Tether stands out as the ticking time bomb of cryptocurrency…except now the system can’t do without it.

CAS PIANCEY could feel his heart pounding as the elevator doors slid open onto a tiled corridor of the eighth floor of the K Wah Centre. He was sweat-grimed and wrung out after a day of scouring Hong Kong for traces of a mysterious corporate entity. This was his final stop. Ahead lay a door marked “Proxy CPA Co. Ltd.” Piancey reached for the buzzer, then paused. What if the people he was chasing were really here—and understood what he was after?

It was September 2018, and Piancey, a cryptocurrency journalist, had flown from Los Angeles on a hunch. (“Piancey” is a pseudonym; doxxing is an occupational hazard best conducted anonymously.) He suspected that a handful of very clever and not particularly scrupulous people had come up with a way to create money in any quantity at the stroke of a keyboard—artificial electronic dollar bills that could be swapped for the real stuff. If he was right, these people were pulling off the swindle of a lifetime, a scam that would dwarf Bernie Madoff’s Ponzi scheme. If he was wrong, he owed some serious apologies.

Piancey pressed the buzzer. A Chinese woman in her 40s appeared. “Hello, can I help you?”

“I’m looking for Tether. This is the listed address. Is this Tether?”

“No, no,” she shook her head. “I have never heard of Tether. Sorry.” She disappeared.

And there it was. A company that supposedly held $3 billion in assets didn’t have a real office.

Play Money

It all started with The Mighty Ducks, the 1992 Disney flick about a children’s underdog hockey team. One of the movie’s child stars was a big-eyed 12-year-old named Brock Pierce. A few more movies (Problem Child 3, First Kid) didn’t exactly launch him to stardom, but did provide a calling card. Pierce leveraged his stardust into a series of dot-com start-ups and was on the periphery of a bizarre Hollywood child-sex scandal before getting drawn into the latest tech trend: cryptocurrency. The buzz began in 2009 with the creation of Bitcoin, a digital token of exchange generated through a computerized algorithm and registered on a public database called a blockchain. Enthusiasts believed that because it was decentralized, and not under the control of any government, it had the potential to revolutionize global finance.

Sporting a Three Musketeers mustache and a Billy Jack hippie hat, Pierce proved a charismatic, if diminutive booster, exuding a vibe that John Oliver later described as “sleepy, creepy cowboy from the future.” By 2014, Pierce was convinced Bitcoin was “the biggest thing going on in the world today.” But it had a problem: Since it had little real-world use to anchor its value, its price swung wildly. What if there were a way to make a cryptocurrency that held steady value? Together, Pierce and his partners hit upon a solution—a digital “coin” that would be registered on the blockchain like any other crypto, but backed by actual U.S. dollars. The concept rested on three promises: First, the issuer would keep a reserve of actual dollars that would match one for-one the digital coins it created (akin to the old gold standard). Second, the issuer would offer a public and transparent account of these reserves. And, third, the issuer would allow anyone to swap the coins back for real dollars whenever they wanted. Functionally, the coins would be the equivalent of dollars, but with all the digital-world flexibility of crypto. The team dubbed their breakthrough RealCoin.

At first, RealCoin was more of an idea than a functional currency. Then Brock and his partners sold their start-up to burgeoning cryptocurrency exchange Bitfinex, changing the name to Tether in the process. Among the new principals was 42-year-old Phil Potter, a former Morgan Stanley banker who’d enjoyed a flash of fame at age 25 when The New York Times profiled him as the face of young “uberconsumers.” Even as Wall Street rode the original tech boom, he came across as grotesquely materialistic and Morgan Stanley fired him. “He was done. Kaput. Finished,” wrote The New York Observer at the time. Now he was back. The new management released Tether onto the Bitfinex exchange. By March 2015, a quarter-million digital coins were in circulation, though scarcely used—sometimes only $1 a day traded hands. But, slowly, Tether caught on. Traders found it useful because of the way the cryptocurrency world is divided into two kinds of markets. The first, called “banked exchanges,” has access to traditional banking because it follows rules established by government regulators. Here you can buy bitcoins and the like with U.S. dollars so long as you can prove your true identity.

