The Blockchain Debate Podcast

Motion: Tether has always been acting in bad faith (Bennett Tomlin vs. Larry Cermak, co-host: Patrick McKenzie)

January 12, 2021 Richard Yan, Larry Cermak, Bennett Tomlin, Patrick McKenzie Episode 22
Motion: Tether has always been acting in bad faith (Bennett Tomlin vs. Larry Cermak, co-host: Patrick McKenzie)
The Blockchain Debate Podcast
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The Blockchain Debate Podcast
Motion: Tether has always been acting in bad faith (Bennett Tomlin vs. Larry Cermak, co-host: Patrick McKenzie)
Jan 12, 2021 Episode 22
Richard Yan, Larry Cermak, Bennett Tomlin, Patrick McKenzie


Bennett Tomlin (@bennetttomlin)
Larry Cermak (@lawmaster)


Richard Yan (@gentso09)
Patrick McKenzie (@patio11, special co-host)

Today’s motion is “Tether has always been acting in bad faith.”

This topic is very relevant for today’s markets because Tether is simultaneously an incredibly important, if not the most important, source of on-ramp liquidity for crypto, and a controversial, legally-challenged, blackbox operation that make market participants worry about their undesirable dealings and, worse, imminent collapse.

We previously had a similar debate on this with Matthew Graham from Sino Global Capital vs Cas Piancey, the independent crypto commentator and Tether skeptic. So definitely check that out.

Today’s debaters are Larry from the Crypto publication and Bennett Tomlin, another crypto commentator and Tether skeptic. The episode was also co-hosted by Patrick McKenzie, who also did extensive independent research on Tether.

If you’re into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We’ve featured some of the best known thinkers in the crypto space.

If you would like to debate or want to nominate someone, please DM me at @blockdebate on Twitter.

Please note that nothing in our podcast should be construed as financial advice.

Source of select items discussed in the debate (and supplemental material):

Guest bios:

Bennett Tomlin regularly publishes articles about fraud in the crypto space via his blog. His dayjob is data scientist and fraud investigator in the pharmacy benefits area.

Larry Cermak is Director of Research and Analysis at The Block, a crypto research, analysis and news outlet geared toward institutional investors.

Patrick McKenzie is a Tokyo-based entrepreneur and commentator. He wrote a thorough recount of the Tether controversy on his personal website. Patrick works for the Internet at Stripe. All comments are his own.

Show Notes Transcript


Bennett Tomlin (@bennetttomlin)
Larry Cermak (@lawmaster)


Richard Yan (@gentso09)
Patrick McKenzie (@patio11, special co-host)

Today’s motion is “Tether has always been acting in bad faith.”

This topic is very relevant for today’s markets because Tether is simultaneously an incredibly important, if not the most important, source of on-ramp liquidity for crypto, and a controversial, legally-challenged, blackbox operation that make market participants worry about their undesirable dealings and, worse, imminent collapse.

We previously had a similar debate on this with Matthew Graham from Sino Global Capital vs Cas Piancey, the independent crypto commentator and Tether skeptic. So definitely check that out.

Today’s debaters are Larry from the Crypto publication and Bennett Tomlin, another crypto commentator and Tether skeptic. The episode was also co-hosted by Patrick McKenzie, who also did extensive independent research on Tether.

If you’re into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We’ve featured some of the best known thinkers in the crypto space.

If you would like to debate or want to nominate someone, please DM me at @blockdebate on Twitter.

Please note that nothing in our podcast should be construed as financial advice.

Source of select items discussed in the debate (and supplemental material):

Guest bios:

Bennett Tomlin regularly publishes articles about fraud in the crypto space via his blog. His dayjob is data scientist and fraud investigator in the pharmacy benefits area.

Larry Cermak is Director of Research and Analysis at The Block, a crypto research, analysis and news outlet geared toward institutional investors.

Patrick McKenzie is a Tokyo-based entrepreneur and commentator. He wrote a thorough recount of the Tether controversy on his personal website. Patrick works for the Internet at Stripe. All comments are his own.

Tether Bad Faith Debate

Richard: [00:00:00]  Welcome to another episode of the Blockchain Debate Podcast, where consensus is optional, but proof of thought is required. I'm your host, Richard Yan. Today's motion is: Tether has always been acting in bad faith.

[00:00:20] This topic is very relevant for today's markets, because Tether is simultaneously an incredibly important, if not the most important source of on-ramp liquidity for crypto, and a controversial, legally-challenged, black-box operation that make market participants worry about their undesirable dealings and worse, imminent collapse.

[00:00:44] We previously had a similar debate on this with Matthew Graham from Sino Global Capital versus CasPiancey, the independent crypto commentator and Tether skeptic. So definitely check that out if you're interested. 

[00:00:58] Today's debaters are Larry Cermak from the crypto publication The Block and Bennett Tomlin, crypto commentator and Tether skeptic. The episode was co-hosted by Patrick McKenzie, who also did extensive independent research on Tether.

[00:01:14] If you're into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We featured some of the best-known thinkers in the crypto space. 

[00:01:23] If you would like to debate or want to dominate someone, please DM me at block debate on Twitter. Please note that nothing in our podcast should be construed as financial advice. I hope you enjoy listening to this debate. Let's dive right in!  

[00:01:38]Welcome to the debate! Consensus optional, proof of thought required. I'm your host, Richard Yan. Today's motion: Tether has always been acting in bad faith.

[00:01:48] To my metaphorical left is Bennett Tomlin, arguing for the motion. He agrees that Tether has always been acting in bad faith. To my metaphorical right is Larry Cermak, arguing against the motion. He disagrees that Tether has always been acting in bad faith. And to my metaphorical middle is Patrick McKenzie. He will be co-hosting the debate today. Welcome, Bennett, Larry and Patrick!

[00:02:10] Bennett: [00:02:10] Glad to be here.

[00:02:11] Larry: [00:02:11] Hey glad to be here.

[00:02:11] Patrick: [00:02:11] Thanks so much for having me.

[00:02:13]Richard: [00:02:13] No worries. Here's a bio for the two debaters and our co-host: Bennett Tomlin regularly publishes articles about fraud in the crypto space via his blog. His day job is data scientist and fraud investigator in the pharmacy benefits area. 

[00:02:27] Larry Cermak is Director of Research and Analysis at The Block, a crypto research analysis and news outlet geared toward institutional investors.

[00:02:37] Patrick McKenzie is a Tokyo-based entrepreneur and commentator. He wrote a thorough recount of the Tether controversy on his personal website. Patrick works for the internet at Stripe. All comments are his own. The works of all three of our guests will be linked in our show notes. 

[00:02:56] We normally have three rounds, opening statements, host questions, and audience questions.

[00:03:00] Currently our Twitter post shows that 64% agree with emotion and 25% disagree with the motion. So Larry, you're in the extreme minority here. After the release of this recording, we will also have a post debate poll between the two polls. The debater with a bigger change in percentage votes in his or her favor wins the debate.

[00:03:21] Okay time for opening statements. Bennett, please go ahead and tell us how has Tether been acting in bad faith all this time, since they started in 2014.

[00:03:32] Bennett: [00:03:32] I think the easiest way to go about this is to look at a specific example that will show many of the patterns that have persisted over this period. Bitfinex gave over $1 billion to a payment processor, Crypto Capital Corp, without a contract or an agreement. This payment processor was not a registered money servicing business or a licensed money transmitter.

[00:03:55] This payment processor lied to the banks about what the accounts would be used for. And when the principal for this payment processor was arrested, they had in their possession, counterfeit US currency and fake bond certificates. When this payment processor stopped responding to Giancarlo and Bitfinex's requests to withdraw funds and the Bitfinex executives believed that these funds were potentially lost. Bitfinex publicly insisted that withdrawals were working fine and there was no problem. 

[00:04:26] However, privately in order to combat this effective insolvency at Bitfinex, the executives at Bitfinex and Tether orchestrated a swap of multiple hundreds of millions of Dollars from Tethers bank accounts to Bitfinex's in exchange for ledger notation, saying that Tether now possessed the inaccessible funds at Crypto Capital, effectively making Tether insolvent.

[00:04:52] This fact was not disclosed. And Tethers homepage and terms and conditions at this point still claimed every Tether was fully backed by the equivalent currency, despite this effective insolvency. These are not the actions of good actors in the cryptocurrency space.

[00:05:09]Richard: [00:05:09] Thanks Bennett. That was very thorough. And I would say you're probably one of our first guests that have actually prepared a statement and read from it as if this was a hearing or something.  But anyway thank you, Bennett. I definitely don't think you are in the minority there when you accuse Tether of being in bad faith. So I'd love to hear what Larry has to say next. Larry, please go ahead with your opening statement.

