Evaluating Quality of Public Disclosures from Tether Limited

Tether Limited, the company behind the popular stablecoin USDT, has long faced scrutiny over its claims of full reserves backing every USDT token in circulation. With billions of dollars in market capitalization, the quality and transparency of Tether's disclosures are critical for market stability and consumer protection. This article will examine key considerations around evaluating the merits of Tether's public attestations of its reserves.

Introduction

As the largest stablecoin by market capitalization, Tether plays a pivotal role in markets. Traders often use USDT as a risk-off asset during market volatility. However, lingering doubts over the full backing of USDT have led to accusations of market manipulation. Tether aims to provide assurance through periodic reserve attestations from accounting firms, but the thoroughness and reliability of these public disclosures are debatable. Understanding the strengths and weaknesses of Tether’s disclosures can empower stakeholders to better grasp the stablecoin’s underlying stability.

Scope and Frequency of Attestations

The frequency and scope of Tether’s attestations provide insight into the depth of reserve examination occurring. According to their website, Tether aims for attestations at least on a quarterly basis, conducting them more often as market conditions dictate. However, in 2021, attestations spanned over 200 days between issuances. The prolonged periods between reports undermine confidence in regular validation. Additionally, earlier attestations focused solely on Tether’s consolidated reserves as a whole, ignoring solvency of specific stablecoins like USDT. Only later reports drilled down into Tether’s headquarters and examined USDT reserves specifically. While Tether has committed to more granular attestations, stakeholders should watch for inconsistencies that could enable avoidance of full scrutiny.

Nature of Attestations: Reasonable vs. Full Assurance

Tether’s disclosures have fluctuated between “reasonable” and “full” assurance attestations. Reasonable assurance indicates that an auditor has deemed there is a reasonably low level of misstatement, while full assurance provides a higher level of confidence in the accuracy of reporting. Tether claims its latest attestations are full-scope, but past reliance on reasonable assurance has drawn criticism. Since assets like commercial paper carry higher risks than cash and cash equivalents, reasonable assurance may fail to detect issues with risky holdings. Tether’s shift to full assurance could inspire more confidence if it becomes the long-term standard.

Asset Composition and Liquidity Metrics

Perhaps the most important element of evaluating Tether’s reserves is the asset composition and liquidity metrics provided in disclosures. A May 2022 attestation revealed 65.39% of reserves held in Treasury bills, with commercial paper comprising 24.55% and secured loans 12.55%. While specifics on the commercial paper and loans are scant, the growing percentage of reserves held in cash equivalents signals improving liquidity. However, commercial paper still introduces risks, especially if issued by crypto entities themselves. Granular liquidity metrics like average days to maturity of holdings could illuminate vulnerabilities but remain absent from reporting. Enhanced visibility into asset composition and liquidity measurements would enable clearer judgement on the health of reserves.

Accounting Firm Pedigree and Ties

Putting faith in Tether’s public attestations also means relying on the reputation and independence of its accounting partners. After splitting with a Big Four firm in early 2018, Tether has mainly worked with Moore Cayman and MHA Cayman for attestations. The relative obscurity of these firms makes evaluating their credibility difficult. There are also concerns over Moore Cayman seemingly operating out of New York despite no record of registration in the state. Any accounting deficiencies or potential conflicts of interest could impair the objectivity of the attestations. Scrutinizing the pedigree and professional ties of Tether’s auditors protects against questionable opinions clouding the true state of reserves.

Adherence to Official Reporting Standards

Proper execution of official accounting and auditing procedures ensures Tether’s attestations avoid material misstatements. According to statements from MHA Cayman, the latest attestations follow the professional standards of both the American Institute of Certified Public Accountants (AICPA) and the International Standard on Assurance Engagements 3000 (ISAE 3000). However, details on how these standards are upheld are lacking. There is no insight into the inputs, testing methods, and documentation used to arrive at the assurance opinions. Without evidence that reporting standards were rigorously followed, the substance behind the attestations could be doubtful.

Conclusion Evaluating the quality and transparency of Tether’s public reserve disclosures requires a critical eye and skepticism informed by past lapses. While recent attestations signal improvement through more regular timing, full assurance opinions, and heightened reserve composition visibility, Tether’s reporting has room to mature. Key questions remain around the liquidity metrics of holdings, auditor reputability, and adherence to reporting standards. Until thorough, irrefutable assurance of reserves is provided through trusted channels, some doubts may continue to linger. Ultimately, faith in Tether hinges on an accounting and disclosure apparatus properly calibrated to inspire investor confidence in USDT backing.

Can Proof of Reserves Audits Establish Trust in Tether?

Tether aims to build trust in USDT through periodic proof of reserves attestations on its holdings. However, given the persistent uncertainty surrounding Tether's solvency, proof of reserves audits on their own may be insufficient for establishing widespread confidence. While these attestations provide snapshots of reserve balances, they lack the dynamism to capture intra-period fluctuations in backing levels. Some advocates have called for real-time proof of reserves to mitigate this limitation. Though technologically challenging, real-time attestations could supplement periodic audits by accounting for changes in reserves between reporting dates. This could reduce windows of time where holdings fall dangerously low.

Additionally, proof of reserves audits by themselves focus solely on holdings, not the financial stability or liquidity risks associated with the underlying assets. For instance, even if Tether holds commercial paper worth billions of dollars, default risks on the part of issuers could significantly impact USDT stability. More holistic financial and liquidity audits checking the quality and marketability of assets would provide wider assurance alongside reserve snapshots. Though no reporting can provide 100% certainty, expanded transparency and audit scopes could go further in inspiring confidence.

Are Transparency Standards in Traditional Finance a Model for Stablecoins?

While Tether aims to provide assurance through periodic attestations, some argue these disclosures pale compared to the transparency exhibited in traditional finance. Public companies face extensive reporting requirements, including filing quarterly and annual financial statements audited by reputable firms. Furthermore, these statements detail not just assets but also income, debts, expenses, and other dynamics essential for gauging solvency. Stablecoins like USDT provide comparatively sparse snapshots centered solely on holdings. Mimicking the in-depth, audited financial reporting prominent in traditional finance could significantly bolster stablecoin transparency.

However, completely emulating legacy standards also presents challenges. Stablecoins lack centralized management with fiduciary duties tousers, clouding accountability. And the global, digital nature of stablecoins makes compiling comprehensive financials more operationally complex. Though the transparency of traditional finance provides a model, stablecoins may need to tailor standards around their unique attributes. The optimal path forward likely involves selecting the most critical reporting elements from traditional finance and innovating to make comprehensive disclosures feasible for decentralized assets. As stablecoins grow in prominence, establishing comprehensive transparency frameworks will be key for building trust.