Tether’s official website has a surprise hidden in its “legal” section:

“Once you have Tethers, you can trade them, keep them, or use them to pay persons that will accept your Tethers. However, Tethers are not money and are not monetary instruments. They are also not stored value or currency. There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money. There is no guarantee against losses when you buy, trade, sell, or redeem Tethers.”

Mixed messages

Naturally, you have to dig a bit to find that statement. Simply going to the website’s homepage brings up an entirely different message. There, tether tokens are touted as “Money built for the internet.” Potential users are told that these tokens are a “stable currency,” “100% backed,” “transparent” and “secure.”

One might be forgiven for wondering if the marketing department and legal team work for two entirely different companies. The message could hardly be more conflicted.

Sister companies

It has long been known that Bitfinex and Tether are associated with each other. For instance, when Bitfinex’s banking at Wells Fargo was cut off, Tether joined Bitfinex’s lawsuit against the bank. A Bitfinex employee posted to one of several reddit threads today, under the handle “bfx_drew,” saying:

“I'd like to correct two common misapprehensions: Bitfinex does not own Tether. It is a sister company with a minority percentage of overlap in shareholders. No banking? Institutional customers move 6-7 figures of fiat in and out daily. And also to introduce a new piece of information: Tether is undergoing a balance sheet audit.”

One user made a skeptical comment about the audit, asking if the Tether audit would remain in “coming soon” status indefinitely, like Bitfinex’s own audit. In reply, bfx_drew offered a bet of 5 BTC that Tether’s audit will in fact be completed this year.

Lack of transparency

Tether assures users that:

“Every tether is always backed 1-to-1, by traditional currency held in our reserves. Our reserve holdings are published daily and subject to frequent professional audits.”

Despite this, the site gives no information about its auditor and does not make any audit reports available. Also, one wonders why bfx_drew boasts that Tether is currently undergoing an audit when, in the company’s own words, they are regularly audited. If in fact such audits are routine, why call special attention to this one?

How it all works

Supposedly every tether token in existence - at present, over 300 million of them - is backed by US dollars in Tether’s bank account. When a Tether business partner deposits US dollars in Tether’s bank account, Tether creates a matching amount of tokens and transfers them to that partner.

However, without published audit results, there is no way to know whether these tokens are fully backed. Tether insists that they are not operating a fractional reserve system, but they either cannot or will not prove it.

Even worse, it may not matter, since Tether is adamant that their tokens aren’t actually redeemable as money in any event.

Funny money?

Deeper consideration of the matter brings to mind a rather troubling question. If Tether is not legally obligated to redeem their tokens for money - as they insist - why would anybody in their right mind deposit millions of dollars in Tether’s bank account? Why would any of Tether’s business partners give the company US dollars in exchange for a token that Tether plainly insists is worthless?

Is it possible that there are no deposits, and Tether simply creates more tokens and transfers them to itself, or to sister company Bitfinex? Without audited financials, nobody knows.

Meet “Spoofy”

Not long ago, Cointelegraph published an article on a mysterious trader nicknamed “Spoofy” who seemed to be manipulating the price of Bitcoin, primarily on Bitfinex. He allegedly does so by “spoofing”--placing large buy and sell orders with no intention of actually allowing them to be executed. Spoofy is also believed to actively engage in “wash trades,” where he sells into his own buy orders (or vice versa) to generate fake trading volume.

The same blogger who initially posted the expose on Spoofy, BitCrypto’ed, recently made another intriguing post. He suggests that Spoofy and/or Bitfinex themselves could be using tether tokens as collateral to trade Bitcoin on margin.

BitCrypto’ed suggests that Tether could create unbacked tokens and transfer them to Bitfinex. There they could be used to back margin positions on Bitcoin. Once the price of Bitcoin goes up, the margin positions could be closed and the unbacked tokens destroyed.

Conspiracy theory?

If this all sounds too much like a conspiracy theory, perhaps it is. At present there is no evidence to definitively prove any of the allegations. However, plenty of questions do come to mind. Perhaps the most curious one is this: under the present circumstances, who in their right mind would deposit millions of dollars into Tether’s bank account?

When Tether and Bitfinex had their banking ties cut, there were around 66,000,000 tether tokens in existence. Today, there are 319,501,508 - nearly five times as many. It seems totally irrational that deep-pocketed entities would deposit nearly $250,000,000 with a company that currently has limited banking connections.

In short, even if Tether did decide to redeem tokens that the company insists it is not obligated to redeem, how could they? Without banking partners, there would be no way to transfer the funds.

Nonetheless, Bfx_drew insists that certain parties transfer “six or seven figures” in and out of Tether every day.

Indeed, Bitfinex and Tether both seem to have some relationship with certain Taiwanese banks, although only for Taiwanese customers. Are we to assume that Taiwanese nationals are the sole driving force behind the creation of hundreds of millions of tether tokens over the last few months?

The strangest thing of all

More bizarre by far is that people still trade in tether tokens every day. So far, the tokens have maintained their $1 peg quite well. One wonders how long it will be until somebody tries to redeem a large number of tokens, and what will happen if Tether simply says “no.”