Auditing the Tether “Audit”: Tether Has Shown Nothing Thus Far

Recently (late June), the official Tether Twitter put out a couple of tweets in which they:

  1. Linked a ‘report’, which they titled a ‘Transparency Update’
  2. Linked another report, which they stated was prepared by the law firm, Freeh, Sporkin & Sullivan LLP

It does not take a rocket scientist to guess that these reports were more than likely issued as a response to the litany of critics that have claimed that Tether’s reserves are not backed 1:1 (they do not hold one dollar for every Tether that they have issued).

The purpose of this article will be to dissect the reports that Tether recently published and assess whether this should have any bearing on their perceived legitimacy/legality in the crypto space.

Below, are the Tweets for Reference:

Tether on Twitter

Tether Transparency Update: https://t.co/Cwii8stthv

Tether on Twitter

Earlier this year Tether engaged Freeh, Sporkin & Sullivan LLP to review bank account documentation & to perform an inspection of the numbers of Tethers in circulation & the corresponding currency reserves. The report can be viewed in its entirety here: https://t.co/BeLXhQY6FV

Transparency Update — FSS Report (Link in the First Tweet)

The best way to dissect this is to just go through it piece by piece.

So, let’s start:

  1. “We have spent our time largely disregarding these allegations” — I wouldn’t call threatening lawsuits against any and all individuals that speak against your company to be ‘disregarding’. I also would not consider attempting to solicit the services of another accounting/auditing firm (Friedman LLP) in order to silence said critics, ‘disregarding’ either. But let’s not nitpick here. In addition, this is not their first transparency update either.

2. Without an audit performed that actually confirms the above statement, this is no different than saying, “I can fly. People have seen me fly, there are reports on me flying and other leaders in the airplane industry have observed me do as much as well.”

The claim that Tether and Bitfinex have maintained strong relationships with the banking industry is laughably false. They had their banking privileges infamously revoked by Wells Fargo in 2017. Which was followed up by a lawsuit by Bitfinex and Tether (when they were both purporting to be two separate entities before this lie was exposed by the release of the Panama Papers), which they eventually retracted.

