Tether (USDT) has been one of the most prominent stablecoins in the cryptocurrency market, serving as a bridge between digital assets and traditional fiat currencies. With its well-known claim to be backed by an equivalent amount of real-world assets, Tether has faced scrutiny and controversy regarding its transparency and financial stability. Tether's latest balance sheets and financial position continue to stand on unstable ground by many standards.
Background
Tether, created in 2014, operates on the Omni Layer protocol and has expanded to other blockchain networks, including Ethereum and Tron. It was designed to provide stability in a volatile cryptocurrency market by pegging its value to a fiat currency, primarily the US dollar. The company behind Tether, Tether Limited, claims that each USDT token is backed by one US dollar held in reserves. Great, that kind of tool is exactly what traders need as a safe harbor between exiting one position and entering another without cashing out entirely and generating unnecessary trading fees.
Reviewing Tether's Balance Sheets
Tether Limited, in a move towards increased transparency, has periodically released its balance sheets for public scrutiny. The balance sheet should reveal the composition of its assets and liabilities:
Reserves and Assets: The critical aspect of Tether's financial position lies in the reserves it holds to back the issued USDT tokens. Investors and users need assurance that Tether can honor the conversion of USDT tokens into fiat currencies as promised. Too many examples lately have happened where there was blatant insolvency being covered up (ex. Terra, FTX, Celsius).
Liabilities: Any significant debts or outstanding obligations could raise concerns about the stability and solvency of the stablecoin issuer. If Tether's liabilities outweigh its assets, this could potentially impact the redemption process and overall market confidence. It's essentially what killed Luna and Celsius platforms.
Audit and Transparency: Historically, Tether Limited has faced criticism for its lack of proper audits to validate its claims of holding sufficient reserves. Independent audits conducted by reputable firms could go a long way in alleviating concerns and verifying Tether's financial position. Currently, the latest "attestation" is by an Italian firm, BDO Italia S.A. No American auditors in sight. A former SEC enforcement chief was not impressed with the publication.
Analyzing Tether's Financial Position
The lack of a comprehensive audit by a reputable third-party firm continues to raise doubts about the true nature of Tether's reserves and assets.
Additionally, recent regulatory scrutiny and legal challenges faced by Tether Limited have further highlighted the need for a more robust examination of its financial position. Government agencies and regulatory bodies worldwide are becoming increasingly vigilant regarding the compliance of stablecoin issuers with anti-money laundering (AML) and know-your-customer (KYC) regulations. In fact some flat out want to replace them with centralized stablecoins, i.e. central bank digital coins or CBDCs.
Two Steps Forward, Three Steps Back
According to the attestation report issued by BDO Italia on May 9, 2023, Tether has:
- $69.3 billion in cash and cash equivalent assets (U.S. Treasury Bills, cash accounts, money market accounts, repurchase agreements etc.).
- $1.5 billion is in Bitcoin holdings,
- $3.4 billion in precious metals, and the remaining
- $7.5 billion or so is in market investments (bonds, stocks etc.).
The total balance for the report was just over $81.8 billion combined.
The latest circulating supply of USDT is over $82 billion. A year ago it was at $76 billion. Yet, recent disclosures are showing $37 billion in Tether assets being moves offshore to a Bahamian bank institution. So just when everyone thought they had a grip on what's going on, the field goal post has been moved again. Tether isn't doing itself any favors on the transparency front.
