Tether produces a new attestation — it says nothing useful

Crypto’s favourite dollar-substitute stablecoin, Tether, releases an audit of their backing reserves, the value behind each and every tether! An audit by proper accountants!

Well, actually an attestation. Well, functionally a press release: [Tether]

Tether has always been fully backed, and the assurance opinion we made available today confirms it once again.

(The settlement with the New York Attorney General from February details how and when that first claim was false, for what that’s worth.)

The attestation was done by Moore Cayman and assesses the numbers provided by Tether in their Consolidated Reserves Report as of 11:59 PM UTC, 28 February 2021.

So Tether may have been backed for a minute.



The Independent Accountant’s Report

The report is an 8-page PDF, and states: [Independent Accountant’s Report, PDF]

Consolidated total assets amount to at least USD 35,276,327,156.

This matches the 35 billion tethers that had been issued as of 28 February. (There’s nearly 41 billion as I write this.)

The reserves include digital assets, gold (backing the XAU tethers), and “other assets and  liabilities”. The proportions of each of these in the reserve is not stated.

Digital assets are valued at “the lower of cost or fair market value.”

“Liabilities” would include loans — such as loans of tethers that are being claimed as backing for issuance of tethers, or loans to other iFinex companies.

The only assets spoken of specifically are “digital assets” and gold — the words “bank”, “cash”, “currency”, “currencies” or “deposit” don’t appear.

That the report doesn’t detail Tether’s crypto custody arrangements is a minor omission compared to all its other issues.

Attestations, audits and shenanigans

Attestations are a kind of audit, sort of. But they don’t tell you what you want to know about a stablecoin reserve — that is, the trustworthy stability of the reserves:

Our opinion is limited solely to the CRR and the corresponding consolidated total assets and consolidated total liabilities as of 28 February 2021, at 11:59 PM UTC. Activity prior to and after this time and date was not considered.

Remember the trick that the NYAG caught Tether pulling with this sort of attestation? Tether opened an account at Noble Bank on the morning of 15 September 2017, Bitfinex transferred $382 million into Tether’s account from their account, and then Tether showed Friedman LLC their new account balance, at 8pm that day.

That’s why attestations don’t count as audits — and why attestations from Tether really don’t count as audits, ‘cos they’ve been busted pulling literally this shenanigan before.

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.

On that last one, Blotto_Otter on the SomethingAwful Buttcoin thread spotted this example in this report:

Management’s accounting policy is to value assets and liabilities at historic cost plus any accrued interest and less any expected credit losses, or otherwise the redemption value where applicable. The realisable value of these assets and liabilities could be materially different if any key custodian or counterparty incurs credit losses or substantial illiquidity.

Apart from Tether’s valuation policy being completely contrary to both GAAP and IFRS accounting standards, that paragraph subtly indicates that some of Tether’s backing assets may have dropped in realisable value — and Moore felt they needed to indicate that in the report. This is Moore telling you that they don’t think Tether are valuing their reserve assets correctly.

Who or what is this report for?

It’s not clear what the purpose of this report is. Nobody who’d read the settlement with the NYAG would be reassured by this — particularly when the report shouts out loud that it’s vulnerable to the same exploit that the settlement detailed Tether as having pulled in 2017.

The main use so far for the report is for the more pliant crypto media outlets — and, of course, Tether advocates on social media — to claim that Tether is vindicated, everything is completely backed and it’s all fine.

The report wouldn’t fit what the NYAG required Tether to publish by mid-May, because it doesn’t break out each category of backing asset by percentage.

I’m somewhat surprised Tether didn’t break the reserves out by percentage. Surely it would be trivial to do so — if everything was fine.

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6 Comments on “Tether produces a new attestation — it says nothing useful”

  1. David, I think it’s too strong to say that Moore Cayman is telling the reader they think THL (Tether Holdings Limited) incorrectly values its reserve assets, because MC is in fact saying the CRR is NOT materially misstated. What MC *is* saying is that a reader might reasonably disagree with this aspect of the valuation methodology.

    On that, I agree with THL and MC that in a point-in-time attestation it’s not appropriate to include a discount to valuation based on counterparty liquidity risk if there is no evidence of same. And that’s particularly so the longer we go past the point in time (we’re now a month past) and no counterparty liquidity event or default has occurred. the continued high price of BTC in particular over that month would have made it extremely unlikely that such an event would have occurred; I think we can give credence that “no counterparty discount” was an appropriate valuation in the circumstances.

    1. I read that para and “substantial illiquidity” seemed to me to say “unsaleable sh-tcoins”. But admittedly I’m divining from tea leaves a bit here.

  2. Why wouldn’t Tether get a well known and credible third party to verify it’s a real business instead of putting forth an attestation from an off shore, small, unknown non-bank….

  3. You might want to check this Cayman island company in detail. They have listed 3 employees on LinkedIn. Wouldn’t be surprised if they hadn’t done any business before ever, lol.

    1. yes, the attestations for other stablecoins are precisely as useless, for precisely the same reasons.

      It’s not clear how the Gemini USD is audited – I think the corporation for the stablecoin is audited? I couldn’t find the audits, however.

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