The controversial stablecoin Tether is back in the spotlight after changes were made to the way in which tokens are secured on offer.
As reported on March 14, various online users have noticed and posted worrying changes to the Tether website that appear to have changed the way the company maintains the security of the tokens it issues.
Tether is a stable coin backed by the US dollar at a 1: 1 ratio, which means the company has $ 1 for every USDT in circulation. This has long been a point of contention among the broader cryptocurrency community as Tether has never conducted a third party verification of its financial accounts.
Although the exact date of the change is unknown, it appears that Tether’s website has adjusted the details of how to secure a reserve for the circulation of tokens. The “100% Backed” statement no longer claims that every USDT is backed by a fiat currency:
“Each Tether is always 100% covered by our reserves, which include traditional currency and cash equivalents, and may from time to time include other assets and receivables from Tether’s loans to third parties, which may include affiliates.”
It is the latest twist in Tether’s checkered history that Cointelegraph has dealt extensively with.
Controversial pledges of reserves
The company’s most recent certification of its financial accounts is a document from the law firm Freeh, Sporkin & Sullivan LLP that confirmed Tether’s foreign reserve assets in 2018.
A number of clauses at the end of the document make the representations immaterial.
First, Freeh, Sporkin & Sullivan is not an accounting firm and has not performed the audits under generally accepted accounting principles. The document also makes it clear that the confirmation should not be construed as the result of an official examination.
The results are also only valid from June 2018, which means that the company has not given a third-party guarantee for currency reserves for more than nine months.
After separating from Puerto Rico-based Noble Bank in October 2018, Tether also had to look for another banking service provider. The company submitted a bank certificate to Bahamas-based Deltec Bank in November.
A December 2018 report by Bloomberg indicated that the company did indeed have the necessary cash reserves in its new bank accounts.
During that time, USDT struggled to hold its 1: 1 peg to the US dollar as its value fell below the $ 1 mark. This sparked waves of new controversy as the cryptocurrency struggled to maintain its stable coin status.
It’s worth noting that Tether isn’t the only stable coin struggling to maintain its 1: 1 peg to the US dollar.
The Dai (DAI) stablecoin, also backed by the US dollar, has fallen below the $ 1 mark on various exchanges, prompting developers to propose an increase in fees to keep their peg.
Industry experts have raised concerns about the broken reserve
With the cryptocurrency community setting off the alarm bells for Tether’s change in reserve policy, industry experts have also joined in and given their views on this situation.
Tuur Demeester, a renowned cryptocurrency investor and analyst, provided a series of tweets and grabbed Tether, who operates a fractional reserve system, from what he called a slippery slope:
“Slippery language from Tether. “100% secured” <=> “may also include claims from loans issued”. Imo this is a clear transition from full to broken reserve banking. “
“Note, like Tether’s comment that their reserves” may contain other assets “opens the door to being backed by virtually anything with fuzzy valuation assumptions. It would be helpful to at least see more details from the contractual fine print.”
In response to questions from Cointelegraph, Demeester responded in an email that the main concern was how Tether would invest some of its reserves and the liquidity of those assets to satisfy the potential redemption of a large number of tokens at any given time:
“I can only speculate, but based on the USDT, which is currently trading at almost the same level as the USD, I would suspect that Tether currently has sufficient cash reserves to survive a“ run on the bank ”. My main concern is the precedent this change in terms of conditions is setting: it opens the door to potentially investing Tether’s reserve in assets that are illiquid or difficult to value. “
XDex analyst and crypto podcast host Fernando Ulrich has also looked at the controversial changes on the Tether website. In a long Twitter thread, Ulrich unpacked his views on fractional reserve banking and how Tether’s business should be cause for concern.
Ulrich wrote directly to Cointelegraph, focusing not on whether Tether has the necessary reserves to circulate USDT, but on the quality and type of those reserves:
“I believe Tether has 100% of the reserves for issued tokens. But that is not the problem either, the problem is the quality of these reserves. Do they consist of 50% Treasury bills, 30% bank certificates of deposit and 20% accounts receivable? Or is it 99% treasury bills? We don’t know and that’s the problem. It’s the quality of the reserves, not the quantity. “
Another point that has been of concern over the past two years is Tether’s connection to the Bitfinex cryptocurrency exchange. The companies share some of the same executive positions, including CEO JL van der Velde.
