Bloomberg's in-depth investigation: Where exactly is USDT's $69 billion reserve?

Author: Zeke Faux

Original Title: 《Anyone Seen Tether's Billions?》

*Translation: Linqi, * Chain Catcher

In July, U.S. Treasury Secretary Janet Yellen convened the Federal Reserve Chair, the SEC Chair, and six other senior officials to discuss Tether. They could no longer sit idly by while the absurd situation continued: inflation was soaring, and the surge in COVID-19 posed a serious threat to economic recovery.

Yellen also wanted to have a good talk with the former child actor who missed a penalty kick in the animated film "Mighty Ducks" (Note: Tether co-founder Brock Pierce was a well-known Disney child actor). However, Tether had grown so large that it threatened the U.S. financial system, putting it at risk. It was as if a snowball fight on flat ground had escalated out of control, necessitating the gathering of the U.S. Joint Chiefs of Staff to avert nuclear war.

The USDT issued by Tether is known in the financial world as a stablecoin, and it is considered stable because 1 USDT is pegged to 1 U.S. dollar. But Tether is more like a bank, with the currency-issuing company Tether Holdings Ltd. obtaining dollars from those wanting to trade cryptocurrencies and depositing an equivalent amount of Tether into their digital wallets.

After holding Tether, people can use it at cryptocurrency exchanges or use it as collateral for thousands of cryptocurrencies with varying prices, such as Bitcoin and Ethereum. At least in theory, Tether Holdings holds dollars, so whether people want to send tokens or withdraw dollars, it should be feasible. The reason for such a complex mechanism is that real banks are reluctant to work with crypto companies, especially foreign ones.

How Tether is pegged to the dollar and whether it is truly backed has always been a mystery. Over the years, critics have argued that despite the company's assurances, Tether Holdings does not have enough assets to maintain a 1:1 exchange rate, meaning the tokens it issues are essentially a fraud. But in the cryptocurrency world, even a meme coin with a dog avatar can be worth billions of dollars, and scammers periodically get rich through flashy schemes; Tether may just be one of those "strange things."

Then, this year, Tether Holdings began issuing a large amount of digital currency. Currently, there are 69 billion USDT in circulation, of which 48 billion were issued this year. This means the company would hold an equivalent of 69 billion dollars in real currency to back these digital currencies. If this were pegged to a U.S. bank rather than an unregulated offshore company, this amount would make it one of the 50 largest banks in the U.S.

Whether on Twitter, business radio, or the trading floors of hedge funds and investment banks, questions began to arise about why Tether was minting so many digital currencies and whether it truly had as many dollars as it claimed. An anonymous anti-Tether blog post titled "The Bit Short: Inside Crypto's Doomsday Machine" quickly spread, and CNBC host Jim Cramer urged viewers to sell their cryptocurrencies, warning, "If Tether collapses, it will destroy the entire crypto ecosystem."

From a regulatory perspective, even if Tether's dollars are real, holding such a large amount of dollars is very risky. If enough traders demand to immediately exchange back to dollars, Tether might have to liquidate assets at a loss, triggering a bank run. These losses could spill over into the regulated financial system through a credit market collapse. If the maliciously provocative posts are correct and Tether is indeed a Ponzi scheme, it would be larger than Bernie Madoff's biggest scam.

So earlier this year, I began to unravel this mystery. Traces of Tether's funds flowed from Taiwan to Puerto Rico, the French Riviera, mainland China, and the Bahamas. A former banker at Tether told me that the company's CEO had been putting its foreign exchange reserves at risk by investing them, possibly earning himself hundreds of millions of dollars in profit. "This is not a 'stable' coin, but a high-risk offshore hedge fund," said John Bates, who runs a bank in Puerto Rico. "Even Tether's banking partners don't know how much they hold or if it even exists."

Crypto Banks

On the company's official website, the green pentagon logo with an embedded white T is particularly eye-catching, representing USDT and boasting "digital currency for the digital age." The logo doesn't look like much, but perhaps that is the most normal thing about Tether Holdings. Beyond that, it is very strange in every conceivable way; for example, the company lists only 12 employees on LinkedIn, which is insignificant compared to the $69 billion in assets the company manages.

