Consumer Watchdog: Tether Has Become a Crypto of Choice for Cartels, Terrorists, and Human Traffickers

Courtesy of Consumers' Research

The following article is sponsored by Consumers’ Research and authored by Will Hild, its executive director.

Since its infancy a decade ago digital currency has gained purchase in the marketplace both as an asset class and an alternate mode of exchange. Some believe that the advancement of dollar denominated stablecoins may well strengthen the U.S. dollar’s primacy as the global choice in reserve currency.

But as we build toward our digital future, it’s important to remember that, as with all financial systems, there will be bad actors who attempt to exploit it. True crypto enthusiasts can agree that identifying the bad actors is necessary if digital currencies are to thrive. More debacles, like the fraud-induced collapse of Sam Bankman-Fried’s FTX, could further erode market confidence and delay or derail the development of the crypto market. That’s why Consumers’ Research is calling out Tether as a threat to the future of money.

Tether, whose parent company iFinex is registered in Hong Kong, is a major stablecoin operator. Stablecoins are a promising crypto innovation which features the fast and low-cost transactions benefit of digital currencies without the volatility associated with cryptocurrencies such as bitcoin. Stablecoins maintain a stable value because they’re backed by a reserve asset such as the U.S. dollar or commodities such as gold. In Tether’s case, it asserts that its USD₮ stablecoin offering is backed by a 1-for-1 ratio with the U.S. dollar. But Tether’s failure to submit USD₮ to a rigorous independent financial audit stands out as an exception among its competitors.

There’s ample cause for concern.

In 2021, the U.S. Commodity Futures Trading Commission ordered Tether to pay a $41 million penalty for misrepresenting to customers that, between June 1, 2016 and February 25, 2019, its reserve of U.S. dollars was large enough to redeem every USD₮ in circulation with the “equivalent amount of corresponding fiat currency.” Even after that, Tether still refused to submit to a full audit.

In December 2023, S&P issued risk assessments of eight of the top stablecoins. Tether scored an alarming four, with five being the lowest possible rating and one the highest. “Tether’s lowly score reflects a lack of information about who or what holds its reserve assets,” according to a Reuters report, which continued that “a large chunk of those are U.S. government bonds and cash-like equivalents, but there is also ‘significant exposure’ to riskier assets.”

Tether has publicly stated that it had a total staff of just 60 people, with plans to potentially scale to 90 employees. Comparably sized financial institutions (i.e., overseeing $80 billion in assets; earning net revenue of $1.6 billion/quarter; or issuing assets held by millions of consumers) in the United States generally employ 10,000 people, of whom about 100 (one percent on average) would be full-time compliance officers. Even if all 60 Tether employees were compliance staff, it would be a red flag for significant “safety and soundness” issues that elevate the risk of mismanagement, non-compliance, or poor market conduct.

Much in the same way that Tether refuses to come clean with an audit of its assets, the company appears equally unwilling to clean up the issue surrounding its unsavory use by nefarious actors. Chinese crime syndicates reportedly favor USD₮ to launder billions of dollars in profits derived from illegal gambling, drug dealing, and investment scams. And USD₮ is widely used by Chinese actors to finance fentanyl traffic, now the top cause of death among Americans aged 18 to 45. Tether also appears to be the method of choice for payments destined for Hamas’s Al-Qassam Brigades, Palestinian Islamic Jihad, and Hezbollah. That doesn’t mean that Tether directly encourages people using its stablecoin for drug trafficking and terrorism, but a good institutional operator should be concerned about its cryptocurrency being used for illicit purposes. Obviously, Tether has other priorities.

Last year, Sam Bankman-Fried was convicted of defrauding customers of $8 billion while serving as CEO of the centralized cryptocurrency exchange FTX. It doesn’t look alarmist now to say the signs were all over the place with FTX. How were they naming stadiums? How were they buying up celebrities? In retrospect it feels like it was right in front of our faces; everything was a fraud. Savvy consumers should pay close attention to signals in the marketplace.

Given its practices, Tether presents a continuing financial risk to consumers, which is why Consumers’ Research is issuing a Consumer Warning on Tether. At the same time, we remain enthusiastic about America’s digital currency future, including stablecoins. Working to clear the crypto marketplace of bad actors will help ensure its survival and help fulfill its economic promise to American consumers.

Consumers’ Research is the nation’s oldest consumer protection organization. 


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