Can We Trust Tether’s Reserves? A Look at Their Audits

Introduction

Tether (USDT) is one of the most significant and controversial stablecoins in the cryptocurrency market. It plays a crucial role in providing liquidity, facilitating trades, and offering a relatively stable store of value within the volatile crypto ecosystem. However, Tether’s credibility has been persistently questioned due to concerns about the transparency and reliability of its reserves. At the heart of these concerns lies the issue of audits—how well has Tether disclosed and verified its financial backing?

This article delves into the history of Tether’s reserve disclosures, examines the quality of their audits, and assesses whether users and investors can trust Tether’s claims about their financial stability.

The Importance of Reserves in Stablecoins

Stablecoins are cryptocurrencies pegged to the value of traditional fiat currencies, typically the US dollar. For a stablecoin to maintain its peg, it must be backed by an equivalent reserve of assets. If users begin to doubt the legitimacy of these reserves, confidence in the stablecoin erodes, potentially leading to depegging and financial instability in the broader crypto market.

Tether, which claims to be backed 1:1 by reserves, has faced significant scrutiny regarding whether it holds sufficient assets to match its circulating supply. Unlike traditional financial institutions, which are subject to strict regulatory audits, Tether has historically resisted full transparency, further fueling skepticism.

Tether’s History of Transparency Issues

Tether was originally issued on the Omni Layer of Bitcoin in 2014 and later expanded to Ethereum, Tron, and other blockchains. Since its inception, Tether has promised users that each USDT token is fully backed by reserves. However, questions about its solvency have persisted for years.

The 2018 Controversy

In 2018, Tether faced intense scrutiny when it failed to provide a comprehensive audit. The crypto community and regulatory bodies raised concerns over whether Tether actually held the reserves it claimed. The issue intensified when Bloomberg reported that Tether had cut ties with Friedman LLP, an accounting firm that was supposed to conduct a full audit.

The 2019 NYAG Case

The New York Attorney General (NYAG) launched an investigation into Tether’s parent company, iFinex (which also owns the cryptocurrency exchange Bitfinex). In 2019, the NYAG accused Tether of misrepresenting its reserves and covering up an $850 million loss. The investigation revealed that Tether’s reserves were not always held in cash or cash equivalents but included unsecured loans to related entities, further exacerbating trust issues.

As part of a 2021 settlement with the NYAG, Tether agreed to provide quarterly reserve reports but did not commit to a full external audit.

Tether’s Attestation Reports vs. Audits

A key issue in evaluating Tether’s credibility is the difference between an attestation and a full audit:

• Attestation: A limited financial report conducted by an accounting firm that verifies whether certain statements are accurate at a single point in time. Attestations are not as rigorous as full audits.
• Audit: A comprehensive financial examination conducted by an independent firm that provides a thorough review of a company’s financial health and adherence to accounting standards.

Tether has only provided attestations rather than full audits, leading critics to argue that these reports offer limited assurance about its financial health.

Current Attestation Practices

Tether has engaged accounting firm BDO Italia to conduct quarterly attestations. These reports provide some transparency regarding the composition of Tether’s reserves. The most recent attestations show that Tether holds a mix of cash, cash equivalents, short-term U.S. Treasuries, secured loans, and other assets.

While BDO Italia’s reports confirm that Tether’s assets exceed its liabilities, the reports only capture a snapshot in time and do not provide the depth of analysis that a full audit would.

What’s Inside Tether’s Reserves?

Tether’s reserve breakdown, as per its attestations, includes:

• U.S. Treasuries: Considered one of the safest assets, these short-term government bonds make up a significant portion of Tether’s holdings.
• Cash & Bank Deposits: Actual fiat reserves held in banks, though the exact institutions and locations remain undisclosed.
• Secured Loans: Tether has admitted to holding some reserves in secured loans, which raises concerns about liquidity and risk exposure.
• Corporate Bonds & Other Investments: While providing diversification, these assets introduce additional financial risk.
• Digital Assets: Tether’s exposure to cryptocurrencies could make its reserves more volatile than those of traditional stablecoins like USDC.

Although Tether has increased its holdings in safer assets like U.S. Treasuries over time, the presence of secured loans and non-cash assets continues to be a red flag for skeptics.

Can We Trust Tether’s Claims?

Given Tether’s history of incomplete disclosures, regulatory scrutiny, and reliance on attestations rather than full audits, many in the crypto community remain skeptical. However, there are arguments on both sides of the debate:

Arguments in Favor of Trusting Tether

1. Increased Transparency: Tether now provides regular attestations and claims to be improving transparency over time.
2. Reserves Exceed Liabilities: According to attestations, Tether consistently has more assets than liabilities.
3. Market Confidence: Despite skepticism, Tether continues to be widely used, and its peg has remained relatively stable over time.
4. Regulatory Engagement: Tether has settled its case with the NYAG and continues to work with regulatory bodies.

Arguments Against Trusting Tether

1. Lack of a Full Audit: Without a comprehensive audit, users cannot be entirely sure of Tether’s financial health.
2. Opaque Banking Relationships: Tether has not disclosed all details about where and how its reserves are held.
3. Past Legal Issues: The NYAG case and past transparency failures continue to cast a shadow over Tether’s credibility.
4. Exposure to Riskier Assets: The presence of secured loans and other non-cash assets in reserves raises liquidity concerns.

The Bigger Picture: Stablecoin Regulation

Tether’s issues highlight the broader need for stablecoin regulation. Governments and financial authorities worldwide are working to establish clear regulatory frameworks for stablecoins to ensure they are fully backed and transparent.

In the U.S., legislative proposals like the STABLE Act aim to bring stablecoins under stricter oversight. In the European Union, the Markets in Crypto-Assets (MiCA) regulation will impose additional transparency and reserve requirements on stablecoin issuers.

If regulatory bodies impose mandatory full audits, Tether may be forced to provide more transparency or risk losing market trust.