Can Law Enforcement Stop Tether?

The Unknowns

There’s plenty the public can glean from information Tether provides openly: we know how many Tethers are on the blockchain, how many have been minted, frozen, or burned, who they’ve worked with in the past, and the locations in which the Tether umbrella of corporations are domiciled.

But there’s also a lot that can’t be determined due to what we don’t know.

For instance, to this day no one knows how the mechanism for printing, burning, or freezing Tethers works:

There’s also the little matter of who Tether utilizes as banking partners. I say banking partners, plural, because while Tether admitted to banking with the Bahamas-based DelTec Bank in 2018, a complete lack of inflow of cash to the Bahaman banking system over the past two years leads one to believe that DelTec couldn’t possibly be Tether’s only banking partner (it’s either that, or Tether is far less collateralized than previously believed).

Lastly, there’s the matter of executive leadership. We know that there are two individuals listed on the Tether website as executives: JL Van der Velde (CEO) and Giancarlo Devasini (CFO). We also know, thanks to his vocal criticisms of skeptics, that Paolo Ardoino is the CTO and mouthpiece for Bitfinex and Tether. But we hardly know anything about the CEO or CFO, as they purposely stay out of the limelight. Rumors as to their whereabouts range from: Hong Kong, Milan, a yacht, a mansion on the French Riviera, Taiwan, Greece, and the list goes one. Some of these places are open to US extradition, others not so much.

How Law Enforcement Can Attack Tether

The first, and most obvious, way in which Tether could be attacked is that the US government could seize their assets (including keys for managing Tethers on the blockchains) and freeze all Tethers in existence. This sounds extreme — and would be — but also isn’t impossible.

We may not know how Tethers are created or frozen, but we know that it isn’t through some automated protocol. ie; if dollars, euros, or yen are deposited into a bank account and acknowledged as received, an algorithm doesn’t see that and print the necessary Tethers. Instead, it seems almost certain that there’s a few people with keys who can print when the necessary amount of signatures is met. This is dangerous because it means that law enforcement simply needs to arrest the right people, in the right places, in a coordinated fashion, and Tether is theirs to control. It’s also dangerous for other reasons, but we’ll delve into that in another post.

Secondly, there’s the use of force to seize Tether’s real-world assets, which has already proven to be an effective way to cause general panic in the marketplace.

Finally, there’s the concept that LE can attack Tether and Finex from within (the honeypot hypothesis). This idea goes that by inserting real compliance officers (Peter Warrack, Leonardo Real), getting rid of Phil Potter, allowing LE to get as close as they want to Finex and Tether, and granting Finex/Tether the ability to run as long as possible, actually benefits LE, who can readily freeze assets by simply making the request and get a beautiful map of where criminals are attempting to send money.

All of these on their own are very unlikely, but none are impossible.

How Tether Can Elude Law Enforcement

Well, to be quite honest, they’ve done a pretty good job thus far.

To start, the public knows zilch about the inner-workings of Tether and the thought that LE would have significantly more knowledge is hopeful, at best.*

*a reader brought it to my attention that law enforcement clearly has private chat logs between Finex executives and Crypto Capital Corp executives — it could very well be law enforcement have far more information than I’m giving them credit for

Additionally, by being opaque about how Tethers come to be, they do themselves a favor. No one can be sure how many keys are needed to freeze assets and no one knows who controls those keys. Same goes for the opaque nature of the Finex/Tether executive leadership.

We should also discuss their banking. As was displayed in the lawsuit filed by Bitfinex against Crypto Capital Corp, Bitfinex has cash located in banks throughout the world. Some of these assets may be provably theirs — as in, located in a bank account that was in the name of a payment processor, but Tether has receipts to show that that money (as in real cash money, not Tethers) originally came from them. In all likelihood, this means Tether’s umbrella of corporations, and perhaps even some companies controlled by Tether that we don’t know about, have money placed in dozens or hundreds of banks throughout the world.

Freezing that many accounts, in that many different nations, simultaneously, is difficult, to put it mildly.

There’s the issue of domain seizure, which would be exceedingly difficult for LE to accomplish against Tether, which is a dot to domain. Bitfinex also holds the Bitfinex domain at numerous country codes, so while it may be easy to seize Bitfinex dot com, shutting down the exchange itself and the Tether wesbite would require a lot more work.

It’s also fair to say that Finex/Tether like to put up fights in court. They appeal appeals of appeals, they argue every sentence, and they take their time. All of this, while a net gain for a fair justice system, undeniably benefits Tether. And in what some would call an astounding reversal of fortune if successful, Finex and Tether are attempting to get back the money Crypto Capital Corp was handed, despite the fact that industry insiders recognize that CCC had numerous red flags and shouldn’t have been used:

The Magic of DeFi

The amazing part is that even though it’s clear Finex/Tether broke the trust of their customers by taking out a loan from themselves without stating so publicly, have never received a full GAAP audit, worked with a scam payment processor (without a contract), and have been hacked numerous times, the community has thrown all of its support behind the two companies.

When the Crypto Capital Corp news finally broke and Tether admitted it wasn’t fully backed, instead of the revulsion you’d expect, people from Zhao Dong to Arrington decided it best to pour money into Finex/Tether and help create the LEO token.

This seems to have gone better for some than others:

Needless to say, when the token was announced, the woes of Tether dissolved with it. The peg has been solid ever since, and therein lies the magic of DeFi.

At the end of the day, it doesn’t matter if every Tether ever minted was frozen and every bank account with Tether funds was seized: with the advent of synthetic Tether, Tether derivatives (and derivatives of those derivatives), and decentralized exchanges, Tether could, technically, stay valued at about a dollar indefinitely. If the few remaining people using Tether decided it was still worth a dollar, there’s absolutely nothing anyone could do about it.

What Happens if LE Does the Unthinkable?

Without getting into the broader macroeconomic consequences of such an action, here’s what I honestly believe would occur if there was a full freeze of all Tethers (need to reiterate, a very unlikely event):

The government wouldn’t seize ~$15 billion without believing that some of the individuals holding the asset weren’t doing so with malintent. While it may be sickening to imagine, I do think they’d simply request KYC/AML information from anyone with a Tether account, followed by a long list of how those Tethers were traded and for what purpose. Unfortunately, most holders of Tether don’t have a Tether account and I’m not sure how centralized exchanges would help those customers.

It wouldn’t surprise me to see a similar situation to MtGox play out, where a creditor is assigned to the case and figures out some way to get a percentage of what’s owed back to the customers. We’d probably see a lot of scalpers hope to take advantage of this “time arbitrage” opportunity by buying out account holders who would know it’d be years and years before they’d see a penny.

It’s a fascinating journey to watch a massive, centralized dollar derivative continue its domination of an industry, despite consistently decentralizing all of its risk.

Stay skeptical, friends.

Fraud. Fraud everywhere.