Tether's website also touts a settlement with the New York Attorney General, but the announcement of the settlement always gives the impression that they are up to something terrible. U.S. Attorney General Letitia James stated in a press release that Tether Holdings is run by "a group of unlicensed, unregulated individuals and entities operating in the darkest corners of the financial system."

There is also an open letter from an accounting firm on the website claiming that Tether has reserves backing its tokens, along with a pie chart showing that about $30 billion of its held assets are invested in commercial paper (i.e., providing short-term loans to companies). This would make Tether the seventh-largest holder of such debt, alongside Charles Schwab and Vanguard Group.

To verify this claim, some colleagues and I surveyed Wall Street traders to see if anyone had noticed Tether purchasing anything. The result was that no one had seen anything. Deborah Cunningham, Chief Investment Officer of Federated Hermes' global money market, said, "It's a small market, and there are many people who know each other. If there were new entrants, it would be obvious."

It is still unclear which regulatory agency is responsible for overseeing Tether. In a podcast, a representative claimed that Tether is registered with the British Virgin Islands Financial Investigation Agency. However, the agency's head, Errol George, told me in an email that they do not oversee Tether—"We are not responsible for it and have never overseen it."

The CEO listed on Tether's website, JL Van der Velde, is a Dutchman living in Hong Kong who seems to have never given an interview or spoken at a conference. The CFO is Giancarlo Devasini, a former plastic surgeon from Italy, who was once described on Tether's website as the founder of a successful e-business. In searching Italian media, the only report related to him was a fine for selling counterfeit Microsoft software.

"No motive or conspiracy. They are not Enron or Madoff. When problems arise, they will be resolved transparently."

Tether's lawyer, Stuart Hoegner, told me over the phone that Van der Velde and Devasini prefer to avoid the spotlight. He referred to Tether's critics as "crusaders" whose goal is to destroy the company. He mentioned, "We maintain a clear, comprehensive, and complex risk management framework to protect and invest reserve assets," and added that there have been no instances of customers being denied refunds.

However, when I asked where Tether puts its money, Hoegner refused to disclose. When he told me the company has enough cash to cover the maximum amount it must pay in a day, it did not alleviate my concerns, as bank runs can last more than 24 hours. Hoegner later responded to follow-up questions in an email statement, claiming my report was "merely a compilation of insinuations and misinformation from disgruntled individuals who have no involvement or direct knowledge of the company's operations." He added, "Success speaks for itself."

It is hard to believe that people have sent $69 billion in cash to a company that is almost stitched together with warning flags. Every day, at cryptocurrency exchanges, traders buy and sell USDT coins as if they were betting on the U.S. dollar. Sometimes, more than $100 billion in USDT changes hands. It seems that those who are clearly taking huge risks in the crypto market have a lot of trust in USDT, and I can't quite understand why. Fortunately, in June, 12,000 of them gathered in Miami for what was claimed to be the largest cryptocurrency conference ever.

At the Mana Wynwood conference center, I found some awkward cryptocurrency symbols. Models walked on floors printed with Bitcoin logos, and a podcast host screamed, "F--- Elon." A trash can filled with Venezuelan bolivars was labeled "Cash is Trash." The place was packed with Tether holders, and Sam Bankman-Fried (SBF), a 29-year-old billionaire who renamed Miami's basketball arena after his cryptocurrency exchange FTX, told me he had purchased billions of USDT to trade other cryptocurrencies. He also revealed, "If you are a crypto company, banks get nervous when working with you."

If you still believe Bitcoin is a peer-to-peer currency, a clever way to transfer value without intermediaries, then his explanation doesn't make much sense. But in fact, most people have not used cryptocurrencies to buy things; they only trade cryptocurrencies on exchanges and invest in valuable coins, hoping to make real money by picking the next Dogecoin. After Elon Musk tweeted, Dogecoin surged 4,191%, and Solana rose 9,801% in 2021, which makes no sense at all.

Many view cryptocurrency exchanges as giant casinos. But some of these people, especially in regions outside the U.S., cannot handle dollars because banks will not open accounts for them to avoid money laundering. Therefore, when customers want to place bets, they first need to buy some USDT. It's as if all the poker rooms in Monte Carlo and Mahjong parlors in Macau send gamblers to a central cashier to buy chips.

