In an affidavit released Tuesday, Stuart Hoegner, general counsel for Tether, revealed that only 74% of its stablecoins were backed by its cash reserves, claiming the company knowingly did not disclose this information to its customers.
Hoegner wrote that Tether currently has cash or cash equivalent of around $2.1 billion, representing around 74% of its current outstanding stablecoins. The remaining 26% is held by Bitfinex, the crypto exchange that was charged by the New York Attorney General's office for draining $700 million from Tether to cover its alleged $850 million loss.
Hoegner wrote that Tether intentionally decided not to disclose to its customers that tethers are not 100% fiat backed. Although he said the practice was nothing new, in the affidavit, he drew on the example that traditional commercial banks operate under a similar “fractional reserve” system where only a small portion of customers’ deposits are backed by cash reserves.
However, as of Feb. 19, Tether's company website still said that its stablecoins are 100% backed “by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD.” Interestingly, around Feb. 27, Tether quietly added some language to this statement, an apparent attempt to obscure the definition of "100% backed".
The additions hedge on the initial claim slightly, stating that “every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”).”
In a Feb. 21 meeting with NYAG, Tether and Bifinex’s lawyers, David Miller and Jason Weinstein stated that Tether's reserves had “previously been encumbered and that the Companies intend to enter into an agreement in the future to provide the Bitfinex platform with a line of credit from Tether’s reserves.”
NYAG immediately followed up with Miller and Weinstein for more details, requesting all documents related to the issuance and redemption of tether and transaction records between Tether and Bitfinex. It specifically asked for records dated between Aug.-Oct. 2018, “regarding $400 million in tethers redemption via Bitfinex.”
However, the two companies apparently didn't provide NYAG with satisfactory answers, according to a March 22 email from NYAG to Miller and Weinstein in which NYAG said, "the Companies have failed to produce a single such contract or other documentation to the OAG,” noting they tried instead to offer “verbal responses.”
In Weinstein's response, he argued that NYAG’s requests were overly burdensome, complaining that they had been "voluminous and have had unreasonably tight deadlines." He also mentioned that the companies were simultaneously dealing with “a substantial number of requests” from the Department of Justice (DOJ), the Commodity Futures Trading Commission (CFTC). However, the disclosed correspondences do not specify why the DOJ and the CFTC made these requests.
It was not clear what kind of information Weinstein eventually provided to NYAG, but it seems from the April 24 lawsuit NYAG presented that the office never received the documents it needs to lift the cloud around Tether's reserves.