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Is the privatization of whistleblower programs a trend?

Posted  December 3, 2021

Tether is a type of cryptocurrency known as a “stablecoin.”  That means, in theory, that anyone buying Tether is promised Tether holds an equal amount of U.S. currency to back up your crypto purchases.  There’s just one problem with that:  no one has seen any proof that Tether actually holds anywhere close to sufficient currency to back up the billions in stablecoins traded.  All Tether has offered is an unverified “attestation” that it does hold the currency it says it does.  Not surprisingly, regulators did not accept this barebones statement, and the CFTC issued a $41 million fine against the company in October 2021, finding that “Tether misrepresented to customers and the market that Tether maintained sufficient U.S. dollar reserves to back every USDT in circulation with the “equivalent amount of corresponding fiat currency” held by Tether and “safely deposited” in Tether’s bank accounts.”

Thus it should not be surprising that a lot of people in the crypto community are concerned that Tether is a sham and a potential threat to the legitimacy of the entire crypto universe.  And some crypto loyalists are now trying to do something about it.

Mr. Whale is a part-investment advisor, part-commentator, part-art dealer, part-comedian for the crypto community (and thus a good encapsulation of where investment news may be heading).  Cryptowhale, his website, recently announced a “Tether Bounty” program—a program “cracking down on fraud” by “reward[ing] individuals or firms with up to $3,000,000 for information surrounding the dubious backings of Tether.”  If this sounds a whole lot like the purpose behind the CFTC and SEC whistleblower programs, that is surely on purpose.

Why is Mr. Whale offering a private whistleblower reward instead of trusting the regulators to do the job?  One can only speculate, but such a privatization of whistleblower programs seems in line with the general libertarian, anti-regulation, self-policing ethos of the crypto community.  It remains to be seen if this is the start of a trend or a one-time deal.  After all, it’s the same ethos that allowed Tether to exist as long as it has.

Regulators have been slow to catch up to the rapidly expanding crypto markets.  Both the SEC and CFTC have made noise recently about increasingly bringing crypto into the existing regulatory framework.  Even the most loyal crypto fans may then see no need for private whistleblower programs.  Or, as seems equally likely, we may soon have competing whistleblower schemes—one private and one public.

The one thing that is absolutely clear is that everyone recognizes that a functional regulatory system needs functional whistleblower reward programs.  The only question is whether the crypto community is going to try to create its own parallel whistleblower regime.

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Tagged in: Cryptocurrency, Financial and Investment Fraud, Whistleblower Rewards,