Why Tether Cannot Be Trusted

IMHO, Tether is not to be trusted.

Tether, the first stablecoin, apparently headquartered in Road Town, Trinity Chambers, British Virgin Islands,?has spent seven years?promising transparency, credibility and audits. Yet still has provided none.

The first time Tether told a live, public audience it was going to get an audit was on March 9, 2015. You can still find the?tweet, in which Tether claims to have partnered with blockchain company Factom, even though Tether reportedly?never worked?with Factom at all.

We last heard from Tether about an audit when Paolo Ardoino, the Chief Technology of Tether (and spokesperson for all things financial at Tether), and Stuart Hoegner, General Counsel at Tether sister company Bitfinex, appeared on CNBC to?discuss?the their use of so-called attestations.?The interview was a disaster of double-talk, equivocation and caginess with?non-denial denials?overwhelming the majority of?the discourse?and?Hoegner promising a full audit of the Tether reserves?in a matter of “months, not years.”

It’s been over a year and a half since Hoegner made that promise. And still nothing.

The Tether Regulatory Vacuum

Stablecoins like Tether?face no regulatory constraints. There are no U.S. requirements on how reserves must be invested, nor any requirements for audits or reporting.??In fact, there seems to be no existing stablecoin-related U.S. regulatory framework.

Tether’s fundamental business, the essence of everything Tether does, is tied exclusively to Tether’s financial reserves. Yet those reserves remain unaudited, unconfirmed and therefore dubious, leaving Tether's customers to grapple with Tether's remarkably condescending and ineffective public relations blather, hype and bluster.

This is what those in the business of investigating fraud would call a "red flag."

Attestations Are Meaningless

Let’s be clear. Tether only offers “attestations,” not audits, previously from a random 5-person Cayman Islands firm, and?then from BDO Italia, an independent firm of BDO International.?

Moreover, the last quarter for which Tether is required to legally submit to attestations of its reserves, as?dictated by the Attorney General of New York, has passed. That means that Tether apparently?no longer has?any legal obligation to submit attestations, quarterly or otherwise.?

Under any circumstance, an attestation report is not the same as an audit report. It is an??“unverified snapshot,” which would never pass any sort of regulatory muster.?

Audits are methodically designed to look for potential risks,?while attestations only evaluate?whether the data being examined by the “attestator” is accurate at that precise moment in time. Hence, any iteration of attestation is essentially?useless as a proof of bonafides, especially as a matter of due diligence.

Along the same lines, attestations are akin to so-called "Proof-of-Reserve" (PoR) reports, which are similarly misleading marketed as actual audits. Given the proliferation of proof-of-reserve reports and their consistent mischaracterizations in the crypto-ecosystem, the Public Company Accounting Oversight Board's (PCAOB) Office of the Investor Advocate has warned investors that while crypto companies may use PoR reports to bolster consumer confidence, they are not formal, rigorous audits, do not provide “any meaningful assurance to investors and the public,” and are not conducted using uniform audit standards.

Per the PCAOB:

"As a general matter, these PoR Reports purport to provide an asset verification for an asset type at a particular moment in time, subject to significant limitations based on the procedures performed. For example, the procedures undertaken likely do not address the crypto entity’s liabilities, the rights and obligations of the digital asset holders, or whether the assets have been borrowed by the crypto entity to make it appear they have sufficient collateral or “reserves” in excess of customer demands. For this reason, if the assets were borrowed by the crypto entity at the time of the PoR engagement, investors would not know based on the PoR Report. Also, because PoR Reports concern digital assets at?one point in time?they do not provide any assurance about whether the assets were used, lent, or otherwise became unavailable to customers following issuance of the PoR Report. Moreover, PoR Reports also provide?no assurance?regarding the effectiveness of internal controls or of governance of the crypto entity.

Despite any representations to the contrary, PoR Reports are?not?equivalent or more rigorous than an audit, and they are?not?conducted in accordance with PCAOB auditing standards. In addition, there is a lack of uniformity regarding service providers that perform PoR engagements. For example, some PoR engagements are performed by accounting firms, whereas others are performed by non-accountant assurance providers. Management of the crypto entities also have discretion on whether the results of PoR reports are made public, including the extent and format of the information provided.

PoR engagements, whether intended to provide reasonable assurance, limited assurance, or no assurance (agreed-upon procedures), are not subject to PCAOB auditing standards and the engagements are not subject to PCAOB inspection. Importantly, such reports do not provide assurance that such reserves will be adequate as of the date of the PoR Report, in the future, or that customer assets will be protected."