In these exchanges, one major trader told me they often buy and sell hundreds of millions of USDT, viewing it as the industry standard. Even so, many people have their own conspiracy theories about the circulation of USDT, such as it being controlled by Chinese organized crime, or that the CIA uses it to transfer funds, or that the government allows it to grow large so it can track criminals using it, etc. I realized that it is not that holders trust USDT; rather, they need USDT to trade, and they have already dug too deep and made too much money here. "It may be more unstable as a stablecoin, but I don't care," said Dan Matuszewski, co-founder of cryptocurrency investment firm CMS Holdings LLC.

The Origins of Stablecoins

In the 19th century, hunters, trappers, and cowboys in the American frontier faced a shortage of currency. The U.S. government did not issue paper money at the time, only gold and silver coins, as its early leaders feared inflation. According to John Adams, it was "an endless series of thefts." Therefore, some states allowed their banks to issue their own paper money, redeemable for U.S. coins on demand. But some banks were disdainful of holding corresponding reserves. These institutions were known as "wildcat banks," supposedly because they set up branches in remote areas where wild animals roamed to prevent borrowers from bringing notes for redemption.

In this situation, many banks failed. A bank in Michigan filled boxes with nails and glass, then covered them with a thin layer of silver coins to fool inspectors. The state bank commissioner at the time, Alpheus Felch, later wrote, "What a temptation this is for unscrupulous speculators and adventurers, who dream only of wealth and are prepared to risk everything in pursuit of it."

Almost two centuries later, the same temptation appeared before Brock Pierce, a former child actor who played the young version of Emilio Estevez in the "Mighty Ducks" movie. Now, Pierce wears shiny hats, vests, and bracelets, resembling Johnny Depp in "Pirates of the Caribbean," and speaks in riddles like a character from "Charlie and the Chocolate Factory."

After creating a successful brokerage for trading video game items (he hired future Trump advisor Steve Bannon), Pierce was one of the few early Bitcoin players with real money to invest. "I'm not an amateur entrepreneur throwing darts in the dark," he told me over the phone while preparing for a trip to promote Bitcoin in El Salvador. "I'm a midwife of creation; I just go to accomplish the impossible."

Pierce said he proposed the idea of a stablecoin in 2013 with programmer Craig Sellars. To run the company, Pierce recruited Reeve Collins, who gained infamy for inventing pop-up ads in web browsers. They collaborated with Phil Potter, an executive from the offshore Bitcoin exchange Bitfinex that was working on a similar project, and adopted his name: Tether. They worked out of a bungalow in Santa Monica, California, pitching themselves to venture capital firms like Sequoia Capital, Goldman Sachs, and others. But no one was interested.

The problem was that USDT, like other cryptocurrencies, almost violates all regulations of the banking industry. Banks track every person who has an account and where they send money, allowing law enforcement to trace criminals' transactions. Tether Holdings checks the identities of those purchasing tokens directly from the company, but once the currency is out in the world, it can be transferred anonymously with just a code. A drug lord could hold millions of Tether in a digital wallet and send it to terrorists without anyone knowing.

"The U.S. will find trouble with Tether at the right time," Arthur Budovsky, founder of Liberty Reserve, emailed me from a federal prison in Florida, where he is serving a 20-year sentence. "I almost feel sorry for them."

This concern is not just theoretical. Zhao Dong, a well-known USDT trader in China, was sentenced to three years in prison for laundering $480 million for illegal casinos using USDT. In May 2013, the creator of the stablecoin prototype Liberty Reserve was arrested in Spain and ultimately pleaded guilty to a money laundering conspiracy charge. Prosecutors said this anonymous online currency is attractive to scammers, credit card thieves, hackers, and other criminals. "The U.S. will find trouble with Tether at the right time," Liberty Reserve founder Arthur Budovsky (serving a 20-year sentence) wrote in an email from a federal prison in Florida, "I almost feel sorry for them."

This prospect led Pierce and Collins to abandon Tether about a year after 2015. But exchange executive Potter was not worried about its legality, as he said in a 2019 podcast that his exchange had been operating in a gray area. The boss there was former plastic surgeon Devasini (Devasini is the nominal CFO, but those who have dealt with the company say he is the one in charge). Potter and Devasini agreed to buy out their partners for less than $100,000. Pierce said he gave away his shares for free.

