Bloomberg Takes Tether Crack, Kraken Fires Back
The negative press just keeps coming for Tether. On Friday, Bloomberg issued a report detailing numerous “red flags” surrounding the trading of Tether on the crypto exchange Kraken. Two days later, Kraken fired back, issuing a scathing rebuttal to the allegations of impropriety.
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Rennhack Is No Hack
Bloomberg’s report largely credits the research of Andrew Rennhack, a former professional poker player who now spends much of his time on crypto. Rennhack notes he was at one time “long” on bitcoin (betting on a price rise), but is now “short” (betting on a price decline).
Reading posts from the infamous Bitfinexed is mentioned as one of the reasons for his bearing outlook. Rennhack has been tweeting about Tether, more recently as it relates to Kraken, since early May. Bloomberg has now followed suit, downloading the exchange’s trading data from May 1st through June 22nd of this year to examine. A New York University professor and a former Federal Reserve bank examiner aided in the analysis of the data.
Points of Contention
One major point of contention was the commonality of three specific volumes of tether trades: 75, 1000, and 13076.389. Kraken claims to have spoken to the trader behind the 13076.389 figure, saying it was “literally randomly selected” for or by his bot.
The article notes other uneven trade volume numbers going out several decimal places, including 34.05478, 30.06946, and 34.14089, saying they “could be signals to cheaters’ automated trading programs.” Cheaters would seem to be an unfair label, however, given there are no rules or regulations against the use of bots in crypto trading.
One motive suggested for the high volume in certain numbers is wash trading, which is the use of heavy buying power to give the impression of high volume and demand in order to lure in more investors. Sell orders are set at near identical prices, either on the same exchange or another. Wash trading is illegal in traditional stock markets, but crypto is unregulated.
Kraken’s rebuttal points out there is little if anything to gain from wash trading Tether, given the minimal price fluctuations. They also defend arbitrage trading, noting that in the crypto world, “we often encounter traders who will buy and sell cryptocurrency across various different platforms to take advantage of differences in price.”
Bloomberg also makes note of the heavy trade volume of Tether in short periods of time that fail to impact the USDT price:
“Take May 7, for example. Within a span of less than two minutes, there were 31 consecutive trades to buy the currency, representing a total of 159,487 Tethers. But Tether’s price didn’t budge from 1, despite the unrelenting purchases.”
Furthermore, the outlet said:
“On May 9, eight sell trades for 13,076.389 Tethers each occurred in succession over 16 seconds, yet Tether’s price was unchanged at 0.999. The next trade—for just 75 Tethers—pushed the price up 0.0001.”
Kraken Strikes Back
Kraken pointedly refutes this, stating that “small trades and large trades may result in no change or similar changes in price because there is a much larger buy or sell order in the order book that has not been filled.” Kraken challenges Bloomberg to test that claim themselves. They also point to the very purpose of Tether, being a “stablecoin”:
“Tether is unique in that each USDT is (according to the issuer) collateralized with $1 US dollar. Unlike BTC, ETH, XRP, or other cryptocurrencies, USDT does not experience the same level of volatility because it is asset-backed. The lack of volatility encourages traders to place bigger orders in the orderbook within a tight range, reflecting their confidence that each USDT is worth ~$1 US dollar.”
Among Kraken’s other defenses is the assertion that their USDT trading accounts for only 0.1% of the USDT market, with the vast majority of USDT trading occurring on other trading platforms with other trading pairs. They also take a pot shot at the U.S. dollar, which in their words “itself is an explicitly manipulated asset.”
Kraken held no punches and took direct aim at Bloomberg:
“If we are to take up our pitchforks against market manipulation, guide your torches toward this illumination: the Bloomberg News piece was published on June 29th, the last business day of trading for Q2, and expiration date of numerous futures contracts. It raises red flags.”
Bloomberg Attack Petty, Kraken Won’t Back Down
Kraken also discusses exchange solvency, stating Tether does not present a risk to them. Per Kraken, “If an asset’s value goes to $0, the exchange will simply allow you to withdraw your full balance of worthless assets.” This is hardly a statement likely to assuage investor concerns.
In fairness to Kraken, Bloomberg’s report may not have been written by someone entirely familiar with Tether’s use on exchanges. While correctly stating Tether is useful to customers as “many venues are unable to secure bank accounts to give their customers access to dollars or other traditional currencies,” Bloomberg also says “investors are often paid with Tether when they cash out.”
This seems to be a misrepresentation of how Tether is used on exchanges. When investors cash out they are typically using BTC, or another currency with an available fiat trading pair, to convert to fiat. Tether is mainly used as a hedge investors move their funds into temporarily to safeguard against predicted market volatility.
Following the release of Kraken’s statement, Rennhack chimed in on the controversy he started, largely backing Bloomberg and maintaining his critical stance against Kraken. He had this to say when pointing out Kraken’s defense of their own safety against the rise or fall of Tether itself:
“USDT does not present a solvency risk to exchanges – Don’t worry. Your tokens are safe, but your money is gone. When tether goes bust we’ll give you back your worthless USDT.”
Tether and Kraken Both Mired in Controversy
This report comes under a month after the New York Times published a study alleging Tether manipulation was responsible for much of bitcoin’s bull run of 2017. The United States Department of Justice (DOJ) is currently investigating bitcoin price manipulation, specifically having mentioned wash trading as something being examined. It is unknown if Tether is a part of this investigation. Tether was subpoenaed by the Commodity Futures Trading Commission (CFTC) back in December.
Kraken is one of the community’s oldest exchanges, founded back in 2011. They are one of the few exchanges with a USDT/USD trading pair. Kraken made news in April when publicly refusing to comply with the New York Attorney General’s request for extensive information on the operations of their exchange. The Attorney General, Eric Schneiderman, has since resigned from his post.
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