The other part of the market consists of “unbanked exchanges,” which don’t follow government regulations for dealing in securities. Legit banks don’t like to do business with such shady entities, since it could cause them to run afoul of money-laundering laws. Instead, most customers trade on unbanked exchanges by first buying crypto on a banked exchange, then transferring it over on the blockchain. It’s a pain in the ass, but unbanked exchanges are where rules are scarcer and you can trade anonymously, an appealing selling point for drug dealers, terrorists, extortionists and others looking to launder money.

What made Tether so useful is that it offered a form of U.S. dollar that people could use anonymously on unbanked exchanges—a convenient way to trade all the different brands of digital coin, as well as a place to park your profits when things got volatile. At first, Tether only sold on Bitfinex, but soon all the unbanked exchanges offered Tether trading. It’s worth noting that Tether’s business model has never been entirely clear. According to its own rules, Tether was obliged to sit on customers’ funds in the form of cash and not invest their deposits as a bank would. The only way it could make money was to charge fees for transactions. At the same time, it had to cover its own considerable expenses.

Untethered

Tether had already violated one of its three core promises. It hadn’t released an audited account of its reserves (and never would), so there was no way to tell if Tether really was selling for hard cash kept in reserve for potential redemptions in the future or if it was issuing currency out of thin air, trading it for other crypto and pocketing the proceeds. Conveniently, it’s in the nature of crypto that there is no governing authority keeping watch.

The amount of Tether in circulation continued to climb, topping $1 million by January 2016. And it was getting more widely used, with tens of thousands of tethers traded a day. Along the way, though, Tether also started to break its second promise, by declaring on its website: “We do not guarantee any right of redemption or exchange of tethers by us for money.” In other words, if you gave Tether cash for their digital coins, that cash was theirs to keep.

Remarkably, crypto traders didn’t seem to give a shit. Tether kept registering new coins on the blockchain, and people kept accepting them at face value in crypto trades. By January 2017, the amount in circulation had passed 10 million coins. A 4,000 percent increase in less than two years looked like a stunning success, but Tether and Bitfinex were dogged by a persistent problem. It was hard for them to store funds because banks viewed them as potential money launderers. For a while, Bitfinex used a Taiwanese bank that then routed funds through Wells Fargo to clients in the United States, but then Wells Fargo pulled the plug. Potter told an interviewer: “We’ve had banking hiccups in the past. We’ve just always been able to route around it or deal with it, open up new accounts, or what have you…shift to a new corporate entity, lots of cat-and-mouse tricks.”

TETHER HAD ALREADY VIOLATED ONE OF ITS THREE CORE PROMISES.

This time, Tether had run out of tricks temporarily. The company issued a statement that “…all incoming international wires to Tether have been blocked….

As such, we do not expect the supply of tethers to increase substantially until these constraints have been lifted.” In fact, the opposite happened. In the following eight months, the company registered more than a billion new tethers onto the blockchain. It was no longer an intriguing concept for a cryptocurrency; it now accounted for the majority of all crypto trades. “Tether wasn’t just in the crypto markets—Tether was the crypto markets,” the blogger Crypto Anonymous put it. Tether also had become the measure by which other digital currencies were valued. When newspapers breathlessly reported that the price of Bitcoin had hit $10,000, what they really meant was that it was trading for 10,000 Tether, a distinction that few readers appreciated.

This tidal wave of newly minted artificial money caused crypto prices to soar. The mainstream financial media went googly-eyed as Bitcoin climbed from $1,000 to $18,000 over the course of the year. The idea that crypto could turn Joe Schmo investors into millionaires overnight excited journalists. “Meet Some People Getting Rich From Bitcoin,” trumpeted a Yahoo Finance headline. Revved-up newbies bought in and drove the market still higher.

Like sharks drawn to the smell of chum, rogues and grifters swarmed. John McAfee, the tech guru who’d recently escaped murder accusations in Belize, declared, “I’ll eat my dick on national television” if Bitcoin wasn’t worth $500,000 within three years. (It wasn’t, but he recanted in the nick of time.) Propelled to crypto stardom by this vulgar boast, McAfee earned millions in illegal kickbacks by promoting various digital coins on Twitter. It was just one of the many games being run in a market already rife with wash trading, pump-and-dumps, front-running and every imaginable form of chicanery.

Then the bubble burst. A week before Christmas 2017, Bitcoin started to tumble, and within a year had lost 80 percent of its value. Investors started asking hard questions about the value of cryptocurrency in general—and the integrity of Tether in particular. If it really had cash to back its issuances, why wouldn’t it open its books? Even the infamous Wolf of Wall Street himself, convicted felon Jordan Belfort, said, “I strongly suspect it’s a massive fraud.”