Audits Are Not Rocket Science

Reviewing financial statements and verifying their integrity and authenticity is not rocket science. It’s easy, it’s simple, it’s straightforward and the analysis can be done swiftly, efficiently and with 100% accuracy. All that is necessary to conduct an audit of Tether's financial reserves is a pencil, a piece of paper, access to Tether's financial statements, the use of a telephone to call the sources and a few airplane tickets and a rental car to visit the sources in person.

Audits are not novel or new. Audits are as fundamental for public companies and financial firms as inhaling oxygen is for the human body.

So why is it so hard for Tether, an $80B company, to do what is a matter of routine and necessity for every single US public company, every single U.S. SEC-registered firm and every single US bank?

Red Flags

If Tether’s books and records are so disorganized, complex and challenging that it takes quarters or even years to make heads or tails of them, that speaks volumes as to Tether’s integrity and trustworthiness.?

If Tether’s internal controls are so lacking that an immediate accounting of its financial reserves – to the penny – cannot be done with the click of a mouse, that speaks volumes as to Tether’s reliability and credibility.?

If Tether’s chief financial officer cannot immediately explain to Tether’s CEO the precise nature, amount and liquidity of its financial reserves at any given moment, that speaks volumes as to the quality of Tether’s personnel.

Other Specific Concerns About Tether

Tether is a financial firm that:

• Has been repeatedly sanctioned for lying about their reserves. For example,?NY Attorney General Letitia James said, regarding her office’s allegations against Tether, that “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. [Tether] obscured the true risk investors faced and [was] operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system;”
• Has been charged by The Commodity Futures Trading Commission for making untrue or misleading statements and omissions of material fact in connection with the U.S. dollar tether token (USDT) stablecoin. The order requires Tether to pay a civil monetary penalty of $41 million and to cease and desist from any further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged (“The Tether order finds that since its launch in 2014, Tether has represented that the tether token is a stablecoin with its value pegged to fiat currency and 100% backed by corresponding fiat assets, including U.S. dollars and euros. However, the?Tether order finds that from at least June?1, 2016 to February?25, 2019, Tether misrepresented to customers and the market that Tether maintained sufficient U.S. dollar reserves to back every USDT in circulation with the “equivalent amount of corresponding fiat currency” held by Tether and “safely deposited” in Tether’s bank accounts. In fact Tether reserves were not “fully-backed” the majority of the time. The order further finds that Tether failed to disclose that it included unsecured receivables and non-fiat assets in its reserves, and that Tether falsely represented that it would undergo routine, professional audits to demonstrate that it maintained “100% reserves at all times” even though Tether reserves were not audited.”);
• Has been banned in Ontario. Specifically, the Ontario Securities Commission, which regulates investments across Canada’s largest jurisdiction, issued a list of prohibited crypto assets late last month. That list (filed under Appendix C in a favorable ruling for local exchange Coinberry) is incredibly short. In fact, it is not a list at all — there was just one banned cryptocurrency: USDT;
• Is?reportedly?under by the U.S. Department of Justice (U.S. DOJ) for bank fraud; and
• Has, according to?a scathing Wall Street Journal Report, even facilitated terrorism.

Tether Is Not Regulated

Tether officials too?often imply?that Tether is somehow regulated, which I believe is misleading.

Regulatory frameworks come in all shapes and sizes and are not all equally robust, vigorous and effective. For instance, there exist regulatory frameworks designed to ensure that dog poop is cleaned up by dog owners and to ensure that only those individuals with the proper level of experience, training and competence can fly commercial airplanes or perform heart surgery. The same variations apply to financial frameworks.

Registering with The Financial Crimes Enforcement Network (FinCEN), with New York State as a “Trust,”??with a non-U.S. regulator, with the U.S. Securities and Exchange Commission (U.S. SEC) as a "public company," or even with all of the 50 U.S. states as a “money service business” are meaningful achievements – but are all a far cry from registration with the U.S. SEC.

U.S. SEC regulatory oversight is akin to experiencing a permanent financial and operational colonoscopy, 24-hours a day, 365 days a year, which creates a robust framework of trust, confidence and credibility. It is also paramount.

In other words, just because someone cleans up their dog’s poop when taking the dog on a walk (even when no one is watching), does not make them “regulated” enough that anyone should trust the same person to fly an airplane or perform heart surgery.

Why U.S. SEC Registration Matters

U.S. SEC registration and the robust and balanced enforcement of the rules and regulations that U.S. SEC registration requires command extraordinary respect and admiration in financial markets – and with good reason.

