Things Got Weird for Stablecoin Tether

Yesterday evening, the Office of the Attorney General of New York State announced an absolutely bananas lawsuit against Bitfinex and Tether. Bitfinex is a cryptocurrency exchange, and Tether, “which is owned by the same small group of insiders that own and operate Bitfinex,” is the issuer of a cryptocurrency also called Tether (or USDT). That cryptocurrency is a “stablecoin,” meaning that one Tether is supposed to be worth exactly one U.S. dollar, a ratio that is maintained, Tether claims, by keeping one dollar in a bank account for each Tether that it issues. People have for a long time had doubts about those claims, because Tether never got around to releasing audited financial statements proving that it had the dollars.

The New York attorney general’s filing refutes the extreme version of those doubts — Tether mostly had the dollars — but it is nonetheless a wild ride that alleges that Tether’s backing might not be as good as it claims. Here are the attorney general’s memorandum of law and supporting statement, which I read last night with growing amazement.1 But when I got to these two paragraphs I felt dizzy and had to lie down. This is heady stuff: