The Tether playbook is simple: any time suspicions are raised about whether Tethers are fully backed, release an irrelevant non-proof in the hope that it causes enough premature celebration on social media to front-run reality, so that by the time it becomes clear the public has been misled, the headlines have already been written and everyone has moved on to the next scandal. In fact, Tether is becoming an artisan at promising to provide an audit showing that its stablecoin is fully backed and then doing everything in its power to avoid exactly that.
This is exactly how Tether’s latest attempt at vindication has played out. No doubt anxious about the effect last month’s scathing announcement by the New York Attorney General had on public perception, Tether has published a Consolidated Reserves Report, along with an ‘assurance opinion’ provided by an accountant. These two things together, according to Tether, show that they aren’t lying about claiming that Tether has always been fully backed.
In reality, they do no such thing. The Consolidated Reserves Report was prepared by Tether and sets out the amount of assets and liabilities on Tether’s balance sheet as of February 28, 2021, along with a confirmation that at that time, the amount held in reserve by Tether exceeds the amount required to redeem the number of Tether that have been issued. No information is given as to the composition of Tether’s assets, liabilities or reserves.
The assurance opinion merely attests that the statements made in the report as to Tether’s holdings on February 28 are correct—which is to say, on February 28, the amount of assets held by Tether exceeded its liabilities and that the reserves held by Tether were enough to cover the number of Tether that had been issued at the time. The accountant’s statement itself puts this beyond doubt:
“Our opinion is limited solely to the [Consolidated Reserves Report] and the corresponding consolidated total assets and consolidated total liabilities as of 28 February 2021m at 11:59 PM UTC. Activity prior to and after this time and date was not considered when testing the balances and information described above. In addition, we have not performed any procedures or provided any level of assurance on the financial or non-financial activity on dates or times other than noted within this report.”
Upon reading this, those familiar with the New York Attorney General’s investigation will know to immediately disregard this latest charade by Tether. After concluding the investigation, the NYAG fined Tether US$18.5 million, banned it from operating in New York and set out the ways in which Tether had lied to justify its claim to be fully backed. In particular, the investigation found that Tether would arrange for their bank accounts to be ‘verified’ by accountancy firms, inflate the account with cash on the day of the verification and then depopulate the account soon after:
“The OAG’s investigation found that, starting no later than mid-2017, Tether had no access to banking, anywhere in the world, and so for periods of time held no reserves to back tethers in circulation at the rate of one dollar for every tether, contrary to its representations. In the face of persistent questions about whether the company actually held sufficient funds, Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as ‘a good faith effort on our behalf to provide an interim analysis of our cash position.’ In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’”
The self-proclaimed verification referred to here took almost the exact same form as this latest assurance opinion. Tether tried the same thing again in 2018:
“On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.”
Like in the present case, these ‘proofs’ offered by Tether were in the context of mounting demands for a full audit and accompanied by much fanfare and celebration from Tether employees, particularly general counsel Stuart Hoegner, who was made a fool of by insisting that Tether was 100% backed by USD in the early days of the company and has been backtracking ever since, apparently ebbing and flowing along with whatever version of events Tether thinks it can get away with at the time. For example, by the time Hoegner submitted an affidavit for the NYAG investigation in April of 2019, Hoegner was said Tethers were only 74% backed. Now, we appear to be back at 100% backing—which one imagines will change again the next time a Tether employee is asked about it under oath.
As was brought to light on the SomethingAwful forums and shared by author David Gerard in his critique on the situation, the third-party attestation includes a disclaimer that Tether’s accounting policy is to value its assets and liabilities at historic cost as opposed to realizable value, which not only flies in the face of common accounting standards but is a highly conspicuous inclusion in a report otherwise scant on detail. It would suggest a non-insignificant proportion of Tether’s assets come from digital assets (in fact, digital assets are about the only class of asset specifically referenced in either Tether’s report or the third-party attestation) and invites the question whether these might include any of the many coins to have collapsed in value over the years.
But despite anything else, Tether’s latest release is not an audit. As pointed out by author David Gerard in his critique:
An actual audit would test a few other things. Just for starters:
- Look for unreported liabilities — don’t just take Tether at their word.
- Check that the assets … exist.
- Check the assets are in fact owned by Tether.
- Check the reserve assets over time — to make sure Tether couldn’t pull the wool over the accountants’ eyes the same way they did in 2017.
- Check that Tether’s accounting principles do in fact account correctly for assets and liabilities.
- Check the valuation of the assets Tether is claiming as a reserve — and that Tether is valuing them correctly.
Just as with the previous ‘attestations’ offered by Tether, the document released this week is not an audit, and it certainly doesn’t say anything about backing. At this stage, it’s also not enough for Tether to show proof they have managed to pivot toward complete backing; their story has changed so often, and Tether has at various points made inconsistent claims about their reserve, that the only certainty is that Tether has been lying for large portions of its history—the question is which, if any, assertions were true.
It’s not just that Tether has still yet to offer any proof that it is fully backed and by what—it’s that Tether has once again tried to mislead us with a non-proof in the hope that their assurances cause enough premature celebration on social media to front-run reality. The entire strategy can be seen by comparing Tether’s press release concerning the conclusion of the Attorney General’s investigation with the NYAG announcement itself—they might as well be describing two different events. And yet, this tactic is working, judging by the amount of headlines which seem content to take Tether at its word on their latest ‘attestation.’
Of course, we know exactly what it would take for Tether to prove that its token is fully backed by currency holdings: a complete independent audit performed by a qualified accountant. Tether knows this too, which is why we’ve received nothing of the sort.
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