When top stablecoin issuer Tether announced on Thursday (Aug. 18) that it had hired one of the world’s largest auditing firms to provide monthly reports of the reserves backing the dollar-peg of USDT, it was a big step forward in putting a rest to questions about the existence of its reserves that have festered for years.
The question is, was it a big enough step to calm the concerns that saw investors dump $10 billion worth in the week in May in which the Terra/LUNA algorithmic stablecoin ecosystem was collapsing in a $48 billion run on its reserves, followed by another $6 billion over the next two months?
See also: How a Stablecoin’s $48B Collapse Rippled Across Crypto
In that time, Tether’s market capitalization fell from $83 billion to about $66 billion. Meanwhile, the No. 2 stablecoin, Circle and Coinbase’s USD Coin, or USDC, grew from about $48.5 billion to $65 billion. It is widely believed that many investors dumped USDT for USDC, especially as Tether’s stablecoin lost peg for about two months, dropping below $0.95 very briefly but mostly staying above $0.999 until reclaiming full peg in late July.
Read more: Tether Breaks Buck as Stablecoin Panic Spreads
Tether’s hiring of auditing firm BDO Italia puts a much more credible name behind Tether’s transparency reports than its previous oversight by a small Caribbean firm.
Beyond that, Tether managed to establish the credibility of its long-stated promises that it had the reserves to back its stablecoin by handling what amounted to the beginning of a potential run without much trouble.
As Tether’s chief technology officer and main spokesperson, Paolo Ardoino, tweeted on June 27, in a little more than a month “Tether processed 16B in redemptions (~19% of our total reserves), again proving that our operations, portfolio, banking infrastructure and team are solid and battle tested.”
Notably, Tether’s market cap has begun to tick back up, adding $1.5 billion to reach its current $67.5 billion in May. Meanwhile, USDC has seen a drop of about $4 billion to its current $52 billion.
But there’s another factor beyond the market cap numbers. Tether remains vastly more used than USDC, which had a 24-hour trading volume of about $5.4 billion on Aug. 23. Tether’s USDT’s was $53 billion — almost 10x as much.
Looking at all that, there is an argument to be made that the market has rendered judgment, at least for the time being.
Why not?
Still, there are areas where Tether’s reporting falls short.
While BDO Italia brings far more credibility to Tether’s now-monthly report on the state of its reserves, it is a “reasonable assurance opinion” which confirms that the report does not contain material misstatements, it is not yet a full audit — meaning Tether falls short of the Generally Accepted Accounting Principles (GAAP), which require a fully independent annual audit.
Tom Hearden, a senior trader at hedge fund Skyland Capital, tweeted “You misspelled audit again” in response to Tether’s announcement of the BDO Italia attestation deal.
you misspelled audit again https://t.co/nh62RyUmpF
— Tom Hearden (@followtheh) August 18, 2022
Ultimately, it’s only a full audit that’s going to end all doubts — including the basic one of why Tether isn’t doing one. That will likely be coming soon, as several pieces of stablecoin oversight legislation proposed in both houses of Congress will mandate publicly published audits.
So, has Tether turned the corner and put doubts about the quality of its backing reserves behind it? No.
But there is a case to be made that it is turning the corner. And ultimately, that will be needed if it is to break more heavily into the young but growing cryptocurrency payments market, where USDC has an advantage.
Longstanding Questions
The concerns about Tether’s reserves were such that Nellie Liang, undersecretary for domestic finance of the Treasury Department, told the House Financial Services Committee in February that based on its disclosures, her “understanding” was that Tether’s reserve “may not be … fully collateralized under all conditions.”
See also: With Short Sellers Gunning For Tether, Stablecoins Risk Grows
These have been batted around in the core of the crypto trading industry for years — although to little practical effect, despite an August 2018 Wall Street Journal article — until New York Attorney General Letitia James sued Tether on April 25, 2019, alleging that a loan of at least $750 million was made to sister company Bitfinex, a major cryptocurrency exchange after that firm was robbed of about $1 billion.
See also: Crypto Crime Series: Bitfinex Using $3.6B Seized in Hacking Arrests to Cover Shadow Banking Losses
Tether eventually ended up agreeing to an $18.5 million settlement to resolve the lawsuit, as well as another $42.5 million to the Commodity Futures Trading Commission (CFTC), as a result.
It has also had severe criticism when it revealed — in the wake of the NY Attorney General’s settlement — that the majority of its reserves, some $45 billion, were in commercial paper of uncertain liquidity. It has since reduced that substantially and has said it will be zero by October.
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