[00:05:34]Larry: [00:05:34] Yes.  First of all, Bennett's statement, I think it was great. I think there's a lot of merit to it. That being said, Tether has seen tremendous growth this year.

[00:05:44]It's important in several different products. It's incredibly important for the current market structure. Basically all the futures are collateralized by Tether now. The majority of volume is coming from Tether pairs. And we've seen legitimate growth from Tether this year. Some people argue that that growth is pumped by Tether itself.

[00:06:02]You can see similar growth in USDC and competing stablecoins. There is, at least in my experience, there is overwhelming evidence that there is money going into Tether and there's money being redeemed by several different parties.   These parties are usually OTC desks, market-makers exchanges.

[00:06:21] The reason why there isn't much public evidence of this is because These parties tend to be more on a private end, and they don't have much of a reason to actually tell people that they're redeeming  hundreds of millions of Dollars. I do think that Tether used to act questionably and Bennett highlighted that really well.

[00:06:40]I do think that they've changed significantly in the past year and a half. I've been watching Tether for the past, like four years now. And the behavior has changed a lot. They are much more transparent publicly. They are much more transparent in their goals, how they operate.

[00:06:58] And I do think that right now my belief is that they are fully backed. And my belief is that they are not acting in bad faith and quite the opposite. I think they are super important to the crypto space. And I agreed that, it's important to consider the possibility that Tether might at some point stop existing. But I don't think it's fair to say that they've been acting in bad faith, especially in the last couple of years.

[00:07:21] Patrick: [00:07:22] If I can jump in there, assuming arguendo that, Tether is fully backed. Tether has said a few definitions over the years as to what constitutes backing. Under which definition do we believe that they are fully backed? What is the collateral? Where is it?

[00:07:37]Larry: [00:07:37] Yeah, that's a good question. I think that they're fully backed when it comes to Dollars on bank accounts that it has the mandate to invest in super low risk, yielding opportunities. So as far as I know, the vast majority is in US Dollars on their bank accounts and they don't just have one. It's possible some of it is, and, some bonds or really low yield investment vehicles. I don't believe that any of that backing is in cryptocurrencies or some kind of other, more risky vehicle.

[00:08:08]Patrick: [00:08:08] And when we say bank accounts are those bank accounts at Deltec bank in The Bahamas. Are those bank accounts at Deltec bank? Somewhere else? Are there banks that the world doesn't know about?

[00:08:19]Larry: [00:08:19] Absolutely. So as far as I know, and the last time I talked to Paolo was like maybe a month ago when we were working on a stablecoin report. And I asked him this question as well. And he did say that the majority of funds is a Deltec and that there are also some other banks that they're working with, but only for smaller amounts.

[00:08:37] And I assume that's mostly just to make the redemptions and the transfers easier. For customers, but I do think that the majority of the funds is at Deltec in The Bahamas.

[00:08:48]Bennett: [00:08:48] If I can ask a question, because I've been curious about that too, just as an outside observer, as to where the funds might be held, the central bank of The Bahamas publishes a quarterly statistical digest that looks at the total assets. All the banks in The Bahamas are holding. And if you look at it, With the most recent one being released in November, you do not see any increase in assets, held in Bahamian banks over the last year.

[00:09:14] And so either there must be comparable, outflows from somewhere else to match any inflows from Tether or there's some reason Deltec bank would not be counted among those statistics. Do you have any insight into why that would be.

[00:09:28]Larry: [00:09:28] I don't, I really don't know I've looked into those documents as well. I'm not sure if it even encompasses all the money that is in the Bahamian banking system. I'm not sure why that is honestly, but again, I don't think basically,  the reason why I believe that there is fully back is not just, I talked to Paolo and they feed me this marketing stuff.

[00:09:50] It's because I talked to a lot of different actors in the crypto space. Those being massive OTC desks, large traders, exchanges directly. And basically anyone who deals with Tether directly and they have redeemed tens of millions of Dollars. I mean, I've seen proof of that, I trust these people.

[00:10:10] And I've talked to so many of them at this point that it's beyond reasonable doubt, that Tether is operating as it should when it comes to redeeming money. The frequent argument that I hear from people on the other side is, why isn't the supply decreasing at all? Basically. Why is it only going up?

[00:10:25]And the simple answer to that is that the demand is just so much higher and they don't do these redemptions. They don't do these every week or something. They have a system where if more money is coming in than it's coming out, they obviously don't reduce the supply. And this happens in fairly long periods of time.

[00:10:42] So that's why it's not happening. And, if what you guys are inferring is that if Tethr was not back fully or only had a really small amount of the backing, they would not be able to serve these redemptions and basically without any issues, these things are happening quickly and, to the point where a lot of these large, either traders or institutional customers, they have started their own bank accounts in Deltec, just so they can make the process more efficient. And so that's the basis for my argument  that there is backed. And then also just talking to Paolo and like having conversations with people that are close to the business at this point, I would be shocked to find out that it was less than 98 or 99% back.

[00:11:25] Bennett: [00:11:25] I've got a couple things I want to add after that. The initial document released in the New York Attorney General investigation said at that point, the largest redemption was 24.2 million. So do you think that, Tether's documents that were handed over before the ex parte order were incomplete, that the average size of the redmption has gone up significantly in the intervening two years? What would explain that dynamic?

[00:11:53] Larry: [00:11:53] Oh, absolutely. I think it has gone up way significantly in the last two years, to the point where now a hundred plus million Dollar redemptions are completely normal and that's because the space has just grown quite a lot. And like I said, the dynamic with Tether has changed significantly as well.

[00:12:08]Bitcoin used to be the main reserve currency, when it comes to crypto, both for futures and derivatives. Now it's Tether and the same is happening for the pairs. It used to be all Bitcoin, now it's Tether. So Tether is much more important, now the supply is much higher and these parties are using it.

[00:12:24] Unquestionably, because if they want to get access to futures and these features are extremely liquid they do have to have access to Tether. So these redemptions are definitely increasing in size. There's no doubt about that. And also one thing I would like to point out is that you have to understand Tether obviously doesn't want any of their information to be public.

[00:12:43] And then it's not only because they are covering something shady, which could be the case but it's also because they just don't want their own business information to be out there for everyone like you and me. So that's my basic response to that.  I do think that the redemptions are now significantly larger.  It still means that they're not acting in bad faith. 

[00:13:00] Bennett: [00:13:00] There's one other point I I wanted to make there before we move on, you said that you were confident they were fully backed because they've been able to service these large redemption, but you also said that there are more deposits actively coming in than going out, which would mean to service these redemptions until there's a whole group of them. They could in theory, service them with a small amount in reserve and the incoming deposits, correct?

[00:13:24]Larry: [00:13:24] Yes.  It's hard to estimate how much they would need to have to justify these conditions. I agree with you. Again I guess the main question here is why do you think that Tether's doing it?  What do you think they're doing with the money basically?

[00:13:37] Do you think they're just taking it for themselves? Or what do you think they're doing with it?

[00:13:40]Bennett: [00:13:40] Well, I mean, we know from the New York Attorney General investigation, that Tether executives do receive large, aperiodic payments from co-mingled client and corporate funds out of the Tether account that was discussed when they were arguing for the initial injunction against them, with the limits on related party transactions.

[00:13:59] So I do think there is the possibility that money has been exfiltrated by Tether executives. Their lawyers also argued that their mandate is not just to invest in easy yield or things like that, but that Tether has the ability, per Tether themselves to keep zero in reserves and invest anywhere they see fit, including, and the lawyer made very clear that they had done this, in Bitcoin and crypto assets.

[00:14:27] So it is conceivable to me that a meaningful portion of their backing is currently invested in extraordinarily volatile assets.

[00:14:39]Larry: [00:14:39] I think that's definitely not true. And again, I've had conversations with other executives and talked to people. And as far as I can tell, that's not true. They're not investing in Bitcoin and volatile assets. They are investing in low yielding opportunities.

[00:14:55] And, to your point that some of the money used to go out to some of the executives. I do agree that's a terrible look. And I think, it can mostly be explained by the fact that they just had so much trouble backing themselves, that they just used their personal bank accounts, which is terrible practice.

[00:15:11] I agree, I don't necessarily think that means that they're acting in bad faith, but they acted in a careless way. I don't think at this point that they're just taking money out of it for their own personal gain. And that's mainly because Tether now has more than $20 billion in supply.