At 50, Devasini was almost an old man by crypto standards. Property records show he was active between Milan and Monaco, where his home overlooks the Mediterranean. In photos, he is a tall, handsome man with long curly hair and a scarf around his neck. In 2014, he modeled for a photography exhibition at an art gallery in Milan, looking at his reflection in the mirror with half his face covered in shaving cream, a look of not recognizing himself. The show was about turning points, and in an accompanying interview, he said his turning point came in 1992 when he left his plastic surgery career. He said, "All my work seemed like a scam, a utilization of whims."

He entered the low-end of the electronics industry, founding a series of tech companies importing memory chips and set-top boxes. According to a notice of special dividends in the 2008 film "Young Harlots: In Detention," he opened an online shopping site in Italy and obtained licensing for adult DVD copyright protection technology.

In 2012, he invested in Bitfinex, then a nascent exchange established by a young Frenchman who copied the source code from a now-defunct exchange. He quickly became the de facto head of the company. In early posts on the forum bitcointalk, Devasini referred to complaining customers as whiners. He asked, "[Is] your ability just to blow hot air from [your] mouth, or have you forgotten how to make your brain work?" But compared to other exchanges that often collapse after stealing or losing customer funds, Bitfinex was relatively reliable. In a 2016 hack, about a third of its funds were stolen, and the exchange compensated its customers.

From the beginning, Bitfinex and Tether struggled to enter the regulated financial system. They employed a series of unstable workarounds to keep their bank accounts open (many akin to cat-and-mouse tricks), Potter said in an online chat with traders. However, as more people traded on Bitfinex and other exchanges began accepting USDT, its 'movements' became harder to 'hide' under the radar. By March 2017, over $50 million in USDT was in circulation. The following month, a Taiwanese bank that had been using Tether and Bitfinex closed their accounts, leaving Devasini's executives in despair; according to an insider, they even considered renting a plane to fly large amounts of cash out of Taiwan.

Ultimately, they found a startup in Puerto Rico called Noble Bank International LLC willing to work with them. I met its founder, John Betts, in Manhattan, who explained that Tether was a legitimate business, or at least it was while he was a banker: "During Tether's partnership with Noble, we held over 98% of their cash reserves and received and verified their monthly statements from other accounts."

Connecting Bitfinex

From the start, cryptocurrencies attracted skeptics, who were as fervent as the promoters I met in Miami; in April 2017, they began to 'attack' Tether. In that month, an anonymous commenter on Twitter (pseudonym Bitfinex'ed) claimed that USDT had no backing at all. He asked where the company put its money and why it had not produced audited financial statements. "They are actually Dave & Busters/Chuck-e-Cheese tokens," Bitfinex'ed mentioned these tokens on Twitter. These claims and other similar statements spread in the cryptocurrency world and eventually reached Washington. Meanwhile, the Commodity Futures Trading Commission and the FBI launched investigations in Washington.

At the same time, cryptocurrency trading was booming, and stablecoins were becoming increasingly popular, with a value exceeding $1 billion by the end of 2017. That year, Bitfinex made $326 million in profit based on investor introductions. Devasini's share had exceeded $100 million. This made Tether and Bitfinex Noble's largest clients, and Betts believed Devasini allowed rumors about Tether's reserves to circulate, putting the bank at risk. He told me he urged Devasini to hire an accounting firm for a full audit to reassure the public, but Devasini said Tether did not need to take that step to respond to critics.

Devasini may have had reason to be cautious. Tether's website had long promised, "Every Tether is always backed 1:1 by traditional currency in our reserves." However, according to Betts, Devasini wanted to invest those reserves. If Tether's $1 billion reserves earned a 1% return per year, it would yield $10 million annually. Betts believed this posed a conflict of interest for Devasini, as any investment profits would flow to Devasini and his partners, but if the investments failed, Tether holders could lose everything. When Betts expressed opposition, Devasini accused him of stealing. "Giancarlo wanted higher returns," Betts said, "I repeatedly urged him to be patient and work with the auditors."

