Tether: Reserve Claims and the Assets Behind the Tokens

Tether agreed to a $41 million civil penalty to settle the CFTC’s allegations that it misled customers about the dollars behind its stablecoin. The Commodity Futures Trading Commission’s October 15, 2021 order covered June 1, 2016 through February 25, 2019. For someone working in treasury, accounting or reserve reviews, the case turns on a familiar comparison: what the company told customers, what the bank held, and what the business counted as backing.

Tether’s USDt tokens gave traders a way to move value between cryptocurrency platforms and buy digital assets such as bitcoin. Tether represented that a token could be redeemed for a U.S. dollar. The reserve promise therefore went directly to what customers believed they were holding while their money moved through the crypto market.

What Tether Promised Token Holders

Tether promoted backing by traditional currency held in its reserves, with each token matched by the corresponding currency. The CFTC order quotes the company’s website and whitepaper, which also promised regular professional audits. A June 20, 2018 announcement on Tether’s transparency page put the backing claim this way:

The promise covered the currency, the amount and backing at all times. In November 2018, Tether also represented that the dollars were safely deposited in its bank accounts. We take a claim that absolute seriously: it invites a comparison with the reserve records on ordinary days, as well as the day chosen for a review.

That comparison belongs alongside the broader problem of crypto custody fraud. A treasury employee may understand the asset behind the balance, while a customer sees only the assurance that the balance is backed.

What the Reserve Records Showed

The CFTC alleged that Tether’s reserve holdings differed from its public description in both composition and location. For September 2, 2016 through November 1, 2018, the agency alleged that fiat currency in accounts in Tether’s name or held in trust for Tether fully backed the circulating tokens only 27.6% of the time.

The agency alleged that some reserve funds sat in other accounts, including Bitfinex accounts where they were mixed with the exchange’s operating and customer funds. Other counted reserves included receivables and non-fiat assets. From at least 2018 through the end of the covered period, the CFTC alleged, Tether failed to disclose unsecured receivables, commercial paper, funds held by third parties and other non-fiat assets in the reserve pool.

The accounting detail matters. The agency alleged that Tether counted anticipated receivables and anticipated wire transfers as reserve assets at various times. For an insider, the useful distinction is whether an entry represents money already received, money expected, or a claim against someone else. A reserve total can conceal that distinction unless the person reviewing it knows what the entries mean.

Account ownership mattered too. The agency alleged that Tether relied on an unlicensed payment processor registered in Panama to receive customer money. It alleged that Tether had no written agreements governing the processor’s handling of those accounts and lacked access to all periodic statements. Its account describes Tether maintaining an internal ledger of the money it believed the processor held.

The order records a change to Tether’s reserve disclosures on February 25, 2019, the final day of the covered period. The revised definition included traditional currency and cash equivalents and allowed other assets and receivables from loans to third parties, including affiliates. For an insider comparing the promise with the ledger, that wording matters: the public definition of backing had broadened.

Bank Money Out, a Ledger Entry Back

The CFTC alleged that in November 2018 Tether transferred $625 million from its reserve bank accounts to provide Bitfinex with liquidity unrelated to USDt. The agency alleged that Bitfinex directed the payment processor to record an offsetting transfer to Tether on its ledger, while the funds at the processor were at least restricted and more likely wholly unavailable.

The order describes Tether and Bitfinex sharing ownership, management, employees and operational resources. The agency’s account puts a bank transfer between the businesses beside a bookkeeping entry. For a reserve accountant, that is the question worth pursuing: what could Tether actually access after the entry changed? The order also records Tether’s representation that iFinex, the operator of the Bitfinex platform, repaid the resulting loan in full in January 2021. That later repayment sits alongside the earlier question of what backed the tokens when the public statements were made.

Affiliate transfers also feature in FTX’s customer-asset case, where the CFTC’s civil consent order described supposedly safeguarded customer assets diverted and mixed with funds used for Alameda. Tether’s reserve case focused on what the issuer told the market about token backing. The common recognition point is the gap between the public promise and the affiliate’s access to the money.

A Reserve Review on a Date Tether Chose

The CFTC alleged that no audit of Tether’s reserves occurred during or before the covered period, despite the promise of regular professional audits. The order describes an accounting firm’s review of fiat currency held in Tether’s name on September 15, 2017. The agency alleged that Tether selected the date and its principals knew it in advance.

The agency alleged that on that date Bitfinex transferred $382,064,782 into Tether’s newly opened bank account. The review compared the reported reserves with currency held on that single date. We think the timing described in the agency’s allegations deserves at least as much attention as the balance.

The order also describes a separate review in 2018 comparing holdings in two bank accounts with tokens in circulation as of June 1. Tether later characterized that work publicly as an inspection based on a random date. The agency’s allegations addressed both the audit representations and the failure to disclose the prearranged timing of the earlier review.

For a reserve-confirmation reviewer, the engagement’s scope, selected date and transfers surrounding that date are part of the same story. They explain what the review could show and whether the public description promised something broader. A snapshot has a date. Tether’s public assurance said always.

The Reserve Spreadsheet Behind the Transparency Page

The CFTC alleged that Tether relied on manual reserve accounting that did not consistently reflect balances in real time. The agency described an internal system that, at least until 2018, primarily consisted of a reserve spreadsheet requiring manual updates. Its allegations also covered bank balances that had to be entered manually into the token database for much of the period.

The agency alleged that the executive team was ultimately responsible for the spreadsheet and knew its limitations. The order quotes an internal message from the chief strategy officer to the finance chief and other employees asking how often the bank balance was updated. That is a concrete connection between the accounting process and management’s knowledge of what the transparency page could support.

A person updating those balances could recognize a difference between the latest bank statement and the number being published. Someone responsible for token issuance could see a different part of the same reconciliation. The case gives those ordinary jobs a clear significance: the public promise depended on both sides being counted at the same time.

What the CFTC Settlement Resolved

The CFTC brought an administrative action against the Tether business through its holding and operating companies in the British Virgin Islands and Hong Kong. The agency treated the token as a commodity, which is why CFTC cryptocurrency fraud jurisdiction reached Tether’s reserve claims.

Tether accepted the civil penalty and an order to stop further violations. The CFTC also recorded Tether’s representations that it had begun separating operating funds from reserves in May 2019 and introduced more automated balance tracking that year.

We see a striking comparison between the agreed penalty and the much larger reserve transfer the agency alleged. The promise concerned the money behind customers’ tokens, yet the agency described that money being used to meet the exchange’s need for cash.

What Evidence Is Required to Prove Fraud?

We work through that question with you, using what you saw in treasury, accounting or reserve reviews to develop the case. Tether’s case shows why dated public claims, bank balances, affiliate transfers and management’s knowledge belong in the same conversation. Someone who classified a reserve asset or approved a transfer may know who controlled the money and what the published total actually represented.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The separate CFTC whistleblower program can pay awards of 10% to 30% of monetary sanctions collected. If your work exposed a comparable gap between a reserve claim and the assets behind it, our whistleblower experts can build your strongest CFTC whistleblower case with you and guide your CFTC fraud report.

You Know What Went Into the Reserve Total

If you saw expected transfers counted as reserves, affiliate money moves behind a reserve claim, or a review presented as more than it tested, talk to our whistleblower experts. We develop the case with you, bring in cryptocurrency fraud whistleblower lawyers who understand reserve and custody evidence, and stay beside you through the case.