoins in general, it won’t mean much,” Renieris said.

One of the most vocal and consistent Tether critics, who goes by the pseudonym Cas Piancey, notes these developments are a “positive thing for Tether, and likely the space as well.”

“I’ll continue [researching and writing on Tether] because there’s still loose ends to tie up in regard to the ongoing CFTC/DOJ actions, but if they start getting regular attestations and being properly regulated then no need to push for that,” he added in a direct message regarding the Commodity Futures Trading Commission and the U.S. Department of Justice.

Indeed, as Cascarilla said, “In the case of Tether, it’s still unregulated, unaudited and ... that will always create concerns. That doesn’t mean tether is a source of systemic risk.”

UPDATE (2/23/2021 18:41): Corrects context around the nature of the investigation.