Photographer: Simon Dawson/Bloomberg

Tether Theft Isn't the First Controversy for Cryptocurrency Firm

  • Dollar-backed tokens aim to ease trading for online exchanges
  • Company doesn’t guarantee users can exchange coins for fiat

The latest victim of a high-profile theft in the world of cryptocurrencies isn’t a stranger to controversy.

Tether Ltd. disclosed Tuesday on its website that a “malicious” attacker swiped $31 million in tokens from its so-called Tether Treasury wallet on Nov. 19 and sent them to an unauthorized bitcoin address. The firm, which issues what it calls U.S. dollar-backed tokens with the purpose of easing trading on crypto exchanges, says it’s trying to prevent the stolen coins from being used.

Skepticism had already been building around Tether after the Hong Kong incorporated company said in April that U.S. dollar wire exchanges of funds had been blocked. That fueled concern about whether the tokens were fully backed by fiat currencies. Critics have also raised questions about Tether’s relationship with Bitfinex, an online exchange that has also been hacked.

Tether has sought to position itself at the center of the crypto ecosystem by helping online exchanges facilitate trades using currencies like the dollar, euro and yen. Anti-money laundering and know-your-customer rules have prevented many bitcoin exchanges from opening bank accounts needed to hold fiat currencies. With a market capitalization of about $675 million, tether is the world’s 20th most-valuable virtual currency, according to data from Coinmarketcap.com.

The utility of the tokens may be the largest question surrounding tether. On the legal section of its website, Tether says it’s not obligated to let customers exchange their tokens for dollars.

Read more on how bitcoin fell after the tether hack was disclosed

"Tethers are not money and are not monetary instruments," the company says. "There is no contractual right or other right or legal claim against us to redeem or exchange your tethers for money. We do not guarantee any right of redemption or exchange of tethers by us for money."

Tether and Bitfinex, which have worked together since at least 2014, sued Wells Fargo & Co. in April after the bank cut off access to U.S. dollar wire transfers, which the companies say they relied on to send money back to customers. The companies voluntarily dismissed the action against Wells Fargo less than a week after it was filed.

Tether’s roots go back to a Santa Monica, California-based digital currency startup called realcoin, which rebranded itself in November 2014. Among its founders was Brock Pierce, a former child actor who starred in "The Mighty Ducks," who also started Blockchain Capital, a San Francisco-based venture capital firm.

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