Tether's leadership wanted to withdraw from Noble. Potter disagreed, so Devasini and his other partners bought out for $300 million in June 2018. That same month, Betts resigned from Noble for health and family reasons. His partners later accused him in court of using company funds for luxury hotels and private jet travel, even though he said those trips were for work. Regardless, Devasini got his way and withdrew the deposits, and soon the bank collapsed.

That summer, Devasini faced another crisis. According to documents later disclosed in a lawsuit filed by the New York Attorney General, his Bitfinex exchange had entrusted $850 million to Crypto Capital Corp., a remittance service in Panama, as a workaround for its banking issues. But suddenly, Crypto Capital refused to wire the money back to Bitfinex, leaving it unable to pay customers wanting to withdraw cash. This was an extremely dangerous situation that could trigger a bank run if the public found out.

So Devasini concocted various excuses for customers while pleading with Crypto Capital to wire some cash; their chat records were made public as part of the lawsuit. In 2018, Devasini wrote to the founder of Crypto Capital: "We have a large demand for withdrawals, and unless we can move some money out, we cannot face our customers anymore." He said, "Please understand that this situation is extremely dangerous for everyone and the entire crypto community." The result was that Polish prosecutors froze Crypto Capital's accounts. Prosecutors later accused Crypto Capital of laundering money for clients, including Colombian drug cartels. U.S. prosecutors charged one of its main executives, Oz Yosef, with bank fraud. He has not yet responded to these charges in court. (Tether and Bitfinex's lawyer Hoegner stated that the companies were deceived by Crypto Capital and believed they complied with regulatory requirements.)

Devasini did not disclose that Bitfinex was insolvent but instead filled the gap with loans from Tether's reserves, which left some stablecoins unsupported. In February 2019, Tether modified its 1:1 commitment, changing its website to state: "Every USDT is always 100% backed by our reserves, which may include traditional currency and cash equivalents, and may sometimes include other assets and receivables from loans made by Tether to third parties (which may include affiliated entities)."

This change indicated that Tether was borrowing from its reserves, but at the time, few people noticed. These loans only became public knowledge in April 2019 when New York sued Tether, attempting to force it to hand over documents.

Surprisingly, given that Devasini had lost most of the customers' funds, the cryptocurrency world did not lose confidence in him. In May 2019, a major trader alliance bailed out Bitfinex, injecting an additional $1 billion into the business. The exchange used this money to repay loans to Tether Holdings. The following year, as crypto trading 'fired on all cylinders' during the pandemic, the company experienced exponential growth, selling 17 billion USDT. So far this year, its sales have exceeded 48 billion.

In February of this year, Tether agreed to pay $18.5 million to settle the lawsuit in New York but did not admit to any wrongdoing. Supporters argue that this is an acknowledgment of Tether: if Tether were a large-scale fraud, would the state attorney general settle? However, investigations are still ongoing in Washington.

Earlier this year, U.S. Department of Justice prosecutors sent letters to Devasini and other Tether executives informing them that they were targets of a bank fraud criminal investigation. The government is reviewing whether they deceived and misled banks into opening accounts years ago. The company stated in a release, "Tether regularly engages in open dialogue with law enforcement agencies, including the Department of Justice, as part of our commitment to cooperation and transparency."

Written Records

Tether still has not disclosed where its funds are held. The only financial institution I could find willing to speak is Deltec Bank & Trust in the Bahamas. I met with the bank's chairman, Jean Chalopin, in Deltec's office. He is located on the top floor of a six-story building in a prime spot in Nassau, surrounded by palm trees. In his past life, Chalopin co-created the cartoon "Inspector Gadget," and a painting of a mechanical cop in a trench coat from the 1980s hangs on his office door. His bookshelf displays magazine covers featuring his wife (a former model) and daughter (a singer). The 71-year-old Chalopin has red hair and wears frameless round glasses. When we sat down, he pulled out a book about financial fraud titled "Misplaced Trust." "People do interesting things for money," he said cryptically.

He brewed himself a cup of tea and told me he sold his first animation studio, DIC Entertainment, in 1987 and later moved to the Bahamas. This deal made him wealthy, and he bought a castle in the Paris suburbs and a pink colonial-style house in the Bahamas, which later became the home of the villain in the 2006 James Bond film "Casino Royale." He had worked at Deltec Bank and later became friends with the company's elderly founder.

