In 2019, Tether got away with a blatant misrepresentation about the state of its stablecoin reserves. This dubious behavior did nothing to deter the cryptocurrency industry from embracing Tether, which remains the stablecoin market leader. He set an example of what is considered acceptable in the industry. And here we sit in the middle of the FTX saga.

Former FTX CEO Sam Bankman Fried (SBF) is very familiar with Tether because his other company, Alameda, was the second largest Tether distributor. In other words, by the time Tether is minted, about a third has gone to Alameda.

There are parallels between the business structure of Tether and SBFs. Tether is owned by Giancarlo Devasini, who also owns the Bitfinex cryptocurrency exchange. In the case of Tether, he used the stablecoin’s reserves to prop up the crypto exchange. SBF also owned a cryptocurrency exchange, but instead his other ‘independent’ business was the proprietary trading company Alameda. And it appears he used the trade to prop up Alameda.

The companies shared banks: Deltec was one of Tether’s banks and is listed in FTX’s recent bankruptcy filings.

SBF admires Tether founder

In July 2021, the Financial Times published an exposé on Tether founder Devasini. “Bankman-Fried says Devasini is ‘very proud’ of what he has built on Bitfinex and Tether,” the FT article reads. He quotes SBF as saying: “He is very grateful for the people who supported him. He certainly is quite upset with the people he sees as. . . shitting on his business for no real reason for it.”

Let’s take a minute to explore the real reason.

In 2019, Tether claimed: “Every Tether is always backed 1 to 1, by traditional currency held in our reserves. So 1 USDT always equals 1 USD.” While this statement was active on his website, he lent $625 million of his reserves to the Bitfinex exchange to cover a massive exchange loss.

Later, he quietly modified that reserve statement to include the loans made by Tether, “which may include affiliated entities.”

Tether and Bitfinex acknowledged these and other misrepresentations in a settlement with the New York Attorney General. They agreed not to do business in New York and paid a fine of $18.5 million.

The Attorney General also made a comment that is eerily similar to one made by SBF. “During this period of time, Bitfinex began to look for ways to avoid what Bitfinex internally characterized as a ‘temporary liquidity crisis’.”

So, SBF’s reference to people criticizing Tether ‘for no real reason’ seemed flippant at best. His comments and his relationship with Tether imply that he saw nothing wrong with Tether’s actions.

Get out of a hole in the balance sheet

At the time of the Bitfinex/Tether New York deal, it was early 2021 and crypto winter had turned into spring. So Bitfinex and Tether made profits elsewhere and got out of the balance sheet hole.

Technically, the Tether misrepresentations were not fraud because there was no loss of customers anymore. In civil law, fraud involves an intentional or negligent misrepresentation that someone reasonably relies on and is harmed by that reliance.

Had Bitfinex and Tether not traded in the loss, the actions would have been more than a misrepresentation.

When the New York legal settlement was announced in early 2021, Tether had a market capitalization of $32 billion. From then until the May 22 crypto crash, there was almost linear growth to $83 billion.

By continuing to use Tether despite evidence of wrongdoing, the crypto industry could be said to have endorsed Tether/Bitfinex’s behavior. In particular, cryptocurrency exchanges and market makers. And he set a precedent: plug a hole by changing it.

The problem is that the large cryptocurrency exchanges that have continued to support Tether are not paying the price of SBF and FTX shares. It’s the retail customers that are.