Chinese traders’ key link to cryptocurrency market in trouble

• Investigation of Tether could put further downward pressure on bitcoin

TOKYO — In yet another blow to the cryptocurrency market, Tether, a token often used by Chinese investors to circumvent strict restrictions on trading, has come under official scrutiny in the U.S.

America’s Commodities Futures Trading Commission issued a subpoena to Tether and Bitfinex, a cryptocurrency exchange, on Dec. 6, according to reports that surfaced at the end of January. The companies are led by the same people and are both based in Hong Kong.

The CFTC is believed to be investigating whether Tether has enough assets to back its claim that its namesake currency is pegged to the U.S. dollar. The company had issued about $2.2 billion worth of tokens as of Friday. If it does not have at least the same amount of cash, it would be unable to guarantee its 1-to-1 conversion ratio, and investors could face losses.

There have been questions about Tether’s governance structure. The company apparently even cut ties with its audit firm. The CFTC has not yet released any of its findings, but trading in the token could plunge if its reputation is damaged.

Tether is especially popular in China, where it is used as a way to fly under the authorities’ radar. Most of the tokens are traded at China-affiliated exchanges based in Hong Kong and elsewhere, according to Thomas Glucksmann, head of marketing at Gatecoin, a cryptocurrency exchange in Hong Kong.

In an effort to keep investors from pulling out of the yuan and seeking speculative opportunities, Beijing forcibly closed virtual currency exchanges in mainland China last fall. Chinese traders have since relied on exchanges elsewhere, such as in Hong Kong, but they could still be scrutinized by the authorities for buying bitcoin and other big cryptocurrencies with the yuan.

Chinese authorities pay less attention to Tether because it has a fixed rate and is less speculative in nature, said Daisuke Yasaku of the Daiwa Institute of Research. Investors can first convert their yuan into “tethers,” which they then use to buy bitcoin and other coins. Investors and exchanges are trading “using methods that leave no records,” Yasaku said.

Tether’s market capitialization soared as it issued more tokens following China’s crackdown last fall. Its performance points to a surge in demand for a loophole for trading cryptocurrencies in China.

But Beijing is also turning more vigilant. Chinese state media reported on Feb. 4 that authorities will start watching offshore exchange operators. That could slow down coin trading by Chinese players in Hong Kong and elsewhere.

Roughly 20% of bitcoin trading was based in the yuan until last fall, according to cryptocurrency information site Coinhills. The figure has since plunged to less than 1%. But the Chinese currency is still expected to have made its way into the market through tethers. There may be $100 million being invested into bitcoin every day via the cryptocurrency, based on one estimate.

Falling confidence in tethers and tougher Chinese regulations could further squeeze the inflow of Chinese funds into cryptocurrencies. Bitcoin’s value dipped under $6,000 at one point last Tuesday. It has since recovered, but uncertainties are only growing.