Tether Claims Solvency; Community Skeptical

The controversial cryptocurrency tied to the US dollar, Tether (USDT), has reportedly passed a solvency test conducted by Freeh Sporkin and Sullivan (FSS), a Washington-based law firm.

However, the crypto community remains skeptical.

Tether, a so-called “stablecoin,” has been accused by critics of issuing more coins than they have backing for. This resulted in significant pressure last year for Tether to allow a proper third-party inquiry into its US dollar reserves. While not a formal audit, the inquiry gives an overview of the company’s bank balance.

The ‘audit’ was conducted by a firm that includes three former US federal judges, one of whom is a former FBI director. Their report that shows Tether’s solvency says, “FSS is confident that Tether’s unencumbered assets exceed the balance of fully-backed USD Tethers in circulation as of June 1st, 2018.”

This wasn’t enough to satisfy the crypto community. A bank balance on a certain date doesn’t automatically mean the funds are free and clear, or unencumbered. This basically means that the report is not worth the paper it’s printed on.

Tether refuses to perform an audit, which would answer the question whether its assets are unencumbered or not. This audit is the same that most companies, especially those with shareholders, undertake on a regular basis. Tether officials claim that a traditional audit is currently impossible because major auditing firms aren’t willing to risk their reputations by working with cryptocurrency companies.

The controversy apparently hasn’t hurt the coin’s value, as Tether has been holding steady at around $1 USD throughout its history.

Tether is considered important to the cryptocurrency ecosystem, as traders use it as a safe store-of-value in times of market volatility, and as a way to move crypto-assets between exchanges.

“Tether is the third-largest cryptocurrency by trading volume, behind Bitcoin and Ethereum, which are also used as liquidity. Thus, most exchange pairs are against Bitcoin, Ethereum or Tether,” said Juan M. Villaverde, an econometrician who studies cryptocurrency, in an email to Weiss Ratings, a veteran firm dedicated to analyzing investments.

Villaverde also expands on other critical facts surrounding Tether:

  • Tether is the only cryptocurrency whose trading volume regularly exceeds its market cap.
  • There is ‘big’ movement, called “velocity of money,” in the Tether supply, as supply changes hands often, sometimes multiple times a day.
  • This means many traders are using Tether, and often, since Tether is one of the main sources of liquidity in cryptocurrency.
  • This liquidity is important as it stabilizes prices and facilitates fast and seamless trading.
  • If there is any fraud or dishonesty going on, the consequences would be far-reaching and significant.

“What happens if Tether does turn out to be fraudulent? Or what happens if a major government determines that cryptocurrencies like Tether are being used by exchanges to avoid regulations? What if this large source of liquidity suddenly evaporates?” Villaverde asked.

Villaverde believes that while it’s hard to predict what might happen, there could be a silver lining in the debacle. He says that “if that liquidity rug is pulled from under the market’s feet, it can help expose all sorts of shenanigans that went by unnoticed before.”

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