01 May 2019
The rumors are true… Tether is not fully dollar-backed. While the news certainly doesn’t help the currency or crypto market’s credibility, it may not come as a surprise to investors. Indeed, Tether’s relative stability this morning can be seen as evidence of a longstanding, tacit market understanding of the currency’s insolvency. According to Bitfinex and Tether’s management, USDT is only 74 percent dollar-backed. The admission comes during a period of intensifying scrutiny from U.S. law enforcement.
Last week, New York Attorney General Letitia James, accused Bitfinex of using Tether’s cash reserves to cover up a $600 million funding shortfall. What does this mean for the market? Tether has come to occupy a unique place in the crypto market, acting as a crucial funding currency for investors trading across large exchanges. A crisis at Tether has the potential to send shock waves across the market. That said, in the long run, we are constructive on this scandal as we feel it will bring about greater transparency and disclosure in future. According to famed Bitcoin bull, Tom Lee, the market doesn’t care about Tether’s issues. Regardless, Bitcoin’s fundamentals continue to improve and innovation continues with Bakkt’s acquisition of a custody company. Enigma is excited to report developments of our own, with the launch of our new API product.
Performance Snapshot as of 7am GMT 01/05
Name
Ticker
Wk Close
Wk Change
YTD Change
Record High
Mkt Cap
Bitcoin
BTC
$5,398.160
-1.4%
40.2%
$20,089.00
$95,282,778,382
Ethereum
ETH
$163.380
-1.2%
10.7%
$1,432.88
$17,138,013,581
Ripple
XRP
$0.309
1.8%
-15.7%
$3.84
$12,918,153,003
Bitcoin Cash
BCH
$270.000
-2.3%
65.7%
$4,355.62
$4,794,621,595
Litecoin
LTC
$74.490
3.0%
131.5%
$375.29
$4,565,728,119
EOS
EOS
$4.970
2.1%
82.1%
$22.89
$4,529,175,505
Binance Coin
BNB
$21.830
-1.3%
270.0%
$24.37
$3,103,040,416
Tether
USDT
$1.020
1.0%
-1.9%
$1.22
$2,857,335,297
Stellar
XLM
$0.102
-1.3%
-11.4%
$0.93
$1,935,069,611
Cardano
ADA
$0.068
-6.1%
62.1%
$1.32
$1,794,961,249
TRON
TRX
$0.024
3.5%
21.7%
$0.30
$1,608,748,953
Monero
XMR
$64.630
-2.6%
30.6%
$495.84
$1,066,440,743
DASH
DASH
$114.760
-1.0%
45.0%
$1,642.22
$990,004,875
Bitcoin SV
BSV
$54.110
2.3%
-40.4%
$117.52
$960,754,068
IOTA
MIOTA
$0.312
10.4%
-17.1%
$5.96
$840,659,690
Tezos
XTZ
$1.230
-3.9%
165.7%
$10.74
$811,755,211
Enigma Research
Lead Analyst: Aliya Itzkowitz
aitzkowitz@enigma-securities.io
Regulation Watch
Russia is testing crypto in four regions: Moscow, Perm Krai, Kaluga Oblast, and Kaliningrad Oblast. As AMB Crypto reports, “According to a bill drafted by the Federation’s Economy ministry, regulatory sandboxes will be allowed to establish bases in these regions. This effectively means that companies, firms, and projects will be allowed to experiment with cryptocurrencies in these regions without actually breaking any federal law, even though the administration is yet to regulate crypto-assets.” This is a surprisingly progressive move from Russia. As Cryptobriefing reports, “users of cryptocurrencies will be immune from prosecution for working with crypto.” That said, the initiative will be closely state-monitored.
In France, the PACTE draft Bill (Action Plan for Business Growth and Transformation) was adopted at its final reading in the French National Assembly on 11 April, 2019. Once enacted, the law will establish a framework for fundraising via the issuance of virtual tokens (ICOs) and digital assets services providers (DASP). Providing that they meet certain requirements, ICOs now have the option of applying for a visa from the Autorité des Marchés Financiers (AMF), although the visa remains optional. As we noted last week, France is pushing for the rest of Europe to use the French approach as a model for crypto regulation. From 1 May, Finland will follow France and adopt cryptocurrency regulation. The so-called “Act on Virtual Currency Providers” aims to regulate cryptocurrency service providers and has been approved by the Finnish President.