There have been allegations that Bitfinex has effectively issued Tether tokens on credit over the past few years. Ulrich believes this could have serious consequences for the cryptocurrency market if people use USDT to buy other cryptocurrencies.
“I find it worrying, especially because the ability to issue tokens on credit creates liquidity that can impact prices in the short term. In addition, it can put Tether in an illiquidity situation and potentially drain its reserves. Given that their main exchanges (as measured by average daily volume) rely on USDT for their BTC / USD trading pair, it can certainly have an impact on these markets. The whole thing can lead to turbulence in the crypto markets in the short term. “
Bitfinex even threatened legal action against various social media commentators who speculated about the relationship between these two companies in December 2017.
Tether rejects claims
Tether’s General Counsel, Stuart Hoegner, responded to Cointelegraph’s request for comments on a number of questions raised by various members of the wider community.
First, Hoegner stated that Tether’s reserve includes cash, cash equivalents, and other assets, while those reserves are equal to or greater than the USDT amount in circulation.
Hoegner declined to elaborate on the types of assets the company would use as reserves, but said the decision to change its reserve policy was a result of the changing stablecoin landscape:
“We’re generally not commenting on the specific makeup of our reserves, but this change in optionality reflects the growth of Tether and the growth of the stablecoin industry – and associated options for unsolicited accounts – in general.”
When asked to comment on allegations that Tether had no reserves equal to the amount of USDT in circulation, Hoegner alleged that the company had the necessary reserves and was open about its stake on its website:
“Tethers remain completely stable and 100% hedged, so that Tether’s reserves always equal or exceed the number of tethers issued. In addition, our reserves are booked in real time on Tether.to. “
He was also asked if and when Tether would conduct a third party review of his accounts. According to Hoegner, Tether’s website provided a transparent report on its reserves – which it deems appropriate.
“Tether works as transparently as possible. We publish the value of our reserves daily and provide 24/7 access to our bank balance and the value of reserves. “
The critics’ claim that Tether also operates a partial reserve system has also been refuted by the company. According to Hoegner, Tether does not have a banking business that lends reserve amounts to private customers.
“Tether’s reserves are and were 100% covered by the reserves. Tether will still be able to fulfill all redemption requests. “
In his replies to Cointelegraph, Ulrich of Xdex said that Tether’s claims cannot be truly trusted until an official third-party verification is conducted:
“This cannot be confirmed without an audited annual financial statement from a reputable company. We can only speculate. What I can say is that the updated Terms of Service open up the possibility for this. From now on, Tether can issue tokens on credit, and the “outstanding claim” can serve as a reserve for issued tokens. In addition, it is not clear to what extent such reserves can be used. Would it be possible to have 10% of the provisions as receivables? 50%? 90%? What about the due date of accounts receivable? Only up to 30 days or even longer? The terms of use don’t make it clear. So I suspect anything is possible and that should be a concern for USDT holders. “
Ulrich also brings up an interesting point regarding the key USDT holders and what situations could test Tether’s liquidity and its reserves.
A potential acid test would require a large number of USDT token holders to request the redemption of their tokens, forcing Tether to prove its liquidity.
According to Tether’s Rich List on its website, Binance holds over $ 732 million and Huobi holds over $ 264 million – half of all USDT in circulation. According to Ulrich, these relationships raise some interesting questions:
“Would you want to force Tether to become illiquid by redeeming tokens? Did you also buy USDTs on credit? How much (if any) do they owe Tether? It’s a complicated relationship that lacks transparency. “
Demeester advises that every USDT holder should ask the company some serious questions about their accounts and intent to invest in certain assets that are classified as reserves:
“If I were interested in buying or holding USDT, I would like to know more about exactly how the reserves are invested.”
The line trudges on
Despite the new controversy surrounding Tether, the company is pushing efforts to increase the availability of Tether tokens for more players in the cryptocurrency space.
In early March, Tether announced plans to partner with the Tron (TRX) blockchain protocol, which will be used to issue USDT on the Tron blockchain later this year.
USDT is issued as a TRC-20 token and is compatible with Tron-based decentralized applications. This allows USDT to be used for transactions on the Tron blockchain.
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