Tether has been hit with a $41 million penalty from the Commodity Futures Trading Commission over misleading claim that its stablecoin was fully backed by US dollars. Separately, the CFTC has fined sister company Bitfinex $1.5 million for illegal transactions.
Since its launch back in 2014, Tether has claimed that its token is 100% backed by fiat currency.
However, the CFTC has found that from at least 1 June 2016 to 25 February 25 2019, Tether reserves were not “fully-backed” the majority of the time. In fact, for a 26-month sample period between 2016 and 2018, Tether only held sufficient fiat reserves in its accounts to back USDT tether tokens in circulation for just over a quarter of the days.
In addition, the CFT found that Tether falsely represented that it would undergo routine, professional audits to demonstrate that it maintained “100% reserves at all times” even though the reserves were not audited.
The order also finds that, instead of holding all USDT token reserves in US dollars as represented, Tether relied upon unregulated entities and third-parties to hold funds comprising the reserves; comingled reserve funds with Bitfinex’s operational and customer funds; and held reserves in non-fiat financial products.
The order further finds that Tether and Bitfinex’s combined assets included funds held by third-parties, including at least 29 arrangements that were not documented through any agreement or contract, and that Tether transferred reserve funds to Bitfinex, including when the exchange needed help responding to a “liquidity crisis”.
In a statement responding to the CFTC order, Tether stresses that ""there is no finding that tether tokens were not fully backed at all times—simply that the reserves were not all in cash and all in a bank account titled in Tether’s name, at all times," and that there are no issues relating to the firm's current operations.
As for Bitfinex's fine, the CFTC says that the exchange offered, entered into, executed, and confirmed the execution of illegal, off-exchange financed retail commodity transactions with US persons that were not eligible contract participants.