Controversial stablecoin Tether’s holdings of commercial paper fell and its cash and bank deposit holdings rose, according to a “reasonable engagement report” released yesterday. The report provides a breakdown of the reserves backing tokens circulating in the market. Tether claims that its holdings of commercial paper and cash and bank deposits increased by 58% and 32% respectively. [Commercial paper is considered a risky investment because its value fluctuates in financial market].

“The attestation indicates a continued reduction in commercial paper investments by the company and demonstrates that the group’s consolidated assets consistently exceed its consolidated liabilities, despite market capitulation in Q2 2022, which led to cascading failures across the industry,” Tether stated on its website.

The world’s biggest stablecoin has become an embattled entity in recent years. Even as it has lost its share of the stablecoin market, Tether has become a touchstone for controversy and lost its peg to the US dollar numerous times.

Critics have accused it of misrepresenting and commingling funds meant for its reserves. Last year, the company paid $18.5 million in penalties to the New York Attorney General to settle charges that its deceived investors by claiming that its stablecoin was always backed when that was not the case.

For supporters of the cryptocurrency, yesterday’s report might have come as a shot in the arm. While Tether may have reduced its commercial paper holdings, the company is misrepresenting its gains. What’s more, the report is still not credible proof that the stablecoin is backed by adequate reserves “at all times” when it is trading.  

Tether’s Problematic Report

The purpose of Tether’s report is to reassure investors that the stablecoin has the necessary liquid reserves, readily available or within a week at the maximum, to cover its liabilities and make investors whole. That is, the stablecoin will honor its promise of exchanging each Tether token for a dollar.

But there are two problems with using the latest attestation as proof of its finances.

The first one is its method of preparation. Tether’s attestation report is a snapshot of its accounting at a certain point in time. The report is not an independent audit of its holdings across the quarter. It is prepared by accounting firms, in this case BDO Italia, based on inputs from Tether’s management. In other words, Tether’s management retains control of its books and can manipulate its contents by buying up assets, when a snapshot of its holdings are prepared, and using them for other purposes or disposing them off later.

In fact, yesterday’s report clearly states that “activity prior to and after the time (30 June 2022) was not considered when testing balances and information.” BDO has also washed its hands off assurances for the management’s accounting practices used to prepare the Consolidated Reserves Report (CRR). The CRR was used as input to yesterday’s report.

Misrepresenting Gains

The second problem with Tether’s assurance report is its presentation and math.

On its website, the company claims that it reduced commercial paper holdings by almost 58%. [Some publications have dutifully repeated this assertion]. But it is still an open question whether the decline was instigated by a lower market cap – a result of redemptions due to a crypto bankruptcies – or a conscious decision by the company to reduce its holdings of the asset class. A lower market capitalization means that the company needs fewer assets to ensure solvency.

But a comparison between differing market caps and associated commercial paper holdings is one between apples and oranges. A better metric for measurement, in this case, might be the commercial paper holdings as a percentage of the overall market cap. Tether’s commercial paper holdings have, indeed, declined but not by 58%. To be precise, as a percentage of the total market cap, commercial paper asset holdings declined by roughly 12% from the last attestation report.

Meanwhile, the company’s US Treasury holdings – another liquid investment – also declined by 4.1% as a percentage of the overall assets. Cash and bank deposits in the company’s reserves increased by roughly 3.1%, and not by 32% as claimed by the company, as a percentage of the overall assets.