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The inner workings of Tether have been under constant scrutiny and they’re in the spotlight again after issuing 300 mln new Tether tokens last week. To understand why Tether has been the subject of controversy for the past six months, one should remember how this cryptocurrency works.
According to Tether, USDT tokens are “backed’ by US Dollars in a 1:1 ratio. In the last six months, Tether have been constantly accused of not having sufficient fiat reserves to back the tokens that they periodically issue.
That’s why some industry critics paid special attention to the changes in a price of Bitcoin that have come after the issuance of new Tether tokens. Given that Tether is equal to one dollar, users have been buying various cryptocurrencies with Tether tokens. If these tokens are not backed by an equal amount of dollars, cryptocurrencies prices, in particular, may have been irregularly inflated.
Point proven again?
Casting aside speculation on the reserves backing Tether tokens, the issuance of 300 mln new USDT last week once again coincided with a six percent rebound in the price of Bitcoin.
This prompted fresh reactions from critics - with outspoken anonymous blogger Bitfinex’ed leading the charge with another heated tweet. Tether and sister company cryptocurrency exchange Bitfinex threatened legal action against critics in December.
In January 2018, Pantera Capital chief investment officer Joey Krug expressed concerns that these rallies had led to Bitcoin rise to an all-time high in $20,000:
“This became more and more concerning, because every time the markets went down, you have seen the same thing happen. It could mean that a lot of the rally over December and January might not have been real.”
Tether refute claims, but still unaudited
Prompted by a subpoena from US regulators in December 2017, Tether reacquired the services of Friedmann LLP to conduct an audit on it’s US dollar reserves. However, a month later, news broke that the Tether had parted ways with their auditors, meaning no audit results were ever disclosed.
That caused alarm and woke up the critics. However, Litecoin founder Charlie Lee joined the fray on Twitter:
There's a fear going on that the recent price rise was helped by printing of USDT (Tether) that is not backed by USD in a bank account.
— Charlie Lee [LTC] (@SatoshiLite) November 30, 2017
I urge @bitfinex and @Tether_to to perform a 3rd party audit to prove their reserves. Please do the right thing. Thanks.
While he also allayed fears that the crypto markets would be brought down if Tether were to crash, it is still disconcerting that there has been no official statements made about the unfinished audit.
No official audit ever done
Before the subpoena from Commodity Futures Trading Commission (CFTC) - Tether’s employed Friedman LLP to conduct an audit in what they described on an ‘expedited basis.’ Tether then posted the memorandum as an attachment to that announcement on its website. They also stated that it was not an official audit or attestation engagement, but hoped to appease concerned critics:
“We hope that the community considers the attached memorandum for what it is: a good faith effort on our behalf to provide an interim analysis of our cash position and our issued and outstanding tokens, as part of ongoing efforts to further professionalize the transparency mechanisms of Tether Limited.”
According to the document, as of Sept. 15, 2017, Tether had $442.9 mln reserve in its bank accounts while a little over 442 mln Tether tokens issued and outstanding. At that point, Tether was in the clear in terms of their reserves.
While it still isn’t completely clear what led to the breakdown between Tether and Friedman LLP, Bloomberg reported that Tether wasn’t happy with the time frame given for the latest audit:
“Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable timeframe.”
Cointelegraph reached out to American accountant and auditor Abhishek Shah, who had reviewed the memorandum released by Friedman LLP. Shah says the document showed that Tether did have the necessary US Dollars reserves at that time.
However, Shah founds it disconcerting that Tether had terminated the audit due to the timeframe given:
“The reason given by Tether was certainly not clear and precise, neither acceptable. An audit is to be allowed as much time as required, albeit the audit needs to be concluded before the due date. It is not a reasonable ground and I've personally not heard of such a reason in my auditing career.”
Community must demand an audit
Shah goes on to concede that Bitfinex, the largest cryptocurrency exchange in the world, could well have the necessary reserves to back up Tether. Nevertheless, Shah believes pressure from the community is the only thing that will lead to a transparent audit:
“The Crypto community should come together and demand a complete independent audit of Tether. Research suggests that Bitfinex makes enough trading and lending fees to have enough cash reserves. Bitmex research was able to track the banks which supposedly have the cash reserves. There is no doubt that they could have the required reserves, but an audit is required and refusal to do so would only create an unstable environment.”
Furthermore, Shah calls any talk of an audit of a cryptocurrency exchange being too difficult due to the new technology ‘nonsensical.’
“This is a completely redundant statement. We've audited companies which handle far more complicated operations, which deal in Derivatives and Futures markets which have a lot bigger market cap, using algorithmic trading. We have, and every reputed audit firm has a separate IT department which creates a blueprint of a flowchart to aid the auditors.”
Nothing to fear?
As Shah reminds us, there are entities that believe Tether and Bitfinex are acting in good faith.
In February 2018, a report from Bitcoin derivatives exchange Bitmex suggested that Tether does indeed have sufficient reserves to back all outstanding USDT tokens in circulation. Bitmex added that Tether may have US dollar reserves in a Puerto Rican bank account, which is believed to be a cryptocurrency tax haven.
In Bitmex opinion, a hard fork carried out by Tether in the wake of a $31mln hack showed that the developers had complete control of its ledger, tokens and funds.
“(This) demonstrated that Tether is effectively in complete control of the ledger, as they can force a hard fork at will and reverse any transaction- although there may not have been any doubt about Tether’s control beforehand.”
In an announcement on its website on Dec. 19 2017, Tether stated that its wallet services were slowly being restored after the hack. Furthermore, Tether announced developing a new platform. There are no further updates on this new platform on the website.
Users were directed to use alternative exchanges to buy or sell new Tether tokens for US Dollars or other cryptocurrencies. USDT have continued to be issued, as seen on the Tether Omi Explorer.
We have reached out to Tether for official comment on the most recent issue of Tether tokens, and discontinued the relationship with auditors Friedmann LLP, but haven’t received a reply by press time.