Tether revealed the collapse of its reserves for the first time and cast another ray of hope on support from USDT, the largest cryptocurrency pegged to the US dollar.
Much, however, remains cloudy in part because the pie charts provided by Tether on Thursday made no mention of an independent audit by an accounting firm. Moore Cayman, a five-person accounting firm based in the Caribbean, released two reports this year confirming that USDT is fully supported. However, the auditor (part of the Moore Global Confederation of Accounting and Consulting Companies) has not specified exactly what exactly the token supports.
To be fair, other stablecoin issuers like Circle and Gemini typically don’t produce a breakdown of their reserve compositions at all. For example, Gemini’s accountant states on his certificates that the client’s reserves are held either in FDIC-insured accounts with State Street Bank or in a Goldman Sachs Asset Management money market fund that invests exclusively in US Treasuries. The percentage of each is not given – but on the other hand, both are considered highly liquid and creditworthy assets (“money good” in Wall Street parlance). The same does not apply to all of the assets on Tether’s balance sheet.
The new composition report is part of Tether’s efforts to meet the settlement reached with the New York Attorney General (NYAG) after the prosecutor investigated him and his sister Crypto Exchange Bitfinex for covering up losses of around $ 800 million.
Bitfinex and Tether paid a $ 18.5 million fine and agreed to include a quarterly breakdown of their reserves as part of the settlement.
“Tether proposed that we keep the reserve breakdown under our settlement agreement with the New York Attorney General and we are committed to making this information available to both the Attorney General and the public,” said Stuart Hoegner, General Counsel of Tether, in one statement. “Today’s release reflects our ongoing commitment to transparency.”
The breakdown states that the bulk of Tether’s reserves are in cash, equivalents, or other short-term deposits, with the remainder in secured loans, corporate bonds, and other investments. However, the first category consists mostly of commercial paper, a form of corporate bond that can or may not be easily converted into cash depending on the issuer and market conditions.
According to the breakdown, Tether’s reserves as of March 31, 2021 were 75.85% cash, 12.55% secured loans, 9.96% corporate bonds and precious metals, and 1.64% other investments, including digital currencies. This is in line with what the company said earlier, but is more accurate.
The cash area was further divided into different components: 65.39% commercial paper, 24.2% trust deposits, 3.87% cash, 3.6% reverse repo notes and 2.94% treasury bills.
It is unclear what the ratings are on the commercial paper or corporate bonds, which agencies rated them, or which companies issued them. Likewise, Tether declined to identify the borrowers of the loans or the collateral backing them.
“That’s a little doubtful,” said Francine McKenna, associate professor at American University’s Kogod School of Business, former accountant and author of The Dig, a newsletter on accounting and corporate governance. “Due to the creditworthiness of different companies, not all commercial papers are created equal. Even some of the multinationals that used to be flawless are no longer like that. “
Do the math, and unspecified commercial paper makes up just under half (49%) of USDT collateral.
Tether’s reserves are partially invested in Bitcoin, which is less than 1.64% of total coverage (in the “Other Assets” category), and in gold, which is less than 9.96% of coverage (in the “Precious Metals” category) “) Matters. .
While the release will not be confirmed on Thursday, the reserves would be the same as Moore Cayman would have assessed in the release of confirmation reports for the company. The company released its first report in late March discussing support for the USDT stablecoin as of February 28, 2021. Another report was released last month confirming support as of March 31st.
USDT is a key element in the global crypto market of around $ 2 trillion. Traders use it to quickly transfer dollar value between exchanges and to take advantage of arbitrage opportunities when a bank transfer is unavailable or too slow.
However, the opaqueness of Tether’s business has fueled the flames of speculation from critics who question USDT’s support and presumption that the company is propping up the market by printing tokens.
Tether has a long tradition of checking its reserves without providing much documentation. The company initially hired accounting firm Friedman LLP, which released a preliminary report stating that the amount spent by USDT Tether was covered by its cash reserves, albeit with several caveats.
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The firm then hired the law firm Freeh Sporkin & Sullivan LLP to publish a report on their support, which was also secured.
In late 2018, Tethers Bank, Deltec Bank & Trust, based in the Bahamas, released a letter with an illegible signature stating that the company has reserves of $ 1.8 billion that are in circulation to the USDT in circulation correspond.
During the NYAG investigation, Hoegner found that Tether was only 74% covered by reserves at one point in time.
With that said, USDT has traded at or near USD 1 for almost all of its history.
This year, Tether has committed to posting regular certificates about Moore Cayman.
Lawrence Lewitinn contributed to the analysis.