Most Popular Cryptocurrency Keeps Showing Up in Illicit Finance | Mint

Most Popular Cryptocurrency Keeps Showing Up in Illicit Finance

ILLUSTRATION BY WSJ
ILLUSTRATION BY WSJ

Summary

Tether, the $84 billion so-called stablecoin, is increasingly showing up in investigations tied to money laundering, terror financing and sanctions evasion.

Tether, the $84 billion so-called stablecoin bridging the worlds of cryptocurrencies and the dollar, is increasingly showing up in investigations tied to money laundering, terror financing and sanctions evasion.

Tether is now the world’s most heavily traded cryptocurrency by volume. The stablecoin, also known as USDT, maintains a 1:1 exchange ratio with the dollar. Traders use it to stash their cash, easily invest in other cryptocurrencies or swap it into traditional currencies such as the dollar.

Another use for tether seems to be in illicit finance, according to indictments, blockchain analysis and sanctions notices. In the past year, the cryptocurrency appears to have been used in financing Hamas, paying Chinese fentanyl suppliers, funding the North Korean nuclear program and helping buy sanctioned Venezuelan oil for sanctioned Russian oligarchs.

Tether has $84 billion in circulation. It has maintained its value and trading volume despite two cryptocurrency headwinds. During a “crypto winter," when some of crypto’s biggest players collapsed, the total global market cap for cryptocurrencies has fallen today to about $1.3 trillion from more than $2.1 trillion in April 2022.

At the same time, interest rates have soared, making safe investments lucrative again. Tether pays no interest, but yields on the assets it owns have risen sharply. So the opportunity cost of holding it has gone up.

Tether’s eponymous parent company, Tether Holdings, is getting all of the benefits of the higher rates. The company generates billions of dollars of cash as one of the 22 largest buyers of U.S. Treasury debt, holding more than countries like Mexico and Spain, according to the company.

Cryptocurrencies including tether came under scrutiny following the Hamas attack on Israel.

Blockchain analysis shows that wallets seized by the Israeli government for being connected to Hamas received some $41 million in cryptocurrency between 2020 and 2023, according to Israeli blockchain firm Bitok. More than 99% of that came in tether, Bitok said.

After high profile seizures earlier this year, Hamas’s militant al-Qassam Brigades asked supporters to no longer send bitcoin to protect themselves.

Tether has appeared repeatedly in recent high-profile sanctions, seizures and indictments. One case involved the use of tether to purchase 500,000 barrels of oil from Venezuela’s sanctioned national oil company in 2021. “Everyone does it now. It’s convenient, it’s quick," wrote Yury Orekhov, a Russian who lived in Dubai, to someone involved in the transaction.

The message was part of Orekhov’s U.S. indictment last year on several counts of fraud, money laundering and sanctions evasion, including operating fronts for a sanctioned Russian oligarch and Russian arms manufacturers.Orekhov was arrested in Germany, where the U.S. attempted to extradite him. Orekhov opposed the extradition and was released by German authorities after a German court ruled that the Venezuela-related allegations weren’t illegal in Germany. Orekhov didn’t respond to a request for comment.

Recent moves by the U.S. government targeting a transnational fentanyl supplier network and the North Korea’s nuclear-weapons program have also highlighted the use of tether, in addition to traditional financial networks and laundering techniques.

A spokeswoman for Tether didn’t respond to requests for comment. After The Wall Street Journal sent Tether questions for this article, it published a blog post “reinforcing its stance against crypto’s terrorist utilization."

The blog said Tether has aided governments worldwide with criminal investigations, helping freeze a total of $835 million in assets it said were mostly tied to theft. Tether said it had frozen 32 addresses with around $873,000 linked to illicit activity relating to Israel and Ukraine.

“There is simply no evidence that Tether has violated sanctions laws or the Bank Secrecy Act through inadequate customer due diligence or screening practices," the company wrote.

The attacks on Israel have spurred bipartisan calls in Washington to subject cryptocurrency companies to the Bank Secrecy Act and other oversight aimed at deterring money laundering and illicit finance.

Sen. Cynthia Lummis has urged the Justice Department to accelerate a probe into Tether. PHOTO: MARCO BELLO/REUTERS
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Sen. Cynthia Lummis has urged the Justice Department to accelerate a probe into Tether. PHOTO: MARCO BELLO/REUTERS

Sen. Cynthia Lummis, who has been a crypto industry supporter, and Rep. French Hill, chair of the digital assets subcommittee on the House Financial Services Committee, sent a letter to Attorney General Merrick Garland imploring the Justice Department to accelerate a long-running investigation into Tether. The DOJ should act against Tether “to choke off sources of funding to the terrorists currently targeting Israel," the legislators wrote.

Tether’s owner is under pressure because tether is a centralized token. That means tether can be frozen by the company that generates it, even in privately held wallets. Bitcoin was also used in several of these cases. But bitcoin is decentralized, meaning it can’t be frozen unless it is stored in an account at an exchange or institution.

Earlier this month, the Justice Department charged eight Chinese companies and 12 employees and officers with crimes related to fentanyl trafficking. Several of those charged maintained cryptocurrency wallets to handle the transactions related to the drug shipments that were also sanctioned by the Treasury Department. The designated wallets received more than $1.2 million in tether over hundreds of transactions, as well as additional transactions in bitcoin, according to data provided by ChainArgos, a blockchain data platform.

The North Korean nuclear-weapons program has also used tether, according to a U.S. indictment from earlier this year.

In an effort to fund the nuclear program despite sanctions, employees of the North Korean Munitions Industry Department would use fake documents to get themselves hired at companies—including several cryptocurrency exchanges—that were hiring remote IT workers.

At their request, the workers were paid in cryptocurrency. The payments, if not already in tether, would often be swapped into tether, which would be sent back to North Korea through accounts controlled by the country’s sanctioned Foreign Trade Bank. According to an indictment, $7.2 million in tether was sent to an account controlled by a Foreign Trade Bank employee funding the nuclear program.

The Treasury Department also sanctioned Russian cryptocurrency exchange Garantex last year, citing its usage by Russian cybercriminals and willful disregard of anti-laundering policies. Despite the sanctions, around 80% of the exchange’s trading still involves tether, according to a leading blockchain analytics company.

Angus Berwick and Konrad Putzier contributed to this article.

Write to Ben Foldy at ben.foldy@wsj.com

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