In the realm of cryptocurrency, a captivating rumor is making its rounds, sparking debates between fact and fiction. The suspicion at hand carries the potential to disrupt markets significantly: the looming downfall of major exchange Huobi, allegations of dubious stUSDT tokens by Justin Sun, Tether’s questionable dollar payouts, all tangled into a web of uncertainty. But can these claims withstand scrutiny?
The cryptosphere has a penchant for rumors, and one particular narrative is gaining momentum on social media. This intricate tale weaves together USDC and USDT stablecoins, intertwining the paths of Huobi and Binance exchanges, all amidst allegations of colossal fraud and impending financial instability.
While exclusive information eludes us, let’s delve into the constituent components of this rumor and meticulously explore the veracity within.
The Mechanics of Stablecoins
The Mechanics of Two Stablecoins The saga commences with two pivotal data points that frame this narrative as a puzzle seeking resolution: The evolution of the paramount stablecoins, USDC (Circle) and USDT (Tether).
Throughout this year, the market capitalization of these tokens has exhibited peculiar behavior. Initially, their trajectories aligned with market cycles: Tether peaked at over $84 billion in March 2022, and USDC in July at $56 billion. Subsequently, the supply of both stablecoins experienced a sharp decline—a natural reflection of a bear market scenario. As cryptocurrency profits recede and interest in government bonds intensifies due to rising rates, users tend to redeem stablecoins for traditional bank dollars. All seems ordinary thus far.
However, a deviation emerged in spring 2023, as the two stablecoins veered off their synchronized course. While USDC witnessed a swift outflow, plummeting to around $26 billion, Tether’s market cap rebounded during the same period, surpassing its previous peak.
This anomaly suggests a scenario where USDC is being redeemed and withdrawn from circulation while USDT experiences creation. Since March, USDC has contracted by $17 billion, while Tether has surged by $13 billion—a dynamic akin to a tug of war.
Huobi’s Troubling Situation
But how can this intricate dance be explained? And how does it relate to the fate of Huobi and Binance?
The Enigma of Huobi’s Alleged Turmoil At this juncture, a momentary divergence from stablecoins leads us to China. A report by Hong Kong-based Techhub NEWS recently sent ripples through the scene, disclosing the apprehension of “at least three executives” from Huobi. These arrests coincide with earlier speculation that Chinese authorities are investigating an exchange for potentially enabling payments to and from gaming sites and casinos—totaling a staggering 7.6 billion USDT.
Huobi, one of China’s former leading stock exchanges, has been operating from overseas since the country’s cryptocurrency ban. Its reputation has been somewhat tarnished, often associated with facilitating illicit activities spanning China, Asia, and the Western world. The gravity of these claims has prompted market observers to regard the arrests seriously, culminating in a significant drop in Huobi’s stablecoin holdings and raising concerns about potential defaults.
However, before we continue tracing this trail, a third dimension comes to light.
Stake Stablecoins and Justin Sun’s Involvement
Staking Stablecoins and the Justin Sun Connection Enter the Huobi exchange, which Justin Sun, the daring and prosperous founder of Tron cryptocurrency, either wholly or partially acquired in October 2022.
In July, Sun introduced a groundbreaking financial product: stUSDT and stETH. These tokenized versions of tether (USDT) and ether (ETH) on the Tron or Ethereum blockchains are obtained by exchanging stablecoins for tokens. These stablecoins are then invested in “real-world assets,” primarily government bonds, generating a 4.29 percent yield on tokens.
On paper, this innovative concept has the potential to revolutionize stablecoins, perhaps heralding the era of a dollar token that pays interest on a government bond. However, an astute analysis by Adam Cochran uncovers inconsistencies. Despite claiming over 351,000 users staking more than half a billion tethers for stUSDT, an examination of the Tron blockchain reveals that nearly 98 percent of stUSDT tokens are concentrated in the hands of Justin Sun and Huobi. A similar trend is observed on Ethereum, where over 72 percent is directly owned by Justin Sun.
Questionable Practices and Red Flags
A Closer Look at Huobi’s Stablecoin Situation This intricate puzzle continues to unravel as concerns mount about Huobi’s stablecoin reserves. Cochran’s investigation reveals a perplexing scenario wherein Huobi’s tether wallets blend liabilities to the exchange’s users with those of stUSDT token holders. This discrepancy has led clients to believe that the exchange possesses $631 million in stablecoin reserves—when, in reality, the figure stands at a mere $90 million.
