from Hacker News

Tether claims and believes that their tokens are backed 1:1 by US Dollars. However, this claim has a catch.

Tether + BitFinex have been running a new business model since they lost their bank accounts. B&T agreements with affiliated exchanges are something along the lines of "Here are $100 mill worth of Tethers, now please hold $100 mill cash in your account for us".

When affiliate X transfers Tethers to affiliate Y, Tether instructs Y to pay X directly. When a Bitfinex customer wants to withdraw funds, they match-make customers to do the same kind of transfers.

This model of leaving funds under control of affiliates is what caused problems for Friedman LLP auditors in completing their audit.

Also potentially US Regulators can consider this business model a Hawala model.

Sources:

https://medium.com/@bitfinexed/the-bitfinex-dilemma-blow-up-now-or-try-a-hail-mary-to-retain-in-business-10b9d989359f

https://www.youtube.com/watch?v=62cvxPIDBGY