This bank, which once conducted investment banking across Latin America, has seen its assets shrink to only a few billion dollars. Chalopin made investments and eventually became its largest shareholder. Bahamian banks are often depicted in films as havens for money launderers, but Chalopin said Deltec's strength lies in customer service, not secrecy. He decided to seek clients in new business areas, such as biotechnology, gene editing, and artificial intelligence, as he could not operate in smaller fields without attracting the attention of large banks. Another area is cryptocurrency. "Cryptocurrency is like 'don't touch it, it's very dangerous,'" he said, "but if you dig a little deeper, you'll realize that's not the case."

Chalopin said that in 2017, a client who became wealthy from Bitcoin introduced him to Devasini. Devasini impressed him with his straightforwardness during a lunch where he made Italian risotto. When they discovered that Devasini and Chalopin's mother grew up in the same Italian village, they began calling each other cugino (cousin). Devasini bought a property near Chalopin's house in the Bahamas, and they jointly purchased and divided a beachfront lot between their two properties. Chalopin told me that Tether has been unfairly defamed. "There is no arrangement or conspiracy," he said, "they are not Enron or Madoff. When problems arise, they will be resolved properly."

Chalopin said he conducted months of investigation into the company before taking Tether on as a client in November 2018. He signed a letter guaranteeing its assets. He was surprised that critics still insisted that Tether's currency had no cash backing. "Frankly, the biggest issue at the time was 'the money doesn't exist,'" he said, "but we knew the money existed! It's right here."

But when I asked Chalopin if he was sure Tether's assets were completely safe now, he smiled and said, "That's a difficult question." He only holds cash and very low-risk bonds for Tether. But recently, the company has begun using other banks to handle its funds. Only a quarter of the funds, about $15 billion, remain with Deltec. "I can't talk about things I can't know," he said, "I can only control what is within the scope of our relationship."

After returning to the U.S., I received a document detailing Tether Holdings' reserves. It includes billions of dollars in short-term loans to large Chinese companies (which money market funds avoid). But that was before one of China's largest real estate developers, China Evergrande Group, began to collapse. I also learned that Tether has provided loans worth billions of dollars to other crypto companies, secured by Bitcoin. One of them is Celsius Network Ltd., a large quasi-bank for cryptocurrency investors, as its founder Alex Mashinsky told me. He said he pays a 5% to 6% interest rate for a loan of about 1 billion USDT.

Tether denies holding any Evergrande debt, but Tether's lawyer Hoegner refused to disclose whether Tether has other Chinese commercial paper. He stated that the vast majority of its commercial paper has high ratings from credit rating agencies and that its secured loans are low-risk because borrowers must put up Bitcoin worth more than their loans. "As we have always demonstrated, all Tether tokens are fully backed," the company stated in a release on its website after the report was published.

Tether's investments in China and loans related to cryptocurrency are potentially significant. If Devasini took on enough risk, he could even earn a 1% return on Tether's entire reserves, which would yield $690 million in annual profits for him and his partners. However, if these loans fail, even a small portion of them could cause the value of one USDT to drop below $1. Any investor holding USDT would have the incentive to redeem them. If others do so first, the funds could run dry. A bank run would continue.

In July, officials gathered at the Treasury Department discussed regulating Tether like a bank, even considering issuing a formal U.S. stablecoin to undermine it, which would force Devasini to eventually specify where the funds are. Strangely, at least for now, most participants in the cryptocurrency market, including some very large and complex operators, seem unconcerned about any risks.

Just last month, traders bought $3 billion worth of newly issued USDT, presumably sending billions of intact dollars to the Bahamian bank of the co-creator of Inspector Gadget in exchange for digital tokens managed by executives targeted by U.S. criminal investigations.

This situation resembles the era of 'wildcat' banks. The customers of these non-banking institutions were not hicks; the shabby paper money was the only currency they could find. However, when President Abraham Lincoln began printing federal paper money and imposed excessive taxes on other currencies at the start of the Civil War, this situation ended. The wildcat notes that once drove the economies of frontier towns were abandoned. Some people sent them to children to play with. In rural areas, they might be used as wallpaper.

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