Tether, Stablecoin

Tether claims no more commercial paper in stablecoin reserves

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Tether, the largest stablecoin by market cap, claims to have completely purged commercial paper from the reserve assets backing its USDT token, although it still won’t submit to an audit that might prove that claim.

On October 13th, Tether issued a blog post in which the integrity-challenged firm claimed that as of October 12th it had “eliminated commercial paper from its reserves, replacing these investments with U.S. Treasury Bills (T-Bills).” Tether further claimed that “direct exposure” to T-bills “now makes up the majority of Tether’s reserves.”

Commercial paper consists of unsecured promissory notes issued by large corporations seeking to plug short-term financial holes. These IOUs aren’t backed by anything other than the faith that the corporation in question will still be solvent when the repayment bill comes due.

Tether previously stated that its commercial paper holdings topped US$30 billion in 2021, which would have made Tether the asset class’s seventh-largest investor. And yet no one in U.S. financial circles seemed aware of any entity that had struck such deals with Tether or its parent company iFinex.

Suspicions were rampant that Tether’s commercial paper was largely issued by shaky real estate firms like China Evergrande Group, a belief Tether vehemently denied but could never disprove due to its ingrained aversion to financial disclosure. In a painfully awkward CNBC interview in 2021, CTO Paolo Ardoino insisted that Tether couldn’t divulge its commercial partners because of a need to respect their privacy, a stance espoused by exactly no one else in the commercial paper space.

Recall that on June 27, Ardoino tweeted about Tether having “reduced its commercial paper exposure … to ~8.4B” and that “all the expiring CP have been rolled into US Treasury bills.”

Sharp-eyed critics pointed out that, as of March 31, 2022, Tether claimed to have $20.1 billion worth of commercial paper and certificates of deposit, nearly $19 billion of which matured within 90 days. If Ardoino had been telling the truth about rolling “all the expiring CP” into T-bills by the end of June, Tether’s commercial paper holdings would have totaled $1.2 billion, not $8.4 billion. Like Teen Talk Barbie, Ardoino apparently believes that math class is tough.

Failing the (at)test(ation)

Last month, a U.S. District Court judge ordered Tether to produce hard evidence of the assets behind its reserves. Tether dismissed the order as “a routine discovery matter in a meritless case.” We won’t comment on the merits of the suit but getting hard data on Tether’s assets would be anything but routine.

In the meantime, we remain forced to take Tether’s word regarding the makeup of its financial reserves, a dubious proposition considering the company has been caught red-handed cooking its books on numerous occasions.

Following a bruising $18.5 million settlement with New York’s Attorney General in February 2021 that found there were times when Tether “held no reserves to back tethers in circulation,” Tether was required to submit quarterly reports detailing the reserves behind its assets.

But rather than submit to audits, Tether instead relied on threadbare ‘attestations’ given by Moore Cayman, a tiny accounting firm in the Cayman Islands that was later absorbed by a U.K. firm and rebranded as MHA Cayman. Tether ditched MHA Cayman following its March 31, 2022 attestation, switching its business to an Italian unit of BDO this summer.

In case anyone’s counting, BDO Italia is the seventh (or possibly eighth, it’s hard to keep track) company that Tether has employed in this capacity since September 2017. The last company Tether hired to perform an actual audit – Friedman LLP – was fired before completing its audit due to what Tether claimed were “excruciatingly detailed procedures” that would make an audit “unattainable in a reasonable time frame.” Five years later, it’s clear Tether’s definition of a ‘reasonable time frame’ is flexible AF.

Tether’s market cap currently stands at US$68.4 billion, down from its all-time high of over $83 billion in May of this year. While Tether has trumpeted its alleged ability to handle billions’ worth of USDT redemptions as the ‘crypto’ market crashed, cynics have suggested that Tether’s recent accountant shuffle might have been necessary because the numbers and data that MHA Cayman saw this spring might not have jibed with the ones that BDO Italia was asked to approve this summer.

And while BDO is a familiar face in the auditing world, its luster appears to be fading. In July, the same month Tether began working with BDO, U.K. financial regulators found BDO’s audits “unacceptable,” with a full one-third of its reports “requiring significant improvements.” Among BDO’s biggest shortcomings? An appropriate level of “skepticism.”

BDO Italia’s lone Tether attestation to date includes a list of caveats worthy of a pharmaceutical commercial, but the primary takeaway is this: BDO only looked at Tether-supplied documents “limited to a point in time as of 30 June. We did not perform procedures or provide any assurance at any other date or time in this report.”

Tether loves to play the crypto victim but its refusal to submit to an audit makes it the primary contributor to its dodgy reputation. There’s a reason that your middle school math and science teachers made you show your work on tests: to demonstrate that you didn’t just crib the answers from a kid who took the same test last year. Shame on us for daring to expect a similar level of disclosure from a company whose failure would collapse crypto’s already shaky pillars.

The black knight of stablecoins always triumphs!

As it has claimed in the past, Tether insisted this week that selling off its billions in commercial paper was done “without any losses.” This is Tether’s problem in a nutshell. It can’t limit itself to telling a small fib. It always has to swing for the fences. Sure, the global bond market is having its worst year ever. Sure, everyone is taking an absolute bath on their holdings. But Tether? They never left the champagne room, never stopped making it rain. And hey, did you know that Tether keeps the U.S. dollar strong?

It makes one wonder: what other Gordian Knots might Tether be capable of untying? Has Tether solved the enduring enigma of cold fusion? Has it cracked the riddle of the perpetual motion machine? Can it pull swords from stones like it pulls numbers from its ass? Do tell, Paolo!

Given Tether’s pivotal role in artificially inflating the BTC balloon, the lack of freshly minted USDT is considered one of the primary causes of the crypto market’s inability to thaw the current ‘crypto winter.’ But now that Tether has closed its BTC loans with exchanges and crypto lending platforms, it’s once again time to start minting USDT out of thin air and pumping some artificial air back into crypto’s deflated balloon.

Don’t trust. Verify. Unless it’s Tether

We’ll close by noting that one of the most ardent enablers of the ‘Tether is fully backed’ myth is Adam Back, CEO of Blockstream, who religiously applies his company’s ‘Don’t trust. Verify.’ mantra to everything not named Tether. Back does so because, like everyone else in the crypto space, he knows that Tether’s ability to conjure up ‘money’ on command is the only thing keeping the ‘number go up’ charade going.

It’s fascinating to watch crypto apologists bend over backward to give Tether the benefit of the doubt while simultaneously demanding that Dr. Craig Wright prove that he is Bitcoin creator Satoshi Nakamoto by signing early blocks on the Bitcoin blockchain. No other evidence will suffice, no matter how compelling. The small blockers insist that until Wright uses a private key associated with Blocks 1-9, his word can’t be trusted.

And yet these same arch-skeptics suddenly morph into poster boys for credulity when it comes to taking Tether at its word that all its tokens are backed by U.S. dollars or their equivalents (although cracks are forming in this wall of denial).

This month, Tether celebrated its eighth birthday, meaning it’s now gone eight years without a third-party audit. Given everything we’ve discussed above, we encourage readers to set up their own accounting firms now. If current trends persist, Tether will eventually run out of actual bean-counters to rubberstamp its attestations and will hire you to do the job. A lack of verifiable accounting skills isn’t a dealbreaker; basically, if you were able to click ‘I agree’ on your iTunes updates, you’re qualified to vet Tether’s books.

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