The Problem with Tether is not the Reserves, It's the CRIME

Today I feel compelled to take a page out of Brad DeLong’s playbook, as he has consistently challenged journalism that “take[s] an anthropological approach to the Trump administration—look at all these interesting beliefs of this tribe! we should respect their cognitive picture of the universe!” DeLong rightly focuses on stories that make it look like the Trump administration has a rational plan, when they almost never do.

But I suspect the problem may be even more acute when it comes to crypto and finance,¹ because by shifting the frame to the players and their activities (and their wardrobes, and their dinner choices, etc.) these stories often get the basic mechanics of the money tokens/assets and money markets quite wrong.

This morning The NY Times turned its attention to the crypto village in Trumpland, with two front page stories on World Liberty Financial, and Tether, respectively. The World Liberty Financial piece deserves its own anti-sanewashing treatment, to deal with the fact that it somehow misses the wash sales lying at the dead center of the story. But I want – no, need – to say a few words about the Tether piece, because despite being such a straightforward story, this article manages to utterly mangle what’s actually at stake with Tether (and other so-called stablecoin-issuing institutions).

In a much more solid piece of reporting last September, the Wall Street Journal informed its readers of some key facts about Tether:

Wherever the U.S. government has restricted access to the dollar financial system—Iran, Venezuela, Russia—tether thrives as a sort of incognito dollar used to move money across borders.

Russian oligarchs and weapons dealers shuttle tether abroad to buy property and pay suppliers for sanctioned goods. Venezuela’s sanctioned state oil firm takes payment in tether for cargoes. Drug cartels, fraud rings and terrorist groups such as Hamas use it to launder income.

As I explained in my own follow-up at the time, if you want to launder money or buy AK-47s, Tether is the shadow bank for you. Don’t get me wrong, a lot of people give their real money (actual bank dollars) to Tether so that they can place wagers in the crypto casino. Tether is the cashier for that casino – the place you trade money for chips. But a lot of other people give a lot more real money to Tether, with the express intent of engaging in criminal activity. As Paul Krugman put it in a great turn of phrase, crypto is for criming.

The big pile of links in the above paragraph should indicate that these are now established facts. Stablecoins are shadow bank money, used for two purposes – entertainment (gambling), and lawbreaking. But after an opening four paragraphs centering its anthropological account on its main character, Paolo Ardoino, Tether’s current chief executive, The NY Times piece redescribes the above facts with this sentence: “Its stablecoin has proved to be a popular tool for criminals.” The hyperlinks serve as underlined emphasis: Tether’s stablecoin is a popular tool! Sure, that popularity is with criminals, but for details on that, you’ll have to follow the link (not to the WSJ story, but to a very dry report from the International Compliance Association).

With the “facts” now (re)established that Tether is a stablecoin and a tool, the article can turn back to breathless discussion of Ardoino’s recent visit to the United States; neither he nor the article’s authors can resist saying over and over again how amazing it is that someone this rich has never before visited the United States. The reader must persevere for a dozen more paragraphs before they are finally informed about what Tether actually is. One can only hope that the payoff would be worth the wait. Alas, we get this instead:

Tether’s product is designed to address a key shortcoming of traditional cryptocurrencies, which constantly swing in value, making them inconvenient to use for payments and other standard transactions. Because stablecoins maintain a price of $1, many crypto investors prefer using them for trades.

In many ways, Tether and other issuers operate like banks. A trader deposits $500 and receives 500 stablecoins; the issuer generates revenue by investing a portion of those deposits and keeping any returns for itself. But the system works only if the issuer has $1 in reserve for each coin it sends into circulation, allowing customers to redeem their holdings at any time.

Only one of these five sentences is neither wrong nor misleading: it’s quite true that Tether functions like a bank. I loan the Tether institution real money (bank money) and in exchange they give me a token of Tether debt. A “tether” is like a nineteenth-century banknote or a twenty-first-century share in a money market fund – a dollar-denominated debt held against a non-bank institution. Tether is “like a bank” precisely because it is a shadow bank. The only key additional detail needed is to point out that the Tether shadow bank is currently less regulated than either nineteenth-century “wildcat” banks or most contemporary shadow banks.

But after that, everything in those paragraphs is a disaster.

First, tethers are absolutely not “designed” to overcome a problem with “traditional” crypto. If by “crypto” we mean decentralized blockchain assets, like bitcoin, then tether is not crypto at all. Tether is designed to create an unregulated shadow bank masquerading as part of (and providing an onramp into) the crypto universe. Unlike the ridiculous and untenable “algo stablecoins” that collapsed so spectacularly in the crypto winter, tethers do not “maintain a price of $1” somehow magically, of their own power and accord. Tether issues their own debt, which means they issue promises to pay $1. That’s the only thing that makes a tether worth a dollar. People operating in the crypto universe (but also in the crime universe) prefer tethers because it’s cheaper to convert all your real dollars to tethers, and then use tethers to trade crypto or launder money, than it is to constantly try to exchange real dollars directly for crypto assets.

