Cryptocurrency Tether enables a parallel economy that operates beyond the reach of U.S. law enforcement
Wall Street Journal Angus Berwick and Ben Foldy Sept. 10, 2024
A giant unregulated currency is undermining America’s fight against arms dealers, sanctions busters and scammers. Almost as much money flowed through its network last year as through Visa cards. And it has recently minted more profit than BlackRock, with a tiny fraction of the workforce. Its name: tether. The cryptocurrency has grown into an important cog in the global financial system, with as much as $190 billion changing hands daily.
In essence, tether is a digital U.S. dollar—though one privately controlled in the British Virgin Islands by a secretive crew of owners, with its activities largely hidden from governments.
Known as a stablecoin for its 1:1 peg to the dollar, tether gained early use among crypto aficionados. But it has spread deep into the financial underworld, enabling a parallel economy that operates beyond the reach of U.S. law enforcement.
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.
Yet in dysfunctional economies such as Argentina and Turkey, beset by hyperinflation and a shortage of hard currency, tether is also a lifeline for people who use it for quotidian payments and as a way to protect their savings.
Tether is arguably the first successful real-world product to emerge from the cryptocurrency revolution that began over a decade ago. It has made its owners immensely rich. Tether has $120 billion in assets, mostly risk-free U.S. Treasury bills, along with positions in bitcoin and gold. Last year it generated $6.2 billion in profit, outearning BlackRock, the world’s largest asset manager, by $700 million.
Tether’s CEO, Paolo Ardoino, boasted earlier this year that, with under 100 employees, it earned more profit per person than any company ever.
Tether wants “to build a fairer, more connected, and accessible global financial system,” Ardoino said in a May press release. He claims over 300 million people are using the currency.
With sanctions, Washington can cut adversaries off from the dollar and thus much of the global trading system, since all dollar transactions involve U.S. regulated banks. Tether’s popularity subverts those powers.
“We need a regulatory framework that doesn’t allow offshore dollar-backed stablecoin providers to play by a different set of rules,” Deputy Treasury Secretary Wally Adeyemo told The Wall Street Journal. Adeyemo singled out tether in April testimony before Congress.
For this article, the Journal spoke with tether users, researchers and officials, and reviewed messages exchanged between intermediaries, court and corporate records, and blockchain data.
Tether didn’t respond to requests for comment. The company said in May it collaborates with law enforcement and was upgrading its capacity to monitor transactions for sanctions evasion. Tether voluntarily freezes digital wallets used to transfer its tokens that were connected with sanctioned entities, it says. Ardoino said Tether has a “proactive approach to safeguarding our ecosystem against illicit activities.”
How Tether works: The company behind tether, Tether Holdings, issues the virtual coins to a select group of direct customers, mostly trading firms, who wire real-world dollars in exchange. Tether uses those dollars to purchase assets, mostly U.S. Treasurys, that back the coin’s value.
Once in the wider market, tether can be traded for other tokens or traditional currencies through exchanges and local brokerages. In Iran, for example, a crypto exchange called TetherLand allows Iranians to swap rials into tether.
Tether vets the identities of its direct customers, but much of its vast secondary market goes unpoliced. The tokens can be pinged near-instantaneously along chains of digital wallets to obfuscate the source. A United Nations report this January said tether was “a preferred choice” for Southeast Asian money launderers. The company says it can track every transaction on public blockchain ledgers and can seize and destroy tether held in any wallet.
But freezing wallets is a game of Whac-A-Mole. Between 2018 and this June, Tether blacklisted 2,713 wallets on its two most popular blockchains that had received a total of about $153 billion, according to crypto data provider ChainArgos. Of that massive sum, Tether could only freeze $1.4 billion because the rest of the funds had already been sent on.
Tether’s founders—a group that included a former plastic surgeon called Giancarlo Devasini—created the currency back in 2014. Uptake for a stable token was initially slim. The prospect of profiting from billions of accumulated dollars was a “fantasy,” said William Quigley, an investor who was part of the founding team.
He and other co-founders sold their stakes soon after to Devasini, who has run Tether ever since, according to people familiar with the company. The reclusive billionaire lives at a modernist villa in the French Riviera enclave of Roquebrune-Cap-Martin, corporate records show. Ardoino, a fellow Italian, has become Tether’s public face.
Tether’s entry into the crypto mainstream came during the market’s 2020-2021 bull run, as traders used tether to buy and sell out of risky bets. Its market capitalization exploded from $4 billion to almost $80 billion.
The dollar for all: In Venezuela, financially isolated by sanctions and economic mismanagement, Tether found a ready user base.
President Nicolás Maduro’s government was under siege in 2020 from U.S. measures that targeted state oil firm Petróleos de Venezuela, or PdVSA. That October, Maduro’s parliament passed an “Anti-Blockade Law” that authorized the government to use crypto to protect its transactions.