[00:15:29]Even if you say that they're yielding, about maybe 0.5% or around 1%. That's a lot of money and the business is really treating them well in that regard, they've grown significantly this year and they're generating a lot of money from it. And that's while Bitfinex itself, as an exchange has struggled this year.

[00:15:48]Now it's picking up again,  early, this year and late last year, the volumes really dropped significantly. And that again is another argument against people that think that, Bitfinex is just faking volumes, they're just creating a lot of Tether, and then the volumes are going up.

[00:16:02] That's definitely not the case. And the clear evidence against that is because, in 2017 and 16, Bitfinex was one of the most important exchanges when it comes to spot. Now it's not even in the top five. And the volume has dropped significantly compared to other exchanges. So I don't agree with that fully.  

[00:16:21] Patrick: [00:16:21] It's extremely curious that their lawyers wouldn't bring up that we only invest in low volatility, zero custodial risk assets when asked that in the course of investigation, as to whether they were disciplining client funds and instead chose to tell the court that they had the right to invest it in absolutely anything they wanted to and including cryptocurrencies, and we're doing that. These seem difficult to square for me.

[00:16:43]Larry: [00:16:43] I don't think it was as clear as saying, I was the one that read the document first and I was the one that led the coverage on that first. So I know what the document said. It wasn't as clear. It was a little bit more ambiguous. They've said they've previously invested in small amounts of cryptocurrencies.

[00:17:00] Again, I don't believe that to be a significant amount. And if it was, I still believe that it was a very small amount of the total. And again,  it's hard to explain some of these things, because that's just by talking to people and understanding how Tether works in the background.

[00:17:15]But you keep coming back to the point that,  Tether basically can do anything. And that the lawyers don't want to disclose what, basically what they don't want to tell people. And that to me makes a lot of sense, right? Tether is basically, they can do almost anything.

[00:17:30]And the lawyers really are, it's in their best interest not to disclose the information because they feel like the US people, and the United States overall, they don't have any jurisdiction over Tether since Tether claims to not function there. So I would say that kind of explains that.

[00:17:47]Patrick: [00:17:47] The jurisdictional point is an interesting one for me because I'm not super familiar with banking regulations in The Bahamas, but if hypothetically Tether is holding large amounts of Dollars at Deltec and not in The Bahamas. Then the natural thing for me to assume is that they're holding it in some sort of correspondent banking relationship elsewhere.

[00:18:07] And so it would matter a bit whether those jurisdictions would care, whether the US believes that Tether is subject to a US court order. So do we actually know what those jurisdictions are? Are there ones like, without loss of generality, Russia, which don't care about US court orders? Are they ones like, Japan or the United Kingdom, which would happily enforce one?

[00:18:28]Larry: [00:18:28] Yeah, I don't think we know the details.  So again, I think, what do you think would have to happen for the money to be frozen by the authorities?

[00:18:36]Patrick: [00:18:36] A polite request to.

[00:18:38]Larry: [00:18:38] But why do you think that would happen?  There would have to be significant evidence of some sort of fraud or money not being used in the right way, and we haven't seen that yet.  

[00:18:48]Bennett: [00:18:48] I remember a case where an analyst published some evidence that Bitfinex was using global trade solutions at HSBC. And shortly after that, their accounts got shut down and they had to switch to new banking.

[00:19:01] Larry: [00:19:01] Oh, absolutely. And I used to be in the same boat as you are. What I realized later is that, they're doing this because they are having so much trouble finding a bank. And that's why, when they find a banking relationship that works for them they tend to stick to it. And Deltec seems to be the one that has stuck.

[00:19:19] I 100% agree with you. It is really weird when you see, they open a new bank account then all of a sudden, after everyone finds out, it gets shut down and that's because no bank really wants to associate themselves with Tether, because they're risking way more than they would be gaining out of it.

[00:19:34]That's just a natural response. And also because Tether just, again, I don't think this is necessarily a bad faith, it could come across as that. But when they start these bank accounts, it's because they basically are forced to and, again I want to make sure that everyone who listens, they understand my position, isn't to defend Tether. I think they've made several major mistakes before. But I do think that they're super important to the space. And I do think that they're acting well now.

[00:20:02]But they were in a difficult position because no one would give them bank accounts. So at that point, you really have no other choice almost. 

[00:20:08] Patrick: [00:20:08] I think that's the answer to my question on what the United States government would likely take issue with. If one assumes arguendo that Tether has not been entirely candid with what it said to prior banking relationships, and then gotten frozen out of their accounts, that record of being less than entirely candid might not just go away because they got a new bank that was willing to, say, politely, have a broader risk tolerance.

[00:20:36]Not a lawyer, couldn't speculate. But that, that would be a thing that I would not want in my history if I wanted a stable US Dollar banking in the future.

[00:20:44]Larry: [00:20:44] Yeah. I think that the response to that from Tether would be that they have not really been involved with a lot of the US customers directly. And the US court system doesn't really have much of a jurisdiction over what they're doing. I wanna be clear again. I do think that something like this is possible, and then I've warned people about it. Tether, at this point, is massively important to the crypto space. And if something like this, it's a black Swan event, like this were to happen, it's important to be ready and to be prepared to do something about it and then make sure that you don't get completely screwed over if something like this happens, I think it's possible. I don't think it's likely at this point.

[00:21:21]Richard: [00:21:21] Can we take the debate a different direction? Let's think about the fact that institutions do business with Tether. What is the nature of the business relationship between these businesses and Tether? Why do they not do business with USDC of a similar scale, for example ? 

[00:21:38] And when they obtain their USDTs, given the fact that Tether had this history of not being fully backed to put it politely, what kind of discount, if any, do the hedge funds or OTC desks get when they get the Tethers?

[00:21:52]Larry: [00:21:52] They get no discount whatsoever. And that was one point I was going to bring up as well before. If you guys believe that they're not fully backed. And if you believe that, they might be acting in bad faith, why do you think there's no discount? And why do you think there's no premium?

[00:22:06] The discount only happened twice. If I recall correctly and it was always about 10% maximum, then it went back quickly. So why do you think that there is no premium, there's no discount. Why do you think it's trading at par? It's actually less volatile than USDC, for example, or at least comparable.

[00:22:22]Bennett: [00:22:22] Generally, if you look at the USDT / USD markets, it trades  pretty even at1e. And there hasn't been a major premium since, I want to say the end of 2018, like comparing Tether to spot exchanges. 

[00:22:35] And just speaking more broadly, the OTC quotes I've been able to see for Tether do generally have it priced right around a Dollar.

[00:22:44] So I don't think there's any major discount in the market for Tether like that. And even accepting that Tether is not fully backed, I don't necessarily think there would be a discount so long as you believe that it's redeemable or that your need for it at that moment, that you've got more need for each other than you would for the comparable Dollar.

[00:23:08] And so I still think even a potentially fractional reserve Tether could still trade one-to-one without that being evidence of anything.

[00:23:17]Larry: [00:23:17] So I don't agree with that myself. I agree with Bennett saying that if it's only like 85% back, 90% back, they would still trade at 1, but it's only trading at 1 because there's a future expectation that it will be backed one by one at some point in the future, not just because you can redeem it,  these large traders, again, they're not idiots.

[00:23:34] They have to hedge their risks. And if they do think that at some point in the future, there might be a bank run on Tether, and they won't be able to redeem all their money, they're not gonna even deal with it. So I don't agree with that.

[00:23:45]Richard: [00:23:45] And what about the earlier part of my question? Why don't these OTC desks do business with USDC, which also has experienced dramatic growth by the way, to your earlier point? 

[00:23:54]Larry: [00:23:54] Yeah, answer that maybe then Bennett can jump in.  The biggest reason is because Tether has been the first and it has by far the biggest network effects. So I brought this up earlier, already. But the majority of futures is now collateralized by Tether. And that wasn't the case, early this year before BitMEX really started to be effected.

[00:24:15] And then now effectively it's not even important anymore. BitMEX was all collateralized by Bitcoin and it was by far the largest futures exchange, the most important one by far. Now it's not anymore. Now you have Binance, you have Huobi, you have OKEX, you have Deribit, most of them are collateralized by USDT.

[00:24:34] So that dynamic itself, that shift has already happened. And those network effects are why these OTC desks and these large institutional players have to get exposure to Tether because the product that are available are only, they only function in Tether, there are no futures that are collateralized by USDC.

[00:24:52]So really the only alternative you have is Bitcoin, but then you're not trading the most liquid futures. And really similar can be said about crypto exchanges. Like the role of Binance has also grown so much this year. And that's actually another thing I'm a little bit concerned about, along with, Tether and Binance are by far the two most important companies right now in the space. And if something happens to either of them, we are definitely in trouble. So I wanna make sure that people understand that and those risks need to be understood and prepared for if they do happen at some point, even if it's a low chance of happening.  To answer your question, it's because the market structure just demands Tethers and it's mostly because of network effects.

