REPORT: TETHER IN TROUBLE: Incomplete Audits, Lack Of Transparency, Questionable Banking Jurisdictions; Red Flags Abound For Beleaguered Stablecoin

Tether Limited (“Tether”), one of the most traded digital assets, has been under pressure for lack of transparency and concerns that it does not have the U.S. dollar (USD) holdings to fully back its tokens (“Tethers”) in circulation.

Since 2017, Tether has taken steps to re-insure investors. Each effort, however, only raised additional concerns.

According to data from CryptoCompare.com, more than 40% of all Bitcoins are currently traded on exchanges directly against Tethers1; but the failure to alleviate these long-standing concerns could result in investors seeking better alternatives, namely stablecoins issued by regulated, audited, and transparent firms.

Some exchanges may also decide to move away from offering Tether trading pairs and adopt a rival, regulated stablecoin instead.

Tether’s Response to Industry Concerns

Tether responded to these concerns by stating on its website that “much of the speculation and negative reporting has been the result of misunderstandings of how Tether functions.”2

In addition, Tether’s website states that “(a)ll Tethers in circulation are fully backed by USD reserves”, and this has been “confirmed by “(m)emoranda, consulting reports, industry leaders, virtual currency pioneers, and competitors”.3

The company maintains a “Transparency” page that provides the current balances that Tether is holding in USD and euros (EUR) compared with the number of Tethers in circulation.4 Tether’s website also states that holdings are “subject to frequent professional audits.”5

Third-Party Attestations Issued, But With Significant Qualifications

Tether has supplied some evidence of its assets. Tether, however, has not produced a full assessment of its bank balances or a comprehensive attestation of its holdings by a professional, trusted third-party.

The most recent assessment of bank balances by a third-party was issued by Bahamas-based Deltec Bank & Trust Limited (“Deltec”). According to a statement released by Tether, Deltec accepted Tether as a client after a due diligence review that included an analysis of compliance processes, policies and procedures; a full background check of the shareholders, ultimate beneficiaries and officers of the company; and assessments of its ability to maintain the USD-peg at any moment.6

The statement also noted that Deltec reviews the company on an ongoing basis.7 It is unclear from the statement, however, when Deltec will conduct reviews or what the reviews will specifically assess.

Tether also released a letter, dated 1 November, from Deltec, which states that Tether has a portfolio cash value of $1,831,322,828.8 The reserve funds cited in the letter exceed the number of Tethers currently in circulation by more than $50 million.

The phrase “portfolio cash value,” however, implies that Tether may not be strictly complying with its own assertion that all Tethers in circulation are “fully backed by USD reserves”. “Portfolio cash value” could refer to various fiat currencies, virtual currencies, or, perhaps, short-term unsecured promissory notes.

The ambiguous letter, however, will not likely ease concerns from investors, as Deltec strongly qualified its findings. In the letter, Deltec states that the confirmation of reserves was made “without any liability, however arising, on the part of Deltec Bank & Trust Limited, its officers, directors, employees, and shareholders” and the confirmation was “solely based on the information” provided to the financial institution.9

Earlier this year, a three-page “Attorney-Client Communication/Work Product” prepared by Freeh, Sporkin & Sullivan LLP (FSS) was released by Tether. FSS reviewed bank account documentation and performed a randomized inspection of the numbers of Tethers in circulation and the corresponding currency reserves. FSS also reviewed the USD balances in accounts owned or controlled by Tether at its banks.10

The FSS report concluded that all Tethers in circulation as of 1 June 2018 were fully backed by existing USD reserves.11

Like Deltec, however, FSS, significantly qualified its findings, The FSS report stated:

  • FSS is not an accounting firm and did not perform the review and confirmations using Generally Accepted Accounting Principles.
  • The confirmation of bank and Tether balances should not be construed as the results of an audit and were not conducted in accordance with Generally Accepted Auditing Standards.
  • FSS makes no representation regarding the sufficiency of the information provided to FSS.
  • FSS procedures were not performed for the purpose of providing assurance.12

The attestation has a few other additional limitations. The FSS findings are restricted to a single date-1 June- and do not confirm that each Tether was backed by a dollar for all points in Tether’s history.13 The FSS attestation also does not name any of the banks Tether was using to hold its reserve funds.