For example, U.S. SEC registration of financial firms: (1) mandates that investor funds and securities be handled appropriately; (2) ensures that investors understand the risks involved in purchasing the often illiquid and speculative securities that are traded on a cryptocurrency platform; (3) makes buyers aware of the last prices on securities traded over a cryptocurrency platform; and (4) provides adequate disclosures regarding their trading policies, practices and procedures. Overall, entities providing financial services must carefully handle access to, and control of, investor funds, and provide all users with adequate protection and fortification.

With traditional U.S. SEC-registered financial firms, the U.S. SEC has absolute, unlimited and instantaneous visibility into every aspect of operations. With crypto trading platforms, the U.S. SEC lacks any sort of oversight and access — and has scant ability to detect, investigate and deter fraudulent conduct. As a result, the crypto marketplace — like all Web3 marketplaces — operates without much supervision, lacking:

• The hallmarks of the traditional transparent surveillance program of a financial firm like a U.S. SEC-registered broker-dealer or investment adviser, so the U.S. SEC cannot analyze or verify market trading and clearing activity, customer identities and other critical data for risk and fraud;
• U.S. SEC and/or Financial Industry Regulatory Authority licensure of individuals involved in crypto trading, operation, promotion, etc., so the U.S. SEC cannot detect individual misconduct and enforce violations;
• Traditional accountability structures and fiduciaries of financial firms, so the U.S. SEC cannot ensure that every customer's interest is protected and held sacrosanct;
• The compliance systems, personnel and infrastructure, so the U.S. SEC cannot know where crypto came from or who holds most of it; and
• The verification and investigatory routine and for cause U.S. SEC or FINRA examinations, inspections and audits, so the U.S. SEC and FINRA cannot patrol, supervise or verify critical customer protections and compliance mechanisms.

Moreover, the stark reality is that by hijacking bona-fide regulatory labels, together with a sleek website, flashy commercials and attractive customer-interphase, unregistered crypto-firms create a dangerously bogus veneer of assurances, integrity, expertise and regulatory supervision.

When a Financial Firm is Not Registered with the U.S. SEC

For firms like Tether, that are not registered with the U.S. SEC, there exist:

• No U.S. record-keeping and archiving requirements with respect to operations, communications, trading or any other aspect of business;
• No U.S. requirements regarding the pricing or order flow of transactions or the use internal platforms and payment systems by employees;
• No reason to abide by U.S. statutes and rules prohibiting manipulation, insider trading, trading ahead of customers and other fraudulent behavior by customers or employees;
• No U.S. mandated cybersecurity requirements or standards to combat online attackers and protect customer privacy;
• No U.S. requirement to establish mandated training or code of conduct requirements;
• No U.S. obligation to have in place internal compliance, customer service and whistleblower teams to address and archive customer complaints;
• No U.S. requirement to reverse charges if any dispute or problem arises;
• No U.S. mandated robust and documented processes for the redress and management of customer complaints (N.B. that and even if there was a formal complaint filing structure in a digital asset trading platform, the pseudo-anonymous nature of virtual currencies, ease of cross-border and interstate transport, and the lack of a formal banking edifice creates enormous challenges for law enforcement to investigate and apprehend any individuals who use cryptocurrencies for illegal activities);
• No U.S. obligation to follow publicly disseminated national best bid and offer and other related best execution requirements;
• No U.S. minimum financial standards for operation, liquidity, and net capital;
• No U.S. governmental team of objective auditors and examiners to inspect and scrutinize the fairness, execution and transparency of transactions;
• No U.S. requirement to ensure consistency of trading operations i.e. that the trading protocols used, which determine how orders interact and execute, and access to a platform's trading services, are the same for all users; and
• No U.S. obligation to design ethics and compliance codes for Wall Street entities (regardless of registration status) which would ban their employees from investing in cryptocurrency or NFT investments based on the same arguments as the ban of initial public offerings and options – i.e. that they are too risky and may tempt an employee to steal if not prohibitive.

FinCEN Registration is a Far Cry From U.S. SEC Registration

Despite claims to the contrary, crypto firms like Tether are not "regulated" by FinCEN, but are merely "registered" with FinCEN.

This means only that FinCEN created an electronic account for the registrant for uploading Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs). But there's no:??traditional US regulatory oversight, consumer protections, net capital requirements, audits, examinations, inspections, licensure of individuals, etc. (Yes, registering with FinCEN indicates that AML, KYC, etc. rules must be followed but those rules apply whether or not an entity is registered with FinCEN.)

The ruse of touting that a firm is "regulated" when the reality is that the firm is merely "registered" is widespread throughout the crypto-ecosystem and is grossly misleading and irresponsible.

