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.

Buterin Proposes Increasing Privacy on Ethereum Using 'Minimal Design Mixer'

Ethereum co-founder Vitalik Buterin has revealed that currently there are “large privacy problems” in the Ethereum (ETH) ecosystem.

Per Buterin’s words:

The default behavior is to do everything through a single account, which allows all of a user’s activities to be publicly linked to each other. It seems like this can be improved by using multiple addresses, but not really: the transactions you make to send ETH to those addresses themselves reveal the link between them.

Adding A Mixer To Ethereum Could Enhance Privacy

In order to enhance user privacy on the Ethereum blockchain, Buterin suggested using a  “minimal mixer design” which would allow users to send “fixed quantities” of ETH. The crypto address mixer would let users transfer ether from one account to another “without the link being visible on-chain.”

Implementing this type of mixer design on the Ethereum network would “be a great first step in alleviating” or addressing (to a certain extent) the lack of sufficient privacy on the largest smart contract platform, Buterin suggested.

Many Ethereum Applications Don’t Require Large ETH Transfers

He added that even if small amounts of ETH are “targeted” by the mixer, such as a fixed denomination of around 0.1 ether, it might still significantly improve the overall privacy of the nascent Ethereum ecosystem. According to Buterin, there are many different Ethereum-based decentralized applications (dApps) that do not process large volume ETH transactions as they only require small quantities of ETH to “pay for small-scale security deposits and/or application and particularly transaction fees.”

As noted by Buterin in a blog post published on HackMD (on May 23, 2019), a simple version of the minimal mixer design can be implemented by issuing two contracts on the Ethereum mainnet, including a “mixer contract” and a “relayer registry contract.”

Mixer Contract To Perform Deposit And Withdraw Functions

The Russian-Canadian programmer mentioned that the mixer would perform two main functions:

  • Deposit (bytes32 commitment) “payable verifies that DENOMINATION ETH (eg. 1 ETH) was sent along with the call, and if so, it adds the commitment to a list of commitments. It also maintains a Merkle tree of all commitments [so] far that uses some SNARK-friendly hash function”;
  • Withdraw (address destination, bytes proof) “verifies that (i) proof is a valid ZK-SNARK that proves that destination and some commitment in the tree are related to each other (eg. destination = H(commitment + salt)) but does not reveal which commitment the witness corresponds to, and (ii) destination has not yet been used. Upon success, it pays out DENOMINATION - FEE to the destination and FEE to msg.sender”

Meanwhile, the relayer registry is a simple contract that any user can “publish their IP address for a small fee (note that this could be re-used for other applications and not be mixer-specific)”, Buterin explained.

The Bigger the “Anonymity Set”, the Greater the Privacy

In statements shared with CoinDesk, Buterin mentioned that the “‘anonymity set’ is cryptography speak for ‘set of users that this thing could have come from.’”

For instance, “if I sent you 1 ETH and you can’t tell who exactly it was from but you can tell that it came from (myself, Alice, Bob or Charlie), then the anonymity set has size 4.” He added that the larger the size of the anonymity set, the greater the level of privacy a user may have.