A September 2017 memorandum prepared the accounting firm Friedman LLP (“FLLP”) that is posted on Tether’s website is also problematic. The memorandum states that Tether had at least $440 million and €1,590 in various bank accounts.14

The memorandum, however, states that FLLP makes no representations about “whether the funds are committed for purposes other than Tether token redemptions”.15

The memorandum also redacts the name of banks where reserve funds are held, and the document is carefully phrased, so it is unclear if the Tethers are exclusively backed by USD reserves.

Tether’s relationship with FLLP was dissolved in January 2018 without a comprehensive audit being completed.16 Tether acknowledges that the services provided by FLLP “do not constitute an audit or attestation engagement, which would include a significantly expanded scope of procedures and take substantially more time to complete.”17

Unease over Tether’s Access to Banking Services

There have also been long-standing concerns over Tether’s relationships with banking institutions. These concerns will not be alleviated by Tether’s recent decision to select a bank in the Bahamas to hold its currency reserves.

A July 2017 Caribbean Financial Action Task Force (CFATF) report was highly critical of the Bahamas efforts to combat illicit finance activities. The scores for the Bahamas for the eleven “effectiveness ratings” are troubling. The Bahamas scored “low” in six categories, and “moderate” in five categories. The Bahamas did not receive a “high” or “substantial” score in any category.18

The report also specifically faulted the Bahamas for:

  • Not providing law enforcement agencies with adequate resources to conduct investigations into illicit financial activities.
  • Limited judicial action (e.g. prosecutions) against individuals suspected of committing illicit financial activities.
  • The low number of suspicious activity reports filed, in particular in the context of the substantial size of the financial sector.19

The selection of a Bahmanian bank follows Tether’s previous banking relationship with Noble Bank International, based in San Juan, Puerto Rico, which ended earlier this year. Nobel Bank was audited by Puerto Rico’s bank regulator in 2017. The audit “raised concerns,” but the bank has not been “faulted publicly.”20 The bank is currently for sale.21

Prior to its relationship with Noble Bank, Tether lost its relationship with its Taiwanese bank in early 2017 after Wells Fargo & Co. (“Wells Fargo”) ended its correspondent banking relationship with the Taiwan lender.22 This followed Wells Fargo’s decision earlier in the year to end its role as a correspondent bank through which customers in the U.S. could send money to Tether’s banks in Taiwan. Tether was the co-plaintiff with Bitfinex in a suit filed against Wells Fargo, but the plaintiffs withdrew the case.23

Allegations of Market Manipulation

Authorities have not accused Tether of unlawful activity. There is possibly evidence, however, that Tether may have been used to manipulate the price of Bitcoin and other virtual currencies, according to a research paper released by the University of Texas at Austin.24

The paper, written by Professor John Griffin and graduate student Amin Shams, alleges that Tether was a possible source of fraudulent buying demand that drove about half of the rise in Bitcoin in late 2017.25

The researchers found that Tether issuances rose in 2017 during periods when the price of Bitcoin was dropping. When Bitcoin was rising, the same pattern could not be found. Once issued, nearly all Tethers were moved to Bitfinex and then shifted to other exchanges, where they were used to buy Bitcoin, propping up the price.26

The authors contend that the findings may “provide substantial support for the view that price manipulation may be behind substantial distortive effects in cryptocurrencies”.27

In a statement, Bitfinex and Tether Chief Executive Officer JL van der Velde said that “(Neither) Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation”.28

In addition, an anonymously published statistical analysis of the issuance of Tethers, dated 24 January 2018, suggests that the timing of new Tether releases in 2017 was “closely aligned with notable dips in the price of Bitcoin”.29

The anonymous report contends that that price data for 2017 suggests that Tethers may have not been minted independently of Bitcoin price and may have been created when Bitcoin was falling. One interpretation of the data suggests that “Tether could account for nearly half of Bitcoin’s price rise, not even allowing for follow-on effects and the psychological effects of rallying the market repeatedly”.30