[00:25:30]Patrick: [00:25:30] Are we seeing something fragmentation of the network where half of the network exists or some percentage of the network exists in, let's say the United States and tightly aligned countries and some percentage of the network exists everywhere else, because it would seem to me, if you want futures exposure, you can get futures exposure at the Chicago Mercantile Exchange at the price of having to be credible to the Chicago mercantile exchange and deal exclusively in regulated Dollars.

[00:25:59] And what I hear you saying is that you would want futures exposure at, let's say exchange that is more flexible with respect to how one funds that futures exposure. Does this portend well for those networks, continuing?

[00:26:13]Larry: [00:26:13] I think that the biggest reason why these funds and these clients are interested in trading on these venues is because they are more liquid. And that's because, like you said, they're a little bit more lenient when it comes to which clients they take. Like it's hard for someone in China to trade on CME.

[00:26:29] It's not hard if they want to trade on Binance or Huobi, and, naturally the products with the most liquidity they end up attracting the most liquidity again, and it compounds with that. CME is not a perfect product, it's cash settled. But for example, they're like pretty high limits of how much, you need to get exposure to.

[00:26:50] And, a lot of these exchanges like Binance or Huobi, they also have a ton of retail clients. And, needless to say, some of these funds do want to trade against those people because they're less sophisticated and it's easier to market-make and all that. So CME right now is not a product that is really an alternative to something like Binance or Houbi, just because you don't have the same possibilities.

[00:27:11]Bennett: [00:27:11] I agree, almost completely with Larry's last two answers. Tethers got the largest market cap and the most adoption because it was the earliest and it is the most used. It's been integrated at the most exchanges. It's used as collateral for the most things. And. I do think there is an appeal for a lot of people that Tether is less willing to serve at the beck and call of US regulators.

[00:27:37] So you see adoption for Tether out of China and out of Russia. But even for online gambling and stuff in the Chinese mainland, and the kind of people who would be interested in Tether, they would not be probably interested in USDC because they would expect there to be a larger risk of funds being frozen or an accessible, in the sense that Circle would freeze the tokens or block the redemption more so than Tether would.

[00:28:02]Larry: [00:28:02] I absolutely agree with that. And USDT is viewed by some people, like Bennett said, as less friendly to US regulators and the US overall jurisdiction. The influence of the United States is viewed as much smaller than USDC or Paxos or Gemini Dollar. 

[00:28:20] And also one thing I want to point out and, I'm sure Bennett will agree as well, the first massive growth of Tether initially, end of 2017, we have to remember the reason, was that Chinese exchanges got cut off from the fiat systems. And a lot of that money ended up flowing into Tether. First couple of billion or the majority of the money early on, has come from the Chinese exchanges.  So what that means is that because of these early network effects, they're massive OTC markets in China.

[00:28:52] They use USDT and China was super important early on in crypto. And it still is. And those network effects are at this point super hard to,   destroy basically. And so I do think that when it comes to trading, unless there is some regulatory intervention, Tether will become or will remain the stablecoin that is used by far the most.

[00:29:14]Richard: [00:29:14] Okay. An audience question. So this is from Nevine Mishra, and this is a question for everyone here, actually. What would be the ratio of bad transactions in Tether? So the "bad" here basically refers to money laundering. And Tether is basically an on-ramp for outside of the USD payment system. And, I'm just not sure if Tether has necessarily instituted the mechanisms to do the proper KYC, AML and so forth. Even though recently, I think they did put out a tweet affirming that they do so to suspicion on the internet. So can you guys speak to basically the possibility and the extent to which these transactions are of the money laundering nature facilitated by Tether.

[00:30:05]Larry: [00:30:05] I can start and then maybe Bennett can answer after me. I do think because of the dynamics that we talked about, it's by far the most used by trading, and it's also viewed as the most lenient, when it comes to just allowing stuff to happen. So it is, it does end up being used for nefarious activities and activities that are illegal.

[00:30:28]But it is my belief that there is KYC and AML system internally is as advanced as USDC's, as advanced as Paxos' one. So I do think that the compliance is on almost the same level, if not the same level their compliance team is great. You can find all the people associated with Tether, and the ones that they work on compliance.

[00:30:50]Also it's important to realize that there is frozen a lot of money this year, and a lot of transactions by far more than USDC by far more than Paxos, by far more than any regulated stablecoin. 

[00:31:02] Richard: [00:31:02] Can you talk about why? Can you elaborate on that point? The 

[00:31:04] Larry: [00:31:04] freezing.

[00:31:05] Yeah because I think that it's just more likely to be associated with these activities.

[00:31:08] And when Tether finds out about it, especially this year, they have been really ruthless. And when they think something weird is going on, they block it. And some people do believe that they're more lenient but actually they do end up blocking a lot. If there's any suspicion that it's involved some money laundering activity, they freeze it immediately.

[00:31:27] And that has happened a lot this year. And it's not really happening with USDC or Paxos. The best thing about stablecoins on Ethereum is that all this data is public. You guys can, after this podcast, you can go and find, the number of blocked addresses on USDC and Paxos, and you'll see it's much, much lower than Tether.

[00:31:44]So the argument that they're less active, it's weird that way.  

[00:31:50] Bennett: [00:31:50] So Larry actually mentioned something, that's one of my biggest frustrations with Tether. And that is that they are at their essence, a finance company that is supposed to be keeping track of all these records of Tethers issued assets in their bank accounts and all of that. And on their transparency page, on their website for years, they've listed for Omni their quarantined USDT, the stuff that was frozen, either as part of the initial hard fork after the hack, or later after the Omni devs added the freezing ability to Omni and that number, the number of quarantined USDT they have in their transparency page, does not match with what happens if you add up what you can find in the Omni blockchain. And that's been true for years. So we're talking about ostensibly, a company where this type of record is the most important thing they keep, and it's been publicly wrong for years, and it took me like 45 minutes of scanning the blockchain to figure that out and Tether hasn't done that.

[00:32:53]Larry: [00:32:53] Again, I do think that Tether has been extremely negligent early on and to some extent still is in small ways. So I do agree with that. It is behavior that doesn't come across, I think the contrary agreement to that is that Tether simply doesn't care about you and me. That's the thing that Tether's skeptics don't realize They just don't care about what's viewed publicly.

[00:33:13] They care about one thing and that's, if they can find counterparties to actually trust them enough, to send them real money and then, work with them to redeem their money as well. One thing that we didn't touch on yet, and it's really important for this to be known is that Tether functions in a B2B way.

[00:33:30] So it only works with large clients, like exchanges, like OTC desk traders, and it only redeems with them. So whenever there's an argument on Twitter, I try to redeem Tether with them directly, it's just not possible. And I agree that early on, they stated that it was possible and that's a major mistake, but they don't function that way.

[00:33:53] And they don't care about Tether skeptics at this point. They only care if the peg actually remains the same, and they only care if they can find more clients to put in more money and earn more yield, that's their point of view. And they don't care about me and Bennett. Why would they?

[00:34:07]Bennett: [00:34:07] So there's a couple of things here I want to look at. One is yes, they're B2B and they really always have been, but that leads to the question of why they publish their stated minimums, which are only like a hundred K or something to be deemed, and why they made such a big deal of reopening their verification platform, supposedly for clients to redeem Tethers.

[00:34:29]Also Tether themselves are the ones who still proclaim on their website, that they are the most transparent that they will provide this look inside. And so I don't think it's unreasonable to hold them to their own statements.

[00:34:46] Larry: [00:34:46] Oh, I totally agree. And I do think that it makes almost no sense for me why they would do that. I think initially it was for people to trust them because early on you have to remember, all this was new and you had a couple tens of millions in it. It was hard to trust it. And they had to gain the trust somehow.

[00:35:03]And I do think that they made some of these statements up because they just wanted people to trust it more. And so the peg would actually hold. One thing that's important for fiat-backed stablecoins. It's really the only thing that's important, is trust in that stablecoin itself, because when the trust breaks it's very hard to get it back.

[00:35:20]So I do think that, they just were super careless, super negligent, made several of these mistakes before, where they claimed that something was true and that they couldn't follow up on it. Another example that I didn't  bring up yet is that they used to claim that they're are a hundred percent audited and there was never any audit.

[00:35:37] There was barely any proper attestation.  And I do think that was in some way, acting in bad faith, pretending to do something, just to gain early trust, so it would work at larger scale. 

