Nick Chong · 7 days ago · 2 min read · Insights via Grayscale Investments
USD-paired stablecoin Tether released a report that indicates the company behind USDT does possess sufficient capital to back each individual token on a 1:1 basis. The report, released in full by Tether, demonstrates that Tether held — at one point — currency reserves that match the number of USDT in circulation.
The Tether Transparency Update — FSS Report, published on June 20, states that the release of financial data is intended to directly address criticisms of the platform that have surfaced recently, including allegations of Tether-driven Bitcoin price manipulation.
Earlier this year Tether engaged Freeh, Sporkin & Sullivan LLP to review bank account documentation & to perform an inspection of the numbers of Tethers in circulation & the corresponding currency reserves.
The report can be viewed in its entirety here: https://t.co/BeLXhQY6FV
— Tether (@Tether_to) June 20, 2018
Tether Fires Back at Criticism
Tether has remained under intense scrutiny throughout the year since the announcement that a comprehensive audit of Tether holdings, set to be executed by financial auditor Friedman LLP, would never eventuate.
The subsequent printing of an additional $300 million Tether after the cancellation of the audit raised concern with the cryptocurrency community, with many market participants expressing doubt that the platform holds sufficient reserve capital to back each Tether.
To date, Tether has not yet released any evidence that it holds sufficient capital to support the $2.6 billion market cap of USDT. The potential that Tether may lack sufficient reserves has critical implications for the crypto market, as USDT currently represents roughly 17 percent of all daily crypto trade volume.
The new report released by Tether, however, stated that Tether absolutely does hold enough capital to back earth USDT:
“To address allegations head on, we wish to make a few things clear: All Tethers in circulation are fully backed by USD reserves. Full stop. Memoranda, consulting reports, industry leaders, cryptocurrency pioneers, and competitors have all confirmed this. Reserves have always, and will always, match the number of Tethers in circulation.”
FSS Report is Not an Audit
The Tether Transparency update may provide information on the amount of capital that Tether has access to, but it’s not an audit — notably, the report is composed by the law firm Freeh, Sporkin & Sullivan LLP (FSS), not the original financial auditing firm Friedman LLP.
FSS, co-founded by FBI director Louis Freeh, didn’t conduct an official audit, but instead published data gathered during a two-week period in which the firm had access to Tether’s accounts at two different banks:
“Earlier this year Tether engaged Freeh, Sporkin & Sullivan LLP (FSS) to review bank account documentation and to perform a randomized inspection of the numbers of Tethers in circulation and the corresponding currency reserves.”
The entirety of the report, available via Tether’s website, consists of a mere three pages. The report shows that at a single snapshot point on June 1, 2018, Tether held a little over 2.5 billion USD across two bank accounts. The firm then concluded that “unencumbered assets exceed the balance of fully-backed USD Tethers in circulation” as of the same date.
While Tether did hold enough capital to back each USDT at one point, the report does not demonstrate that Tether has consistently secured each individual Tether issued since launch, and does not prove that each Tether is fully backed right now.
Tether Official: Audit is Impossible
Stuart Hoegner, Tether’s general counsel, admitted in a phone interview with Bloomberg on Tuesday that it’s not actually possible for Tether to deliver the level of assurance that an audit would provide:
“The bottom line is an audit cannot be obtained.”
Hoegner stated that major accounting firms are unwilling to engage in an audit of the Tether platform:
“The big four firms are anathema to that level of risk … [Tether has] gone for what we think is the next best thing.”
Under U.S. law, auditors can be held accountable by third parties for financial information — the 1931 Ultramares decision enabled auditors to be held liable for negligence to the extent that it is equivalent to fraud. The developing nature of the cryptocurrency industry, combined with the lack of regulatory oversight, makes the potential risk associated with a comprehensive audit of the Tether platform too high for professional auditing firms.
However, Tether Chief Executive Officer JL van der Velde vehemently defends that the platform does indeed hold sufficient capital to back each USDT. Van der Velde claimed that the FSS report is sufficient evidence that Tether maintains enough reserve capital at a “given moment” in a statement issued to Bloomberg:
“Despite speculation, we have consistently stated that Tether is backed by USD reserves at or exceeding the Tethers in circulation at a given moment, and we’re glad to have independent verification of this to answer some of the questions posed by the public.”