Tether’s First Reserve Breakdown Shows 49% of Token’s Reserves as Unspecified Commercial Paper

Doing the math, unspecified commercial paper represents just under half of USDT’s collateral – 49%.

Tether's First Reserve Breakdown Shows 49% of Token's Reserves as Unspecified Commercial Paper

Tether has disclosed its reserve breakdown for the first time, providing a bit of transparency into the reserve position of USDT (+0.01%), the largest cryptocurrency pegged to the U.S. dollar.
However, much remains murky, in part because the pie chart Tether provided Thursday did not mention any independent review by an accounting firm. Moore Cayman, a Caribbean-based auditing firm with five employees, has issued two reports this year certifying that USDT is adequately backed by reserves. But the auditor (which is part of Moore’s global consortium of accounting and consulting firms) did not elaborate on exactly what assets are backing the token.

To be fair, other stablecoin issuers like Circle and Gemini typically do not provide a breakdown of their reserve composition at all. For example, Gemini’s accountants state in their certification that customers’ reserves are held in an FDIC-insured account at State Street Bank or in a money market fund at Goldman Sachs Asset Management, which invests only in U.S. Treasury securities. The ratio of the two is unclear – but then again, both are considered highly liquid and creditworthy assets (“big money” in Wall Street parlance), and the same is true for all assets on Tether’s balance sheet.

The new report is part of Tether’s efforts to remain in compliance with a settlement agreement with the New York Attorney General’s Office (NYAG), after prosecutors investigated it and its sister cryptocurrency exchange Bitfinex for covering up approximately $800 million in losses.

Bitfinex and Tether paid $18.5 million in fines and agreed to provide quarterly breakdowns of their reserves as part of the settlement.

Tether General Counsel Stuart Hoegner said in a statement, “As part of our settlement agreement with the New York Attorney General’s Office, Tether has proposed to publish reserve breakdowns on an ongoing basis, and we are committed to making that information available to the Attorney General’s Office and the public. Today’s release reflects our continued efforts to increase transparency.”

Breakdown table

The breakdown shows that the majority of Tether’s reserves are in cash, equivalents or other short-term deposits, with the remainder in secured loans, corporate bonds and other investments. However, the majority of the first category is made up of commercial paper, a form of corporate debt that can be easily converted into cash – or not, depending on the issuer and market conditions.

According to the breakdown, as of March 31, 2021, Tether’s reserves consist of 75.85% cash and equivalents, 12.55% secured loans, 9.96% corporate bonds and precious metals, and 1.64% other investments, including digital currencies. This is consistent with the company’s past statements, but more precise.

The cash component is further broken down into different components. 65.39% in commercial paper, 24.2% in trust deposits, 3.87% in cash, 3.6% in reverse repurchase notes and 2.94% in treasury bills.

It is not clear what the ratings of the commercial paper or corporate bonds are, which agencies rate them, or which companies issued them. Similarly, Tether declined to identify the borrowers of the loans or the collateral backing the loans.

“It’s a little bit iffy,” says Francine McKenna, an adjunct professor at American University’s Kogod School of Business, a former auditor and author of The Dig. He is the author of a newsletter on accounting and corporate governance. “All commercial paper is not the same because various companies have different credit ratings. Even some multinationals that were once very pure are no longer so.”

Doing the math, unspecified commercial paper represents just under half of USDT’s collateral-49%.

Tether’s reserves are partially invested in bitcoin (BTC, -3.1%), which makes up less than 1.64% of its overall reserves (in the “Other Investments” category), and gold, which makes up less than 9.96% of its reserves (in the “Precious Metals” category).

Although Thursday’s publication was not certified, these reserves will be reviewed by Moore & Cayman when it issues its assurance report for the company. The firm issued its first report at the end of March, covering the USDT stablecoin’s backing as of Feb. 28, 2021. Another report was released last month, certifying support as of March 31.

Background of the story

USDT is a key conduit for the roughly $2 trillion global cryptocurrency market. Traders use it to quickly transfer dollar values between exchanges in order to take advantage of arbitrage opportunities when bank wire transfers are unavailable or too slow.

However, the opaque nature of Tether’s operations has fanned speculation from critics who question the backing of USDT and speculate that the company props up the market by printing tokens.

Tether has long tried to validate its reserves, but has not provided much documentation. The company first hired auditing firm Friedman LLP, which prepared a preliminary report noting that the amount of USDT Tether issued was backed by its cash reserves, but with several caveats.

The company then commissioned law firm Freeh Sporkin & Sullivan LLP to issue a report on its reserves, but that also failed to address the concerns.

In late 2018, Tether’s bank, Bahamas-based Deltec Bank & Trust, published a letter with an illegible signature stating that the company had $1.8 billion in reserves, matching the amount of USDT in circulation.

In the NYAG investigation, Hoegner revealed that at one point Tether was backed by only about 74 percent of its reserves.

Nonetheless, USDT has traded at or near $1 for almost all of its history.

This year, Tether has pledged to regularly release proof documents through Moore Cayman.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/tethers-first-reserve-breakdown-shows-49-of-tokens-reserves-as-unspecified-commercial-paper/
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