D AYS AFTER allegations of misuse of customer money against Tether rocked the cryptocurrency world, the shock wave has temporarily subsided. The four-year-old currency, which fell to 97 cents last week, has returned to parity with the American dollar. And after a 10% fall, to $4,953, the price of a single Bitcoin, its best-known peer, has steadied at around $5,400. But cryptocurrency-watchers remain wary. Beneath the surface, trouble may be brewing.

Doubts had long swirled about the bona fides of Tether, which has more than $2.8bn-worth in circulation, and Bitfinex, the exchange it is traded on. On April 25th New York’s attorney-general, Letitia James, accused both of a cover-up intended to hide a loss of $850m in client and corporate funds. That hit the value of other cryptocurrencies because of Tether’s unique status. Cryptocurrencies stem from libertarian attempts to create a currency resistant to central control. Many exchanges thus struggle to get hold of dollars, because banks, which must comply with fraud and money-laundering rules, do not want their custom. For them Tether, which is pegged one-to-one to the greenback, acts as a dollar substitute. Traders use it for transfers between one cryptocurrency and another.

For years Tether said that every coin it issues is backed by a real dollar in a real bank account. Yet it provided no audit of these holdings. Ms James’s allegations suggest that at least some of them exist, but can be misused without customers knowing. Because Bitfinex was having trouble getting accounts at banks, by 2018 it had entrusted over $1bn to a Panamanian firm that would serve as an intermediary to pay traders—“without any written contract or assurance”, the attorney-general says. When it was unable to access $850m held by the Panamanian entity, Bitfinex is alleged to have sought to plug the hole by tapping $900m of Tether’s reserves (Tether and Bitfinex share the same managers and owners). Ms James reckons the cash was then used to meet clients’ withdrawal demands. Bitfinex has issued a statement saying that the attorney-general’s court filings “were written in bad faith and are riddled with false assertions”.

Tether’s bounceback since the accusations became public is because of its centrality to the cryptocurrency ecosystem. It is not the only “stablecoin”, as cryptocurrencies designed to hold a steady price are called. But it is vastly dominant among them, representing 96% of daily trading volumes in that category. Some 80% of Bitcoin trades ostensibly involving dollars are in fact executed using Tether, which acts as an intermediate staging post. “It supplies all the liquidity in the Bitcoin trading markets,” says David Gerard, a cryptocurrency sceptic. “So everyone has a vested interest in keeping it going.”

But other signs suggest something is amiss. Bitcoin currently trades at a price on Bitfinex ($5,638 a coin on May 2nd) that is roughly 6% higher than on other exchanges. This may be because investors trading on Bitfinex are anxiously converting their Tethers into Bitcoin—thereby buoying Bitcoin’s price on that exchange—in order to escape the platform. So far Tether’s market capitalisation has not fallen significantly since Ms James’s announcement, but rival stablecoins have recorded some inflows (over $40m each for Paxos Standard and USD Coin, two of the largest). Both remain minnows compared with Tether: USD Coin has a market capitalisation of $297m. But Eric Turner of Messari, a data-provider that tracks cryptocurrencies, expects traders to drift away from Tether as more exchanges start to list alternatives, which tend to be more transparent.

Murky exchanges could suffer a harder fate. Unnerved by a lengthening string of scandals, regulators are starting to clamp down. The Securities and Exchange Commission, an American watchdog, brought nine enforcement actions last year alone. “Bitcoin itself is a software program. It cannot be shut down,” says Bitfinex’ed, a vocal online Tether critic who declines to disclose his real name. “But exchanges can.”