The company behind the controversial Tether stablecoin claims to have booked hundreds of millions in profits during the tumultuous final quarter of 2022, but we’ll have to take their word on that.
On Thursday, Tether Holdings Ltd released the latest quarterly’ assurance opinion’ of the financial reserves allegedly backing the tens of billions of USDT stablecoins currently greasing the wheels of ‘crypto’ commerce.
Tether’s management claims its total assets amounted to ‘at least’ $67 billion as of December 31, 2022, about $1 billion more than its total liabilities. Tether further claims that it booked a $700 million ‘net profit’ in the three months ending December 31.
This ‘profit’ claim marks a first for Tether’s threadbare attestations and apparently came despite a period that saw a tremendous upheaval in the crypto sector. That upheaval was highlighted by the November bankruptcy of Sam Bankman-Fried’s FTX exchange and its affiliated market-maker Alameda Research, which had been the single-largest recipient of USDT.
Tether’s profit may have come from interest on Tether’s (allegedly) growing supply of U.S. Treasury bills. Or perhaps it was derived when the Celsius Network crypto lending platform went bankrupt last year. Celsius borrowed over $1.8 billion worth of USDT from Tether, providing over $2.6 billion worth of BTC tokens as collateral, which Tether announced it had liquidated after Celsius filed for Chapter 11. Tether claimed to have “returned the remaining part to Celsius” following this liquidation, but we can’t help notice that the difference between those two figures is in the $700 million ballpark.
Earlier this week, Tether CTO and notorious flop-sweater Paolo Ardoino gave an interview in which he celebrated Tether’s ability to redeem $7 billion—10% of its alleged reserves—in one 48-hour period during last year’s crypto meltdown.
Ardoino claimed “hundreds of millions” of these redemptions were made with USDT borrowed from companies by short-sellers and then sold off on secondary markets in an apparent bid to cause USDT to lose its 1:1 peg with the U.S. dollar. Ardoino warned that “before attacking a company like Tether, you should really make sure you understand how it works.”
That would be swell, but Tether’s own statements make understanding its workings impossible. And trusting its representatives is a mug’s game.
Beguile, deceive, obfuscate
Tether’s most recent assurance was issued by BDO Italia, the seventh or eighth firm Tether has engaged for such purposes in its relatively brief history. Despite Tether’s habitual claims, these assurances are not anything remotely approaching a comprehensive audit.
As evidence of the meticulous care that BDO Italia applied to its cursory inspection of Tether-supplied information, the report states that its conclusions are entirely based on data supplied by Tether and “is limited to a point in time as of 31 December 2023.” Yes, it apparently traveled forward in time to the end of this year to conduct this report, which you’ve got to admit is pretty impressive. (Perhaps they’d be good enough to tell us who won this year’s NBA finals?)
Even if we charitably assume that BDO just fat-fingered its attempt to type ‘2022,’ the firm still has no idea whether, as Tether has proved guilty of in the past, it may have shuffled assets from a sister firm on December 30 and returned those assets on January 1.
As BDO states, “activity prior to and after this time and date was not considered when testing the balances,” and “we have not performed any procedures or provided any level of assurance on the financial or non-financial activity on dates or times other than that noted within this report.” Also, “we do not express an opinion or provide any assurance” regarding notes that Tether has added to the report.
Recall that in 2021 the U.S. Commodity Futures Trading Commission (CFTC) fined Tether $42.5 million for lying about its reserves, and the New York Attorney General reported that “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.”
That NYAG enforcement action is the only reason Tether releases any info regarding its reserves. This latest report may be the final one under that two-year requirement. A different civil action in New York could result in a future publication of Tether’s financial dealings. Still, otherwise, Tether will be free to resume its previous cloak-and-dagger financial status.
On Friday, New York Supreme Court Justice Laurence Love rejected Tether’s bid to prevent the publication of financial documents Tether supplied the NYAG as part of the latter’s 2021 settlement. The CoinDesk media outlet filed a freedom of information request for the documents—which detail the assets backing Tether’s reserves—that same year. Tether will likely appeal Love’s ruling.