[00:35:47] Bennett: [00:35:47] So the curious thing to me is back when they were banking in the Taiwanese banks, they had an accounting firm who did give them a monthly attestation that is in large form similar to what Grant Thornton gives to Circle. And then they stopped that. And a couple of years later, we got the Friedman report and then a little bit after that we got the Freeh report, and then the Deltec letter, and then nothing.

[00:36:12]So at one point, they were able to get monthly attestations saying that the balance in their accounts was greater than the number of Tethers issued. And then they stopped.

[00:36:22]Larry: [00:36:22] Yeah.  That's a really good question. And when I talk to Paolo, and if someone at Bitfinex is listening  to this, I 100% agree. Attestation should be the bare minimum of what they publish especially because it's fairly easy to do. And it's reasonably cheap, everyone else does it. I think the reason why they don't do it is again, it goes back to the point that they just don't have to. It just functions well enough without attestations and people at this point trust it enough that, they just feel like it's not even worth their time. Tether is still a relatively lean team, same for Bitfinex, and they just probably feel, who cares, unless the peg starts breaking we're not going to really send you attestations and there's precedent before, I'm sure you recall Bennet, but whenever there was some sort of a break to the peg historically, pretty much like clockwork, like a week or two afterwards,  they started doing some sort of a relationship that confirm some of these reserves and they worked with Bloomberg as well. So my view on this is that they only do the bare minimum, because they just don't feel like they have to. They feel like at this point, they're trusted enough that they just don't have to go to these lengths and spend the money. But if someone, again, if someone at Bitfinex is listening right now, I think this would be the bare minimum. They make enough money right now to justify it. And then it's really a no-brainer.

[00:37:36]Patrick: [00:37:36] Do you feel that their reticence with regards to attestations might be related to their reticence with regards to disclosing banking relationships? If I recall, back in the day, on the UI for requesting a wire from them, they put in red text that they didn't want you to disclose the wiring information to or from them because it would put the entire cryptocurrency economy at risk.

[00:37:59] And I think I read that in a tweet of yours, if I'm not mistaken. Are we allowed to take them at their word? That is the reason why they don't want to disclose this?

[00:38:08]Larry: [00:38:08] Oh, no. I don't agree with this approach as well. Their argument is that they have these banking relationship that, at least back then, used to work in a way that had to be in, almost a shady way.

[00:38:20] And they believed that was the case. I don't think that's the case anymore, by the way. Yeah. I do think that all the banking partners that they have now are aware of the relationship. And I do think that at this point they're functioning In a much more legit way that they were before.

[00:38:34]Back then, that's why I was a Tether skeptic as well, because they had literally no one was publicly associated with other. No one really was able to answer these questions that I had that has changed. So I've changed my mind on a lot of these things because of their approach and because of the information I've been provided by other third parties, but I was in the same boat as well.

[00:38:53] Richard: [00:38:55] So we're seeing a lot more institutional interest in Bitcoin, but the counter narrative to Bitcoin right now is just that it's heavily manipulated with Tether, possibly being the biggest manipulator. What do you think is the level of due diligence these institutional investors have performed on this particular matter?

[00:39:13]Larry: [00:39:13] First thing I would like to address is that I think, this is one of the laziest arguments, that people make on Twitter, that Tether is manipulating the market. They're creating Tethers to pump the price of bitcoin. I think there have been several papers, just debunking the system.

[00:39:27] And it's apparent from data that they're not doing this. I track data on a daily basis. I track pretty much all the indicators that are there. And every indicator this year has been going up everything like, spot inflows,  just talking to exchanges that support fiat, there's no evidence whatsoever that Tether is creating USDT to pump the price of Bitcoin. You can do some fairly simple data analysis, by how the market reacts based on when the Tethers are created, really the simplest explanation to why some people are confused is because when the money comes into Tether, they have to create USDT, and that money ends up going into some sort of a cryptocurrency because otherwise they wouldn't even put it in Tether.

[00:40:11] So they conflate the relationship of printing Tethers to then market going up. It's just a natural reaction when you put more money in the system, the price will go up. And so I would like to, just make sure that people actually studied this relationship more closely because that's one of the laziest arguments that there are a lot of times. And I think that Bennett agrees on this point actually.

[00:40:35] Bennett: [00:40:35] I largely do. Generally when people are talking about Tether manipulating the market, they're referring to the paper from University of Texas that was published in 2018 : Is Bitcoin Un-Tethered? And that paper has some methodological issues specifically, if I remember right with periodicity, meaning that to get the results they get, it's very dependent on which periods you look at and how you analyze the flows with respect to that.

[00:41:01]So, I don't necessarily think that we're seeing the common conspiracy theory, is unbacked Tethers are printed, they're used to buy Bitcoin. The Bitcoin is then inflated, sold, money goes back into Tether's bank account while there bet. The market I think is too liquid for that to really effectively work. Tether can't move the market enough to get back enough to make that effective. However, I think there is still again, we get back to the question of backing and what's really behind the Tethers, because if there's a general belief in the marketplace, that there are 23 billion real Dollars behind this Tether purchase saying this Bitcoin and whatever, if that is not fully backed, if that amount of Dollars did not actually enter the ecosystem, I think that could fairly be called manipulation now as to the size of that effect. I don't necessarily think it's a large effect. I don't think Tether is responsible for any of the bull runs in Bitcoin or anything like that. But I do think that there is possibly some underlying, I think that Tether could have still slightly inflated the price if they were not fully backed.

[00:42:17]Larry: [00:42:17] Sure. Yeah. To some extent, I agree with that. One thing I would like to add is, fun consequence of the paper being published for manipulation is that, I don't know if you guys noticed, but now Tether basically, they don't disclose whenever they create new terrorists. Exactly. They basically give it like a week in advance or something.

[00:42:37]So they prevent people to actually conflate these two things that's happening at once.

[00:42:42] Richard: [00:42:42] You mean, they authorize first, right? So they basically mint, and then they say they authorize it, but it hasn't been deployed. And then they moved them over, distribute them  to various places.

[00:42:52] Bennett: [00:42:52] I feel like you could still do much the same analysis just instead of tracking the issuing address. You track the movements from the treasury.

[00:42:59]Larry: [00:42:59] Yeah. You probably could, but it's just like a funny consequence. I thought.

[00:43:02] Richard: [00:43:02] Okay. But going back to that paper, Is Bitcoin really Un-Tethered, by John Griffin and Amin Shams that Bennett was referring to. What did you say specifically was the issue with their methodology? And also about other papers that have been debunking this, I actually have the papers here, but I quickly looked through, but I'm not sure where the debunking part is. So one of them is called The Impact of Tether Grants on Bitcoin, and that's by Wang Chun Wei. And then the other one is What Keeps Stablecoins Stable, by Richard Lyons and Ganesh Viswanath-Natraj. So the first paper, The Impact of Tether Grants on Bitcoin, the paper basically conducts an independent study as to whether Tether prints prior to Bitcoin pumps, if there's any kind of statistical relationship and basically says there's none, but it doesn't directly go and debunk is Bitcoin really un-Tethered. You see what I'm saying? So when Bennett says there is some kind of methodology problem, I'm not familiar as to what exactly the issue is there.

[00:44:00]Bennett: [00:44:00] It's been a while since I looked at that paper in specific. But if I remember and they even mentioned this in one of the appendixes for the paper, I think if you change the way the period is measured or something like that, you see the impact from the Tether flows decreased significantly.

[00:44:16]And the other thing I think we do need to talk about is what Larry said, is you expect when Tethers enter the market. When legitimate money enters the market, that generally, the prices of things are going to go up because there's more money coming in. And so I've looked at a bunch of data on Tether and I can push it and tweak it and get statistically significant results that are potentially interesting.

[00:44:41] But in order to get them, you have to pick magic numbers. So you're picking a certain period, a certain cutoff, a certain something in order to make sure that your data looks the way it does. And if I remember right this paper has some of those kinds of things in it.

[00:44:58]Richard: [00:44:58] Okay. So you're saying the statistical finding isn't sufficiently robust. If you pick a particular window in construction of your variable, you get favorable result. And if you just move that a little bit, you no longer have favorable result. That's what you're saying?

[00:45:13] Bennett: [00:45:13] Yeah. If I remember, even with the change in the periodicity, it was still directionally correct. But the impact became much smaller. And just looking at it as a skeptic and as someone who tries to observe this market, it was not convincing enough to me. And I was predisposed to be convinced by 

[00:45:30] Richard: [00:45:30] it.

