Tether, a company behind a digital token of the same name, has settled charges with the U.S. Commodity Futures Trading Commission (CFTC) to the tune of $41 million. The settlement is related to claims that its stablecoin was fully backed by U.S. dollars.

The CFTC agreed to the settlement terms since there were misrepresentations about Tether's backing. They indicated that a one-to-one backing existed, meaning one Tether stablecoin for every one U.S. dollar equivalent. While the company fulfilled this promise some of the time, they did not fulfill it 100 percent of the time.

The CFTC also announced on the same day that Bitfinex, a Tether-affiliated cryptocurrency exchange headquartered in Taiwan and founded in 2012, was fined $1.5 million for illegal digital asset transactions with Americans. The CFTC statement indicated that they found no violations with the company after December 2018.

Legal Issues Surrounding This Case.

Regardless of investing experience, the Tether case is complex. By and large, the most significant issues surrounding it include insufficient reserves, broken investor promises, and digital asset transparency. These issues touch on a lot of hot button issues surrounding stablecoins, not only from an investor standpoint but from a legal one as well.

Here is a closer look at the three main legal issues surrounding this case:

Issue 1. Insufficient Reserves

On October 15, 2021, the CFTC issued a statement saying that Tether mispresented its fiat backing between June 2016 and February 2019. According to the statement, the company lacked sufficient reserves to back all issued tokens a majority of the times sampled.

Issue 2. Broken Investor Promises

Tether also failed to disclose that its stated reserves included non-fiat assets. They also falsely told investors that they would audit their reserves routinely to ensure a 100 percent reserve. These reserves never went through the audit process as uncovered in the investigation.

Issue 3. Digital Asset Transparency

The key issue in the Tether matter is the expectation of transparency. Not only do crypto and digital assets value disclosure, but a rapidly growing and developing marketplace demands it.

Takeaways and Future Events.

Although Tether settled with the CFTC, there are still lingering issues that remain. From the DOJ to the Treasury, the company will likely continue to face legal scrutiny for the foreseeable future. Other digital and cryptocurrencies and exchanges should take note and take action to avoid legal consequences.

Below, we have outlined a few interesting legal takeaways and future events surrounding the Tether case:

CFTC Does Not Regulate Stablecoins

The CFTC also made a statement that investors may feel confused by the settlement. The commission made a special note that they do not regulate stablecoins as they do not have daily business intelligence.

The Application of “Commodities”

CFTC commissioner Dawn D. Stump, in a separate statement, questions if their actions create a false sense of security surrounding stablecoins. She also stated that this instance is the first case in which the CFTC applied the “commodity” definition to a stablecoin, and consequently, may raise unnecessary confusion.

Final Thoughts.

While stablecoins can provide the security investors want, it is critical to look into the company backing it. Investors and government officials alike are still navigating this area of digital currency. However, transparency and honesty are non-negotiable regardless of which instrument you use.

In an uncertain market, knowledge and insight can elevate your results. If you need to speak with a business lawyer, contact the legal team at HAN LLP for more information.