Source: iStock/standret, Cryptonews.com

Lawyers for under-fire stablecoin Tether (USDT) confirm the token is not backed 100% by cash reserves, but say that it is not obliged to back its token 1:1 with fiat – sentiments that the market appears to agree with.

At the time of writing (08:36 UTC,) tether still trades above 1 USD.

Source: coinpaprika.com

As previously reported, Letitia James, the Attorney General (AG) of the State of New York has taken out a court order against Tether, the Bitfinex exchange and iFinex, the Hong Kong-based company that operates both.

The AG has alleged that Bitfinex “engaged in a cover-up to hide the apparent loss of USD 851 million dollars of co-mingled client and corporate funds,” and that the exchange had “given itself access” to Tether cash reserves that were put aside to underpin Tether tokens.

Tether’s lawyers have hit back at the AG’s move, with legal firms Morgan, Lewis & Bockuis and Steptoe & Johnson issuing a memorandum of law to a New York court. The document makes the following claims:

the AG neglected due process in issuing the court order

the AG has failed to prove that Tether can be considered to be a security or commodity under the terms of the Martin Act (anti-fraud business legislation)

Tether has made no secret of the fact that its reserve funds include loans made to affiliates [it was revealed in February on their website]

the AG has failed to show that any irreparable harm has been done to investors

Stuart Hoegner, Bitfinex’s General Counsel and a lawyer specializing in cryptocurrency-related matters, has also filed an affidavit with a New York court in which he admits,

“Tether has cash and cash equivalents (short-term securities) on hand totaling approximately USD 2.1 billion, representing approximately 74% of the current outstanding tethers.”

However, the company also has “additional reserves” though “less liquid” assets, Hoegner said without specifying.

Meanwhile, the Tether's website claims that the excess of their assets over liabilities stands at almost USD 23 million.

Hoegner also notes, that Federal Reserve rulings only require American banks to keep cash reserves “representing, at most, only 10% of their liabilities” – indicating that the AG appears to be holding Tether up to impossible standards.

The strongly worded document also claims that liquidity is no problem for Tether, stating,

“Between December 2018 and April 29, 2019, the average daily fiat redemption has been USD 566,066.00, with the largest being USD 24.2 million. The vast majority of [fiat] redemption requests of Tether are for less than USD 1 million.”

Meanwhile, another attorney representing Tether, Zoe Phillips of Morgan, Lewis & Bockuis, said in a separate document that "the Attorney General appears to believe that Tether must hold USD 1 in cash fiat currency for every dollar of tether. These allegations are wrong on multiple levels."

"More fundamentally, the Attorney General has no authority to dictate how Bitfinex and Tether do business with one another, or the amount of reserves that Tether must hold," she stressed, adding that any tether holder dissatisfied with the current arrangement that tether is not fully backed by cash could have freely redeemed his or her tethers for cash, or exchanged their tether for another virtual currency, and can still do so today.

USDT transaction count and price (7 days average):

Source: coinmetrics.io

Furthermore, Hoegner stated that the AG’s injunction was “needlessly disruptive” to Bitfinex, contained incorrect allegations about the company’s dealings with Panama-based company Crypto Capital – and has succeeded in “spreading misinformation to the markets.”

However, the Attorney General said last week that Bitfinex lied to its customers when it claimed that "all cryptocurrency and fiat withdrawals are and have been processing as usual without the slightest interference" in October 2018.

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Discussions

It's $crypto - when has lying and defrauding investors not been the status quo? — The Crypto Dog📈 (@TheCryptoDog) May 1, 2019

I'm sorry, but they straight up lied and decided the market. It's not okay and it only came out via the courts, meaning why should we assume this is the sum of all malfeasance (which today's news contradicts) — Jules Ehrhardt (@ezyjules) April 30, 2019

As per my prev. post on Apr 25



Reminds me of the Big Short. Defaults and big housing mortgage brokers going under ... rating agencies NOT downgrading the Banks ... market NOT moving. Everyone sitting back scratching their heads thinking holy shit this whole market is rigged... — Dean (@dean_dwk) May 1, 2019

We all knew it would happen but the irony is all the things people were acusing only actually happened in Oct 18 once they became too big to maintain banking. Yes there are certainly AML issues but Tether played an integral role in the industry until we could get USDC, PAX, etc — Ethan Kravitz (@EthosVentures) May 1, 2019

tether is currently 74% backed by cash assets and 26% bitfinex shares. (based on loan doc)



so cash value of said assets aside . The concern should be BFX ability to stay operational,pay back the loan,to raise capital to lower the debt( shares) or recovery of confiscated funds pic.twitter.com/nsFRV9xWw5 — I am Nomad (@IamNomad) April 30, 2019

Network effect doesn't explain it because there's no upside above $1. Either the market irrational or it considers the Bitfinex IOU to be good enough collateral. — Arthur B. 🚀 (@ArthurB) May 1, 2019

Yes, they could create the illusion that the consensus is that the peg will hold, and, with hundreds of millions they could do so for a while. But that only works if the market is irrational. — Arthur B. 🚀 (@ArthurB) May 1, 2019

Interestingly, Tether rather than Dai is proving the demand and value of an unregulated stablecoin.



*That* is why it is maintaining its peg. — Phil Bonello (@PhilJBonello) May 1, 2019

If that happened that would be a scenario where governments allow Tether to gain legitimate banking powers. The power to print money for private profits. — Willy Woo (@woonomic) May 1, 2019

... as well as a (potentially unrecoverable) Schrodinger’s Cat-style chunk of deposits... a lack of alternatives... and a set of a handful artificial frictions. — Murad Mahmudov 🚀 (@MustStopMurad) April 30, 2019

7) My next favorite: "The deal was negotiated on an arm's length basis with 'independent counsel.'" Big time red flag -WHY- because the same guy #GiancarloDevasini signed for both Bitfinex/Tether! Good job catching that @Bitfinexed - That's coming out in the next brief. pic.twitter.com/X1uafRx36M — David Silver (SILVER MILLER) (@dcsilver) April 30, 2019

Tether premium is decreasing even after the confirmation that Tether only holds 74% of cash on hand. From about 1.3% yesterday, it is now just 0.7%. Bitfinex premium decreased a bit too (but is still large) from 6.3% yesterday to 5.8% now. pic.twitter.com/OXUx9nx0mV — Larry Cermak (@lawmaster) May 1, 2019

The address distribution matters. If exchanges and large usdt brokers collectively own 25% of supply, if every usdt gets redeemed they'd become bitfinex shareholders solely. There's likely a mutual socialization agreement there.



Same is not true for claims on fiat at bfx. https://t.co/8Sp8ASvssu — Su Zhu (@zhusu) May 1, 2019

Fear inducing headline:



“Only 74% of #Tether is backed by cash and equivalents😱”



The truth:



Your bank would collapse if everyone tried to withdraw, they have nowhere near 74% liquidity.



Calm down people. Buy Bitcoin. — Bitcoin Birch 👨‍💻 (@BitcoinBirch) April 30, 2019

Indeed. However, in its present form Fractional Reserve Banking works well as banks can rely on a lender of last resort. Furthermore, for banks, ALM (asset liability management) is crucial, and banks devote extensive resources in hedging asset-liability mismatches. — Alex Krüger (@krugermacro) April 30, 2019

Price is there because of traders' activities. It doesn't have to make sense. — Alex Krüger (@krugermacro) April 30, 2019

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