U.S. Regulatory Authorities Subpoena Tether

On 6 December 2017, the U.S. Commodity Futures Trading Commission (CFTC) sent a subpoena to Tether.31 Friedman LLP was also subpoenaed by the CFTC.32 According to Bloomberg, the CFTC is investigating whether Tether’s has the currency reserves to fully back Tethers in circulation.33

Tether’s response to the subpoena was muted. A spokesman for Tether (and Bitfinex) said in a statement: “We routinely receive legal process from law enforcement agents and regulators conducting investigations. It is our policy not to comment on any such requests.”34

Tether’s Response Motivated by Fear of Losing Market Share to Rival Stablecoins

Tether’s efforts to increase transparency are likely designed to blunt competition from four recently launched stablecoins that are also backed by the USD: Gemini, Circle, TrustToken, and Paxos.

The companies are substantially more transparent than Tether with disclosures of their holding entities, bank accounts, and regulatory compliance. The four new stablecoins, which are audited, regulated, and licensed, will provide more stability to the market.

Tether Should Increase Transparency to Ease Investor’s Concerns

Tether recognizes that its efforts enhance transparency are “unfinished” and it is taking “additional steps aimed at opening up Tether to the general public and clearing away any uncertainty that may exist.”35

In the near-term, Tether could ease the concerns of the market by:

  • Conducting regularly scheduled comprehensive assessments of assets and liabilities by a trusted third party, such as one of the “Big Four” accounting firms.
  • Routinely updating information on its website that confirms existing relationships with financial institutions.
  • Confirming existing relationships with virtual currency exchanges.
  • Introducing strictly prescribed, predictable rules for the creation of new Tethers.
  • Confirming the destruction of Tethers that have been taken out of circulation to ensure the tokens are not brought back into circulation in the future.

Tether fulfilled its initial promise for the virtual currency community, but its dominance will only continue if it provides investors with a high degree of transparency of their cash reverses, bank accounts, and regulatory compliance that approximates what is offered by rival stablecoins.

The information provided in this report is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney, financial advisor, or other professional to determine what may be best for your individual needs.


This report was prepared by Trifin Roule.

For nearly two decades, Mr. Roule provided for the U.S. government legal analysis of anti-money laundering, counterproliferation financing and counterterrorist financing laws and regulations dozens of jurisdictions, and international standards, as detailed through intergovernmental bodies (e.g. Financial Action Task Force (FATF)), and financial institutions (e.g. banks’ financial intelligence units and compliance offices).

In addition, Mr. Roule has provided in-depth analysis of digital asset accounting, auditing, customer due diligence, exchange, licensing, mining, initial coin offering (ICO), private key storage, and record-keeping practices and regulations.

Mr. Roule is a former Assistant Editor at the Journal of Money Laundering Control, a peer-reviewed journal that provides detailed analysis and insight on the latest issues in the law, regulation and control of money laundering and related matters. Mr. Roule has published dozens of articles on anti-money laundering, and counterterrorist financing laws and regulations.

Trifin Roule is the Publisher of our new division, Abacus Legal, and his and his team’s reports will be free to read for the next 45 days. After that time they will be dubbed premium content and require a subscription.


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  16. “Tether Confirms Its Relationship with Auditor Has ‘Dissolved’,” Coin Desk, 27 January 2018, https://www.coindesk.com/tether-confirms-relationship-auditor-dissolved/ (accessed 5 November 2018).
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  25. “Cryptocurrency Tether used to boost Bitcoin prices, study finds,” Reuters, 13 June 2018, https://www.reuters.com/article/us-cryptocurrency-tether/cryptocurrency-tether-used-to-boost-bitcoin-prices-study-finds-idUSKBN1J92U0 (accessed 5 November 2018).
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  35. “Transparency Update – FSS Report,” 2018, https://Tether.to/fss-report-transparency-update/ (accessed 5 November 2018).