Is this crypto’s next crisis? A Tether sell-off and Huobi’s rumored insolvency spell trouble

On Friday, investor and crypto watcher Adam Cochran published a series of tweets about a big selloff of the stablecoin Tether, explaining that it has been driven by events at Huobi. According to Cochran, Huobi’s executives are being questioned by Chinese police, and the exchange is obviously insolvent due in part to alleged owner Justin Sun using customers’ funds as his own piggy bank. He says this led others, including Binance, to sell off Tether holdings on the exchange.

Huobi and Sun have denied there is anything wrong, but Cochran, who is a credible figure in the crypto world, cites on-chain data to make a damning case against the exchange. He also raises familiar allegations of impropriety against Sun, a Peter Pan-like figure who founded the Tron blockchain, who has for years been a behind-the-scenes fixer for numerous murky crypto deals. Sun, who spent millions in 2019 to win a charity auction to dine with Warren Buffett, was recently charged with fraud by the SEC.

To be clear, Sun has never been convicted of any crime and, for now, Huobi is still operating. But there has been massive outflows from the exchange, which holds many of its assets in token projects tied to Sun—a practice reminiscent of FTX, whose balance sheet was loaded with “Sam coins” tied to its crooked founder. It doesn’t looks good.

That brings us to Tether, which is by far the biggest stablecoin in crypto and a pillar of the trading world. Like other stablecoins, Tether is supposed to be backed one-to-one by dollars so it’s value in theory should not drop below $1. But a week ago, it broke this peg, and on Monday fell further, to 99.7 cents.

This drop is barely a blip in percentage terms, of course, and could simply reflect heavy selling pressure in response to the Huobi events. On the other hand, Tether’s operations are largely unregulated and the company’s informal accounting practices have long made many people uneasy. While the crypto industry can probably absorb the demise of Huobi, a full-blown run on Tether would be an existential event akin to the FTX disaster.

For now, overall crypto prices are stable and there is no reason to hit the panic button. But if things unravel, it will be due to a lack of transparency on the part of major crypto companies, and the industry’s willingness to trust charismatic-but-shifty figures like Sun. The collapse of FTX, which took place nearly a year ago, was supposed to be a bitter lesson that would lead the crypto industry to change its ways. Recent events, though, suggest too many people failed to learn that lesson.

Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts

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