Tether loses money: What is the future for Tether (USDT) with conflicting reports, no official audit

“Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”).”

Tether’s Reserves Are Not What They Appear, Discloses the Company

Tether, the biggest stablecoin in terms of market capitalization, has disclosed some interesting information about its indemnity model. Tether till now has always asserted that its token supply of 2 billion dollars has a backing of real United States dollar reserves. But according to the recent reports, it appears there are other assets involved as well that support the stablecoin.

As per the official statement that goes on the website of Tether,

“Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”).”

Sufficient Funds

As a stablecoin, Tether has a couple of primary responsibilities –

To preserve the price uniformity with the United States Dollar
To demonstrate that it actually has a backup of the US dollars
However, since the last few years, the stablecoin’s audit practices have been unsatisfactory which has ultimately led people to question the company’s abilities to fulfil both the duties listed above. Moreover, the update that loans also partially justify Tether’s value has been aggravating the worry people have. In fact, there are many people who have started believing that the stablecoin has inadequate reserves. This also has to do with the company’s minimal efforts at being transparent. Although nothing has been proven yet, the company’s statement that it forms its value upon many more things, but real money, is definitely going to fuel the controversy.

Coincidentally, this news has broken only months after the declaration made by Bloomberg that said, Tether has sufficient reserves. One more investigation carried out independently came to a similar conclusion. However, both of these reports were not what we call a proper audit and post a series of doubts, there is practically zero way left that helps you win over the stablecoin’s critics.

What’s in-store for Future

Looking at the broader picture, experts do believe that Tether in all likelihood will continue to maintain its significant position in the future. Irrespective of its actual market capitalization value, Tether is undoubtedly the most prominent stablecoin present in the market. It was recently learnt that TRON was keen to integrate Tether on its platform whereas Tether too has implied its intent on more such integrations. So in spite of the ongoing controversy, it is highly improbable that things will mark the end for Tether. The incident, though, could trigger fluctuations in prices or even sell-offs but if we look at it, the stablecoin has bounced back from all the price slump that has come its way so far.

What we must notice here is the fact that despite being a market dominant, Tether is being challenged by more transparent and less centralized stablecoins, such as USDCoin and TrueUSD. So if Tether ever loses its significance, there are plenty of competitors all set to claim its position.

Conflicting reports, No official audit

Here are the some issues Cointelegraph reported about Tether in 2018:

No official audit

While Tether’s balance sheet on its website claims to provide a transparent reflection of its accounts, Tether has failed to complete an audit of its accounts by a third-party – which was promised in 2017.

The crypto community began to put pressure on the company to conduct a full audit to allay fears of inadequate cash reserves to the number of Tether tokens. To this end, Tether acquired the services of Friedman LLP to conduct a short review of its account balances.

Following that, the company published a memo of a short report from Friedman LLP with the company’s accounts – in the hopes of appeasing the concerns of various parties online:

“We hope that the community considers the attached memorandum for what it is: a good faith effort on our behalf to provide an interim analysis of our cash position and our issued and outstanding tokens, as part of ongoing efforts to further professionalize the transparency mechanisms of Tether Limited.”

As various critiques came out in public, Bitfinex eventually threatened legal action against parties that were questioning the authenticity of their operation in November 2017.

Both Bitfinex and Tether then received government subpoenas in December 2017 from the Commodity Futures Trading Commission (CFTC) in response to the concerns raised towards the end of the year.

With the pressure firmly on, Tether got Friedman back to conduct a full audit in January 2018. But less than a month into the process, Tether stopped the auditing process, claiming that it wouldn’t be completed in a reasonable period of time, according to Bloomberg:

“Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable timeframe.”

Conflicting reports

Following the dissolved relationship between Tether and Friedman LLP, Bitmex released a report that speculated that Tether had the necessary cash reserves in a bank account in Puerto Rico.

While that report may have settled some concerns around the validity of Tether’s claims, a research paper published in June from the University of Texas blamed Tether for Bitcoin price manipulation in 2017.

By using algorithms to analyze market data, the report claimed that purchases with Tether were timed after downturns in the cryptocurrency markets which resulted in price increases in the value of Bitcoin.

In the same month, a law firm in the US released a report stating the Tether did actually have the adequate reserve of fiat currency to back tokens in circulation. Law firm Freeh Sporkin & Sullivan LLP had access to two of Tether’s bank accounts to release its findings – which were not an official audit.

In response to the report, Tether’s general counsel Stuart Hoegner told Bloomberg that mainstream accounting firms would not conduct official audits on companies working with cryptocurrencies:

“The bottom line is an audit cannot be obtained […] The big four firms are anathema to that level of risk. We’ve gone for what we think is the next best thing.”

Who buys, Who audits, Does those dollars actually exist?

TechCrunch also reported about some issues on Tether:

Who buys Tether? It’s hard to say; you can trade USD for them at a couple of crypto exchanges, notably Kraken in addition to the BitFinex exchange, but I haven’t been able to find any recent public examples of anyone, institution or person, actually buying newly issued Tethers from Bitfinex. So who provides the US dollars which are said to back all newly issued Tether? It’s very hard to say.

Who audits them, to ensure those dollars are there? Well — actually — nobody, despite their web site‘s assurances that their reserve holdings are “subject to frequent professional audits” and “Our reserve account is regularly audited.” But they “dissolved” their relationship with their first auditors, Friedman LLP, without an audit ever being completed, and the “proof of funds” “transparency update” so prominent on their home page stresses it “should not be construed as the results of an audit.”

Do we have any reason to believe those dollars actually exist? Well, yes. The fact their “transparency report” is not an audit makes it very limited, questionable evidence, in my book … but it’s some evidence nonetheless. (It’s really quite something that we’re talking about some evidence, rather than an actual audit, for the existence of nearly three billion, with a “B,” dollars which are theoretically backing a very widely used asset.) Furthermore they appear to have banking relationships in Puerto Rico, and/or with ING, and the massive growth in total bank deposits in Puerto Rico over the last year or so roughly corresponds with the number of Tethers which have been issued in that time.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
Aamir Kapoor is a fintech writer specializing in cryptocurrency and blockchain. He has a background in finance and banking and was a researcher.