Cryptocurrency firms Tether and Bitfinex continue to face scrutiny from investors after a so-called stablecoin proved less than stable earlier this month.
Tether, the company that issues the U.S. dollar-denominated stablecoin, which is also eponymously known as Tether, and Bitfinex, the Hong Kong-based cryptocurrency exchange, found themselves in the spotlight on Oct. 15 when the price of Tether, which is supposed to be pegged 1-for-1 with the U.S. dollar, crashed below 90 cents following reports that Bitfinex was having banking complications, according to a report from The Block.
Unlike other digital currencies, Tether and other stablecoins are supposed to be fully backed by dollars or other traditional money. Stablecoins are often used to buy other virtual currencies.
The continuing saga has prompted some crypto-based funds to call into question the future of the two companies that share common investors and management.
In a Friday report, Thejas Nalval and Kevin Lu of Element Digital Asset Management, a Santa Monica-based cryptocurrency trading and asset management firm, said unanswered questions left the asset manager unable to rule out the worst for both Tether and Bitfinex.
“The lack of transparency and Tether’s inability to produce a true independent audit of their reserves prevents us from ruling out the possibility that Tether does not have sufficient reserves or that Bitfinex is insolvent,” they wrote.
“The available public information, however, is consistent with the explanation that Tether and Bitfinex are experiencing problems securing a stable banking relationship,” they said.
Bitfinex and Tether haven’t replied to requests for comment on the report.
The companies have previously dismissed questions about their financial footing. On Oct. 7, Bitfinex published a statement denying that it was insolvent.
“There have been ups and downs along the way, with complications scrutinized by watchful ‘investigators’ eagerly anticipating and predicting the industry’s collapse,” the company said, before adding that it “is not insolvent.”
For Tether, critics have questioned whether the stablecoin is 100% backed by U.S. dollars. It had previously sought to ease investors’ worries when it hired Washington-based law firm Freeh, Sporkin & Sullivan, which confirmed, as of the close of business on June 1, that Tether’s reserves did match the amount of Tether in circulation. Critics were unimpressed, noting the report focused on a single point in time, despite the law firm having access to the accounts for four months.
According to Bloomberg, both Bitfinex and Tether were issued with subpoenas by the Commodity Futures Trading Commission in December 2017. The companies, at the time, told Bloomberg that they routinely received “legal process” from law-enforcement agents and regulators conducting investigations and that it was their policy not to comment on such requests.
The Oct. 15 selloff in the price of Tether drew further attention. It caused the price of bitcoin
to spike on the Bitfinex exchange, trading at a substantial premium to other exchanges. Analysts speculated that the rise was due to traders rushing to liquidate Tether holdings, shifting them into bitcoin.
A week after the Tether collapse, bitcoin is still trading at a 2.6% premium on the Bitfinex exchange relative to Coinbase and 2% compared with its price on Kraken.
Element isn’t alone in their concern. Swiss-based cryptocurrency investment fund Block0 predicted Tether has seen its peak market share as unanswered questions linger and competition mounts.
“We are observing a breaking point in the market for Tether,” said Manu Andorra, founder of Block0 in a news release accompanying a report by the firm last week.
“We have seen a prolonged period of uncertainty around Tether’s operations and with the introduction of competitors such as the Paxos Standard and TrueUSD, the market is moving towards the alternatives that put transparency at the forefront of their operations,” he said.
Andorra said a major question remains unanswered: “Is Tether telling the truth when it says that each of its digital coins is backed by one U.S. dollar?”
Despite the concerns, Tether’s rise to the top has been dazzling. In the third quarter of 2018, it was the largest traded currency pair versus the top 10 cryptocurrencies, accounting for 48% of the market, more than any other fiat currency, according to Block0.
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