First off, regulatory frameworks come in all shapes and sizes and are not all equally robust, vigorous and effective. For instance, there exist regulatory frameworks to ensure that dog poop is cleaned up by dog owners and to ensure that only those individuals with the proper level of experience/training/competence can fly commercial airplanes or perform heart surgery. The same variations apply to financial frameworks.

In other words, just because I clean up my dog’s poop when taking her on a walk (even when no one is watching), does not make me “regulated” enough that anyone should trust me to fly an airplane or perform heart surgery.

Tether Works With The FBI, Regulators, Etc. And Presents at Europol Conferences . . . So What?

Tether claims?that they work with law enforcement and regulators, that they attend and participate in law enforcement conferences and that Tether is an extraordinarily good corporate citizen.?

But here is the reality: Tether is?reportedly?under criminal investigation by the U.S. Department of Justice. Moreover, in February 2021, Tether and its sister company, Bitfinex, paid $18.5M to settle a nearly two-year-long investigation with the New York Attorney General’s (NYAG) office into whether it covered up the loss of nearly $1B in customer funds.?In the settlement agreement, the NYAG said Tether used various banks but was suspended from some, including Wells Fargo, for unspecified reasons.?

This sort of ‘working with law enforcement” boast/tout should not be characterized as "cooperation." Grand jury subpoenas, administrative subpoenas and other law enforcement or regulatory queries should not be mistaken for mere requests for information. Subpoenas for testimony and being called to speak to law enforcement are not akin to “meet and greets.”?

In other words requests from U.S. DOJ, U.S. SEC or other U.S. law enforcement are not census requests. Receiving one means there’s a government investigation which can have mammoth ramifications.

Moreover, while helping law enforcement capture criminals and terrorists, who Tether may be assisting commit terrible crimes, is indeed absolutely critical. Tether is helping law enforcement because it is in Tether's best interest to do so. If Tether refused, Tether could suffer significant consequences.

Finally, speaking at conferences and partaking in government meetings is commendable and something to be proud of. During my 11-year tenure as Chief of the U.S. SEC’s Office of Internet Enforcement, I had many meetings with financial firm officials. So kudos for that.?

But regulatory meetings and conferences are not a defense to criminal behavior nor a substitute for having audited financial statements. In fact, SBF and many infamous financial criminals in history were experts at this kind of the subterfuge, deception and artifice i.e. using relationships and optics to generate an appearance of legitimacy/legality.?

Hence, while efforts to engage with regulators and others deserve some degree of praise, it is part and parcel for any business and does little, if anything, to indicate innocence or virtuousness, especially when used as a deflection from answering real questions of integrity, trustworthiness and honesty.

Tether is an $80B Company That is a Regulatory Black Hole

Tether makes assertions about its financial safety and soundness, which may very well be true. But that is not how financial regulation works. When trusting money and assets to others, there must always be independent verification of financial statements and trusted intermediaries subject to robust regulation and oversight. Too much is at stake to accept anything less -- not only individually but also systemically.

The bottom line is that Tether is dangerous for investors -- no matter where the company is headquartered and no matter where its users reside -- just like FTX, Voyager, Celsius, BlockFi, Terra, Genesis and so many others were dangerous for investors.

Without the protections of U.S. SEC registration, customers are not only flying completely blind regarding reliability, trustworthiness, loyalty, safety, security, etc., investors are also often left last in line as unsecured creditors should anything go wrong (from a hack to a theft to a crash). And last in line typically means no recovery at all i.e. absolutely devastating investor carnage.

Banks Versus Crypto-Firms

Tether argues?that the same risks exist at banks. After all, consider the recent collapses of Signature, SVB, Republic and other regional banks.

But that is completely erroneous. Just compare banks with crypto firms to see if that argument actually holds up.

Banks are heavily regulated and depositors generally have protections. In stark contrast, with crypto firms there is no insurance, no regulatory oversight, no consumer protections, no examinations, no auditing, no licensure, no mandated cybersecurity standards, no fiduciaries, no segregation of customer assets, no rules against insider trading or market manipulation — no traditional protections of any kind -- which renders the entirety of the crypto-ecosystem not just unsafe and dangerous but also easily susceptible to fraud, grift and chicanery.

Of course, it should go without saying that U.S. TradeFi is rife with bad actors and can be dangerous -- and is a system that has a lot of flaws -- and some really dire oppressive tendencies. However, the risks of transacting with U.S. registered financial institutions like banks and brokerages pale in comparison to the risks of engaging in transactions with crypto platforms and stablecoins like Tether. That point seems axiomatic.

“Code Is Law” Is Bunk (and Drivel)

Tether wants the world to?trust them and trust code.

But trust is nonexistent in the crypto ecosystem – and no matter what crypto-promoters say, that is not good for anyone except con artists.

