Tether ($USDT)

Controversies and Challenges

Reserve Transparency

One of the most persistent controversies surrounding Tether has been questions about its reserve backing. Critics have long questioned whether the company actually maintains sufficient dollar reserves to back all outstanding USDT tokens. These concerns led to several legal investigations and auditing demands from regulatory authorities. In response, the company has developed a transparency initiative which includes regularly publishing reports and providing other data to help users better understand the token’s underlying assets.

Legal Challenges

In April 2019, the NYAG's office, then under Attorney General Letitia James, filed a legal action against iFinex Inc. (Bitfinex's parent company) and Tether Holdings Limited. The core allegation was that Bitfinex had lost access to approximately $850 million in customer and corporate funds held by Crypto Capital Corp., a Panamanian payment processor. The NYAG alleged that rather than disclosing this loss, Bitfinex accessed Tether's reserves to cover the shortfall, essentially using funds that were meant to back the USDT stablecoin.

The NYAG further alleged that Tether had misrepresented the status of USDT to investors and the market. Contrary to Tether's claims that each USDT token was fully backed by U.S. dollars held in reserve, the investigation suggested that this technically may not have been true at all times. Some observers saw this as particularly problematic because knowledge of tethers being unbacked could have disastrous consequences in terms of confidence in the token. Some insiders pushed back on this notion, arguing that even if tethers weren’t 100% backed at all times, confidence was largely unaffected, which is ultimately what mattered when considering some kind of catastrophic event involving a run on the market.

The legal proceedings continued for nearly two years, during which Tether and Bitfinex fought against document production orders and challenged the NYAG's jurisdiction. A significant legal question was whether digital assets like USDT qualified as securities or commodities under New York's Martin Act, which would determine the scope of the NYAG's authority in the matter.

The case never went to trial because In February 2021, the parties reached a settlement agreement. Tether and Bitfinex agreed to pay $18.5 million in penalties and cease trading activities with New York residents and entities. The settlement also required Tether to provide quarterly transparency reports detailing the composition of its reserves for two years. Importantly, while agreeing to the settlement terms, neither company admitted to any wrongdoing. In fact, many observers saw this as a massive win for Tether. Paying a settlement in the amount of $18.5 million is barely a rounding error for a company as wealthy and successful as Tether. They weren’t found guilty of any crimes.

The settlement agreement revealed several noteworthy findings. The NYAG confirmed that Tether had no access to banking for significant periods between 2017 and 2018, contradicting its market representations. Additionally, the investigation found that Tether had transferred $625 million from its reserves to Bitfinex to address the latter's liquidity issues stemming from the funds frozen at Crypto Capital.

The case had significant implications for the cryptocurrency ecosystem. It highlighted regulatory concerns about stablecoin transparency and reserve management while establishing precedent for state-level enforcement actions against cryptocurrency companies. The settlement requirements effectively forced Tether to provide greater transparency regarding its reserves, which it had previously been reluctant to do.

Following the settlement, Tether began publishing quarterly attestation reports about its reserves. These reports revealed that a significant portion of Tether's backing consisted of commercial paper and other assets beyond cash and cash equivalents. This disclosure further fueled ongoing market concerns about the true stability and backing of USDT. Ultimately, as of 2025, none of these concerns have come to bear and Tether has solidified its ties to the world of traditional finance. Truly, too big to fail.

Still, the legal challenges for Tether did not end with the NYAG settlement. The U.S. Department of Justice and the Commodity Futures Trading Commission (CFTC) conducted their own investigations. In October 2021, the CFTC fined Tether $41 million for making untrue or misleading statements about USDT backing between June 2016 and February 2019.

The Tether-Bitfinex case represents something of a watershed moment in cryptocurrency regulation, demonstrating that despite the novel and decentralized nature of digital assets, traditional legal frameworks and regulatory authorities can and will intervene when they see fit. The case also underscores the tension between innovation in financial technology and the need for transparency, accountability, and consumer protection in emerging financial markets.

Market Manipulation Allegations

Certain research suggested that Tether issuance has been used to manipulate Bitcoin prices, particularly during the 2017 bull run. These allegations have been denied by Tether’s executives and newer research has demonstrated that manipulation claims have largely been based on erroneous conclusions and are unsupported by data.

Regulatory Framework Development

As the stablecoin market has matured, Tether has worked to adapt to evolving regulatory requirements across different jurisdictions. This has included implementing more robust KYC/AML procedures and working with regulators to establish clearer guidelines for stablecoin operations. The company has really been a leader in working with law enforcement to track and freeze funds used by bad actors. This has led to hackers and other criminals turning to tools like Tornado Cash and traditional cryptocurrencies like Bitcoin and Ethereum due to their truly uncontrollable nature. While USDT and USDC can be frozen, BTC and ETH cannot (on the other hand, regulators can place your address on a sanctions list.)