A more distressing revelation surfaces: Cochran suggests that Justin Sun uses the surplus to bolster other DeFi applications, while simultaneously enticing users to deposit more funds on Huobi with attractive interest rates.
This practice paints a worrying picture—Sun appears to be profiting by concealing the actual extent of Huobi’s default. With a mere $90 million in reserves for a major international exchange, the potential ramifications are dire. A complete or partial bank run on Huobi could trigger a massive crypto market downturn.
Binance’s Involvement and Impact
Charting the Interplay Between USDC and USDT As the puzzle pieces fall into place, attention shifts to Binance, another heavyweight in the cryptocurrency exchange landscape. Adam Cochran asserts that Binance was quick to detect the impending issues surrounding Huobi. The exchange’s enormous scale enables it to identify even the slightest market fluctuations, amplifying their impact.
So why is Tether selling off?
Likely Huobi insolvency.
-Binance started selling off USDT in bulk.
-We found out that Huobi execs (and Tron personnel questioned by police)
-This is not long after Sun’s stUSDT launch
-And weird balance shifts at Huobi in the last month pic.twitter.com/f3HViYS93a
— Adam Cochran (adamscochran.eth) (@adamscochran) August 5, 2023
Cochran posits that Binance, anticipating the fallout from Huobi’s troubles, opted to reallocate a portion of its Tether holdings into DAI dollars. This strategic move coincided with a notable sell-off of USDT, briefly driving its price down to $0.998—an anomaly for the typically stable token.
A lingering dilemma unfolds: both Binance and Huobi appear unable to seamlessly convert Tether dollars into actual bank dollars at a sufficient scale. This discrepancy harks back to the “Hotel California” analogy, wherein Tether tokens enter but rarely leave, implying a lack of full backing.
The convoluted route taken to convert Tether tokens involves first exchanging them for Bitcoin and subsequently for USDC. This intricate process offers a potential explanation for the opposing trajectories of the two stablecoins’ market capitalizations, indicating underlying operational vulnerabilities.
Controversies and Doubts
As the complex puzzle nears completion, the stage is set for a potentially gripping climax: an alleged fraud involving tokens and the impending bankruptcy of an exchange, leading to the destruction of USDC and the creation of Tether.
Navigating Shadows of Doubt Amidst this intricate web of allegations, doubts linger, complicating efforts to ascertain the truth. Statements from Huobi and Justin Sun vehemently deny the claims. Huobi’s social media representative, Xie, attributes disparities in asset and address visibility to certain analytics platforms. Despite declaring the rumors as “FUD” (Fear, Uncertainty, Doubt), Huobi remains elusive, refraining from addressing the specifics.
Potential Explanations and Uncertainties
A glimmer of reassurance emerged as 200 million USDT and 5,000 ETH flowed into Huobi’s wallets, seemingly quelling market concerns. Yet, these transactions traced back to addresses associated with Justin Sun, leading to speculation of potential manipulations.
Sun refutes these speculations, dissociating the transactions from himself, although the analyst PeckShield’s findings and Etherscan’s data suggest otherwise.
Tether, too, has entered the fray. Paolo Ardoino, Tether’s CTO, announced that over 325 million USDT had been triggered—a move he deemed normal despite contrary speculation.
However, even this response has sparked doubts. Observers question the origin of the trigger, alleging it stemmed from an account linked to Bitfinex, a sister company of Tether. Such suspicions create an air of uncertainty rather than dispelling it, leaving crucial details unanswered.
Exploring Alternate Explanations and Lingering Red Flags As we assess the current state of affairs, myriad possibilities emerge. The rumored troubles at Huobi may indeed hold some truth, or they could be merely baseless FUD. Both perspectives find ample support within the context of the cryptosphere, with reasons, motives, and precedents lending credence to each narrative.
Huobi’s tether outflows could signify the departure of actors seeking refuge from Chinese investigations, a hypothesis bolstered by the exchange’s historical associations with dubious activities. Meanwhile, the continued demand for USDT among black market participants might explain the divergence in stablecoin trajectories.
Furthermore, the retention of USDT tokens within the exchange, rather than funneling them into the Tether treasury, may indicate an existing bank connection. In this scenario, the tokens serve as placeholders, awaiting activation upon the decision of the owners.
Despite these considerations, a lingering sense of uncertainty remains. The intricate web of connections and complexities presents a conundrum that resists absolute resolution. Amidst these ambiguities, the story leaves an aftertaste of unease, as multiple red flags flutter in the wind, evading complete elucidation. But such enigmatic narratives are a hallmark of the cryptosphere, a landscape characterized by its propensity for intricate intrigue.