The Consumer Financial Protection Bureau, the SEC and the New York Attorney General’s office opened investigations. A group of investors filed a lawsuit against Tether seeking $1.4 trillion in damages. For skeptics like Berkeley computer scientist Nicholas Weaver, Tether wasn’t just another crypto scam, it was a fraud big enough to threaten “a true bloodbath” across the entire crypto market if it collapsed. Even the high-flying Potter had had enough. He resigned in June 2018, leaving Jan Ludovicus van der Velde as CEO of Bitfinex and Tether and Giancarlo Devasini as CFO.

Both are elusive figures. Van der Velde, born in Holland, attended college in Taiwan before becoming a Hong Kong–based tech entrepreneur. Devasini, an Italian, had practiced plastic surgery before switching careers to importing computer parts. They rarely spoke publicly, though during this time Devasini reportedly told a Chinese crypto investor that “the Tether team does not work for money” but out of “a sense of responsibility and mission to the industry.”

Crypto Bomb

From these gathering storm clouds, eventually emerged—not much. Tether kept making more digital dollars, and the markets kept accepting them. Tether, it seemed, had become too big to fail.

Banking problems, however, persisted. By mid-2018, Bitfinex was moving its funds through a shadowy Panama-based company called Crypto Capital, whose backers included former NFL player and team owner Reggie Fowler. When Crypto Capital informed Bitfinex that $851 million of its funds had been seized by foreign governments, Bitfinex could no longer process customer requests for withdrawals. In an exchange of messages later obtained by the New York Attorney General’s investigation, Devasini pleaded with Crypto Capital to process its transfers: “Is there any way we can get money from you?… I need urgently some funds…the situation looks bad, we have more than 500 withdrawals pending…. We have to send them out quickly, people are enraged.”

To provide liquidity, Bitfinex lent itself more than $600 million from Tether’s tenets. Investors still turned a blind eye. “I thought everyone would run away,” says Piancey. “But it seems like at no point is the community going to say, ‘I don’t think this is a good thing.’ ”

UPWARDS OF 90 PERCENT OF ALL CRYPTO TRADES WERE TAKING PLACE IN TETHER.

Instead, Tether had already resumed its rocket-fuel growth. On July 23, 2020, the value of all tethers in circulation topped $10 billion, and upwards of 90 percent of all crypto trades were taking place in Tether. That day, Tether originator Pierce appeared on Belfort’s podcast, where he responded to the host’s suggestion that Tether was a “total fraud.” Pierce, emphasizing that he hadn’t been involved in Tether since he’d sold out, said that while he didn’t know what was going on inside the company, he was disappointed in “the lack of transparency in an industry that is fundamentally, philosophically built around this concept of transparency.”

In an alternate universe, official acknowledgment that Tether had broken its fundamental promise would have sent investors fleeing. In this one, Tether interpreted James’ slap on the wrist as a green light. It opened the fire hose and printed $10 billion a month. At that rate, it covered its fine in about 45 minutes. A fresh round of cryptomania followed. Coinbase, the most respected banked exchange in the United States, went public that month on the Nasdaq stock exchange, bringing crypto into the heart of America’s economic mainstream. Eight days later, Coinbase announced it would start listing Tether. Goldman Sachs, once skeptical of crypto, began trading Bitcoin futures for its clients. “We’re All Crypto People Now,” declared The New York Times.

Not everyone has escaped crypto’s boom-crash cycle. McAfee, who was sitting in jail in Spain awaiting extradition to the States on federal securities and tax evasion charges, was found dead by apparent suicide on June 23. Fowler is free on bail pending trial on federal wire fraud charges. But Tether’s principals remain elusive. Piancey has located a house in Hong Kong that Van der Velde owns, or owned, but has been unable to track their wealth otherwise. Given that they’re minting more than $10 billion a month, they’re presumably not shopping at discount stores.

Meanwhile, it’s become conventional wisdom in crypto circles that Tether could, or must, eventually blow up. And when it does, says computer scientist Weaver, “the whole edifice will collapse.” Even Vitalik Buterin, billionaire founder of the world’s second-biggest cryptocurrency, Ethereum, calls Tether “a ticking time bomb.”

That was back in March, mind you, when there were 37 billion tethers in circulation. As of this writing, there are more than 61 billion…and counting.

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