[00:45:30] Yeah, The other interesting thing that's been happening lately is that some of the Tether executives seem to have become a little bit more open in terms of appearing on podcasts and basically having conversations with the public. First of all, do you agree with that assessment that they're being a little bit more open these days? And second of all, if so, why do you think they're doing that?

[00:45:52] Larry: [00:45:52] It's a hundred percent by design and that's one thing, like I mentioned before, that's one thing that led me to trust in Tether more than I did before. They are public for one simple reason and that's to make sure that people stop spreading conspiracies and it's for marketing purposes.

[00:46:09] It's when you have a person that can go directly against some of these claims early on, it's much more effective than letting someone like Bitfinex just go with these theories that sometimes don't have any merit. Sometimes they do. Sometimes they don't. But they're doing it because they want, people to think of Tether as more legitimate than it has the rep for right now.

[00:46:29]Paolo keeps claiming Tether is as regulated as other stablecoins. It's just a marketing move and it's a good move as well.

[00:46:36]And I'm not necessarily convinced Bennett: [00:46:38] that they are more public. If you go back in time to earlier Bitfinex and Tether history, like I've got saved the entire post history of Raphael Nicolle, the founder of Bitfinex and BitcoinTalk. I've got the same for Giancarlo Devasini, for myself, one of the early consultants for Bitfinex and Phil Potter and would frequently show up not on podcasts and stuff like this, but if you're looking back 2016, 2017 on the whale pool team speaks.

[00:47:06] And in other places like that, where they were still trying to reach out to crypto traders and stuff like that. And I agree with Larry, it definitely is a marketing move. But it's also interesting to me that not all the executives have been more public. Like Paolo, a lot. He's, probably the most public face of both...

[00:47:26] Richard: [00:47:26] and he's the CTO.

[00:47:27] Stuart Hoegner, the generalBennett: [00:47:29] counsel for both Bitfinex and Tether, is probably the one you hear from next often. You will almost never hear from JL VDV, the CEO of both Bitfinex and Tether, who originally came over from Perpetual Action Group Asia, or you'll occasionally hear from Giancarlo now, but you hear from him a lot less even than you used to. I don't necessarily buy that they're more public or more open about this stuff now than they were historically.

[00:47:53] Richard: [00:47:53] And the weird thing is just that if you are going to spend the time to go on all these podcasts and try to assuage the public about your legitimacy, why not just spend the money and do the report? Obviously we've already been through this point and it sounds like both of you actually agreed that some attestations should be in order.

[00:48:09]Larry: [00:48:09] Yeah. Yeah. I think that's a good point. I think for Paolo, Just about Tether, he said this  publicly before, it's also about Bitfinex, and like I mentioned briefly before, Bitfinex hasn't been doing so well the past two years and they attribute that to marketing as well.

[00:48:25]Because they haven't done much of marketing before and volumes went down significantly. Liquidity went down. So I don't think it's just about Tether, it's about Bitfinex as well. And it's about overall just having a face that you can connect to Bitfinex and Tether, that is more public facing.

[00:48:41]Richard: [00:48:41] Okay, so let's take another audience question. This is from someone called EastMother: does a stablecoin issuer, such as Tether have fiduciary duties towards the people to whom issuances are made and, or the secondary market token holders? Any opinion on this?

[00:48:59]Bennett: [00:48:59] This was a matter of debate of law in the New York Attorney General case. When Bitfinex was trying to appeal it, they basically claimed even in the initial transcript that they have no responsibility to secondary market participants, meaning Tether holders who were not directly contracted with Tether Holdings, or Tether Holdings Limited.

[00:49:21]I think it's reasonable to say that Tether, if they don't have a legal responsibility, at the very least as a moral responsibility, that if they are issuing this asset that they say will maintain this value, that the asset does that, whether or not there's a legal obligation, a legal fiduciary obligation towards any secondary market holders. I'm not qualified to answer.  

[00:49:50] Larry: [00:49:50] I totally agree with Bennett there. I Don't think that legally they do. I do think that ethically, that they do. But also one thing to realize that we haven't touched on it much yet, but the collapse of Tether, if it were to happen at some point. And if we are assuming that they're acting fraudulently, it would be terrible for their business and Bitfinex and Tether as well.

[00:50:10] They're Pretty profitable. So that argument to me never made too much sense. Yeah, you can probably make more money more quickly if you just rug-pull and take all the money now. But you're sitting on a business, that's generating millions of Dollars in revenue. You have Coinbase going public this year, likely trading at more than 40 billion, and all these exchanges are going to be worth gold soon.

[00:50:30]So you would have to be shooting yourself in the leg if you were doing this, like why not just run the business for 10 years and probably end up making even more money? It seems ridiculous to me that some people think that this would be a legitimate strategy.

[00:50:43]Richard: [00:50:43] So back to the fiduciary duty part. So there have been recent regulations put forth by the US government. And one of them is the STABLE Act, which basically says, if you are a stablecoin operator, you need to be regulated like a bank. And the second one is more of a rumor, in that stablecoins might be classified as security and as such SEC would have jurisdiction over them. So now, so neither of them actually is law, but if they were to become law, what would be the implication on Tether? And then second order effect on the crypto market?

[00:51:24] Larry: [00:51:24] Yeah. So the first thing I believe, that stablecoins will never be considered securities. I don't think that will ever happen. Not a lawyer. So can't say that for sure, but I think that's extremely unlikely. The SABLE Act, I think is a little bit more realistic and it would definitely affect in a lot of ways because, if you do have to have a bank in charter, if you do have to have a, essentially, a bank to operate stablecoins in US Dollars, that would put Tether in a really difficult spot. And it would be interesting to, to see if they would continue operating.

[00:51:55]Richard: [00:51:55] I think that would conflict with an earlier point in that the Tether folks basically think that the US doesn't have jurisdiction over them. So if so then, the STABLE Act or whatever the SEC wants to do, as long as they claim, Americans, aren't touching this stuff, then it's fine.

[00:52:11]Larry: [00:52:11] Yeah, that's a really good question. Maybe Bennett has some views here. I'm not an expert on this and I'm not sure if they would continue operating if they were directly against one of these laws, I think they might, but I'm not so sure, honestly.

[00:52:26] Bennett: [00:52:26] So this is a tricky question.  So I don't think currency backed stablecoins, like a one-to-one backed or pegged coin, will be considered a security anytime soon now. For other more complicated algorithmic models like Basis before they were shut down, I thought there was the potential for parts of that model ending up being considered a security. But that's not necessarily an acute worry with something like Tether, I think.

[00:52:52] Richard: [00:52:52] Why is that though? With stablecoins, there's no expectation to profit from the effort of others. So that particular component of Howey test  wouldn't work.

[00:53:01] Bennett: [00:53:01] Yeah. What I mentioned before was a multi token system involving Basis bonds and a couple of other pieces, all working together in order to allegedly maintain a pegged value, which ended up accruing a larger number of Basis coins, the stablecoins to the holders of the Basis bond.

[00:53:18]Yeah,Larry: [00:53:19] basically what Bennett is trying to say, that it's a multi token system where one of these tokens is very similar to a security.

[00:53:26] Bennett: [00:53:26] And it's functioning part of the stablecoin system. And I could even see the argument being made that Maker is a security, but I can't necessarily see the argument that DAI, however you  say it, the stablecoin. 

[00:53:40] Now as for the STABLE Act, this is always where I get conflicted with Tether because they try to act as though they're not regulated by US regulators, but in early 2016, Bitfinex was willing to sign a settlement with the CFTC and collaborate with regulators in those respects.

[00:54:01]My guess is a more restrictive, stablecoin law, like the stable act would be somewhat similar to a regulatory shutdown of Tether with the difference being, they would probably be able to spin it down more gracefully. So there'd be a lot less collateral harm to the market and to holders. But I would agree with Larry and say that with a regulation like that, it is unlikely to me that Tether would continue to offer a Dollar-backed stablecoin. They might just, which might be part of the reason why that you've seen them try to, they initially tried to diversify with the Euro Tether, which was never popular. And so now they kept trying again and they've got the Tether Gold and the Chinese Yuan Tether and all that. My guess is that is part of the reason they have those other coins.

[00:54:48]Patrick: [00:54:48] One of the other risks for any regulatory regime is that there's a sort of regulatory contagion where regardless of whether a Bitfinex or Tether, which are all close to each other, regardless of whether they are subject to US law or jurisdictions, some people who would like to be involved in the cryptocurrency ecosystem are subject to US law or jurisdiction, and they might not be able to interact with counterparties, which interact with Tether because of the risk of, basically the Tether cooties attaching to those counterparties. And potentially I know people in the cryptocurrency ecosystem don't think this is likely because it's so technically easy to mix funds via distributed finance, et cetera, et cetera.

