One week ago, cryptos tumbled when a new iteration of a well-known allegation of bitcoin manipulation reemerged: a research paper claimed to have found a pattern whereby tethers were being spent to prop up bitcoin at key moments, which to the authors suggested manipulation.
As the research reported published by John Griffin, a University of Texas professor known for flagging suspicious activity in the VIX benchmark, "Tether seems to be used both to stabilize and manipulate Bitcoin prices."
To be sure, as we have noted repeated and as Bloomberg wrote last week, questions about Tether and Bitfinex had dogged the cryptocurrency world since last year, when Bitfinex lost banking relationships yet continued to operate. The CFTC eventually subpoenaed both firms in December, seeking proof that Tether is backed by a reserve of U.S. dollars, as it claims.
Last week's allegations prompted the following response from Bitfinex Chief Executive Officer JL van der Velde: “Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation. Tether issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex."
A bigger question was whether every tether - a so-called "stablecoin" that depends on full USD backing to maintain its peg to $1. - actually has said dollar backing.
And in what should come as good news to the crypto community, on Wednesday morning Tether said its bank deposits of $2.55 billion were confirmed by the law firm co-founded by FBI director Louis Freeh as the company seeks to reassure investors that its cryptocurrency is backed by U.S. dollars. According to the Tether release, Freeh Sporkin & Sullivan, LLP (FSS), confirmed that all Tethers (USDT) in circulation are sufficiently backed by U.S. dollar (USD) reserves.
The FSS report, based on a random date balance inspection and a full review of relevant bank account documentation, confirms that all Tethers in circulation as of June 1, 2018 are fully backed by existing USD reserves.
Quoted by Bloomberg, Tether CEO Jan Ludovicus van der Velde said that "despite speculation, we have consistently stated that Tether is backed by USD reserves at or exceeding the Tethers in circulation at a given moment, and we’re glad to have independent verification of this to answer some of the questions posed by the public."
“We are by no means done with our efforts to promote increased transparency at Tether. We are planning to build on this report moving forward and, despite the challenges of applying current accounting and assurance standards to cryptocurrency clients, we continue discuss these issues with potential audit partners.”
While Freeh Sporkin & Sullivan LLP didn’t conduct an official audit, they had access to Tether’s accounts at two banks for weeks and released data on how much money the company held on a single day, June 1, Tether’s general counsel said in an interview. That amount is nearly equal to the value of all Tether digital coins in circulation that day, $2.54 billion, according to Tether executives who spoke to the law firm.
Why not a full audit? “The bottom line is an audit cannot be obtained,” Stuart Hoegner, Tether’s general counsel, told Bloomberg in a phone interview Tuesday. The cryptocurrency market looks too nascent for large accounting firms to consider taking on clients who offer digital coins, he added.
“The big four firms are anathema to that level of risk,” he said in the interview. “We’ve gone for what we think is the next best thing.”
In its report released Wednesday, FSS said it picked June 1 as the day to analyze without Tether’s knowledge. It was given online access to Tether’s bank accounts, statements and to employees at the financial institutions, Hoegner said, adding that he can’t name the two banks, in part due to privacy concerns. “Banking relationships are private,” and as a non-public firm Tether has no requirement to name them, he said.
Tether engaged the Washington, DC-based law firm in March to conduct an independent review of its bank account balances. The law firm was granted full access to all relevant bank and account documentation, and selected a random date for review without Tether’s knowledge or involvement. On that review date, FSS examined its bank balances and compared it to Tethers in circulation. FSS selected June 1, 2018 as its random review date, confirming that Tether’s bank balances totaled $2,545,067,236.82. On that date, there were $2,538,090,823.52 worth of USDTs in circulation. The report concludes that “FSS is confident that Tether’s unencumbered assets exceed the balance of fully-backed USD Tethers in circulation as of June 1st, 2018.”
Some questions remains: although FSS didn’t name the banks Tether is using, it did note that Eugene Sullivan, one of the law firm’s partners and a former federal judge, is on an advisory board for one of them. Its investigation also relied on phone and in-person interviews with Tether executives and bank representatives to reach its conclusions.
The law firm included several caveats to its findings. “FSS is not an accounting firm and did not perform the above review and confirmations using Generally Accepted Accounting Principles,” according to its report. “FSS has not performed any procedures or made any conclusions for activity prior to or subsequent to June 1st, 2018, Close of Business.”
The firm added: “FSS has assumed, without further inquiry, that the bank personnel providing the confirmations were duly authorized to provide such confirmations, and that the confirmations were correct.”
In response to the report, cryptos have seen a modest bounce:
The full report can be found here.