Tether: Liberty Reserve Pt. 2

For those that are wondering why there is so much Tether ‘FUD’ around the cryptosphere, you may be tempted to buy into the narrative that there is some sort of larger conspiracy brewing among the Rothschild empire or perhaps the conglomerate of stablecoins that have recently emerged on the crypto scene.

Perhaps all of this ‘FUD’ has been initiated by over-ambitious and overzealous crypto reporters that simply want to curate a story out of thin air that boosts their credibility. Or perhaps some of the individuals that are creating this ‘FUD’ are simply traders that are wishing to profit from massive shorts on the market.

If you ascribe to one of those theories, do you know what that makes you?

Yup, a conspiracy theorist.

So, let’s step into reality for a second and dissect exactly why what Tether is doing is so problematic.

Have You Ever Heard of Liberty Reserve?

If you haven’t, don’t be mad at yourself — this reference is rather obscure, but it’s very pertinent to the issue of Tether.

So, let’s place Tether to the side for a second and talk a bit about Liberty Reserve (don’t worry, this will all make sense to you in less than 2 seconds):

Brief Description of Liberty Reserve

  1. Liberty Reserve was a digital currency company established in the early 2000’s. They created online tokens that were supposed to represent a dollar. According to them, you could “send and receive” these tokens “anywhere on the globe” instantly.
  2. The company stated that each token was supposed to represent a dollar because it was pegged directly to the dollar. They pegged it by telling customers that all tokens were backed by an equivalent amount in U.S. dollars (or Euros in the case they used Euros).
  3. They maintained that they had the express right to refuse any requests to redeem these tokens for the actual dollars they were supposed to represent.
  4. Liberty Reserve’s ‘exchangers’ were third-party entities that maintained direct financial relationships with Liberty Reserve, buying and selling LR in bulk from Liberty Reserve in exchange for mainstream currency. Thus, in order to receive Liberty Reserve tokens, someone would need to move money from their bank to one of these exchanges/exchangers, and then trade that in or another asset in for Liberty Reserve tokens.
  5. Liberty Reserve advertised that their tokens would be useful for people that were looking to store their money in a ‘fixed’ asset without going through the process of ‘cashing out’ into an actual bank.
  6. Given its (perceived) pegged value to the dollar, it became a useful vehicle for moving money from one party to another or for storing one’s money on the internet without having to cash out via a bank.
  7. Liberty Reserve’s headquarters was located in the islands somewhere. Their whereabouts were very vague. They could not be contacted directly and, apart from the direct exchanges that sold Liberty Reserve tokens, there was no other way to purchase or redeem these Liberty Reserve tokens.
  8. All Liberty Reserve employees were under strict NDAs.
  9. There was no objective evidence that Liberty Reserve actually backed the tokens they had 1:1, but people sort of assumed they did.

Liberty Reserve Was Eventually Busted and its Owners Were Sentenced to Prison

Its worth noting that the U.S. Marshalls labeled the Liberty Reserve case as the “biggest case of money laundering in U.S. history” at the time.

These tokens were used to transact less than $2 billion in value total.

Tether’s current volume per day is $2 billion+ at the moment.

Another really important thing to note in that Liberty Reserve case is that jursidiction was nulled due to how the U.S. classified the crime.

They pursued Liberty Reserve under the Patriot Act, which means they pretty much extended extraterritorial jursidiction over just about any location on the planet to come arrest these guys.

The U.S. has done that on numerous occassions.

Most notably, with FIFA officials in 2015:

How the U.S. can arrest FIFA officials in Switzerland, explained

As many amateur humorists on social media noted Wednesday morning, there’s a certain appropriateness to the United States having been the country to articulate and disrupt alleged corruption within the governing body of international soccer. There are few secrets so poorly kept that billions of people know them, but FIFA’s sketchy practices were one of them.

Back to Tether Limited

Now that we know what we know about Liberty Reserve and we’re all on the same page with this, let’s be honest with ourselves a second.

Let’s put all of the ‘FUD’ claims down for a second…

Even if Tether provided an audit that showed that they are backed 1:1 with the correct assets in their account, they are still in serious breach of U.S. law and, functionally speaking, they are materially no different than Liberty Reserve was and you just read about how the United States pursued them and prosecuted them under the Patriot Act.

It’s worth noting that, at the time of writing, iFinex is under a criminal investigation by the CFTC and the DOJ.

Another important thing to note is that jurisdiction is not going to matter in this case. When the U.S. prosecuted Liberty Reserve, they pursued them while they were domiciled in an entirely different jurisdiction.

All the Other Problems Bitfinex is Facing Are Simply Icing on the Cake

At a certain point, we have to hold ourselves accountable in this space, not just iFinex or the people ‘spreading FUD’, or whatever other boogeyman you may have.

For those that are pointing out the many issues with iFinex, myself included, it is our responsibility to understand what role, if any, that we played in their existence and perpetuation in this space. It is also our responsibility to ensure that we take the proper precautions to ensure that we are not contributing to the systemic instability of this space that could ensue if the collapse of iFinex does appear to be imminent.

Conversely, for those that believe that everything is ‘FUD’, you must take a personal responsibility for these statements. If you call this ‘FUD’, and you shout down the people that are trying to spread information that may potentially protect investors from serious losses, then you must take accountability for those losses if they do occur.

We cannot merely shout down any and everyone that shares a story or viewpoint that may conflict with ours or cast our project in a less than positive light and simply dismiss it as ‘FUD’ without honestly assessing the virtue of the argument itself.

If we do, then we must be willing to accept the fact that we played a major contributing role in the degradation of this space when those things that you shouted down as ‘FUD’ do eventually come to fruition.

Understand This Truth About Tether

They will not be operating for very long. It does not matter whether there is a ton of competition or just them holding a monopoly over the market.

It also does not matter whether they post an audit or not.

What they are doing is profoundly illegal in the eyes of the U.S., and it is something that they have and will prosecute for.

In fact, BitMex research summarized it best when they stated,

“History has shown that centralised systems with certain characteristics (censorship resistance or anonymous transactions) tend to get shut down by the authorities. Tether shares some of the same characteristics as these extinguished services so it may also attract criminals and ultimately suffer the same fate.

In our view, Tether has two choices:

Reform the system to include KYC/AML procedures that allow the operator to easily block transactions or freeze funds. In order to do this, Tether may need to fundamentally change its technological architecture and perhaps leave the public blockchains. Essentially, Tether would just be turning into a traditional (or full-reserve) bank.

Continue as is and risk being be shut down by the authorities at some point.”

Conclusion

Wake up.

 

 

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