Cushioning the blow
BDO’s breakdown of Tether’s reserves shows $39.2 billion in U.S. Treasuries, up from $30 billion in the Q3 report. On Friday, the Wall Street Journal cited unnamed sources who claim that Tether is using the Cantor Fitzgerald financial services giant to “help oversee” its bond portfolio.
Forbes also reported on Tether’s Cantor connection, citing a source that claimed Cantor’s sister firm/trading desk BGC Partners “had bought and sold large volumes of Tether.” Cantor has yet to confirm or deny the reports.
Cantor is a Wall Street mainstay, but its forays into less traditional sectors have occasionally proved controversial. In 2016, a sports betting technology offshoot paid a $22.5 million penalty after federal prosecutors linked the business to an illegal’ messenger betting’ operation. It remains to be seen whether ties to Tether might also come back to haunt Cantor.
Forbes also reported that in 2021, after Tether’s NYAG settlement, it moved $37 billion of reserves into a Bahamas-based Capital Union bank. Tether reportedly held other reserves at two other Bahamian banks: Deltec Bank & Trust and Ansbacher, which Deltec announced it had acquired in January 2022.
Deltec owner Jean Chalopin is closely linked to the curious case of Moonstone Bank, which Chalopin acquired in 2020 and rebranded from its original name Farmington. Last March 2022, Alameda took an $11.5 million stake in Moonstone, and the bank simultaneously announced a new crypto-focused strategy. However, the attention garnered by the FTX/Alameda bankruptcy appears to have blown their cover, and the bank announced last month that it would be “returning to its original mission as a community bank.”
Last October, Tether declared that it had “eliminated commercial paper from its reserves,” and its current assurance does indeed show a goose egg in this category. But remember that Tether historically denied that its former billions in commercial paper reserves were issued by dodgy Chinese real estate firms. And yet the recent court-appointed examiner’s report on Celsius showed an internal email in which Celsius execs sought info regarding “Tether’s Chinese CP exposure.” So who knows what’s what?
Despite the aforementioned $300 million reduction, ‘secured loans’ still account for $5.85 billion worth of Tether’s reserves. This is despite Tether’s previous pledge that it only issues new USDT “when they are requested and purchased by customers.” (Emphasis added.)
Tether’s $700 million profit, combined with a $300 million loan reduction, equals the company’s ‘capital cushion.’ And yet Tether’s ‘transparency’ page showed a surplus of only $250 million just ten days before the end of 2022.
That transparency page—which claims to be “updated at least once per day”—showed a similar surplus as late as February 6. The page has since been updated to the ‘correct’ figure after someone pointed out that Tether’s assurances were far from assuring.
As more devoted Tether skeptics have observed, “the near-static nature of Tether’s shareholder equity figure between attestation release dates, in stark contrast to its sudden shifts on those same dates, [is] entirely inexplicable.” (Emphasis in the original.)
Bad actors abound
With his traditional ability to piss on your leg and claim that it’s raining, Ardoino expressed pride that his company “has continued to be a driving force in rebuilding trust within the crypto industry” while “setting itself apart from the bad actors of the industry.” How? By being even worse?
The equally controversial Binance exchange released its own half-assed ‘proof of reserves’ last November that was mocked for displaying only assets, not any liabilities, and was described by other exchange bosses as “hand wavey bullshit.” Mazars, the accounting firm that prepared the attestation, was so annoyed by Binance boss Changpeng ‘CZ’ Zhao’s public misrepresentation of the report as an actual audit that they got out of the crypto business entirely.
Earlier this week, Binance’s Asia-Pacific head Leon Foong told Bloomberg that the timeline for releasing a full audit was nowhere in sight. Foong said this isn’t the fault of Binance, whose concern for the rules can charitably be described as non-existent, but because crypto is not traditional accountants’ “core competence.”
Ardoino and the rest of the Tether crew may soon find themselves tagged with their own scarlet letters should Sam Bankman-Fried come to his senses and realize that he’s facing 115 years in prison for his role in the downfall of FTX/Alameda. Given his former role as Tether’s biggest customer, he likely knows where the bones are buried. And if he’s forced to contemplate a life behind bars without video games, he’ll be looking to leverage whatever dirt he can.
If it’s bad actors you want, our money’s on Ardoino taking home a Golden Raspberry sooner than he thinks.
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