Additional Facts for Consideration

  1. This doesn’t speak on the fact that their banking partners in Taiwan also declined to do any further business with Tether/Bitfinex in 2017 as well. Bitfinex’s banking partner was under significant scrutiny through the latter half of 2017 and well into 2018 too (and still is, to some extent), because they refused to divulge the identity of their banking partner during that time. The only information that is publicly known about Bitfinex’s banking at this current time has not been through any official communications by Bitfinex, but through a leaked source obtained by Bloomberg and Reuters that attested to the fact that Bitfinex was an account holder at ING.
  2. It was also discovered that Bitfinex was redirecting customers to a relatively obscure bank account in Poland that is represented by a shell company that is owned by yet another shell company. So, to assert that they have been anything remotely close to “transparent” or “open” about their banking relationships is laughably false and I think it can be concluded from the statements above that they have failed to maintain good rapport with most, if not damn near all of the major financial institutions on planet Earth.
  3. The assertion that they have maintained a good working relationship with “regulators, governments, and law enforcement agencies” rings false as well. One piece of evidence that this is not the case is the fact that they were subpoenaed in December 2017 by the CFTC (the news broke in January 2018).
  4. They also ended up dissolving their relationship with their supposed auditor as well.
  5. Their supposed auditor was also sent a subpoena by the CFTC.
  6. The nature of the subpoena issued by CFTC was essentially confirmed to be criminal since they denied a FOIA request. The CFTC’s response for denying the FOIA request was, “Some records are exempt from disclosure under FOIA Exemption 7(A), 5 U.S.C. § 552(b)(7)(A), because disclosure of that material could reasonably be expected to interfere with the conduct of the Commission’s law enforcement activitiesand that, Some records were obtained on the condition that the agency keep the source of the information confidential. Those records are exempt from disclosure under FOIA Exemption 7(0), 5 U.S.C. § 552(b)(7)(D). That exemption is intended to ensure that “confidential sources are not lost because of retaliation against the sources for past disclosures or because of the sources’ fear of future disclosures.” These two statements in unison strongly imply that there is an active and ongoing criminal investigation into Bitfinex/Tether’s (they’re both one in the same) business dealings.
  7. The DOJ has recently opened an investigation in which Tether/Bitfinex are rumored from credible sources to be one of the primary targets of that investigation as well.
  8. Tether also writes in their press release that, “Some writers posit an industry rife with money laundering and fraud.” In my estimation, that is correct and, for the aforementioned reasons, this should be considered thorough, non-bias journalism.
  9. Tether also states, “ All issued, redeemed, and existing Tethers, including all transactional histories, are publicly auditable by means of the tools provided at Omnichest.info and Etherscan.io. Until global assurance advisors resolve the complexities associated with the completion of digital asset audits, the (immutable and verifiable) blockchain will have to do.The argument that blockchain somehow makes it prohibitively complex to receive a financial audit for a company is laughable considering the fact that an immutable record of transactions should do nothing but facilitate this process (assuming everything is actually legitimate).
  1. A ‘random’ check to ensure that Tether has the appropriate reserves in account does nothing to improve the veracity of Tether’s claims. Until we know what the operating/maintenance/fixed costs and any other associated expenses of the business as well as their receipts and debits over the period of the last 12+ months, there is no way to verify that the money in the bank account actually represents a reserve.
  2. The above statement feels like something that should be intuitively understood by most individuals. However, it has not been, so I felt it necessary to clarify further. Let’s assume a scenario where there was a massive ‘bank run’ and every single outstanding Tether was redeemed for the money in that bank account where the “random check” was performed. We have no proof that there would be enough money left for customers to receive their deposits from the Bitfinex exchange and that Bitfinex and/or Tether would remain solvent enough to complete their oeprations. We also do not know the source of the funds in the bank account either. If any of the criminal allegations against Bitfinex and/or Tether are true, then it makes sense that there would be able to obtain at least an equal amount, dollar-wise, to the number of Tethers that are currently in circulation. That is not the question and that should definitely not be seen as the barometer of legitimacy either. The best way to quickly “prove” this would be to provide bank statements as well as invoices to the corporate/huge buyer customers that they deal with and show the steady, increasing incremental value of the associated bank account or “reserve” in accordance with the amount of Tether issued.
  1. None of the documents that Tether claims FSS was given would help actually verify the legitimacy of the claim that, “Tether is backed 100% by a corresponding amount of fiat cash.”
  2. “Tether’s anti-money laundering (“AML”), Bank Secrecy Act, and Office of Foreign Assets Control Program” would not help verify the legitimacy of Tether’s reserves.
  3. “Tether’s AML/Anti-Terrorist Financing Risk Advisory Report from 2018” would not help either.
  4. “Extensive documentation on Tether’s account registration process and procedures and its AML system and compliance policies” ; Not helpful
  5. “An unredacted consulting report issued by a professional services firm retained by Tether”; once again, unhelpful.
  6. “Complete account opening paperwork and materials concerning Tether’s accounts with its banks”; once again, unhelpful.
  7. “Tether’s banking policy, banking access policy, and internal controls, including as they relate to the issuance of new Tethers”; unhelpful
  8. “Financial information related to Tether”; COULD be helpful, but we simply do not know enough information.
  9. “Tether’s registration as a money services business with and under the Financial Crimes Enforcement Network (FINCEN)”; given the fact that they are currently under criminal investigation by the United States government, this is definitely unhelpful.
  10. “Documentation and materials with respect to Tether’s personnel and its corporate structure”; Once again, NOT helpful.
  11. “Materials concerning the number of issued and outstanding Tethers, both historically and currently.”; Publicly available information and, once again, unhelpful.

Tether concludes this ‘Transparency Report’ by audaciously stating that, “We are pleased to be able to present independent verification of this.”

What was presented in those paragraphs on their website is far from what one could consider an independent verification. In fact, all they really proved is that Bitfinex is solvent and that’s about it.

There is no viable proof that the money is sourced legitimately, when the money arrived (ironically, bank statements did not make the list of documents they passed on to the “Washington-based firm” — which seems like a pretty intuitive thing to add to something like a….bank audit), or even that the money actually belongs to Bitfinex and is not borrowed in whole or part. In addition, there is no evidence that this money is not part of the same pile of cash that is necessary for Bitfinex/Tether’s operating expenses as platforms. Having $3.2 billion in the bank for $3B+ in Tethers does not count as reserves if $500–$1 billion of that money represents the total expenses of the exchange or the liquidation of some customer reserves, for which Bitfinex has no permission to run a fractional exchange for.

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