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There is an old Arabic proverb: \u201cThe dogs bark, but the caravan moves on.\u201d It could summarize the journey to date of Tether (USDT<\/a>), the world\u2019s largest stablecoin.\u00a0<\/p>\n Tether has been embroiled in legal and financial wrangling through much of its short history. There have been lawsuits over alleged market manipulation<\/a>, charges by the New York State attorney general that Tether lied<\/a> about its reserves \u2014 costing the firm $18.5 million in fines in 2021 \u2014 and this year, questions voiced<\/a> by United States Treasury Secretary Janet Yellen as to whether USDT could maintain its peg to the U.S. dollar. More recently, investment short sellers \u201chave been ramping up their bets against Tether,\u201d the Wall Street Journal reported<\/a> on June 27. <\/p>\n But, Tether has weathered all those storms and seems to keep moving on \u2014 like the proverbial caravan. On July 1, the company announced<\/a> that it had dramatically reduced the amount of commercial paper in its reserves, which has been a sore point with critics for some time.<\/p>\n Tether\u2019s commercial paper reserves are expected to reach a new low of $3.5 billion by the end of July, down from $24.2 billion at the end of 2021. The company added that its \u201cgoal remains to bring the figure down to zero.\u201d\u00a0<\/p>\n Many stablecoins like Tether are stand-ins for the U.S. dollar, and they are supposed to be backed 1:1 by liquid assets like cash and U.S. Treasury bills. But, historically, as much as half of USDT\u2019s reserves were in commercial paper<\/a>, which is generally seen as less secure and more illiquid than Treasuries. Hence, the potential significance of the commercial paper statement.<\/p>\n It raises questions too. On the positive side, does it signal a new maturity on the part of Tether, embracing more of a leadership position in favor of \u201cincreased transparency for the stablecoin industry,\u201d as the company declared in its announcement? Or is this rather just more distraction and obfuscation, as some believe, given that Tether continues to avoid a more intensive, intrusive and comprehensive audit, in favor of a more limited \u201cattestation\u201d with regard to the firm\u2019s reserves? <\/p>\n Is it telling, too, that Tether\u2019s \u201cindependent accountant reports\u201d are issued by a small Cayman Islands-based accounting firm rather than a Big Four audit group? <\/p>\n Finally, what if the short sellers are right and there is less to Tether\u2019s collateral than meets the eye? What would happen to the crypto and blockchain sector if USDT, like TerraUSD Classic (USTC) two months earlier, were to lose its peg to the United States dollar and collapse? <\/p>\n Historically, \u201cThe market\u2019s concern about Tether\u2019s commercial paper is that Tether would not disclose what paper they were holding,\u201d Bruce Mizrach, professor of economics at Rutgers University, told Cointelegraph.\u00a0<\/p>\n There can be large variations in the creditworthiness of commercial paper. This may be more of an issue now because \u201csome short sellers say they believe that most of Tether\u2019s commercial-paper holdings are backed by debt-ridden Chinese property developers,\u201d the Wall Street Journal reported, a charge that Tether has strenuously denied.<\/p>\n For that reason, this latest announcement in which the company declared that \u201cU.S. treasuries will now make up an even larger percentage of Tether\u2019s reserves\u201d than commercial paper and certificates of deposit share \u201ccould be reassuring to investors,\u201d Mizrach said. In its accountant\u2019s March 31 report<\/a> \u201cTo the Board of Directors and Management of Tether Holdings Limited,\u201d U.S. Treasury bill reserves were $39.2 billion, almost double the $20.1 billion from \u201ccommercial paper and certificates of deposit.