Yes, Tether takes its depositors’ money and buys T-bills (and some crazy other stuff) with it, but when the Times says Tether keeps the “returns for itself” they elide a key distinguishing feature of tether. It’s an unregulated shadow bank, yes, but more than this, it’s an unregulated shadow bank that pays 0% interest on deposits. The money market fund (MMF) I referenced above will pay me 4.15% when I loan them money; they will then invest that money in T-bills, currently yielding 4.31%. They make money on that 16 basis points (bps) spread. But Tether will pay me nothing for my deposits, and then turn around and buy the same T-bills. Tether’s spread is 431 bps. They earn 27 times more profit than the MMF!

We should be asking why. The Times articles should be explaining how any of this is even possible. But the article’s authors don’t even remark on it; they don't even tell us how massive Tether’s profits are. The answer matters a lot. Tether gets 27 times more profit for two reasons. First, they are unregulated, and complying with regulations costs money, and thus eats into profits. But second, and really the whole explanation in this particular example, Tether has convinced customers to deposit billions of dollars while demanding no interest in return. Why do Tethers customers agree to this? For many of them, because they want to engage in criminal activity! Mobsters and loan sharks have always earned higher rates of interest than your local bank branch, because banking costs more in the criminal universe. (This is also why mobsters are rich, a key point to keep in mind when outlets like the Times talk about “crypto billionaires.”)

That brings us, finally, to the last line, which is perhaps less consequential in terms of sanewashing Tether, but does point to the utter failure of journalistic fact-checking in 2025. First, the system works not because Tether holds a dollar “in reserve” for every tether issued. That’s not how a bank works. Rather, the system works as long as there is not a run on Tether. There’s strong evidence to suggest that back when Tether’s balance sheet held a bunch of Chinese commercial paper, Tether might have been insolvent. But a bank doesn't need to be solvent if it can hide its balance sheet from the depositors and prevent them from withdrawing all their money. As to the former, Tether has no regulator, so regardless of what documentation they show online, one can never be certain about the health and status of their balance sheet.

As to the latter – ah, well there’s the rub: the Times tells us the system “allow[s] customers to redeem their holdings at any time.” That claim is utterly false. Tether explicitly prohibits many of its customers from withdrawing any of their money, and significantly constrains withdrawals by all of its customers. Their rules are quite strict: if you have less than $100,000 on deposit, you are not allowed to withdraw your money (to redeem your tether tokens) from Tether at all.² Even those who do hold over $100k in their account, face significant fees: 0.1% of the redemption amount, plus a $150 “verification fee.” And those customers can make but one withdrawal per week. Tether: it’s just like a bank…only we don’t pay interest and we make it really hard for you to get your money back.

Perhaps these details are just too picayune for the Times journalists and editors? Yet getting the facts right on Tether redemptions would lead readers to ask: wait, why would anyone deposit money there? More specifically, why would anyone deposit that much money there? There are currently $148 billion in tethers issued. Sure, these fees and restrictions might be annoying for the individual wanting to stake a few hundred dollars in crypto bets, but those individuals make up only a fraction of the total tethers. Why would someone deposit $10 million at the Tether shadow bank, earning no interest and subjecting oneself to onerous withdrawal constraints?

The answer is obvious: you go to Tether if there’s nowhere else to go. You go to Tether to deposit money that is the result of doing crime, as a first step to doing more crime, or perhaps both. In my piece last September I closed by calling for US Federal prosecution of Tether, a conclusion that appears at best quaint and at worst naive today, under Trump 2.0. But literally the very least we can do regarding Tether is refuse to pretend that it’s an innovative/disruptive technology company that has created new and inspiring financial tools.

Tether is a shadow bank for money laundering. It borrows the bulk of its funding from criminals, and then loans that money to the US Treasury. It pays its depositors less than 0% interest (given the fees) and gets paid over 4% interest by the USA. In 2024 Tether took in more than $7 billion from Treasury interest and repo, more than half of its accounting profit for the year. That $7 billion comes from US Taxpayers,³ but ultimately it is blood money.

1. Perhaps this distinct phenomenon even calls for a different name, but I’m averse to creating another *washing term.

2. In banking terms, this would be as if Bank of America told me that I was not allowed to withdraw the $2,000 I have in my account. If I want to turn that money into cash, I need to sell those deposits to some other third party – in other words, write a check to someone in exchange for cash.

3. MMT folks might want to debate this phrasing in technical terms, by arguing that the Treasury can pay interest on its T-bills just by issuing new debt and/or commanding the Fed to use Fed Reserves to pay T-bill holders. That is, the government doesn’t need to get the tax money first; rather, they can spend first, and then use the tax money to cancel out that debt. Sure. But this is a circle, and, like any circle, it has no starting point. The ability of the government to spend first depends on their power to tax and police (the asset side of the Treasury’s balance sheet includes power). Thus, the US taxpayers are there from the start. Even if the government doesn’t “borrow first” their initial spending is itself “backed” by those citizens over which the government wields taxing powers.