Tether Releases Ex-FBI Director’s Law Firm Report on Its Reserves, Stops Short of an Audit

  • Tether has revealed a law firm looked into its financial situation, and claims it has money in the bank to back its USDT tokens.
  • The firm, however, just looked at the company's funds, and stopped short of an official audit.

Tether Ltd, the company behind controversial cryptocurrency Tether (USDT), that’s supposed to be pegged to the US dollar 1:1, has recently revealed it hired a law firm co-founded by former FBI director Louis Freeh to analyze its financial situation. While the firm reported Tether has enough funds to back its USDT tokens, it didn’t conduct an official audit.

According to the report, Freeh Sporkin & Sullivan LLP (FSS), the hired law firm, was given full online access to Tether’s bank accounts and financial statements, as well as to employees at the two banks in which the company allegedly has its funds.

The report reads:

Earlier this year Tether engaged Freeh, Sporkin & Sullivan LLP (FSS) to review bank account documentation and to perform a randomized inspection of the numbers of Tethers in circulation and the corresponding currency reserves

FSS report

Per the document, FSS chose June 1 to look into Tether’s financial situation. It found that in one of the banks the company has over $1.9 billion, and $576 million on the other one. In total, it reveals the company has $2.545 billion in the banks, an amount that surpassed Tether’s then circulating supply of $2.538 billion. At press time, Tether’s market cap is of $2.61 billion, according to CryptoCompare data.

Various concerned users and speculators have in the past claimed USDT tokens were backed by dollars that weren’t actually there, and that they were being created out of thin air so cryptocurrency exchange Bitfinex – a company associated with Tether – could use them to pump bitcoin’s price.

Notably this isn’t Tether’s first unofficial audit, as last year accounting firm Friedman LLP analyzed its financial situation – but didn’t calm critics down. These concerns escalated, to the point the US Commodity Futures Trading Commission (CFTC) subpoenaed both companies in December, when bitcoin hit its all-time high, to investigate the situation.

Stuart Hoegner, Tether’s general counsel, told Bloomberg News:

The bottom line is an audit cannot be obtained… The big four firms are anathema to that level of risk… We’ve gone for what we think is the next best thing.

Stuart Hoegner

While FSS claims it is “confident that Tether’s unencumbered assets exceed the balance of fully-backed USD Tether in circulations as of June 1st, 2018,” it refused to name the banks the company is banking with due to privacy concerns as “banking relationships are private.”

The report follows a study conducted by University of Texas professor John Griffin, which suggests the stablecurrency has been used to manipulate bitcoin’s price last year. The study’s authors claim to have found a pattern between USDT issuance and the flagship cryptocurrency’s price performance.

Bitfinex’s chief executive officer, JL van der Velde, commented on the study stating:

Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation. Issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex.

JL van der Velde

FSS’s report includes several caveats to its findings. It notes that it isn’t an accounting firm and that it didn’t “perform the above review and confirmation using Generally Accepted Accounting Principles.” Moreover, it adds that it assumed “without further inquiry” that the bank personnel who supplied it confirmation was authorized to do so, and that said confirmation was correct.

There are other stablecoins out there, although their supplies are significantly smaller than that of Tether’s. True USD’s (TUSD) supply, for example, is only of $62.8 million. Notably, the coin is traded on top exchanges like Bittrex and Binance.

Seven Major Trends in the Cryptoasset Industry, According to ConsenSys

ConsenSys, a Brooklyn, New York-based organization that builds, consults, and deploys decentralized applications using Ethereum, has revealed that 78% of firms use open-source software. However, the OpenSSL Software Foundation, which develops transport protocols for establishing secure connections between clients and servers, “operates on a budget of less than $2,000 in donations” and less than $1 million of revenue from contract work each year.

Web 3.0 Development Will Mostly Be Open-Sourced, But “Not Free”

As confirmed by ConsenSys, open-source projects like OpenSSL Software and also open-source blockchain and crypto-related initiatives are, for the most part, operating on relatively low budgets due to lack of adequate funding.

Although the management at ConsenSys believes Web 3.0, an evolving set of protocols and standards for the new internet, will be created mainly through open-source development projects, it also noted that the world wide web of the future will not be developed “for free.”

On May 11, 2019, Ethereum co-founders Vitalik Buterin and Joseph Lubin announced they had donated 1,000 ether (each) to Moloch DAO, an initiative aimed at acquiring funding for the ongoing development of Ethereum’s open-source ecosystem.

“Cryptoassets Are A Hedge Against Irresponsibility”

According to ConsenSys’ developers, the “systems of the future will be antifragile.” Commenting on the fragility of Bitcoin (BTC) and other cryptocurrencies, Travis Kling, the Founder and Chief Investment Officer at Ikigai Asset Management, has said: 

 

[Cryptoassets] are a hedge against irresponsibility from governments and central bankers…the world is waking up to the value of a hedge against quantitative easing.

 

Zero-Knowledge Proof Tech Could Solve Ethereum’s “Privacy Paradox”

ZCash’s zk-SNARKS technology, based on zero-knowledge proofs, may solve Ethereum’s “privacy paradox.” As noted in ConsenSys’ blog post, zero-knowledge proof technology could help address the “challenge of reconciling the blockchain’s transparency (for validating transactions) with the need for data privacy and confidential transactions.”

Back in September of 2018, Buterin said zk-SNARKS could be added to Ethereum to help the smart contract platform scale to handle around 500 transactions per second (TPS).

Decentralized Finance (DeFi) Is “The Leading Narrative”

As mentioned in ConsenSys' post, decentralized finance (DeFi) is “one of the most resounding narratives” in the cryptoasset industry. Indeed, there are currently over half a billion dollars locked into contracts issued by leading DeFi protocols including MakerDAO, Compound, Dharma, Uniswap, and Bancor.

DeFi’s main value proposition is allowing investors to access relatively large liquidity pools in a decentralized, or peer-to-peer (P2P), manner - without requiring a trusted third-party.

Regulators Continue To “Join The Conversation”

According to ConsenSys, the blockchain industry has seen increased involvement from regulatory authorities throughout the world. Notably, US Representative Tom Emmer has recommended a bill, referred to as Safe Harbor for Taxpayers with Forked Assets.

Emmer’s bill suggests that the US Internal Revenue Service (IRS) not penalize taxpayers who have not reported capital gains made on forked cryptocurrencies - until the IRS provides clear regulatory guidelines for such digital assets.

Enterprise Blockchain Projects Leading Business Innovation

Another emerging trend, in the crypto ecosystem, is the recent launch of a large number of projects aimed at enterprise blockchain development. Tech giant Microsoft, for example, released a software development kit for blockchain development for the public Ethereum network and Quorum.

Tokenization Will Help Create “Enormous Value"

As cryptocurrency fundraising models move increasingly towards security token offerings (STOs), ConsenSys’ team believes the blockchain ecosystem is “bridging open-source technology with regulated capital.” According to ConsenSys, this may be a “positive step” which may also help in bringing more transparency to the traditional financial sector.

ConsenSys’ blog stated:

 

The next wave of financial products, such as derivatives and equity and debt securities, will be the method in which blockchain finally moves beyond payment settlement.

 

The blog post further noted: 

 

Tokenization as a whole presents blue ocean markets that will create enormous value that will continue to drive the ecosystem forward. Blue ocean markets are new, uncontested market spaces that result in a positive sum game, as opposed to highly competitive red ocean markets that are often zero-sum (someone has to lose for others to win).