(Oct 26): Of all the legal actions taken against cryptocurrency companies by US regulators and prosecutors over the past year, arguably none threatens to shake up the digital-asset industry as much as a potential crackdown on Tether Holdings Ltd.  

Tether is the issuer of a namesake token known as USDT, designed to be a digital substitute for the US dollar, with a market capitalisation of about US$120 billion (RM521 billion). It ranks as the third-biggest cryptocurrency by value, and is the most-traded token on a daily basis due to its role as a stand-in for the dollar in markets where traders aren’t able to use traditional currencies for transactions. 

“For the crypto industry and crypto writ large, I do think Tether is too big to fail,” Hilary Allen, a law professor at American University who studies digital assets, said in an interview on Thursday, a day before The Wall Street Journal (WSJ) reported on US probes of the token that also raised the possibility of sanctions from the US Treasury. “If Tether were to go to zero tomorrow,” Allen added, ”it would be disastrous for the crypto economy."

Tether chief executive officer Paolo Ardoino immediately went on the defensive following the WSJ report, posting on X that “as we told the WSJ, there is no indication that Tether is under investigation. The WSJ is regurgitating old news. Full stop.”

So far, like other times when troubling news about Tether broke, there are no signs of it going to zero. While the token did dip on the report, it went only to as low as about 99.69 cents. Other, more volatile tokens, reacted more strongly to the report, with bitcoin and Ethereum each falling more than 2%. 

For years, questions and controversies have swirled around this cryptocurrency dreamed up in part by a former child actor famous for playing a character who’d missed a penalty shot in The Mighty Ducks. 

While scrutiny originally was focused on whether the company truly held enough assets to back up the US$1 value of its token, federal prosecutors in Washington warned top Tether officials in 2021 that they could be charged for allegedly deceiving banks they used to move cash, Bloomberg previously reported. The probe was later moved to the US Attorney’s Office in Manhattan and two years passed with no indictments or other enforcement actions. 

Yet reporting from the WSJ on Friday says the US hasn’t given up its scrutiny of Tether. Federal prosecutors in Manhattan are investigating whether it has been used to fund illegal activities such as the drug trade, terrorism and hacking, or launder the proceeds of such, according to the WSJ. An earlier Bloomberg report, published in March, said the US and UK were reviewing more than US$20 billion of transactions made on Moscow-based Garantex, a crypto exchange sanctioned by the US and UK on suspicion of enabling financial crimes and illicit transactions in Russia. 

In an emailed statement, a spokesperson for Tether said the company is unaware of any US investigations of the company. 

“These stories are based on pure rank speculation despite Tether confirming that it has no knowledge of any such investigations into the company,” a spokesperson said in a statement. The company has a “well-documented and extensive dealings with law enforcement to crack down on bad actors” who seek to misuse Tether and other tokens, according to the statement.

In addition to the probe by the prosecutor’s office, the Treasury Department has been considering sanctioning Tether because of the token’s widespread use by individuals and groups sanctioned by the US, the WSJ reported. These include Russian arms dealers and Hamas, which the US has designated a terrorist group.

Should the Treasury’s Office of Foreign Assets Control add Tether to its list of specially designated nationals and blocked persons, it “would be devastating”, John Paul Koning, the author of the Moneyness blog, wrote on X. 

And the ramifications would extend beyond the digital-assets market to one of the best-known firms on Wall Street: Cantor Fitzgerald LP, which took on Tether as a client last year to handle the almost US$100 billion of Treasury securities that that the company says it owns to back up the value of its stablecoin. 

“Given that Cantor Fitzgerald would have to block Tether’s billions in T-bills, it’s hard to imagine how the redemption mechanism would continue to function and the peg hold,” Koning wrote, referencing the US$1 value of USDT. Cantor Fitzgerald did not immediately return a request for comment on the WSJ’s report. 

In recent months, Cantor’s chief executive, Howard Lutnick, has defended the company when it comes to lingering questions about whether Tether truly has enough reserves to back up the US$1 peg should a loss of investor confidence lead to a crush of redemptions. 

In a speech at the Bitcoin 2024 Conference in July, Lutnick said that after several years of due diligence he determined that Tether “had every penny, but they had it in what I would call pretty god-forsaken places”, including Chinese commercial paper. Cantor Fitzgerald agreed to onboard Tether, he added, on the condition that when that commercial paper and other investments matured, Tether would send the money to the firm to buy T-bills. 

The relationship with Cantor has turned Tether into, if not quite a whale, still a noticeable player in the market for US debt. Tether also has been working to expand its influence beyond the crypto markets in other ways as well. 

The stablecoin issuer is exploring lending some of its billions in profits to commodities trading companies, Bloomberg reported in October, a move with the potential to shake up an industry typically reliant on traditional banks for credit. In another push into commodities markets, Tether has also been pitching government officials in Türkiye to use blockchain technology to create digital tokens that represent borate minerals, which are mostly used in the production of ceramics, detergents, fertilisers and glass. 

Ardoino has also started putting billions of dollars — and the influence it wields — to work across an array of projects, from brain-implant technology to artificial intelligence data centres and wind farms. He’s also pushing into the global payments sector, seeking to end banks’ decades-long reign as the main conduit for sending money in emerging markets from Venezuela to the Philippines. 

Regardless of the newfound uncertainty about the future of Tether, some veterans of the crypto market remain unfazed. After all, so-called FUD — fear, uncertainty and doubt — is nothing new when it comes to this particular cryptocurrency, or indeed all of them. 

“Tether FUD has always been around in some form or another,” said Edward Chin, a co-founder of the crypto investment firm Parataxis.  “I can’t imagine Tether disappears.”

But for Allen, the American University professor, the greater intertwining of the crypto and traditional financial systems — highlighted by the launch of spot-bitcoin exchange-traded funds this year — makes potential problems for Tether a concern beyond the realm of crypto traders.

“I don’t think we are at the point where it could bring down our entire financial system, but I can’t say that unequivocally any more,” she said. “I am no longer sanguine that crypto failures will stay contained.”

Uploaded by Tham Yek Lee