The Hong Kong-incorporated company, which created a cryptocurrency equivalent to the US dollar, has faced mounting criticism for its failure – or, perhaps, unwillingness – to prove that its US dollar Tether (USDT) is backed by corresponding US dollar reserves. If Tether does not possess the reserves that it claims to, then there could be a breakdown of trust in the USDT, which may ripple throughout the broader cryptocurrency economy.
Unfortunately, due to its numerous stipulations, including the fact that FSS did not use Generally Accepted Accounting Principles (GAAP) or Generally Accepted Auditing Standards (GAAS), the document Tether shared on Wednesday does little to alleviate industry concerns. Simply put, FSS didn't conduct an audit, and the process itself was insufficient. So much for "transparency."
Note: In January, Tether's relationship with Friedman LLP dissolved. Friedman is an accounting and advisory services firm that was meant to provide the long-awaited audit. It also emerged that, in December, the Commodity Futures Trading Commission (CFTC) subpoenaed Tether and Bitfinex, a closely affiliated cryptocurrency trading platform.
Furthermore, what the FSS report does cover is severely limited. The law firm only offered a glimpse into a single day of Tether's operations: June 1, 2018. That's not enough to demonstrate consistency.
"As part of the Engagement, FSS was able to confirm the U.S. Dollar ('USD') balances in accounts owned or controlled by Tether at its banks, including selecting the appropriate confirmation dates, and reporting to Tether as to the results of such inquiries," FSS wrote in its report. "As per the letter of engagement, FSS selected the dates for balance confirmations without prior notice to or consultation with Tether."
Without naming the banks providing financial services to Tether, FSS provided balance information for the company's accounts:
"FSS received the following confirmations from the respective banks by sworn and notarized statements provided by duly authorized personnel.
BANK 1: $1,968,538,584.82 USD (unencumbered)
BANK 2: $576,528,652.00 USD (unencumbered)
TOTAL: $2,545,067,236.82 USD"
Note: Bitfinex is reportedly banking with Puerto Rico's Noble Bank International. Also, "unencumbered" seems to mean that there are no restrictions on the transfer of funds from Tether's bank accounts.
For what it's worth, according to the report, FSS co-founder Eugene R. Sullivan serves as an advisory board member for one of Tether's banks, though this position is not listed in his biography on the firm's website.
In addition to checking Tether's bank account balances, FSS cursorily examined the Tether circulation.
Chief Financial Officer Giancarlo Devasini and general counsel for Tether Stuart Hoegner, certified, through a sworn statement, "the amount of fully-backed USD Tethers that were in circulation as of the close of business on June 1st, 2018." The law firm wrote, "The amount certified to FSS was $2,538,090,823.52 USD Tethers," a number that was apparently confirmed on Tether's own transparency page.
Just for the record, today, that webpage shows a balance that is $100 million higher. Talk about a money-making machine.
What's most interesting about FSS' decision to examine the Tether and bank balances on June 1, 2018, is that the date falls almost exactly at the end of a month. This might make it even harder to trust that the figures are representative of the company's true financial position, especially in light of recent work by Robert-Jan den Haan, a Ph.D. candidate at the University of Twente and independent journalist.
In an in-depth article entitled "Clearing Up Misconceptions: This Is How Tether Should (and Does) Work," he explained that researchers from the University of Texas at Austin "analyzed whether it is possible that Tether only maintained a full reserve at the end of the month."
"If true, a coinciding decline of the price of bitcoin could also be expected at the end of each month to create the necessary reserve in U.S. dollars," den Haan wrote. "Their analysis shows that the price of bitcoin did indeed [emphasis added] show large declines at the end of every month in which a large number of new Tether tokens were issued. This correlation seems to suggest that these declines in bitcoin's price may have been related to Bitfinex's need to raise reserves at the end of those months."
Altogether, it's hard to imagine that this report will change any opinions. The Tether-believers appear firmly entrenched and the skeptics are loath to remove their tin-foil hats anytime soon. We'll just have to wait for the next update. Hopefully, that will be more enlightening.