In the U.S., concerns were expressed by New York’s Attorney General, Letitia James, regarding Bitfinex and Tether. Her comments came as part of an ongoing U.S. Department of Justice probe into parent company iFinex Inc. Tether, which typically trades pegged to the dollar, dropped to 97 cents after the news broke. Interestingly, this morning, after management admitted that the currency not fully dollar-backed, USDT is trading back up around $1.02. As NewsBTC comments, “USDT Not Backed 100%, But Did Anyone Think That it Was?” An affidavit filed by Stuart Hoeger, the general counsel at both Tether and Bitfinex, states: “As of the date [April 30] I am signing this affidavit, Tether has cash and cash equivalents (short term securities) on hand totalling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers.”
Letitia James, New York’s Attorney General, has accused Bitfinex of using Tether’s cash reserves to cover a funding gap.
(Source: Cosmopolitan)
The Tether Rumors Were True
What Does this Mean for the Market?
The U.S. Attorney General in New York, Letitia James, has accused Bitfinex of using Tether’s cash reserves to cover up an $850 million funding gap. James filed the following statement: “Our investigation has determined that the operators of the ‘Bitfinex’ trading platform, who also control the ‘tether’ virtual currency, have engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds. New York state has led the way in requiring virtual currency businesses to operate according to the law. And we will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies.”
The Attorney’s office is currently investigating iFinex Inc. - the company that operates both Bifinex and Tether. As The Financial Times reports, “The attorney-general claims Hong Kong-based Bitfinex had lost access to $850m that it handed to Crypto Capital Corp, a Panamanian entity, and that to cover the gap it “gave itself access” to up to $900m of Tether’s cash reserves through a series of ‘conflicted corporate transactions.’” Tether is the second most traded currency after Bitcoin. The concerns around Tether had a significant affect on the overall market last week, prompting a $10 billion loss across the market.
The allegations of wrongdoing at iFinex are nothing new. For a long time, investors have been questioningwhether Tether is as secure as it claims to be. A major source of suspicion has been Tether’s relationship with the exchange Bitfinex – with whom it shares a CEO. Recent research has exposed the possibility that Tether props up the price of Bitcoin. According to a study, half of Bitcoin’s gains in 2017 can be attributed to Tether.
Last October, insolvency concerns came to a head after reports that Tether had switched to banking with HSBC since their primary partner, Noble Bank, was facing issues. This story, combined with a fake rumor that Binance was delisting Tether led to a 3 percent drop in USDT – a large move for a currency that is meant to stay stable.
Tether sold off sharply last October (Source: Trading View)
The Department of Justice is focusing its criminal probe on Bitcoin, Tether and Bitfinex. Last year, both Tether Ltd. and Bitfinex received subpoenas from the U.S. Commodity Futures Trading Commission. Market manipulation has been a key sticking point in all substantive discussions with regulators. As Bloomberg reports, “While federal prosecutors opened a broad criminal probe into cryptocurrencies months ago, they’ve recently homed in on suspicions that a tangled web involving Bitcoin, Tether and crypto exchange Bitfinex might have been used to illegally move prices.”
Last year, John Griffin, a finance professor at the University of Texas, published a 66 page paper in which he argued that tether was used to buy bitcoin at key moments when it was declining, which helped "stabilize and manipulate" Bitcoin’s price. "Fraud and manipulation often leave footprints in the data and it's nice to have the blockchain to track things," Griffin said. Though Bitfinex has never complied with requests for a full company audit, CEO J.L. van der Velde has denied claims of wrongdoing. "Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation," he recently said. Tether management has repeatedly dismissed insolvency allegations.
Tether dropped last week after comments from New York’s Attorney General about the illicit funding relationship between Bitfinex and Tether (Source: Trading View)
Yet, this week, management admitted to a funding shortfall for the first time. As Stuart Hoeger, general counsel admitted, “Tether has cash and cash equivalents (short term securities) on hand totalling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers.” Transparency remains an issue as Tether has never complied with subpoena requests from the U.S. Commodity Futures Trading Commission.