DeFi promoters proclaim that code is law in their world, which is trustless. But that is grossly misleading. Indeed,?it’s insane?how “code is law” has somehow become a selling point for crypto, DeFi and smart contracts.

Financial intermediaries Ike banks, brokerages, credit card companies, financial apps, etc. play a critical beneficial role for people. They offer redress and relief when there is fraud, negligence or even a mere mistake. They allow for reversal, remedy and recourse. They are policed by sophisticated regulatory oversight and intricate consumer protections such as mandatory auditing, inspections, record-keeping, net capital requirements, licensure of individuals and much more.

In stark contrast, “code” is perilous and rife with bugs and cybersecurity and privacy vulnerabilities galore, can cause forks and is laden with infinite possibilities for deceit, chicanery and error. Code does not allow for settling conflicts or managing mistakes. In fact, code is comprised primarily of meaningless mathematical blather which can too easily leave customers penniless, helpless and financially decimated.

Crypto's Dire Externalities

Tether?boasts about the use of crypto in countries?outside of the U.S. and could be right (Tether points to Turkey and Argentina as examples). However, the data supporting this?global crypto-adoption contention?seems anecdotal at best and most likely?not true.?

For instance, Ben McKenzie and Jacob Silverman actually travelled to bitcoin-loving El Salvador extensively and they did so with open hearts and open minds – anyone who knows will attest that they are both remarkably benevolent souls. And what they encountered was far from any sort of crypto-prosperity. Per Jacob and Ben, El Salvador’s embrace of bitcoin didn’t bring prosperity —?it rode in with waves of repression.?

There do exist some interesting reports about crypto and Turkey but Argentina’s central bank is clamping down on crypto. For instance, in a recent statement yesterday, the bank said that payment platforms are now banned from offering digital assets like bitcoin to customers. The Central Bank of the Argentine Republic said that the reason was to “mitigate risks.”

Perhaps crypto can help people in truly oppressed societies run by terrible dictatorial or otherwise heinous, unjust or undemocratic regimes. But as for the U.S. and most other developed countries, crypto’s utility is sorely lacking, and the costs of the crypto-ecosystem far exceeding and outweighing the benefits.

The Costs of Crypto: A 21st?Century Crypto Crime Wave of Epic Proportions

Crypto has evolved into the killer app for criminals, ushering in a crypto-crime wave of epic proportions. Indeed, the scale of crime in crypto is orders of magnitude greater than what it is in traditional finance and Tether has contributed exponentially to that astronomic growth.

Take for example the crypto-crime of ransomware. Perpetrators of ransomware attacks demand crypto to unlock corporate IT systems and data that the attackers have surreptitiously encrypted.

Collecting crypto in extortion transactions allows ransomware attackers not only to conceal their tracks and identities, but also to conduct their schemes from anywhere in the world. But for bitcoin, ransomware would not exist. Traditional crimes have also increased dramatically because of crypto, including:

Traditional crimes have also increased exponentially because of crypto, including:?drug-dealing,?terrorism financing;?human sex trafficking;?money laundering;?sanction evasion?by countries like?Russia,?North Korea?and?Iran, who use crypto to?transfer funds?outside financial systems;?assassins?and other?killers?seeking payment for?murder-for-hire?services; and a slew of?other financial crimes.

North Korea is a particularly?egregious criminal application of crypto. North Korea's crypto hackers are paving the road to nuclear Armageddon. North Korea has quietly become a cryptocurrency superpower. It has stolen billions in bitcoin and ether and is funneling profits to its nuclear weapons program.?

Meanwhile, U.S. law enforcement is often helpless to investigate, let alone, prosecute, crypto-related crimes. Along these lines, U.S. DOJ?recently reported?that criminals use crypto internationally for their innovation, claims of decentralization and anonymizing features. The cross-border nature of digital asset technologies therefore requires collaboration with foreign law enforcement, which presents extraordinarily complex and sometimes impossible challenges for the identifying, arresting, extraditing and prosecuting crypto-criminals.

Crypto Is Extraordinarily Challenging (And Can Be Impossible) To Trace

Those spreading the myth that crypto-transactions are easy to trace remain sadly mistaken. This is perhaps the most?frustrating and misleading of all crypto-enthusiast retort.?

First off, if crypto were so easy to track, then the tens of thousands of ransomware attackers would all get caught. But the reality is that only a minuscule few are ever even identified, let alone apprehended, charged, extradited and brought to justice. Too many crypto-related tools exist to obscure, mask, disguise, camouflage and secrete crypto-transactions.