\u201d<\/p>\n On the other hand, Tether\u2019s stablecoin circulation could be trending downward as a result of the crypto sector\u2019s continued slump. If that is the case, \u201cthere will be fewer Tether in circulation and therefore less reserves needed as a result of the decline in value and volume of Bitcoin and other crypto transactions,\u201d Francine McKenna, faculty lecturer at the Wharton School and publisher of The Dig newsletter, told Cointelegraph. <\/p>\n Is Tether really turning over a new leaf then? \u201cChanges in the composition of reserves does nothing to change the modus operandi of Tether,\u201d Martin Walker, director of banking and finance at the Center for Evidence-Based Management, told Cointelegraph. It remains an unregulated entity that is economically equivalent to a money market fund or a bank. \u201cRegulators really should look to regulate economically equivalent activities on the same basis, whether crypto related or not.\u201d<\/p>\n Martin wasn\u2019t particularly impressed by the Tether\u2019s May 18 attestation, either, i.e., its Independent Accountant\u2019s Report signed<\/a> by MHA Cayman, a small firm based in the Cayman Islands, which noted: <\/p>\n \u201cWe considered and obtained an understanding of internal controls relevant to the preparation of the CRR [Consolidated Reserves Report] in order to design procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of such internal controls. Accordingly, no such opinion is expressed.\u201d<\/p>\n Recent: A brief history of Bitcoin crashes and bear markets: 2009\u20132022<\/a><\/em><\/strong><\/p>\n Attestations of this sort, Martin said, are limited to checking the composition of reserves at a given moment in time \u2014 in the case, cataloging USDT\u2019s reserves on March 31, 2022 \u2014 but \u201cto get real assurance\u201d an audit firm must be allowed to go deeper, examining the process by which reports are generated, said Martin. \u201cThe March statement from MHA Cayman explicitly said they had no opinion on the controls in place on generating reports,\u201d a significant omission, he told Cointelegraph.<\/p>\n Meanwhile, investors have been placing bets against Tether for the past year, and the pace has quickened since the May collapse of TerraUSD, the algorithmic stablecoin, with more hedge funds joining the shorts, according to the Wall Street Journal. USDT briefly lost its peg to USD during the Terra fiasco, falling to $0.95 before fully recovering. <\/p>\n Recently, John Reed Stark, an SEC lawyer for 18 years, suggested<\/a> on Twitter that a \u201cfast\/effective\/guaranteed way\u201d way for Tether to quell short sellers would be to \u201cEngage a Big 4 accounting firm to conduct an audit which finds a rock-solid balance sheet.\u201d\u00a0<\/p>\n \u201cIt\u2019s such an easy thing to solve,\u201d Stark, president at John Reed Stark Consulting LLC and former chief of the SEC\u2019s Office of Internet Enforcement, later explained to Cointelegraph. Moreover, it\u2019s \u201claughable\u201d that a company with Tether\u2019s market capitalization \u2014 $66 billion on July 10, according<\/a> to CoinMarketCap \u2014 is using a small audit firm in the Cayman Islands for its \u201cattestation(s),\u201d which by the way, are no substitute for an audit, in his view.<\/p>\n A Big Four audit carries some weight with the SEC, and many larger companies \u201cwant to be audited by a Big Four firm,\u201d because it makes their enterprise more attractive to investors and others. In the case of Tether\u2019s reserves, \u201cwe don\u2019t know what the assets are,\u201d added Stark. <\/p>\n One source suggested that a Big Four firm may not want to take on Tether as a client given its controversy and opaqueness, but \u201cI think they would take the engagement,\u201d commented Stark. But, if they did refuse, that in itself would be a red flag, a sign that \u201cthe company was really in trouble,\u201d he said. <\/p>\n McKenna doesn\u2019t believe that a giant accounting group would make a meaningful difference now, however. \u201cIt really does not matter which firm signs the opinion since it is not an audit but a validation of information that is based on management representations.\u201d The accounting firm is limited to the information that Tether is sharing with it, in other words \u2014 and it doesn\u2019t really matter under such circumstances whether the accounting firm is small or large.<\/p>\n Along these lines, a smaller accounting firm \u201ccould do a great job on a fuller scope audit if its partner had integrity and insists that no value is delivered by just checking a discrete balance against management\u2019s reports on one day at the end of each quarter and then delivering that report 90 days later.