Tether’s problems are undeniably a challenge for crypto. That said, as The Wall Street Journal notes, Tether’s woes have been largely “shrugged off” by investors. “Allegations raised Thursday surrounding [the] popular digital coin haven’t had much effect on trading.” At Enigma, we take Tether’s resilience, and the limited market response, as an indication of positive sentiment in the broader market. Even a few months ago, this would have been precisely the sort of news to precipitate a panic-driven sell-off. The fact that this had not happened is a very good sign for the crypto market. Investors may be skeptical of iFinex’s business model but they are separating those concerns from broadly constructive attitudes towards Bitcoin and crypto in general. Perhaps, the market’s resilience is also a sign that regulators interacting with crypto is seen as a positive. An ongoing conversation with U.S. authorities points towards imminent regulation – the catalyst institutional investors have all been waiting for.
Catalyst Calendar
May
10 – Ethereal Summit NY – Ethereum Summit, bringing together investors and industry icons
11 – LTCV Hard Fork – Each LTC holder receives LTCV in the ratio of 1:2 for free
11 – TRON Monthly BTT Airdrop – Binance will take a snapshot of TRX balances at 0:00 (UTC) on the 11th day of each month and distribute BTT
What We're Reading
Providing Liquidity for the Crypto Ecosystem - Enigma Securities Launches New API Product – Since its launch a year ago, Enigma Securities, Makor Group's cryptocurrency brokerage business has experienced rapid growth. Now, Enigma is expanding its services to include a new Application Program Interface, also known as an API. In today's fast paced, technologically driven world, Enigma's API connects institutional clients to one of the largest liquidity pools in the digital assets industry.
Crypto Community Reacts to Tether Admitting USDT Not Fully Backed – According to the company behind it, stablecoin USDT is not fully backed by fiat currency deposits. It was revealed today that the controversial crypto asset firm Tether only holds around 74 percent of the total value of USDT’s current circulating supply. Tether and the crypto exchange Bitfinex are currently defending allegations from the New York Attorney General’s office that the latter borrowed $600 million from Tether to stay afloat after the trading venue reportedly lost $850 million.
Iota Partners With Jaguar Land Rover on Crypto Rewards Program, Price Jumps 20% – United Kingdom car manufacturer Jaguar Land Rover will use blockchain network Iota to reward drivers with cryptocurrency for data reporting, the companies confirmed in a press release on April 29. Part of a plan to gather better information on road conditions and vehicle performance, Jaguar will distribute Iota’s Iota tokens to Smart Wallets tied to participating drivers.
E*Trade Is Close to Launching Cryptocurrency Trading – E*Trade Financial Corp. is getting ready to let customers trade cryptocurrencies on its platform, according to a person familiar with the matter. The firm will start by adding Bitcoin and Ethereum, and will consider adding other currencies in the future, said the person, who asked to remain anonymous because the matter is private. A spokesman for E*Trade declined to comment.
Mutual Owners, Mutual Funds: What We Know About the Bitfinex/Tether Scandal – In what seems to be one of the greatest crypto scandals 2019 has seen so far, the United States Attorney General in New York accused Bitfinex of using Tether’s cash reserves to cover a rumored $850 million funding gap with reserves meant for backing the stablecoin. Both companies share the same owner. Now, the crypto exchange and the stablecoin have found themselves in hot water. At least $90 million worth of assets had left the Bitifinex wallets once the accusations were aired, while tether’s USDT peg remains almost unshaken.
Digital Asset Lending Snapshot - Genesis Q1 Insights – At the end of 2018, we had crossed $1 billion in total originations with an active loan book of $153 million. Since then, we originated an additional $425 million in Q1, bringing our total originations to $1.53 billion since launching the lending business in March 2018. Our current active loan book rose to $181 million at the end of Q1, a 17% increase from the end of 2018. Based on the first few weeks of April, we expect to see sustained growth in the lending market in Q2.
Nike Poised to Break into the Crypto Space with ‘CryptoKicks’ – In what could be one of the biggest announcements in the cryptosphere so far in 2019, trainer behemoth Nike seem poised to break into the crypto space after filing for a trademark on ‘CryptoKicks.’ The filing indicates that Nike is intending to launch a cryptocurrency called CRYPTOKICKS”.
