Noble Bank International, a full-reserve bank providing real-time post-trade services to OTC markets including FX and cryptocurrencies is on the verge of insolvency, reported Modern Consensus. The Puerto Rico-based bank is said to be struggling to survive because of the backlash in the cryptocurrency markets.
The cryptocurrency Tether (USDT) utilizes Noble Bank for its dollar backing. It has been reported that the bank is running dry and it may wind up its operations. It is still unclear that what will be the impact of this on Tether and its customers.
The Modern Consensus further reported that Noble Bank is searching for funding, according to two highly placed unidentified sources, including one at a large cryptocurrency exchange. The bank, with a large chunk of assets coming from Tether’s U.S. dollars, is said to have reached out to at least one large holder of the “stablecoin” for getting funds, but its proposal was rejected.
How is Noble Bank Regulated?
According to its website, Noble Bank International is a limited liability company, operating under the laws of Puerto Rico. It is regulated and regularly inspected by the Office of the Commissioner of Financial Institutions of Puerto Rico (“OCFI”). OCFI is responsible for the supervision of Puerto Rico’s financial system’s safety and soundness.
OCFI is authorized by the Conference of State Bank Supervisors, an organization committed to boosting the quality and effectiveness of supervision among the banking regulators from all 50 U.S. states. The OCFI also follows guidelines issued by the Financial Institution Examination Council and monitored by U.S. Federal regulators, including the Board of Governors of the Federal Reserve and the Office of the Comptroller of the Currency.
Modern Consensus further reported that
Tether itself may be having troubles of its own. A top person at a major trading crypto desk has told Modern Consensus that one counterparty has been trying to unload “tens of millions of tethers” without successfully finding a counterparty.
Noble has been serving as one of Tether’s banks and from August, more than half of all bitcoins traded against another currency has been against tether. The Bitfinex’ed Twitter account, always suspicious about Tether tweeted:
Tether and Controversies
Tether is one of the most controversial coins on the market today. A few days ago, researchers, John Griffin and Amin Shams, of the College of Texas at Austin’s Division of Finance, published their research about Tether. According to this research, Tether, a cryptocurrency pegged to U.S. dollars, is manipulating Bitcoin and other cryptocurrency prices.
Researchers used algorithms to analyze the blockchain data and found that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. Their analysis centered on examining potential manipulation of Bitcoin and other major cryptocurrencies. They also examined whether the growth of a pegged cryptocurrency, Tether, is primarily driven by investor demand, or is supplied to investors as a scheme to profit from pushing cryptocurrency prices up.
According to them, less than 1% of Tether transactions are associated with 50% of the meteoric rise in Bitcoin and 64% of other top cryptocurrencies. The flow clusters below round prices induce asymmetric autocorrelations in Bitcoin and suggest incomplete Tether backing before month-ends. These patterns cannot be explained by investor demand proxies but are most consistent with the supply-based hypothesis where Tether is used to provide price support and manipulate cryptocurrency prices.
In April 2017 tether disclosed that their banking association in Taiwan had been suspended. In the same month, the number of tether expanded massively in the market despite their inability to accept deposits from non-Taiwanese bank accounts. In early September 2017, the tether was undercapitalized and in late September, the company produced a document disclosing USD balances backing the then amount of 440M USDT, a figure that had increased ten-times in only 5 months. In November 2017, the company was a victim of a hack. They froze funds worth over 30M USDT.
USDT now trades at around $1. However, the latest events display that even with this dollar-backed coin, the regulations and other crucial announcements such as the launch of two new dollar-backed coins—issued by Gemini and Paxos can put pressure on the price. These new coins have the benefit of being audited and regulated by the New York Department of Financial Services.
In other words, it seems that Noble bank’s house is like a house of cards and if this house comes crashing down, it may bring down Tether’s price with tremendous force.