[00:55:30] But potentially that sort of contagion risk could cause, if you're regulated stablecoin is fungible for a non-regulated stablecoin via any mechanism you can reasonably foresee, then you have to solve that problem for the government basically.

[00:55:45]Bennett: [00:55:45] This proves that Tether's claim that they're not subject to US regulation that they're separate from all that, doesn't hold up. They are Dollar backed stablecoin, and fundamentally, if you're working in Dollars, the long arm of the United States government will extend to you.

[00:55:59] And that's part of the fundamental risk of Tether, is that at some point that long regulatory arm of the United States government, whether it be the CFTC, the Department of Justice, or state government like the New York Attorney General, will find something that justifies them seizing a large amount of Tethers funds and leaves them deeply insolvent.

[00:56:20] Larry: [00:56:20] Yeah I would like to add I do agree that's a significant risk that's worth considering. I think Bennett's totally right. I do think that if the US government and the US system wanted, they can take out Tether probably fairly easily. But one thing that I don't necessarily agree with maybe Bennett has more information on this, but I don't believe that they claim they are less affected by the US regulation and the United States itself. I think that's what people assume. But I'm not sure that actually claims this.

[00:56:50] Bennett: [00:56:50] Yeah, this is where you get into their public statements in press releases, blog posts and things Phil Potter says in a Whalepool team speak, because you'll see the Bitfinex executives try to make arguments like that, that they're not subject to certain US regulations because of where they're domiciled.

[00:57:04]And you saw Giancarlo making these back on Bitcoin talk. Couple of years into Bitfinex's existence and stuff like that. So there are public statements by DigiFinex executives making those kinds of claims, but the press releases, the blog posts, marketing materials on the websites will generally be carefully worded to give the impression that they're compliant with all relevant United States regulations.

[00:57:28] Larry: [00:57:28] Yeah. And are you aware of any of these statements being made more recently versus early on, in Tethers' functioning?

[00:57:34]Patrick: [00:57:34] In the litigation with the NYAG at oral argument, they were asked point blank, who is your regulator? And they said, we are not regulated.

[00:57:41]Larry: [00:57:41] Yeah, this is a really nuanced topic. We've been working on a stablecoin report for almost two months. And we talked to several different stablecoin providers, like USDC, Paxos, all those. And we asked them about this : what does it mean to be regulated as a stablecoin?

[00:57:56] And everyone has different answers. It's like when you use the word regulated, it's just so ambiguous. You have to think of several different ways of how you regulate it. One is, do you have AML and compliance teams? There are several other aspects. Where are you keeping your funds? Is someone monitoring that? Do you have the compliance manual? It's just so many different things like that. And then, so Tether, publicly claims that they are as regulated as USDC. I think that's questionable. They are registered with FinCEN, which means that they have to report,  when some activities out of the orderly happen. But it's probably not as stringent as when you are a registered with the New York Department of Financial Services like Paxos or Gemini Dollar.

[00:58:38]It is difficult to say what regulated means in this sense, because there are no clear rules and because these things function globally and every jurisdiction has different rules and different regulations.

[00:58:47]Richard: [00:58:47] So as far as the NYAG lawsuit goes, and I've asked this question in the previous podcast as well, but I'm curious to hear your thoughts. What do you think is the timeline for some kind of outcome and some kind of resolution? And what do you think would be the knock on impact on the Tether ecosystem?

[00:59:05]Bennett: [00:59:05] So the next due date for a document production is January 15th, just coming up right around the corner. What will be included in that if documents will be provided,...

[00:59:19] Richard: [00:59:19] which documents are the prosecutors looking for?

[00:59:22]Bennett: [00:59:22] Looking for financial records for Tether going back to 2017 showing, I think the final order was showing KYC, AML, history of redemptions and history of issuances. But I do not have that in front of me.

[00:59:37]Larry: [00:59:37] Quick question for you, but do you think that, the New York Attorney General has the right to ask for these documents while Bitfinex has pretty publicly said that no customers can have access to Tether?

[00:59:51] Bennett: [00:59:51] I Am New York Resident -- the block was very recently able to register an account on Bitfinex and trade with the name I Am NY Resident.

[01:00:03]Richard: [01:00:03] So I'm not familiar with what you were saying about the block registering as a New York resident. Can you guys elaborate on this?

[01:00:09]Larry: [01:00:09] It was an article published like a year and a half ago or something, or almost two years ago where some user registered with a name that said "I'm New York resident." And as part of registration, when you go through the registration process, as far as I know, there's a box that says that you have to tick, I'm not the resident of New York, or I'm not the resident of the United States.

[01:00:33] And that user ticked that box, even though the name said, I'm New York president. And it was like, supposedly to test if the compliance will pick up on it. But the reason why I'm bringing it up is because, sure, some, New York customers definitely had exposures to Tether, but it is probably reasonable to say that, Bitfinex is not interested in those customers unless they are based outside of the US with their own  subsidiary. 

[01:00:58] Bennett: [01:00:58] Sure. That's irrelevant for New York jurisdiction. Bitfinex being interested in them doesn't matter to the New York Attorney General. 

[01:01:08] Going back. And this is particularly striking because if you read the 2016 CFTC settlement, that Bitfinex signed, they agreed to ensure that they would stop violating sections 4A and 4D of that app.

[01:01:25] And part of that was making sure they were at no point offering nonphysically delivered futures to US citizens. And I think it's pretty safe to say that they continued to do that for a while after early 2016. And I think if you look at what the New York Attorney General has found, meaning that there is several professional firms that Tether has hired in New York, that there are Tether traders in New York that you've got Giancarlo emailing the head of Galaxy Digital, and telling him that he should meet up with Phil Potter because they're both in New York and stuff like that. I think it becomes under the Martin Act. It would appear that New York has the jurisdiction to ask for these documents.  I think the better question is. What happens if Bitfinex chooses to ignore the New York Attorney General not produce the documents, I do not know how far their ability to enforce goes.

[01:02:29] Patrick: [01:02:29] I think it's worth mentioning that, so this could possibly be a legal tactical move to ask for the document production. That question was put to them at oral argument and by the judge, if I recall, and they, given the opportunity, did not deny that they were solely looking for Martin Act violations. So it's possible that they're using a statutory authority that they have, to compel the production of documents, which would allow them to uncover evidence of other things that they could throw at Tether later.

[01:03:02] Bennett: [01:03:02] Which I think is actually an interesting thing for us to come back to, because the New York Attorney General launched their investigation into Tether before the really conflicted transaction I started this discussion with, where they transferred the funds out of Tether into Bitfinex in order to deal with the insolvency.

[01:03:18] So there was something before that, that triggered a New York Attorney General investigation, at Bitfinex. And Bitfinex and Tether were both producing documents and cooperating with the new York Attorney General up until the time of this transaction. And that's when then Latitia James and Brian Whitehurst had to go for the ex parte order.

[01:03:39] And then Bitfinex has been endlessly appealing and they are now out of appeals.  I think it's reasonable that you're right, that the Martin Act violation is not the only thing they're potentially interested in, but they thought it gave them the best argument for document production.

[01:03:54]Larry: [01:03:54] Yeah, I think I agree with that as well. I will say though, some of these New York trading firms and you guys must know, they have subsidiaries in jurisdictions that allow them to get exposure to these instruments, even if they are officially based in New York.

[01:04:08]And similar can be said about what the black publish I'm New York Resident. Yeah. It is true. Compliance wise. I think it's probably improved since then. That being said, someone basically had to tick was, I'm not the resident of New York. So technically, you are still breaching the registration form.

[01:04:25]  Patrick: [01:04:25] I Know I've been intervening too much on one side of this debate  Bennett, what would you be satisfied with? Is there a way that Tether could demonstrate that they're operating above board?

[01:04:34]Bennett: [01:04:34] If they were to start regularly getting attestations by a qualified  auditing firm, that would go a long way towards slashing many of my fears. I still think that the history of Tether has left them with enough detritus. They'll never truly be compliant. And that eventually one of those albatrosses around their neck will pull them under water.

[01:04:57] But if I started seeing a true good faith effort, like that to be publicly transparent and show that they are living up to their own promises, that would make me feel a lot better about them.

[01:05:10]  Richard: [01:05:10] There's an article from Decrypt. I think earlier this year, or maybe last year about how a lot of USDT on-ramp is done by Chinese nationals, looking to move their wealth overseas because of the tight capital control there.

[01:05:26] Can you speak to the extent that this is true and whether you see this trend? 

