Home collateral Celsius, Tether and the “known known”

Celsius, Tether and the “known known”


In the 2001 film “The Majestic”, Jim Carrey plays a screenwriter who is brought to Washington to face a congressional committee because he suspects he is a Communist sympathizer. After Carrey’s character earns little sympathy from the panel – despite maintaining his innocence – his lawyer begs him, “Just give them a name” (from another alleged Communist). He ultimately appoints the person who led the committee to him in the first place.

Alex Mashinsky, CEO of crypto lender Celsius, told the Financial Time Tuesday that Tether, the world’s largest stablecoin issuer, occasionally issued its USDT units in exchange for well-known cryptocurrencies rather than the dollars it promises in its terms.

Supporting a dollar to a token is essential to the concept of stablecoins. But the New York Attorney General and the Commodity Futures Trading Commission (CFTC) accused Tether of not having sufficient reserves at all times to back up their stablecoins. Enough that Tether and its affiliate exchange Bitfinex agreed to pay more than $ 60 million in penalties this year in these combined cases.

Mashinsky’s disclosure should be a bomb. But, days after Tether agreed to pay $ 41 million to settle the CFTC’s allegations, it is little more than a logical conclusion. Tether, for its part, neither admitted nor denied the allegations, saying it fixed issues with the CFTC investigation when its terms of service updated in February 2019.

“This survey took place at a very different time in our ecosystem and focused on the same types of challenges many in our industry were facing back then,” Tether said Friday, according to The Wall Street Journal. “Like many companies around the world, Tether has agreed to address this issue in order to move forward and focus on the future.”

Mashinsky said digital currency loans for stablecoins through Tether are typically at least 30% oversized, depending on market volatility. “If Bitcoin goes down, they give us a margin call [and then] we need to give them more Bitcoin, ”he told the Financial Times.

New USDTs are issued for these loans and then destroyed when the loan is closed “so that it does not permanently increase the USDT in circulation,” Mashinsky added.

“If you give them enough collateral, liquid collateral, Bitcoin, Ethereum, etc., they will pit Tether against each other,” Mashinsky told the Financial Times.

In contrast, Tether’s terms of service, last updated in May 2020, explicitly state that digital currencies are not accepted for payments. “Only money will be accepted at the time of issue,” the terms say.

Tether declined to detail to the Financial Times how its USDT loans work or say whether it is issuing new tokens through those loans.

“We have a small, select group of clients who borrow USDT in exchange for collateral,” Tether told the publication. “These loans are secured by collateral held by Tether representing well over 100% of the loan proceeds and earn monthly interest.

“Our loan program was first disclosed long ago in the allocation of our reserves and is no secret,” the issuer added. “This loan is made in a narrow, efficient, secure and profitable manner.”

New York spotlight on Celsius

So how in this scenario does Mashinsky relate to the character of Jim Carrey?

Celsius, it turns out, is one of three crypto lending platforms New York Attorney General Letitia James asked monday to provide more details on their operations. Neither James nor his office named the companies in a press release – and the names were redacted in versions of letters posted on the state office’s website. However, according to Bloomberg, the letter requesting more information contained “Celsius letter” in the title. The company confirmed to the press service that it had received the letter.

“Cryptocurrency platforms have to follow the law, like everyone else, which is why we are now ordering two crypto companies to shut down and forcing three more to answer questions immediately,” James said in Monday’s statement. .

By order of the Attorney General, Celsius and two other platforms must submit, before November 1st, detailed explanations of their business models, including the nature of any loan and deposit product.

James did not name the two platforms the state sent cease and desist orders, but Nexo Financial confirmed to Bloomberg that it was a beneficiary. James’ office said in its letter to Nexo and another company that it had evidence that the platforms violated Martin Law by selling security products without being registered with the state as a broker. The state has given businesses 10 days to comply.

Nexo co-founder Antoni Trenchev told Bloomberg that the company does not offer its loan or exchange products in New York “so it makes little sense to receive a C&D for something we do not offer not in New York anyway “.

The shares make New York the sixth state this year – after New Jersey, Texas, Alabama, Kentucky and Vermont – to order certain crypto firms to stop offering what they see as commodities without license. BlockFi’s interest-bearing accounts have been a common target. But New Jersey and Texas last month sought to restrict Celsius.

Indeed, Mashinsky’s comments to the Financial Times may be a primer for a response to James: “Why don’t you ask for Tether? (Celsius, incidentally, counts Tether as an equity investor.)

Already on the radar

The catch is, James has already settled down with Tether. The exchange agreed in February to pay the state $ 18.5 million to respond to allegations that it was hiding the loss of mixed funds from clients and businesses and lying about their reserves.

In this sense – to borrow an expression attributed to the late Secretary of Defense Donald Rumsfeld regarding weapons of mass destruction during the Iraq war – Tether’s place in the regulatory reticle is a “known known”.

Tether has also been on the federal radar for a long time. He was reportedly at the center of a July meeting of the President’s Financial Markets Task Force – at which Treasury Secretary Janet Yellen urged regulators to “act quickly to ensure that a US regulatory framework appropriate is in place “.

The Ministry of Justice, Bloomberg reported this month, is investigating whether the executives behind Tether committed bank fraud in the early days of the currency by hiding from partner banks that the transactions were linked to the cryptocurrency.

Among the members of the president’s task force is acting CFTC president Rostin Behnam, who said on Friday that the regulator’s $ 41.5 million settlement with Tether “highlights expectations of honesty and transparency in the rapidly growing and developing digital asset market ”.

Between mid-2016 and February 25, 2019, Tether held equivalent dollar reserves in its accounts “for only 27.6% of days in a 26 month sample period” and “misrepresented” to clients and to the market, the CFTC said. Friday.

About half of the “stablecoin universe” goes through Tether, the Financial Times reported.

Treasury officials are preparing a report on stablecoins, and the Yellen-led Financial Stability Supervisory Board may launch a formal review to determine whether tokens pose systemic risk.

However, a crypto lobby group, the Digital Chamber of Commerce, told US regulators in a letter seen by Reuters Monday that dollar-indexed stablecoins should be treated like other retail-oriented digital payment tools, not as investment products.

Stable coins are “not on a significant scale to merit a separate, mandatory regulatory regime” simply on the idea that “new technology is being deployed,” the chamber said.

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