For instance, FinCEN?announced in November, 2022, that U.S. financial institutions spent nearly $1.2B on ransomware payouts in 2021 more than double from 2020, and three quarters of the 1,251 ransomware payments pertained to ransomware were apparently paid to Russian gangs. If crypto were so easy to trace, then the identities, whereabouts and details of the ransomware payment collectors would become known -- and prosecutions would follow. But that rarely, if ever, actually happens.

Second, while crypto payments (if not obscured or properly laundered) might in some instances provide a glimpse into the chain of where crypto is going, the chain does not identify who the crypto is going to.

Finally, even in the best cases of crypto-tracking (which are rare, take a lot of effort and only work in some instances), the identity of the actual holder is typically found using subpoenas, search warrants, arrest, etc. Not an easy task when the individuals and entities reside in countries outside the U.S., who will not only fight U.S. law enforcement efforts but will go so far as to refuse to accept delivery of service. Consider the U.S. SEC enforcement action against Terra and Do Kwon, where Terraform and its founder?continue to fight U.S. SEC subpoenas?despite a detailed ruling compelling them to do so.

Along these lines, the U.S. Treasury Department, in an April 6, 2023, Report entitled, "Illicit Finance Risk Assessment in Decentralized Finance," states ominously:

"[T]here are some limitations to relying on public blockchain information and tracing to mitigate illicit finance risks in the DeFi space. First, as noted above, the data on the public blockchain is pseudonymous. While regulators, law enforcement, and public blockchain companies can in some cases identify transaction participants, they may in other cases only have the participants’ wallet addresses without additional identifying information. Additionally, users can obfuscate the tracing of transactions on the public blockchain through the use of mixers, cross-chain bridges, or anonymity-enhanced cryptocurrencies (AECs), which can create challenges for blockchain tracing. Second, blockchain tracing and analytics often require an initial identified illicit transaction or address as a starting point, although new tools are able to identify potentially suspicious activity based on blockchain data. Third, critical activities in a DeFi service can occur off-chain and there are challenges to locating and obtaining this data."

Yes, U.S. DOJ occasionally catches someone (e.g. discovering their crypto in a laptop under a blanket in a popcorn tin in a bathroom) but those apprehensions and interdictions are few and far between.?

For instance, according to U.S. DOJ, the cross-border nature of digital asset technologies requires collaboration with foreign law enforcement partners to locate and gather electronic records and digital evidence involving off-shore digital asset issuers, trading platforms, service providers and other online infrastructure; to seize and prevent further distribution of digital assets linked to crime; and to identify and hold responsible criminal actors who exploit pseudonymity features of Defi and blockchain technologies to avoid detection, identification and prosecution.

Along the same lines, from ransomware payments demanded in cryptocurrencies to state actors using digital assets to circumvent sanctions and other restrictions, U.S. DOJ is raising the alert that crypto is expanding into every area the agency is exploring.

Acknowledging that U.S. DOJ has seen a tremendous increase in crypto related crime over the past several years, U.S. DOJ’s Director of its National Cryptocurrency Enforcement Team (NCET), Eun Young Choi?recently stated:?

"We are seeing cryptocurrency and digital assets really touch every aspect of criminal activity we investigate . . . By its very nature the technology is built in order to not rely on intermediaries, cross-border transactions that are immutable and irreversible. Law enforcement can freeze conventional transactions, but they can’t do that with digital asset transactions."

Crypto And Predatory Inclusion

The CTO of Tether, Mr. Paolo Ardoino,?has stated:?

“Tether is not a U.S. company and does not operate in the U.S., nor solicit U.S users. Our core markets are the unbanked people in emerging markets and developing countries, billions of people left out from the financial system just because they're too poor to be of interest of the banking industry.”

This is one of the most important proclaimed benefits of crypto i.e. that crypto is a revolutionary equalizer for the unbanked and will cure historical issues of financial inclusion. And it also happens to be categorically false.?

The disquieting reality is that crypto is just another horrendous exemplar of “Predatory Inclusion” and affinity fraud, and?orchestrated shamelessly?to dupe the disadvantaged and disaffected. Crypto?fails miserably?as a “revolutionary equalizer for the unbanked” because, as the legendary Michelle Singletary?recently explained?in her award-winning Washington Post financial column, crypto does not cure historical issues of financial inclusion.?

In fact, when examined closely, as?was done by Tonantzin Carmona for the Brookings Institution, Crypto has also evolved into a dire affinity fraud. Why??

Because “crypto’s current capabilities do not match the needs of the groups it purports to serve, and it carries a host of risks and drawbacks that undermine its benefits. More alarming, we can observe parallels between crypto and other predatory products, which highlights crypto’s potential to exacerbate unequal financial services to historically excluded groups.”??