[01:05:32] Larry: [01:05:32] Okay. So from my experience and from the data that I've seen, I don't think it's as much of a problem as the Decrypt made it out to be. But like I said earlier on, Tether does have a lot of clientele in China and a lot of the money that was sitting on Chinese exchanges that then got cut off the fiat system, that's now some of it is now sitting in Tether. So there's a very large Chinese ecosystem when it comes to Tether. I don't think it's being used that much for fleeing capital controls. It definitely is. To some extent, I don't think it's, one of the biggest use cases of Tether, I don't believe that.

[01:06:07]Because there's already a lot of money that was previously in these Chinese exchanges now with Tether. But it's important to say the OTC markets for Tether is the primary on-ramp for crypto in China right now.  Basically running exchanges in China is illegal. You can argue whether that's being enforced or not, a lot of these exchanges like Huobi, Binance, and OKEx, they have OTC P2P desks that allow people to convert their fiat  to Tether or Bitcoin directly. So it is definitely being used. I don't think it's used at a massive scale.

[01:06:39]Richard: [01:06:39] Okay. So if I can summarize our debates so far, it seems that what Larry is saying is that Tether has had these unprofessional practices, to put it charitably, in the past, where they also had constraints with banking access and so forth, but ultimately they crossed the line in various different ways in the past.

[01:07:05] But now the situation is slightly different. Number one is they're a B2B business. They have enough institutional flow as it is. So they don't really care so much for the retail opinion and therefore they don't have to worry about at attestation reports and so forth. Secondly, I think they have made up their mind about, or at least taking comfort in the fact that they are outside the relevant jurisdiction that seems to be pursuing legal action with them and that's why they basically continue to operate the way they do. But ultimately Larry's arguing that they're no longer acting in bad faith because they're just doing enough to satisfy their existing clientele. Is that a fair summary of your position, Larry?

[01:07:58]  I think a big question mark, on my mind is still whether Tether is playing these games to pump the market with unbacked collateral. But I know we've run around on this.  But so far I don't think I'm thoroughly convinced that they're not doing this.

[01:08:15] So if Larry, you could summarize in one or two sentences to convince somebody that this is not the case, what arguments would you use  

[01:08:23] Larry: [01:08:23] When new money comes into the system, you can expect the price to go up. And the evidence here is that when new Tether is created and deployed price of Bitcoin goes up and even this relationship can be true while not manipulating the market. 

[01:08:39] Richard: [01:08:39] Yeah. So I think the biggest hole I see in that argument is that there's no proof that there's money coming to the market. If there's proof, which is probably what the other patient report can provide, then I think that whole logic will flow. But right now the problem is just that there's no proof that money is coming in.

[01:08:58] Right.

[01:08:58]Bennett: [01:08:58] That's largely my problem is that we don't have any public attestation, audit or anything like that, to suggest that the 23 billion in US Dollars are actually there. This has come for me by other oddities, like the fact that you don't see those show up in the Bahamian central bank report and other things like that. But again, Tether making a better effort to be more public on that stuff would assauge lots of those fears.

[01:09:27]Richard: [01:09:27] Yeah, I think the most favorable view with regard to this under-collateralization problem is something like, even though there's a lot of issuance of Tether right after a bearish movement in Bitcoin price. And after the Tether issuance, the Bitcoin price goes up, even though that's all true, that doesn't mean there's foul play.

[01:09:50] It could very well be that there's authentic demand that is rushing into the market to take advantage of a temporary price dislocation. But the issue is that's somehow still not sufficient to change people's skepticism.

[01:10:02]Larry: [01:10:02] Yeah, I think it's almost impossible to change their mind. Honestly, it's beyond reasonable doubt that Tether has manipulated a price. And I think if you believe this you, your bias is too much to be objective.  

[01:10:15]Richard: [01:10:15] Okay.  So let's move on to the concluding remarks stage. So maybe starting with bennett, synthesize your thoughts and tell us how you feel after having this debate regarding your initial position.

[01:10:26] Bennett: [01:10:26] So I still believe Tether has at many points in their history, been a bad faith actor. And you see this as early as 2015, when they're lying about their ownership, you see this continuing through with the frivolous lawsuit against Wells Fargo. You see it continue with the interactions with Crypto Capital.

[01:10:45] You see it compounded by some of their opacity surrounding the Tether hack and the forced hard fork of the Omni network. And just these continued dpattern of behavior combined with just the public and competence of failing to track their own assets on their public transparency page makes me believe that Tether does not at this point deserve the benefit of the doubt, and there is not sufficient evidence that they are making a good faith effort to be a good member of the crypto community and to be publicly transparent about both their functioning and their backing.

[01:11:25]Okay, great. Larry, go aheadRichard: [01:11:26] with your closing remarks.

[01:11:28]Larry: [01:11:28] All right. So I agree with Bennett that Tether has acted in what someone can call bad faith. I think I would call it bad faith as well, early on. What I do think though is that they were forced to act in this way to basically survive and to find the product market fit early on, and then to grow that business early on, I do think some of it was necessary for the business to function.

[01:11:50]I don't agree with a lot of these practices. And I do think that they've made several mistakes. They've behaved in a negligent way. They behave unprofessionally. That being said, I think recently that has changed drastically. I don't think they're acting in bad faith anymore. I think they're a really important actor in the crypto space.

[01:12:07]And I think that with all that I've said and it might sound like I'm defending other But I still think that there is a chance that there's a regulatory intervention at some point, which would put the markets into chaos for some time. And I do think it's a possibility that even people like me, that don't think Tether's acted a bad faith should consider because the US government can do something about that or if they really want to. And Bennett said, and this one it's a reasonable possibility. I still think it's fairly low chance that something happens, but whoever's listening to this. It's important to consider this closely. And if it does happen, make sure that you're prepared for that possibility.

[01:12:49]That being said again, I think this was a good debate and I agree with a lot of Bennet's points. But I do not think that there's acting in bad faith. Now, I don't think it has been in the past year and a half.

[01:13:00]Richard: [01:13:00] Okay. Great. Thanks for joining the debate today. Bennett and Larry, and thanks for co-hosting, Patrick. How can our listeners find all of you starting with Larry?

[01:13:11]Larry: [01:13:11] you can find me on Twitter. I'm @lawmaster. And you can also email me at

[01:13:17]Richard: [01:13:17] Great. How about Bennett?

[01:13:19] Bennett: [01:13:19] I am @BennettTomlin on Twitter and that's three T's in a row. Cause there's two in my first name and one of my last name. Or you can find my articles in my

[01:13:31]Richard: [01:13:31] Okay. Great. And how about you Patrick?

[01:13:33]Patrick: [01:13:33] I'm patio 11 on Twitter. And you can find my Which should have my writing on Tether on it.

[01:13:42] Richard: [01:13:43] thank you all. So listeners, we would love to hear from you, and have you join the debate via Twitter. Definitely vote in the post debate poll also feel free to join the conversation with your comments on Twitter. We look forward to seeing you in future episodes of the blockchain debat podcast. Consensus optional, proof of thought required. Good bye!

[01:13:58]  Bennett: [01:14:00] Goodbye.

[01:14:00] Larry: Goodbye.

[01:14:00] Patrick: Goodbye.

[01:14:01] Richard: [01:14:01] Thanks again to Bennett and Larry for coming on the show and thanks to Patrick for co-hosting.  

[01:14:07] To summarize. I think there's broad agreement that Tether was unprofessionally run in the past and perhaps is still not totally above board as we speak, but it's a bit like Binance. It's clear that they're operating in gray area, but are they being a bad player?

[01:14:26]Larry thinks that they're not a bad player and they're non transparent ways are simply a reflection of their B2B business model. And the fact that it's unnecessary for them to be so forthcoming to retail.  Bennett thinks there have been and still are too many red flags to give them so much benefit of the doubt. But another interesting area of agreement seems to be that whatever games are being played here, there's no conclusive evidence that Bitcoin prices are being manipulated by Tether, at least not in a meaningful way against an increasingly liquid market. 

[01:15:01] What was your takeaway from the debate? Don't forget to vote in our post debate Twitter poll. This will be live for a few days after the release of this episode and feel free to say hi or post feedback for our show on Twitter. If you like the show, don't hesitate to give us five stars on iTunes or wherever you listen to this. 

[01:15:18] And be sure to check out our other episodes with a variety of debate topics, Bitcoin store of value status, the legitimacy of smart contracts, DeFi, POW vs POS, and so on. Thanks for joining us on the debate day. I'm your host Richard Yan.. And my Twitter is @gentso09. Our show's Twitter is s @blockdebate. See you at our next debate.