Tether and transparency: live or let die

We have just received a new request from trading to be able to trade the stablecoin Tether (68 billion dollars in capitalization) and thus take advantage of market movements in the event that it depreciates compared to its “theoretical” value of 1 dollar.

As a reminder, a stablecoin is the representation of a currency in the blockchain universe. It allows for example to be able to exchange crypto assets against dollars issued in this form, while ensuring its holder both the liquidity and the stability of his position; he can in fact convert it at any time at a rate of 1 to 1 against the currency he represents.

We had, for the record, received an equivalent request from trading in May 2022 following the crash of the “algorithmic” stablecoin Terra (UST) and had issued a negative response for the following reasons:

  • The consanguinity between the two entities Tether (stablecoin) and Bitfinex (crypto market) which belong to the same group
  • The reputation of the founder of these structures Giancarlo Devasini, a former cosmetic surgeon who has to his credit lawsuits for fraud in his former computer hardware activities, as this article from the FT of July 2021 very well relates
  • Tether’s refusal to provide real transparency on its reserve assets: the only document at our disposal is a quarterly statement (Quarterly Consolidated Reserves) validated by an auditor from Grand Cayman MHA.

The justification by trading of this new request is based on:

  • The change of “auditor” which has been the Italian entity of BDO since June 30, 20212
  • The disappearance on September 30, 2022 of the Commercial Paper part of these reserves, whereas they represented 44% of these reserves a year earlier and on which major rumors of losses were circulating
  • Tether’s ability to make all requested refunds to date

Negative response

Our analysis, in light of recent events, including the bankruptcy of FTX, confirms our negative opinion for the following reasons:

  • The “Consolidated Reserve Report” provided by Tether only gives a view of these reserves at a single date (the end of the quarter). It is therefore a photo and, as the listeners point out, they have no view of the movements that made it possible to understand the variation of these assets from one date to another. It is important to go from photo to film, and therefore to have access to the stream in addition to the simple vision of the stock, which is underlined by the many disclaimers from listeners on the subject. Regarding the passive, the auditors have no other data than the word of Tether, according to which it would only be composed of the stablecoins issued.
  • It is therefore quite possible that Tether could carry out, in the days preceding the quarterly closing, movements with other entities, in particular from the same group, so that the “bride” appears as beautiful as possible: this is called window walk-in closet.
  • This is not fiction since Tether was condemned by the CFTC in October 2021 (the policeman of the futures markets in the US) to pay a fine of 41 million dollars because Bitfinex had transferred 382 million dollars to Tether just before one of these photo dates
  • Recent events that showed complete financial porosity between FTX and Alameda Research only confirms this risk between Bitfinex and Tether
  • Paolo Ardoino Chief Technology Officer of Tether and… Bitfinex continues to defend non-transparency, according to him necessary for Tether to preserve its “competitive advantages” (said):
    • In the FT article of 05/12/22, he does not want to reveal “his secret sauce”. It is difficult for us to understand this argument for a fairly basic activity, especially in a positive rates environment as it is today. This rate context induces very high profitability insofar as no “interest” is paid to the holders of the stablecoin
    • The real audits promised in 2022 have been postponed to 2023
    • Tether’s lawyers are seeking, as reported by the Decrypt site in September 2022, to block the request of American judge Katerine Polf to have access to documents allowing a real audit of these reserves to be carried out (movements, accounting documents, etc.).
    • It should be noted that its main competitor the USD Coin of Circle (43 billion dollars) has implemented all the procedures of transparency and makes it a competitive advantage.
  • Ardoino’s argument that Tether has always been able to meet its obligations (several billion repayments in a few days) is not one: no one doubts that Tether has liquid assets in dollars allowing it to make these refunds. The real question is from what amount this will no longer be possible….

In conclusion, we reinforce our negative opinion regarding the position taken on this stablecoin.

If the documents on the reserves are correct, there would be between secured loans and other investments at least 13% of the amount of the assets on which details are necessary to judge the quality of these assets. But due to the lack of transparency, still blatant to this day, and the inbreeding between the two entities Tether and Bitfinex, we believe that there is a risk of inaccuracy of these figures, both in assets and liabilities. . This could result in a break in the parity of this stablecoin with the dollar, the impact of which, even if it is only around ten percent, would have considerable, and no doubt catastrophic, consequences for all players. linked to Tether.

Recent events around FTX show that reality surpasses fiction, there are no longer any excuses to clear risk taking with entities that do not play absolute transparency.

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