A recent research paper, soon to be published in the prestigious Journal of Finance, has ignited widespread discussion across the financial world, regulatory bodies, and the cryptocurrency industry. This 119-page study, titled “Is Bitcoin Really Un-Tethered?,” authored by finance professors John Griffind of the University of Texas and Amin Shams of Ohio State University, employs rigorous methodologies and diverse analytical perspectives to assert the existence of Bitcoin price manipulation, implicating stablecoin issuer Tether as a key player.
Core Research Findings: USDT Over-Issuance Drives Price Manipulation
Utilizing blockchain and market data spanning from March 2017 to March 2018, the professors reached critical conclusions:
- Tether is suspected of artificially inflating Bitcoin prices through the over-issuance of USDT. The research indicates that significant USDT issuances occurred whenever Bitcoin prices experienced downturns or approached crucial price levels. These issuances, the study argues, were not entirely driven by genuine market demand. All manipulative actions point towards a single, massive account, identified as the driving force behind Bitcoin’s surge to its $18,000 all-time high. This raises serious concerns about Bitcoin market integrity.
- USDT may lack full 1:1 USD backing. To address month-end audits and conceal potential reserve shortfalls, Tether allegedly used the same large account to sell Bitcoin in exchange for USD. This calls into question the USDT reserve controversy and the stability of the stablecoin.
In their summary, the professors emphasize that the Bitcoin market price is heavily susceptible to market manipulation, rendering it unreliable and unfair. They advocate for stricter cryptocurrency regulation and caution against the premature launch of derivatives and ETFs in such an unstable market environment.
Top-Tier Journal Validation Triggers Shockwaves
The Journal of Finance, renowned for its stringent publication standards and high impact within the financial academia, lends significant weight to these findings. The study has sent shockwaves through the digital currency research community and traditional financial sectors, drawing intense scrutiny from regulatory authorities worldwide.
Subdued Crypto Industry Response, Weak Counterarguments
In contrast to the broader financial world’s reaction, the cryptocurrency industry’s response has been notably muted, with limited media coverage. Among the few industry voices addressing the research, skepticism has emerged.
Ari Paul, CIO of BlockTower Capital, dismissed the study on social media, suggesting it stems from a misunderstanding of financial asset operations. Samson Mow, CSO of Blockstream, echoed this sentiment in media interviews, labeling the paper’s premise “absurd.” However, these rebuttals lack substance and fail to address the scholars’ meticulous reasoning and data-backed analysis, appearing weak in comparison. The implications for cryptocurrency investment are significant.
“Market Manipulation” Strikes Regulatory Nerve
Cryptocurrencies like Bitcoin, built on blockchain technology and consensus algorithms, aim to decentralize finance. Despite over a decade of growth and increasing integration into mainstream finance, market manipulation risks remain a primary concern for regulators. This fear is a key reason why global regulators have been hesitant to fully embrace digital currencies, worried about market manipulation turning the industry into a tool for wealth extraction and investor exploitation.
Bitcoin’s more decentralized nature has made it relatively more acceptable to regulators and traditional financial institutions, leading to its regulated trading in futures markets. However, the approval of Bitcoin ETF products for retail investors remains elusive, with the U.S. SEC rejecting numerous applications. China’s central bank outrightly declared all publicly traded digital currencies illegal as early as 2017.
Market manipulation is anathema to regulators. The allegation that Bitcoin’s price can be controlled by a single account challenges fundamental perceptions of Bitcoin and the entire digital currency space, potentially undermining its foundation.
Accusations Target a Crypto Heavyweight
The absence of a universally accepted valuation system and high price volatility have driven the popularity of stablecoins since 2017. Today, stablecoin trading volume surpasses Bitcoin, with Tether’s USDT dominating over two-thirds of the market. USDT is crucial for digital currency trading, and Tether’s influence is so vast that it is often referred to as the “central bank of crypto.” This dominance has attracted interest from tech giants like Facebook and central banks exploring CBDC (Central Bank Digital Currency).
However, Tether’s credibility is consistently questioned due to its lack of transparent USD reserve verification and absent audits. Its banking relationships remain undisclosed, fueling industry-wide skepticism. Court documents from April revealed Tether’s admission that USDT’s USD reserves covered only three-quarters of its issued supply.
U.S. regulators, particularly FinCen and the SEC, have long investigated Tether and its parent company, Bitfinex, focusing on anti-money laundering and exchange oversight. The academic paper alleging Tether manipulation of the Bitcoin market provides further ammunition, potentially drawing in the CFTC, which oversees Bitcoin futures markets. If the spot market is manipulated, futures markets become tools for manipulators, compelling the CFTC to act. CFTC involvement could significantly accelerate regulatory enforcement against Tether and Bitfinex. The potential charges extend beyond anti-money laundering or securities law violations to market manipulation, a crime carrying severe penalties.
Bitfinex’s legal counsel has attempted to downplay the research, citing unspecified “academic rigor” issues, but has failed to offer concrete evidence to refute the findings. The inability of Bitfinex and Tether to provide verifiable proof of USD reserves and genuine transaction records further erodes trust.
Already facing industry-wide concerns, Tether and USDT now face heightened scrutiny. Increased regulatory pressure could trigger a run on USDT, potentially leading to its collapse and causing a seismic shift in the digital currency industry.
Ripple Effects and Long-Term Implications
The study’s repercussions will extend across various sectors:
- Academia: Research on the economic impact of digital currencies will likely adjust. Prior studies often assumed Bitcoin prices were market-driven equilibrium outcomes, but this assumption is now challenged. Market microstructure research focusing on preventing digital currency market manipulation will likely become a key area of focus.
- Regulation: Bitcoin ETFs face further roadblocks, and derivatives approvals will become even less likely. Regulators will likely intensify scrutiny of stablecoins and exchanges, cracking down on manipulative stablecoins and illegal exchanges while potentially supporting compliant stablecoins and licensing legitimate exchanges. Optimistic views of China easing digital currency trading bans due to blockchain technology interest may be overly optimistic.
- Industry: Long-term, the research could benefit the industry by fostering a fairer market. However, short-term pain is expected. Bitcoin futures market volatility may increase due to regulatory uncertainty and institutional investor caution. Compliant stablecoins and DEX (Decentralized Exchanges) and DeFi (Decentralized Finance) applications may see growth.
- Individual Investors: Holding substantial USDT long-term carries increased risk, likened to a “ticking time bomb.” Cryptocurrency risk assessment is crucial.
The professors’ report highlights the irony of a supposedly decentralized cryptocurrency world potentially controlled by centralized exchanges and stablecoin issuers. The future of cryptocurrency hinges on addressing this challenge: achieving genuine decentralization or accepting robust regulation.
(Author: Founder of FinTech Post, Senior Researcher at Renmin University of China Fintech Institute)