Cryptocurrencies Shed $10 Billion in an Hour on Worries Over ‘Stablecoin’ Tether – Cryptocurrencies fell amid reignited regulatory worries and questions around the legitimacy of so-called “stablecoin” tether. The entire market shed about $10 billion in value in the space of an hour late Thursday, CoinMarketCap data showed. This after the New York attorney general accused the operator of bitcoin exchange Bitfinex and tether issuer Tether Limited of hiding an $850 million loss.
2,000 More US Grocery Stores Enable Bitcoin Buying at Coinstar Machines – Supermarket kiosk chain Coinstar is expanding the footprint of its bitcoin-buying service to more than 2,000 locations in 19 different states. The service, through a partnership with blockchain startup Coinme that offers individuals the ability to convert cash into bitcoin, has expanded from an initial 70 machines to some 2,100 different kiosks.
Tom Lee: Bitcoin Market Does Not Care About Current Tether Issues – Fundstrat’s chief of research, Tom Lee, has told CNBC that even though on Friday, the BTC price slightly dropped and the market saw some issues to do with USDT, Bitcoin will keep going upwards, and the bull run may have already started. As for the current troubles with Tether (USDT), Lee said that they do not impact Bitcoin much, since the majority of investors “long tether because [they] don’t want to be long Bitcoin.”
ICE’s Bakkt Announces Acquisition of Digital Asset Custody Company – Intercontinental Exchange (ICE)-lead institutional cryptocurrency trading platform Bakkt has аcquired a crypto custodian service, the firm announced on April 29. In a blog post, Bakkt announced a number of new measures in its apparent effort to stimulate regulatory feedback, including the acquisition of Digital Asset Custody Company (DACC).
Nasdaq Adding Index for XRP Cryptocurrency to Global Data Service – Stock exchange operator Nasdaq is adding yet another cryptocurrency index – this time for the world’s third-largest cryptocurrency, XRP. The company announced Monday that, through its partnership with New Zealand-based blockchain data and research firm Brave New Coin, it will offer “real-time” index information for XRP starting May 1.
West Ham Goes Crypto: English Soccer Club Launches Fan Token on Blockchain – English Premier League soccer team West Ham United turns to blockchain to launch its own token. The “fan token,” powered by Socios.comwill allow West Ham’s 40 million supporters to vote on club decisions and gain access to exclusive rewards. The fan token initiative has already been adopted by Juventus and Paris St. Germaine and comes during a wave of mainstream blockchain adoption.
US, Japan, and South Korea Record the Highest Number of Cryptocurrency Exchange Visits – DataLight, a cryptocurrency analytics website published a report on April 29 which reveals that the United States recorded the highest number of visits on cryptocurrency exchanges. According to the report, the United States has 22 million monthly visits to the leading 100 cryptocurrency exchanges.
DTCC Shines A Surprising Light On Enterprise Cryptocurrency – Cryptocurrency took center stage at the annual Fintech Symposium hosted by the Depository Trust and Clearing Corporation, which keeps the master record for $48 trillion worth of stocks, bonds, and other assets. Literally. While other hot technologies like artificial intelligence and cloud were all highlighted in various ways, the only two panels at the event, featuring DTCC clients, were on cryptocurrency an the underlying technology that makes it possible, blockchain.
DISCLAMER: The information contained in this note issued by Enigma Securities Limited is not intended to be advice nor a recommendation concerning cryptocurrency investment nor an offer or solicitation to buy or sell any cryptocurrency or related financial instrument. While we provide this information in good faith it is not intended to be relied upon by you and we accept no liability nor assume any responsibility for the consequences of any reliance that may be placed upon this note. Enigma Securities Limited is an Appointed Representative of Makor Securities London Ltd which is authorized and regulated by the Financial Conduct Authority (625054).
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Thank you for reading. Please reach out to info@enigma-securities.io with any questions.
Kind regards,
Aliya Itzkowitz
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Head of Research
+44 7917752287
Enigma Securities
aitzkowitz@enigma-securities.io
