U.S. regulators are probing one of the world’s largest cryptocurrency trading platforms with ties to a controversial digital currency.
The U.S. Commodity Futures Trading Commission (CFTC) sent subpoena letters last month to Bitfinex, a cryptocurrency exchange, and Tether, a company that offers digital currency that it says is tied to the value of the U.S. dollar, Bloomberg reported Tuesday.
Tether has long been a target of skepticism in the cryptocurrency community, with critics speculating that Tether doesn't actually hold enough dollar reserves to back up the claim that the cryptocurrency's value is tied to the dollar.
Cryptocurrency markets sunk significantly on Tuesday in reaction to the news.
Bitfinex and Tether are closely linked and share the same CEO, Jan Ludovicus van der Velde.
Tether’s coins have become a popular substitute for U.S. dollars within cryptocurrency exchanges. Instead of selling cryptocurrencies, like bitcoin or Ethereum, and potentially incurring higher fees and longer transaction times, investors can easily swap their holdings for Tether within an exchange.
Each Tether is ostensibly worth roughly one U.S. dollar, with $2.3 billion outstanding tokens in existence. The company claims that this money is backed by actual U.S. dollars it is holding, but critics have doubted this.
The company has yet to provide evidence that would prove the claim, and a recent audit attempt appears to have fallen through.
Tether’s relationship with auditing firm Friedman LLP “dissolved” because the process was taking too long, according to a statement it provided cryptocurrency news website CoinDesk on Saturday.
Prior to Friedman LLP’s audit of Tether ending, it said that the company had $443 million and 1,590 euros in bank accounts as of September, exceeding the value of the $420 million Tether currently being traded.
The firm did note that it had not yet assessed the “terms of the bank accounts” or Tethers ability to access funds from the accounts.
Details about the two companies are murky. Ludovicus van der Velde is purported to be in charge of both, and Philip Potter is a director at Tether, according to documents in the Paradise Papers leaks.
It is also unclear where the companies are based.