Tether Releases Attestation Report

Controversial stablecoin Tether released its latest reserves report for the first quarter yesterday. As usual, there are many red flags.

The stablecoin has released an attestation and not an audit, meaning the accounting firm responsible for verifying Tether’s reserves only checked the state of its finances at a particular moment in time. What’s more, their primary source of information and numbers is Tether’s management itself.

The latest attestation also shows that Tether has dialed up the risk quotient of its reserves by adding bitcoin to the mix. It has also broken out the share of gold reserves. But there is nary a mention of the company’s banking or custody relationships for both assets, making it difficult to ascertain the validity of Tether’s assertions.  

Loading up on Risk   

In the previous quarter, the stablecoin’s assets surged to $81.8 billion on the back of new issuances as its competitors suffered setbacks. Binance’s stablecoin BUSD was shut down by regulators and Circle’s USDC suffered a loss of peg that dented investor confidence and instigated withdrawals.

The latest tranche of Tether tokens is backed by a mix of assets including Treasury bills, reverse repo agreements, money market funds, and cash deposits. It is difficult to verify the presence of these artifacts in Tether’s reserves because there has never been proof or explicit admission by traders that they have conducted T-bill purchases on behalf of Tether.

But all that is old news.

Bitcoin and Gold

What’s new in this report is the company’s foray into holding bitcoin. The stablecoin purchased $1.5 billion worth of bitcoin last quarter. It also has $3.4 billion of gold for its reserves. Prices for both rallied last quarter and ought to have added many zeros to Tether’s balance sheet.

Alas, there are significant asterisks attached to that statement.

Bitcoin’s price increase was achieved during a time of declining liquidity in crypto markets and intense regulatory action against the asset class. Those conditions made it easy for relatively few actors to manipulate bitcoin price.

Tether has been accused in the past of doing the same in the past by issuing new tokens and purchasing bitcoin to inflate its price. Subsequently, its management sells those coins for US dollars at exchanges away from the spotlight.

Were the latest purchases part of that strategy?

We don’t know because Tether’s report is an attestation – a snapshot of its finances at a specific point in time – and not an audit. A related question is about bitcoin’s price action. It has been erratic this quarter, attempting to breach past the $30,000 mark and repeatedly failing. As of this writing, it is $27,187.71, down almost 5% from its price on the 1st of April.

How is Tether managing the decline? We don’t know because Tether won’t tell us.

Gold is a more stable investment with relatively liquid markets as compared to bitcoin. But Tether gives scant information about its purchases. It does not provide details of its custody providers or counterparties to the transaction. This is important because gold custody and liquidity vary based on the format and type respectively.

A Profitable Quarter  

In an earlier interview with CNBC, Tether chief technology officer Paolo Ardoino said the company was expecting profits of $700 million in the first quarter. It seems to have outdone itself, by booking gains of $1.4 billion.

We don’t know the sources of those gains. It certainly cannot be the new tokens because most of them are locked away at Tron – a network whose founder has been charged with fraud – away from traders.

Did Tether earn interest income its short-term investments? Or did the company inflate profits by manipulating the price of bitcoin and booking profits?

More Red Flags

There are also the usual red flags associated with the report. The company clearly states that its accounting policy “does not contain sufficient information in terms of general presentation,” allowing it to misrepresent facts.

In March, Circle stablecoin USDC lost its peg because a portion of its reserves were locked up at Silicon Valley Bank, a financial institution that had interest rate risk. The provisioning of Tether’s reserves, whether they are bitcoin, treasury bills, or gold, similarly depends on counterparties and custodians. None of them are identified in the report.

The report also mischaracterizes Tether tokens as refundable, when, in fact, the stablecoin’s Terms of Service clearly state that it can choose to refuse redemptions for no reason whatsoever.

The purpose of an audit or attestation is transparency. But Tether’s attestation only serves to further obfuscate the state of its finances because it is a random collection of statistics without much fact or attribution.

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