The Complex Business Model Behind Tether and Bitfinex

The world of cryptocurrency and blockchain technology is still a nascent one, with new developments and innovations emerging on a regular basis. One of the most controversial players in this space has been the organization behind the digital currency Tether and the cryptocurrency exchange Bitfinex. The business model and operations behind these two related entities have long been shrouded in some mystery, leading to significant debate, speculation, and scrutiny within the cryptocurrency community. This article will explore what is known, as well as the open questions, around the complex business model powering Tether and Bitfinex.

The Origins and Purpose of Tether

Tether is a stablecoin, meaning it aims to maintain a stable value through asset backing, rather than relying on market forces. The purported purpose behind Tether is to allow traders to realize gains and losses from cryptocurrency speculation without converting back into fiat currencies. As a stablecoin, Tether provides a "safe haven" that traders can temporarily hold value in, without exposure to the notorious volatility of the crypto markets.

Tether was launched in 2014 through a partnership between Bitfinex and Tether Limited. Tether Limited is incorporated in Hong Kong and has oversight over Tether's operations and growth. The most prominent personality behind Tether's founding was Brock Pierce, an entrepreneur known for his work in the cryptocurrency and gaming spaces.

A key part of the stablecoin model is asset backing - having sufficient currency reserves to redeem Tethers at face value. Tether originally claimed to hold 1 USD for every 1 USDT (a Tether token) issued. Questions around Tether's reserves have been at the heart of much of the controversy surrounding the organization.

How Does Tether Generate Revenue?

As a digital currency, Tether brings in revenue through:

• Float interest - Tether invests the cash reserves backing Tether tokens in money markets and generates interest.
• Transaction fees - Small transaction fees are charged on Tether's network. These are 0.1% for transactions under $1000 and 0.2% for transactions over $1000.
• Market making - Tether facilitates liquidity in certain cryptocurrency markets through market making activities.
• Account fees - Fees are charged for services like account set up and wire transfers.

Tether also benefits from a synergistic relationship with Bitfinex, which provides added revenue streams and opportunities.

The Murky Relationship Between Tether and Bitfinex

Tether and Bitfinex share common ownership and leadership, though the exact nature of their corporate relationship remains unclear. Bitfinex was established in 2012 and became one of the largest cryptocurrency exchanges worldwide.

Some of the known connections between Tether and Bitfinex include:

• Shared leadership - Bitfinex's CFO Giancarlo Devasini was previously described as Tether’s CFO in legal documents. Phil Potter is another executive with leadership roles in both companies.
• Banking relationships - Documents have shown Bitfinex and Tether sharing bank accounts in several instances.
• Similar corporate structure - Both are owned and operated by iFinex Inc, which is incorporated in the British Virgin Islands.

The close ties between these two entities have raised questions around conflicts of interest, transparency, and whether Tether reserves ultimately benefit Bitfinex. This cloud of uncertainty has informed much of the ongoing controversy surrounding Tether.

Lingering Questions Surrounding Tether's Reserves

One of the biggest points of controversy for Tether centers around its asset reserves. Tether operates under the premise that every Tether token is backed 1-to-1 by fiat currency held in reserves. However, Tether has provided minimal transparency around its reserves and accounting practices.

Some of the major questions that persist around Tether's reserves include:

• Are reserves fully backed? There are concerns reserves may not match up 1-to-1 with circulating token supply.
• What is the makeup of reserves? Tether has provided limited details on the actual assets backing Tether tokens.
• Where are reserves held? Tether has not disclosed the banking partners that hold its reserves.
• Have reserves been used to manipulate markets? There are allegations Tether reserves were used to manipulate Bitcoin prices during key market movements.

Until Tether provides more transparency and trustworthy accounting around its reserves, doubts will persist around whether there are sufficient assets fully backing the billions of Tether tokens in circulation.

Ongoing Investigations and Allegations

Given the concerns around transparency and potential conflicts of interest, Tether has been the subject of various criminal and regulatory investigations. Some of the major allegations and probes include:

• Market manipulation - Regulators have looked into whether Tether manipulated Bitcoin and wider cryptocurrency prices through issuing new tokens.
• Hiding losses - Allegations that Tether reserves were used to cover losses at Bitfinex during an $850 million loss incident in 2018.
• Banking issues - Tether having accounts closed at various banks due to concerns around legality of its business model.

While Tether has not been found guilty of any wrongdoing, the lack of clarity around its operations continues to raise suspicion. Until Tether operates with greater transparency and provides more disclosures around reserves, doubts around the company's activities are likely to persist.

Tether's Future: Can It Maintain Dominance and Build Trust?

As one of the earliest and most widely used stablecoins, Tether has dominated the market despite the controversies surrounding it. Looking ahead, some key questions around Tether's future viability remain:

Can Tether maintain market share as competition heats up? Rival stablecoins like USDC and BUSD now have hundreds of billions in circulation.

Will lack of transparency continue hampering adoption? Trust is crucial, and many institutions may shy away while doubts around reserves persist.

Will regulators intervene? Global regulators are increasingly scrutinizing the crypto space. Tether's opacity could draw crackdowns.

Despite the doubts, Tether continues growing rapidly while cementing itself as a pillar of the cryptocurrency markets. However, building greater transparency around reserves and accounting will be vital for Tether to gain full trust and solidify its long-term standing.