PdVSA began demanding payment for oil shipments in tether, according to people familiar with its activities and transaction records. Purchase orders authorized by PdVSA often instructed buyers to transfer tether to a certain wallet address. Another method was for intermediaries to swap deliveries of cash for tether and load the tokens onto prepaid travel cards, which enabled holders to use crypto for purchases. Venezuelan President Nicolás Maduro’s parliament passed a law allowing the government to use crypto to protect its transactions. The company’s adoption of tether was so pervasive it had another effect: instead of sending oil revenues back to the government, the middlemen that PdVSA used for the sales diverted funds for themselves, leading to a scandal that toppled the oil minister.
“This cryptocurrency’s use only has served to perpetuate gigantic levels of corruption,” Rafael Ramírez, a former oil minister under Maduro, said in an interview.
Venezuela’s government didn’t respond to requests for comment. The country’s attorney general said in April that middlemen’s use of crypto made the stolen funds “undetectable” for authorities.
For regular Venezuelans, tether became a lifeline, too. Inflation that reached 2 million percent wiped out savings held in bolivars. Currency controls made bank transfers abroad impractical.
Guillermo Goncalvez, a 30-year-old Caracas graduate, runs a platform called El Dorado that offers Venezuelans peer-to-peer tether trading, which links buyers and sellers directly. El Dorado has over 150,000 users, who pay fees that are a fraction of what traditional money remitters charge: local stores converting daily revenues into tether, Venezuelan migrants sending money back to families, and freelancers receiving salaries in USDT, as tether is also known. “USDT is the digital dollar for all Venezuelans,” Goncalvez said.
Enough money to fill a plane: In Russia, tether is a vital payment channel, the Journal has previously reported.
A confidential report drawn up this year by a government-backed Russian research center identified tether as one of the most popular ways for importers to convert rubles into foreign currencies. Major institutions are involved, too: Rosbank, a Russian lender, arranges tether transfers for clients to pay suppliers abroad, according to a company presentation circulated in June. Rosbank spokespeople didn’t respond to requests for comment.
It is also the go-to currency for Russia’s elite.
A glamorous fixer called Ekaterina Zhdanova told associates in Telegram messages in 2022 and 2023 that she was arranging huge ruble-for-tether deals for clients. Digital wallets she shared had transferred over $350 million in tether, according to blockchain data.
Born in a Siberian village, Zhdanova, 38 years old, ran a concierge service to help wealthy Russians get foreign visas, and a travel agency that organized luxury cruises. Her ex-husband was a top lieutenant for a billionaire Russian real-estate developer.
Russia’s invasion of Ukraine and the subsequent sanctions amplified demand for her services.
Two months into the war, Zhdanova relayed a request from a client to a group of large Russian crypto traders, according to chats on Telegram. The client, who she said had their own bank, wanted to buy about $10 million of tether each month, needing $300 million’s worth in total, in exchange for cash that would be handed over in the United Arab Emirates or Turkey.
After finding a trader willing to accept the deal, Zhdanova told the group she could coordinate the cash’s collection. “They will use planes to pick up the cash,” she said.
Treasury sanctioned Zhdanova late last year, accusing her of transferring crypto on behalf of unnamed oligarchs. Police in France detained her around that time at an airport there as part of a separate French money laundering investigation, people familiar with her arrest said. She remains in custody. A lawyer for Zhdanova declined to comment.
‘Everything. Everywhere.’: Tether is now investing in startups that use tether for everyday payments. The more Tether can encourage its usage, the more tokens it needs to issue, and so the more dollars it will have to put to work.
In Tbilisi, Georgia, a popular landing spot for Russian émigrés, the token’s symbol—an encircled green “T”—glimmers outside money-change shops with blacked-out windows. Cash machines advertise that users can deposit bills for the stablecoin.
Ardoino, the Tether CEO, visited Georgia last year and approached government officials with an offer to help expand the local crypto economy. They signed a cooperation deal that Ardoino said would make the former Soviet republic a flourishing payments hub. Tether invested $25 million in local startups, according to Georgia’s innovation agency.
The main recipient of Tether’s financing, CityPay.io, has rolled out tether-payment systems for thousands of Georgian businesses. Hotels including Tbilisi’s downtown Radisson Blu Iveria have CityPay point-of-sale terminals, and it has joined with a property venture there to sell premium apartments in tether.
CityPay also facilitates international payments in tether for companies, totaling as much as $50 million a month, according to Eralp Hatipoglu, its Turkish CEO. He said the pressure the U.S. applied on the global banking system created these opportunities. Companies exporting from Turkey to Georgia get hammered with questions from correspondent banks, he said, and wire transfers take days. CityPay’s website advertises “100% anonymous transactions,” though Hatipoglu said they check clients’ identities against sanctions lists and don’t accept Russian businesses.
Tether has said it aims for CityPay to expand into other emerging markets. At a crypto conference in a Tbilisi skyscraper this June, sponsored by Tether and attended by its head of expansion, banners promoted the currency’s use for daily payments on CityPay. Guests queued to buy coffee in tether. “Pay with USDT,” read one sign. “Everything. Everywhere.”
Source: Tether: The Cryptocurrency Fueling the Financial Underworld – WSJ