\u201d <\/p>\n In its May 19 statement, Tether noted<\/a> that it had \u201cmaintained its stability through multiple black swan events and highly volatile market conditions\u201d and has \u201cnever once failed to honor a redemption request from any of its verified customers.\u201d Shouldn\u2019t the firm be praised for the resilience shown during the recent crypto market plunge and others before?<\/p>\n \u201cTether has responded to the digital asset crisis by shrinking supply by over $15 billion,\u201d said Mizrach. \u201cThey appear to be trying to make their collateral more liquid. Both are reasonable steps to take in a crisis.\u201d<\/p>\n McKenna, by contrast, can\u2019t quite see lauding a firm for simply honoring its withdrawal requests. This is just \u201cthe minimum expected by customers who trust a broker to execute its trades, custody its assets on account and honor its requests to transfer funds on a timely basis,\u201d she said. \u201cYou shouldn\u2019t expect applause for not being exploitative, fraudulent, or not yet bankrupt.\u201d<\/p>\n Elsewhere, Tether has been losing ground to its closest competitor<\/a>, USD Coin (USDC<\/a>), and it was recently reported that USDC may be \u201con track to topple Tether USDT as the top stablecoin in 2022.\u201d USDC\u2019s market capitalization has increased by 8.27% since May, while USDT\u2019s has plummeted more than 19%.<\/p>\n It sometimes seems that all the powers that be are arrayed against Tether, yet the stablecoin remains popular in many parts of the world, including Asia, especially among those without bank accounts or access to USD. \u201cI wonder what the average Lebanese or Nigerian who relies on Tether as a dollar instrument would think of these super-rich short sellers who are trying to destroy it for their own financial gain,\u201d tweeted<\/a> Alex Gladstein, chief strategy officer at the Human Rights Foundation.<\/p>\n The company, for its part, appears to view itself as a responsible leader of the stablecoin movement. Its July 1 announcement carried the assertion<\/a> that the company\u2019s recent move \u201cSolidifies Its Position As The Most Transparent Stablecoin\u201d \u2014 though perhaps the firm is over-reaching here? Mizrach told Cointelegraph:<\/p>\n \u201cWhen Tether \u2014 or any other stablecoin \u2014 provides a CUSIP level detail of their collateral and domiciles the assets in an FDIC insured institution, they might be able to make this claim.\u201d\u00a0<\/p><\/blockquote>\n A Committee on Uniform Securities Identification Procedures (CUSIP) number is a unique identification number assigned to stocks and registered bonds, and CUSIPs would provide granular detail about the reserves backing the USDT\u2019s stablecoin.\u00a0<\/p>\n Recent:\u00a0NFTs become physical experiences as brands offer in-store minting<\/a><\/em><\/strong><\/p>\n Asked if Tether has reformed itself, former SEC lawyer Stark said it is generally not good practice to take a company\u2019s word alone on anything: \u201cTrust but verify is the operative phrase here.\u201d Or, as he put it<\/a> on June 28, \u201cWithout a proper audit, everything else Tether\u2019s CFO says is just noise.\u201d<\/p>\n In the unfortunate event that Tether does implode \u2014 as some critics anticipate, but which is mere speculation at this point \u2014 what would that mean for the larger crypto and blockchain industry? According to Martin:<\/p>\n \u201cThe collapse of Tether would have a pretty devastating effect, but the crypto industry is a bit like the villain in slasher movies. It always comes back to life in the sequel no matter how it gets destroyed.\u201d<\/p><\/blockquote>\n \u201cTether is critical for maintaining any confidence in the cryptocurrency and blockchain sector,\u201d said McKenna. \u201cIf Tether collapses, I would venture that it\u2019s all over but the whining and lots of futile appeals to regulators and courts.\u201d<\/p>\n<\/div>\nEmbracing U.S. Treasury reserves?<\/h2>\n
Why commercial paper matters<\/h2>\n
Big Four Audit: An effective solution?<\/h2>\n
Kudos for surviving the drawdown?<\/h2>\n
\u201cIt always comes back to life\u201d<\/h2>\n