The jig may be up for the Tether stablecoin following a trainwreck CNBC interview and regulators losing patience with the digital currency sector’s aversion to oversight.
Wednesday saw Tether’s CTO Paolo Ardoino and general counsel Stuart Hoegner appear on CNBC’s online program TechCheck, where host Dierdre Bosa peppered the pair with questions regarding the lack of transparency surrounding digital currency’s largest stablecoin, as well as the ‘Where’s Waldo’ tendencies of the company’s CEO Jean-Louis van der Velde and CFO Giancarlo Devasini.
Ardoino and Hoegner’s participation was confirmed by Bosa less than 24 hours before showtime, which may have accounted for the paltry audience that tuned in to the livestream. The fact that Ardoino and Hoegner took part at all is notable in and of itself, as the pair generally prefer to give interviews only to obscure vloggers with audiences in the dozens.
Regardless, the 30-minute segment could ultimately give rise to a new acronym, FABNAQ (frequently asked but never answered questions), as Bosa’s more probing queries were routinely batted away by a mix of obfuscation, bafflegab and the visibly uncomfortable Ardoino’s occasional cries of ‘Look! A yeti!’ before cutting his video feed long enough to mop his flop sweat.
Hoegner, who often appeared to be reading from prepared cheat sheets—or perhaps checking that Ardoino wasn’t having a coronary—dismissed Van der Velde and Devasini’s absence by saying that the big cheeses were busy talking to “the people that matter.” At any rate, here’s what the B Team had to say to us peons.
Audit? Odd, that…
The key takeaway from the interview was Hoegner’s claim that an audit—not just another weak quarterly attestation by a rubberstamp Cayman Islands firm—of Tether’s true financial picture was in the works, with the timeline for completion measured in “months, not years.” For the record, Tether has been promising a proper audit for four years now—roughly 48 months in the Hoegner vernacular—so we’ll believe it when we see it.
Bosa noted that Tether previously utilized U.S.-based Friedman LLP as its auditor before that relationship ‘dissolved’ in January 2018 due to Tether’s unhappiness with Friedman’s “excruciatingly detailed procedures.” Asked why Tether didn’t opt for a familiar U.S. name this time around, Hoegner said Tether wasn’t convinced that “trust is necessarily vested in one country or another.”
Hoegner claimed that Tether execs were “leaders in transparency,” despite the prevailing view that the only thing Tether and transparency have in common is the letter ‘t’. Asked why this public ‘disconnect’ existed, Hoegner pleaded ignorance, adding that USDT’s popularity was sufficient evidence of the market’s faith in Tether’s dealings.
Bear in mind that the New York AG’s probe of Tether found that the company had a habit of ‘borrowing’ nine-figure sums from sister company Bitfinex the day before asking an accountant to verify that the cash in Tether’s bank accounts matched the issued value of USDT. The day after that verification, Tether would transfer the sum back to the Bitfinex exchange and the shell game resumed. We suppose you could argue this was transparently dishonest, so we grudgingly concede the point to Hoegner.
Papering over commercial concerns
Much of Bosa’s questioning focused on the assets backing the nearly US$62 billion in circulating USDT, around two-thirds of which was minted this year. Having previously claimed that each USDT had a matching U.S. greenback somewhere, Hoegner now claimed that each USDT was backed “one-to-one with our reserves,” which is a horse of a very different color.
Tether’s release in May of two pie charts—the barest of minimums required by the company’s $18.5 million settlement with New York’s Attorney General—revealed that Tether’s cash reserves were a mere 3% of issued USDT, with the vast majority of reserves being commercial paper of unknown origin.
Widespread suspicion that much of Tether’s commercial paper was issued by Chinese firms of dubious distinction took on new urgency after Chinese regulators reportedly imposed new transparency requirements on issuers of commercial paper. Asked by Bosa how much exposure Tether had to Chinese commercial paper, Hoegner said only that Tether’s portfolio “contains international commercial paper.”
Hoegner further claimed that the bulk of Tether’s commercial paper was rated “A2 or better … across multiple rating agencies.” But when pressed on the Chinese component, Hoeger claimed “we guard our counterparty relationships with great discretion.”
Ardoino similarly evaded Bosa’s pursuit of specifics by saying it was “quite important to respect the privacy of the banking partners that we work with.” This flies in the face of conventional money-market funds, which generally issue detailed breakdowns of their holdings, and also blows Titanic-sized holes in Tether’s ‘leaders in transparency’ mantra.
Tether liquidity not all that wet
Hoegner claimed his company had “never refused a redemption by a Tether customer,” but Tether’s T&Cs permit redemption only to a ‘verified customer,’ aka exchanges and OTC traders. End users need to find a willing buyer on an exchange to convert USDT to anything usable in the real world. Furthermore, Tether reserves the right to delay withdrawals or redemptions depending on the “illiquidity or unavailability or loss” of any of Tether’s sketchy reserves.
On that note, Hoegner’s attempt to set viewers’ minds at ease regarding those reserves went somewhat awry when he claimed that Tether had enough cash on hand to cover “our biggest 24-hour period of redemptions.” Hoegner appeared utterly unaware that bragging about having one whole day’s worth of liquidity on hand is perhaps not the greatest selling point for a financial institution boasting a $62 billion market cap.
You can’t spell security without ‘SEC’
While the general reaction to the Tether bros’ CNBC appearance has been one of comedic disbelief, more serious challenges appear set to arise following Wednesday’s speech by Gary Gensler, the newly appointed chairman of the Securities and Exchange Commission (SEC).
Gensler warned purveyors of digital currency products, including any “stable value token backed by securities,” that a failure to abide by securities laws or refusal to work with securities regulators, um, won’t end well. Gensler warned that the SEC would “use all the tools in our enforcement toolkit” to ensure compliance—real compliance, not the Binance ‘we’re on a journey’ posturing—is forthcoming.
With Tether’s attestations indicating its reserves are comprised mainly of commercial paper and corporate bonds, USDT appears to be the very definition of a tokenized security. As such, the SEC will likely be summoning Ardoino and Hoegner to conduct its own interview soon. Perhaps Tether’s CEO and CFO might even attend this one, assuming that the SEC chair qualifies as a person that matters.
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