Tether is facing federal criminal investigation, what is the reason?

US federal authorities are investigating crypto company Tether for alleged violations related to sanctions and anti-money laundering (AML) regulations. According to people familiar with the situation, the investigation, led by the Manhattan U.S. Attorney’s Office, is examining whether the digital currency Tether (USDT) facilitated unlawful transactions by third parties. These include the alleged financing of illegal activities such as drug trafficking, terrorism, hacking or the laundering of illegal funds.

Tether in the crosshairs of criminal activity

Meanwhile, the Treasury Department is considering sanctions against Tether. The widespread use of the USDT stablecoin by individuals and organizations subject to US sanctions, including Hamas and Russian arms dealers, has also raised concerns. Sanctioning Tether would prohibit US citizens and companies from transacting with the crypto company.

Tether’s stablecoin, USDT, has been the focus of increasing regulatory scrutiny in recent years. Unlike cryptocurrencies with high volatility, USDT’s value is pegged to the US dollar, making it a potential alternative in areas where the use of American currencies is restricted by US authorities.

As the most traded stablecoin worldwide, USDT records a daily trading volume of up to $190 billion. Digital currency is reportedly an important funding tool for priority national security concerns. Illicit operations allegedly funded with USDT include North Korea’s nuclear weapons program, Mexican drug cartels, Russian weapons manufacturers, Middle Eastern terrorist groups, and Chinese chemical producers used in fentanyl production.

Tether’s interactions with regulators and law enforcement go back several years. Initially, the Justice Department’s investigation focused on possible bank fraud, specifically examining whether USDT’s backers had forged documents to secure access to global banking services, sources say.

Company representatives deny comprehensive investigation

However, Tether denies that it is facing an expanded investigation. “To suggest that Tether is somehow involved in supporting criminal actors or evading sanctions is outrageous,” a company representative said, according to a Wall Street Journal report. They also emphasize that the company is actively working with U.S. and international law enforcement agencies “to combat illegal activities.”

The company has reportedly increased its controls to prevent its digital currency from being used for illegal activities. According to Tether executives, the transparency of the blockchain, where USDT transfers are recorded on a public ledger, makes it impractical for illegal use. They noted that this allows authorities to track and, if necessary, confiscate funds, rendering such efforts pointless.

In recent years, U.S. prosecutors have pursued some prominent players in the crypto sector. These include Binance founder Changpeng Zhao, who was sentenced to four months in prison and fined $4.3 billion for failing to meet his anti-money laundering obligations.

Additionally, Tether has also faced regulatory challenges in the past. A few years ago, the company paid $61 million to settle investigations by the New York Attorney General’s Office and the Commodity Futures Trading Commission. At the time, the company was accused of misrepresenting its asset security.

Tether’s ongoing investigation could impact its partners such as brokerage firm Cantor Fitzgerald. This brokerage firm manages the majority of Tether’s foreign reserves, including approximately $80 billion in U.S. Treasury securities, making Tether one of the largest holders of these government-backed assets.

Cantor Fitzgerald CEO and Trump ally Howard Lutnick plays a prominent role on the Trump-Vance transition team. The Trump campaign commented that Lutnick was a “renowned business leader and philanthropist,” without commenting on the ongoing investigation.

Recently, Tether took further action to freeze 1,850 crypto wallets and recover an estimated $114 million in assets. To improve monitoring, the company has partnered with analytics firms Chainalysis and TRM Labs. The company also expanded its lobbying team and hired a former PayPal executive with experience in digital currency regulation. However, the legal review does not seem to be over yet.

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