Tether Blasts reports that the stablecoin giant is under investigation for money laundering and sanctions violations

However, Tether can no longer escape serious scrutiny as the Wall Street Journal reported on Friday that federal prosecutors in Manhattan are investigating whether Tether is violating money laundering and sanctions laws by being used by global criminal networks for drug trafficking, terrorism and hacking. The company firmly rejects the allegations.

“It is completely irresponsible for the WSJ to write articles with frivolous accusations with such certainty when no authorities have publicly confirmed these rumors and no sources are cited,” Tether said in a statement Assets. “The article also carelessly glosses over Tether’s well-documented and extensive dealings with law enforcement to crack down on malicious actors seeking to abuse Tether and other cryptocurrencies.”

With a market capitalization of $120 billion, Tether’s U.S. dollar-pegged stablecoin plays an essential role as a settlement currency for crypto trading and a hedge against volatility in many countries whose populations do not have access to U.S. dollars. However, its unclear connection to regulation has led to ongoing questions about how exactly the stablecoin is covered and whether Tether is being used for criminal activity.

Tether has faced previous investigations, including by the New York Attorney General’s Office, which fined Tether and its parent company iFinex $18.5 million in 2021 for operating illegally in the state, and by the Commodity Futures Trading Commission. As a result, Tether was ordered to pay a $41 million fine in 2021 for illegal transactions. The latest investigation is the reported expansion of a Justice Department investigation into whether Tether’s backers committed bank fraud.

A spokesman for the U.S. Attorney for the Southern District of New York did not immediately respond to a request for comment.

The rise of Tether

Founded in 2014 by Bitcoin enthusiasts including Mighty Duck actor Brock Pierce, Tether was one of the earliest versions of a stablecoin – a type of cryptocurrency pegged to an underlying asset such as fiat currency or commodities such as gold or oil. The project was soon acquired by Bitfinex, one of the leading crypto exchanges.

While Tether maintained respectable volume, its usage increased during 2021’s bull market, as the explosion in trading drove the need for a crypto-native settlement currency on exchanges that were less volatile than Bitcoin or Ethereum. While Tether faced competition from rivals like USDC, a stablecoin project backed by Circle and Coinbase, its offshore operations also made it an attractive option for people in countries outside the U.S. sphere of influence, including in economies without access to the dollar like Argentina and Lebanon.

Despite Tether’s astronomical growth, the company continued to face questions about its management, including whether the stablecoin was actually fully backed by dollars. A 2021 investigation by Bloomberg found that much of Tether’s reserves were held in risky assets such as commercial paper from Chinese companies. The company has insisted it no longer uses this practice. However, Tether has yet to undergo traditional auditing, as it is said to be difficult to convince large accounting firms to take the company on as a client.

Blockchain analysis firms have also linked Tether to global criminal networks, particularly a version of the stablecoin issued on the Tron blockchain. A report published earlier this year by TRM Labs found that Tron hosted 45% of all illicit volume in 2023, with more than half of Tether’s current market cap hosted on Tron. Tether has announced initiatives to combat criminal use and freeze addresses associated with illegal behavior. In September, Tether and Tron announced a new partnership with TRM Labs called T3 Financial Crime Unit.

Ongoing control

The outstanding questions surrounding Tether have not hindered its growth, especially after its rival USDC briefly lost its $1 peg in secondary markets during the banking crisis in March 2023. Even with the launch of new stablecoins from companies like PayPal, Tether continues to dominate the industry. The company also has the backing of Howard Lutnick, the CEO of financial services giant Cantor Fitzgerald, who manages some of Tether’s backing assets. Lutnick is a key economic adviser to former President Donald Trump.

However, the newly reported investigation into Tether’s business raises the risk of disruption for both the company and the crypto sector as a whole, similar to what happened following the collapse of the fraudulent FTX exchange in November 2022. Tether is arguably a more important part of the crypto industry than FTX, as its stablecoin supports the global crypto economy.

Potential charges could mirror the Justice Department and Treasury Department case against Binance, which focused on money laundering and sanctions violations by the exchange stemming from the activities of terror and drug trafficking networks. Tether has been linked to groups such as Hamas and Russian arms dealers.

“There is no indication that Tether is under investigation,” Tether CEO Paolo Ardoino posted on X after the news broke. “WSJ revives old noise. Point.”