While not as well known as Bitcoin, Tether is widely used by traders to bet on price moves for other cryptocurrencies. That’s because the token is more stable than other digital coins but remains outside the traditional banking system, making it relatively easy to transfer between different crypto exchanges.
Tether’s stability, and it’s name, comes from the fact that its value is supposed to be tethered to the U.S. dollar. Tether Ltd. even says that for each digital coin issued, it has $1 in the bank. Some investors have questioned that claim. One reason the CFTC subpoenaed the company was to seek proof that tokens are backed by a reserve of U.S. dollars, Bloomberg reported in June.
Among the issues the Justice Department is examining is how Tether Ltd. creates new coins and why they enter the market predominantly through Bitfinex, the people said.
The probe follows allegations made in a June paper by University of Texas Professor John Griffin and co-author Amin Shams. Griffin and Shams wrote that trading in Tether shows a pattern of underpinning, and manipulating, Bitcoin.
They claimed that Tether was used to buy Bitcoin at pivotal periods, and that about half of Bitcoin’s 1,400 percent gain last year was attributable to such transactions. Griffin briefed the CFTC on his findings earlier this year, according to two people with direct knowledge of the matter.
Griffin declined to comment on whether he’s been contacted by government officials.
After Griffin and Shams published their paper, van der Velde, the Tether Ltd. and Bitfinex CEO, disputed its findings. He said in a statement that “Tether issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex.”
This article was provided by Bloomberg News.