A Huge Slap to "Stablecoins": Tether Backed Partial USDT Reserves in Bitcoin

Tether – the stablecoin issuer admitted it has invested part of its reserves in Bitcoin (BTC) and only 74% of Tether tokens were backed by fiat dollars and other reserves, as reported by the Block 21 May.

David Miller, an attorney for Bitfinex admitted that a “small amount” of Tether’s reserves invested in Bitcoin and other assets. Joel M. Cohen, the New York Supreme Court Judge commented on the case “Tether sounded to me like sort of the calm in the storm of cryptocurrency trading. And so if Tether is backed by bitcoin, how is that consistent? If some of your assets are in a volatile currency that Tether is supposed to somehow modulate, that seems like it’s playing into what they are saying.”

After the court hearing on 16 May, the judge issued a preliminary injunction that allowed Tether to continue its investment but ordered both Tether and Bitfinex to do the following:

1) Restrain access to credit lines on USD reserves;

2) Agents, principals, and executive of Bitfinex are not allowed to receive any dividends or distribution from Tether; and

3) Not intervene with the documents that NYAG had requested.

The New York State Attorney General (NYSAG) issued a court filing against Bitfinex, alleging that Bitfinex used Tether’s cash reserve to cover-up the apparent loss of USD 850 mn of co-mingled client and corporate funds, a loss that never revealed to investors before. It is alleged that Bitfinex took at least USD 700 mn from Tether’s cash reserve to handle clients’ withdrawals and cover-up the losses.

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