In other words, disadvantaged and disaffected communities get access under the auspices of inclusion, but that access only makes their situations worse.

Some Stats

Last year, a?University of Chicago study?found that 44 percent of Americans who owned and were trading crypto were people of color.?

To make matters worse, a?recent J.P. Morgan Chase study?found that people with lower incomes very likely made their crypto purchases when prices were elevated when compared to higher earners and have therefore suffered disproportionately.?

Algernon Austin, director for Race and Economic Justice at the Center for Economic and Policy Research, said during an interview about crypto investing and building Black wealth. “As an investment, it’s closer to gambling.” Austin co-authored a report released earlier this year comparing crypto with index funds.?

When looking at a random sampling of 100 cryptocurrencies — all in the top 1,000 by market capitalization — Austin and his team found that the median cryptocurrency declined 46.6 percent from August 2017 to August 2022. But a total stock market index fund climbed 56.4 percent during that period, while an S&P 500 index fund surged 60.8 percent.

Animal Farm Redux

What's so ironic about crypto-victimization is that the exact kind of people who most need protection are the ones targeted with "get-rich-quick" and "beat-the-system" promises by the very same unscrupulous financial profiteers that crypto is marketed to overthrow.

The whole crypto-paradigm has become one of Animal Farm redux, highlighting the capacity for ordinary individuals to continue to believe in a revolution that has been utterly betrayed. In Animal Farm, George Orwell attempts to reveal how those in power —Napoleon and his fellow pigs — pervert the democratic promise of the revolution. The same goes for crypto, where the purported power of Big Banks and Big Tech has not been supplanted but has simply shifted to a new power group, Big Crypto.

Just as usurious payday lender and check-cashing storefronts are often concentrated in Black or Hispanic communities, the same goes for crypto kiosks (which?are equally notorious?for charging fees that can range from 7 percent to 20 percent per transaction or even higher).?

Clearly, exploited victims of crypto are too often those who cannot afford to lose what they have invested, or those who have been historically marginalized – and who tragically end up in financial ruin like the victims of Celsius, BlockFi, FTX, Voyager and too many others.

Hence, that crypto can expand financial inclusion is as audacious as it is preposterous, and the crypto-marketplace has evolved into an appalling affinity fraud.?

Crypto-promoters also portray crypto as a fantastic alternative to the traditional financial system, but in reality, its lack of transparency on how it functions and its limitations evidence the opposite. The reality is that in most places, it’s still hard and costly to use crypto to buy anything meaningful or as is the case in El Salvador, which?has become a corrupt and horrific morass.?

The big banks orchestrated the same ruse in 2007 with sub-prime, just like check-cashing services and payday loans still do today.?Per Professors Hilary Allen and Christopher Odinet, as crypto has become increasingly adopted by Black and Hispanic communities, it bears mention that there’s a long and devastating history when it comes to “alternative finance” and marginalized groups:

"Payday loans and check cashing services are forms of alternative finance. Subprime mortgage loans were an alternative financial service marketed to marginalized groups as well. Instead of dealing with the root causes of financial inequality, these alternative financial services offer more expensive, more complicated, or more risky alternatives to mainstream finance."?

As so many technologists have already explained, the risks inherent in blockchains and crypto have been poorly described and are often ignored, or even mocked, by grifters. These con artists seek not only to cash in on crypto hype, bluster and fraud but they also target and exploit the vulnerable and disenfranchised, shilling grossly misleading technobabble and grandiose promises of economic empowerment and wealth. https://concerned.tech

Now that the financial carnage has begun to settle, the crypto-titans are rich beyond their wildest dreams while the small investors they hoodwinked are left in financial ruin.

Turning Victims into Victimizers

What remains so incredibly disturbing is that, like vampires, crypto promoters transform their victims into victimizers, incentivizing legions of crypto investors to further spread the gospel of crypto to other future victims. This criminal playbook has been around for almost a century -- because it works.

In fact, a U.S. SEC??warning about affinity frauds from a decade ago, which you can find today on the U.S. SEC website today, still rings true and directly applies to crypto. The U.S. SEC states:?

"Many affinity scams involve "Ponzi" or pyramid schemes, where new investor money is used to make payments to earlier investors to give the false illusion that the investment is successful. This ploy is used to trick new investors to invest in the scheme and to lull existing investors into believing their investments are safe and secure."?

That crypto is a?horrific Ponzi scheme is now well-documented, which makes this U.S. SEC admonition particularly applicable Sadly, it seems that with crypto products and services, the more selfish the drive, the more idealistic the label.

A Future With Crypto? No Thanks.

