Moore Cayman, an auditing firm in the Cayman Islands, has provided an assurance opinion on the current reserves of Tether. I am going to highlight the parts that I found illuminating.
The most important thing to establish upfront is that this is NOT the report that is mandated by the New York Attorney General in their settlement.
This assurance is looking very specifically at the status of Tether’s reserves as of February 28th 2021 at 11:59 PM UTC.
The auditing firm reviewed Tether’s Consolidated Reserve’s Report, which is included at the end of the document and is simply a statement by Tether’s executives that they have the assets and the accounting standards they used to value those assets.
These accounting standards are worth a look so that we can determine how Tether determines the value of their assets.
So this gives us some insight into the likely reserves of Tether. First, we again have confirmation that part of the reserves are digital assets. They value these assets either at the cost they got them, or at the current market value, whichever is low. Assuming these are cryptocurrencies I am incredibly curious how Tether is hedging that position to ensure that small moves do not leave them with insufficient collateral. Currently (as of February 28th), they only have 0.3% more in reserves than they do have circulating. This means relatively small moves in the values of the reserves can quickly leave Tether unbacked. Interesting, if we make a couple of very reasonable assumptions it is possible to end up with the conclusion that Tether has significantly more backing than claimed here. Namely, these assets are valued at the lower of cost or market value. Market value for most cryptocurrencies has exploded recently. Thus many of these digital assets could conceivably have a fair market value significantly above the value that Tether is currently ascribing to them (assuming Tether is following their own standards).
The flip side of this issue is that if the assets have not accrued in value, redemptions that necessitate selling any of the digital assets can cause a decrease in those asset prices, potentially making it so that Tether redemptions force a ‘backed’ Tether to become ‘unbacked’.
Other assets and liabilities they treat their value as cost plus accrued interest, this does not seem to take into account the creditworthiness of the asset issuer, but is how they have chosen to value these.
Gold is valued as gold, which yeah that makes sense.
Moore Cayman correctly points out that Tether’s valuation method potentially results in them overvaluing assets where the custodian or counterparty has issues. This again potentially impacts the true value of the assets. When we get the full breakdown from the New York Attorney General we will hopefully have some additional clarity into these matters.
Perhaps most frustrating to me today is that it is not clear what verification actually went into the reserves. It appears that at the very least Moore Cayman reviewed the internal controls of Tether, and used that to inform them as to what else was necessary in their verification. I do not see any evidence that Moore verified the reserves with banks, custodians, or other involved parties. It seems that this assurance largely depended on reviewing Tether’s statements and reviewing their internal controls so that Moore could sign off on those statements.
Frankly, I am curious to see what happens when we get the real attestation for the NYAG settlement. With that they will need to show how their assets are broken down and hopefully then we will gain some more insight into how Tether is functioning. This just confirmed to us that Tether claims Tether reserves are greater than number of Tethers for at least a single minute on February 28th, and that a Cayman Islands accounting firm was willing to sign and say they could provide assurance that based on the documents they had seen that was true.
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