The story, summarized, as I understand it from this article:
1. It's difficult to bank cryptocurrency because traditional finance has KYC/AML procedures and cryptocurrency exchanges (generally) don't.
2. For awhile, the largest exchange was Bitfinex.
3. Bitfinex suffered a breakin and lost $70MM worth of Bitcoin, and became insolvent.
4. Bitfinex took 36% of all clients deposits/balances to make up for the loss, and repaid them in "BFX" tokens, redeemable for equity in Bitfinex, and eventually for $1/BFX.
5. Bitfinex banked through a series of small regional banks, but these were all backstopped by Wells Fargo, which ultimately cut Bitfinex off.
6. So Bitfinex switched to Tether, a stablecoin meant to trade 1:1 with USD; if you can trust Tether, you don't so much urgently need bank support, because even if Bitcoin (or Monero or whatever) plunges in value, your Tethers will still be worth $1; you can "offramp" your cryptocurrency into Tethers instead of USD.
7. Ostensibly, Tether works by being backed by reserves of dollars or dollar-equivalent commodities.
8. This, as kind of an aside, is a huge win for criminals, who accept fraud detection risk every time they deal with a real bank, but can't accept the currency risk of keeping holdings in cryptocurrency. Bitfinex/Tether even advertises Tether as a way of avoiding KYC.
8. Tether isn't and probably never was backed by dollars or dollar-equivalent commodities; rather, Tether was "backed" by some admixture of Bitfinex receivables and cryptocurrencies.
9. Tether got kicked out of all the Asian banks, happened on a tiny Puerto Rican "bank" called Noble, which was backed by the large BNY Mellon bank; Noble balked at banking Tether, Tether invested $2MM in Noble to get over that objection, BNY Mellon noticed, and killed Noble.
10. Tether switched to Deltec Bank.
11. Tether started using a money laundering firm called Crypto Capital, which set up shell companies to fraudulently route deposits to banks with poor KYC/AML compliance; Bitfinex gave customers wire instructions sourced from Crypto Capital, which were all in some sense I guess a form of wire fraud? Super-amusingly, the wire instructions Bitfinex sent customers included a warning not to reveal any of the details of the instructions, to avoid systemic risk to the greater cryptocurrency economy.
12. Crypto Capital's founder stole a bunch of money from his firm, over a long period.
13. Crypto Capital got caught, a bunch of their accounts got frozen, Tether became insolvent, there was a run on Tether.
14. But Tether is still worth $1, possibly because Bitfinex resorts to shenanigans to satisfy withdrawals, like offering a premium for withdrawals denominated in Bitcoin (which you can sell at a reputable, banked exchange for dollars), or using mules to deliver dollars on a bespoke basis, or satisfying withdrawals using customer deposits directly and papering over that fraud with loan documentation.
15. A bunch of people got indicted recently.
16. The plates are still spinning in this plate-spinning act.
You're missing this little bit: Tether is not asking questions (of a KYC/AML nature) at a scale where they are required to be asking those questions, and the only people who would agree to work with them turned out to be criminals (for not asking those questions), who skimmed off money from Tether in the process. But don't worry, because the government will totally make them whole because there is no way that innocent little Tether could have known of all the illegal shenanigans going on… breaks down in riotous laughter
1. It's difficult to bank cryptocurrency because traditional finance has KYC/AML procedures and cryptocurrency exchanges (generally) don't.
2. For awhile, the largest exchange was Bitfinex.
3. Bitfinex suffered a breakin and lost $70MM worth of Bitcoin, and became insolvent.
4. Bitfinex took 36% of all clients deposits/balances to make up for the loss, and repaid them in "BFX" tokens, redeemable for equity in Bitfinex, and eventually for $1/BFX.
5. Bitfinex banked through a series of small regional banks, but these were all backstopped by Wells Fargo, which ultimately cut Bitfinex off.
6. So Bitfinex switched to Tether, a stablecoin meant to trade 1:1 with USD; if you can trust Tether, you don't so much urgently need bank support, because even if Bitcoin (or Monero or whatever) plunges in value, your Tethers will still be worth $1; you can "offramp" your cryptocurrency into Tethers instead of USD.
7. Ostensibly, Tether works by being backed by reserves of dollars or dollar-equivalent commodities.
8. This, as kind of an aside, is a huge win for criminals, who accept fraud detection risk every time they deal with a real bank, but can't accept the currency risk of keeping holdings in cryptocurrency. Bitfinex/Tether even advertises Tether as a way of avoiding KYC.
8. Tether isn't and probably never was backed by dollars or dollar-equivalent commodities; rather, Tether was "backed" by some admixture of Bitfinex receivables and cryptocurrencies.
9. Tether got kicked out of all the Asian banks, happened on a tiny Puerto Rican "bank" called Noble, which was backed by the large BNY Mellon bank; Noble balked at banking Tether, Tether invested $2MM in Noble to get over that objection, BNY Mellon noticed, and killed Noble.
10. Tether switched to Deltec Bank.
11. Tether started using a money laundering firm called Crypto Capital, which set up shell companies to fraudulently route deposits to banks with poor KYC/AML compliance; Bitfinex gave customers wire instructions sourced from Crypto Capital, which were all in some sense I guess a form of wire fraud? Super-amusingly, the wire instructions Bitfinex sent customers included a warning not to reveal any of the details of the instructions, to avoid systemic risk to the greater cryptocurrency economy.
12. Crypto Capital's founder stole a bunch of money from his firm, over a long period.
13. Crypto Capital got caught, a bunch of their accounts got frozen, Tether became insolvent, there was a run on Tether.
14. But Tether is still worth $1, possibly because Bitfinex resorts to shenanigans to satisfy withdrawals, like offering a premium for withdrawals denominated in Bitcoin (which you can sell at a reputable, banked exchange for dollars), or using mules to deliver dollars on a bespoke basis, or satisfying withdrawals using customer deposits directly and papering over that fraud with loan documentation.
15. A bunch of people got indicted recently.
16. The plates are still spinning in this plate-spinning act.
Am I missing anything here?