The critical question remains:??Are the benefits from partnering with a deadly money laundering and terrorist criminal appliance like crypto in a trading platform really worth it??Of course not.

For the most part, financial pioneers have made our lives better, by supporting transformative technologies like the Internet, mobile phones and cloud computing and they deserve their profits and rewards. And I get it, those technologies have their exploitations and criminal use.

But such a??newfangled retort of?whataboutism?is a flawed pivot and anemic argument form. Yes, legions of criminals have committed crimes using fiat currency, using the Internet, using the cloud, etc.

However, crypto has evolved into the killer app for criminals, and the scale of crime in crypto is orders of magnitude greater than what it is in traditional finance. Moreover,??the mathematical computational blather of crypto is not an innovation or anything else of such dramatic importance.

Crypto has two primary beneficiaries: Grifters, who shill crypto to lure in investors, especially if those investors are the downtrodden, injecting a predatory element of affinity fraud into their schemes (just like check-cashing services and payday loans do) and Criminals, who exploit the pseudonymity of crypto to orchestrate globally a vast array of devastating crimes.?

No amount of whataboutism can counter this stark reality.

Looking Ahead

The?gist of Tether’s public relations campaign?is that investors should embrace Tether, that investors should be impressed with Tether’s operations and that Tether is a responsible, forthright and law-abiding organization that cares about stopping crime.

If only the integrity that Tether promises could be confirmed. But herein lies the rub. Without any transparency, there exists no way to verify Tether’s representations. Meanwhile, the crypto-ecosystem is so rife with fraud, chicanery and grift that the “Tether integrity-pitch” is difficult to believe and strains credulity:

• Without US oversight, audits, inspections, net capital requirements, licensure, insurance and all the rest of the myriad of fundamental regulatory requirements for U.S. SEC registered financial firms, everyone using Tether is at risk;?
• Without rules against commingling customer funds in the crypto-ecosystem, everyone using Tether is at?risk;?
• Without transparency into the crypto-ecosystem, everyone using Tether is at risk;?
• When Tether loses its peg, no U.S. regulatory examination will happen;?
• When Tether’s publishes an attestation like it has recently, which raises far more questions than answers, no U.S. regulatory examination will happen; and?
• When Tether is accused of doing anything wrong or when Tether’s officials make broad sweeping representations on Twitter, there is no U.S. regulator who will make sure those representations are true.

If Tether was U.S. SEC or FDIC registered and even a hint of wrongdoing is suspected, a U.S. team of auditors would be on site and in Tether’s face, demanding to speak to everyone, demanding documents, demanding trading info, immediately investigating and referring any suspicious conduct to the U.S. DOJ. Who knows what is really going on? Tether could be selling its Tether’s in bulk at a discount for all anyone knows. What’s to stop internal theft, schemes and trickery at any crypto platform??

And by constantly citing the Tether's attestation reports as evidence of honesty, Tether continues to shoot themselves in the foot, cutting against their own credibility, believability and authenticity.

In my experience, attestations are not a standard, not legitimate nomenclature and "are not even a thing." And trumpeting attestations as a legitimate baseline is both unethical and misleading.

Tether is masquerading as U.S. dollars, even going so far as to try to look like U.S. dollars by labelling itself?USDT?– all in plain view. Yet Tether is not the U.S. dollar and has not a single characteristic along those lines, Tether is a counterfeiter not just operating in the Wild West – but enabling horrendous investor carnage amid a deadly financial arena of Walking Dead-like post-apocalyptic anarchy.

Tether’s own terms of service?expressly state that, regardless of whether its reserves are real or imagined, Tether can refuse to redeem USDT for cash “for any reason (or for no reason) at any time.”?How can any company spout off about their ‘strength and stability,’ with such an outrageous customer admonition?

My take -- and I have no financial interest of any kind in the crypto-ecosystem – is that Tether looks like one mammoth house of cards. Get. Out. Now.

*John Reed Stark?is president of?John?Reed Stark Consulting LLC, a data breach response and digital compliance firm. Formerly, Mr. Stark served for almost 20 years in the Enforcement Division of the U.S. Securities and Exchange Commission, the last?11 of which?as Chief of its Office of Internet Enforcement. He currently teaches a?cyber-law course?as a Senior Lecturing Fellow at Duke University Law School.?Mr. Stark also worked?for 15 years as an Adjunct Professor of Law at the Georgetown University Law Center, where he taught several courses on the juxtaposition of law, technology, and crime, and for five years as managing director of global data breach response firm, Stroz Friedberg, including three years heading its Washington, D.C. office. Mr. Stark is the author of “The Cybersecurity Due Diligence Handbook.”