I’m not an alarmist and not alarmist, but by the end of January my concerns about the Tether has reached critical mass.
Before you get to the point, I want to note that I consider myself a pretty informed person. I am no stranger to cryptocurrencies, as well as accounting. I have already published oral and written comments on these topics, and in 2014 founded the payment service Bylls based on Bitcoin. In the world of accounting, I worked as the first Treasurer of the Canadian blockchain Association, and almost 5 years in auditing public and private companies in a consulting accounting firm.
I admire Bitcoin and other cryptoprocta. Decentralized technology is at the intersection of Economics, politics, Finance, technology and companies, and it is difficult to ignore. As in any interdisciplinary field, the curve obtaining a skill can be steep, but, fortunately, there are many useful resources to help beginners.
Although many (including me) sincerely believe that cryptocurrency will ever change the world, even the most knowledgeable specialists in this field understand that the recent speculative madness is not necessarily an indicator of success and that we should not try to get ahead of it:
So total cryptocoin market cap just hit $0.5 T today. But have we *earned* it?
— Vitalik Buterin (@VitalikButerin) December 13, 2017
Acne Buterin @VitalikButerin
Total market capitalization has now reached 0.5 trillion dollars. But do we *earned*?
This returns us to the topic of Tether.
Theoretically, the cryptocurrency provided by the US dollar, there is nothing wrong. It could act as a tool to reduce volatility and to facilitate the transfer of funds between exchanges (hail to the arbitration!). The request for such a concept obviously exists, and the Tether is not the only such coin with a stable value (see TrueUSD and Maker).
All the problems I speak of, is directly related to how implements this concept the Tether guide. Their public statements and working style described in the posts of an anonymous blogger Bitfinex’ed, as to inspire interest and anxiety.
In short, if too many letters: Tether, the company has experienced problems with the banking service, lied about conducting regular audits, distorted the results of the consultancy activities carried out by the company Friedman LLP, and, most likely, despite all their proud declarations, lack sufficient funds to support issued tokens (~ 2.2 billion) with a 1:1 ratio.
I tried to ignore these alarm bells, rejecting the presentation of evidence as indirect and hyperbolic – work of conspiracy-lovers. How could a company so shameless to lead people astray and to issue tokens without having, in fact, funds in order to provide them with dollars? There must be a reasonable explanation of why they have not proved it…
Needless to say that to ignore the cognitive dissonance was becoming increasingly difficult.
A good example: recently, Marc Hochstein (Marc Hochstein) from Coindesk has finally shed some light on the relations Tether with their intended audience. As follows from the article Mark, a representative Tether said about the relationship of the company with Friedman LLP the following:
“We confirm the fact of termination of the agreement with Friedman. With those devastatingly detailed procedures used by Friedman in relation to the relatively simple balance sheet Tether, it became clear that to see the results of the audit within a reasonable time fail. Since the Tether is the first company in the industry, going through this process and aspiring to this level of transparency, precedent, starting from which, it would be possible to construct a process or control value, which could be used to measure the degree of success achieved does not already exist”.
I am a supporter of due process and believe in the presumption of innocence, so I am not able with certainty to say whether the Tether on their accounts all the money, the presence of which said company, or whether the company’s management is competent and honest.
I’m also not going to speculate, based on circumstantial evidence.
Instead, I would like to name a few of the reasons why this statement seems to me extremely doubtful.
- 1 #1: Audit of cash balances is not complicated or requiring a time-consuming procedure
- 2 #2: Tether is not the first cryptocurrency company undergoing the audit process
- 3 #3: Complacency Tether is painful character
- 4 #4: there is No good way to justify “the failure to complete the audit within a reasonable time»
#1: Audit of cash balances is not complicated or requiring a time-consuming procedure
I would be interested to know what “a devastatingly detailed procedures» performed Friedman LLP. If you are an auditor, here are a few things you should know about auditing cash balance:
- from the point of view of auditing, the funds are typically one of the least risky and most rapid of the financial statements, especially for companies such as Tether, with just a few Bank accounts in two currencies (dollars and euros);
- as a rule, procedures to audit cash balances, are the most Junior employees in the team (and later checked by someone more senior). In other words, these procedures are extremely simple and technically undemanding. They are usually the same people that run for coffee.
To check the balance of a Bank account is very simple. Since Tether said that holding Fiat money as reserves’, then it is safe to assume that they had so many Bank accounts and the activity and volume of transactions on them is probably pretty low.
To confirm balances on the accounts of the Tether, the auditors will need:
- To ensure that the amount the Bank reports correspond with the numbers in the records of the Tether (or on the Transparency page of their website)
- To make a request of confirmation to the banks Tether, that is fill the form and send it to the Bank that they have confirmed that all amounts, parts and ownership coincide
- To record in the working papers that the amount confirmed by the Bank, which provides operational services for Tether, exist and that these accounts really belong to the Tether
It is almost all you need to do to get sufficient evidence to maintain an appropriate balance of the Bank account.
If you want to take more care, you can also spend an additional check. How to do it? Define and test a limited sample of transactions directly before and after the date of the audit, to ensure that the company did not borrow funds specifically in order to appear creditworthy in the eyes of the auditors. This check also does not take much time.
Why Tether are unable to pass through these tests in a short time, is beyond my comprehension.
#2: Tether is not the first cryptocurrency company undergoing the audit process
Tether also says that is «the first company in the industry, going through this process“that is not true (and not surprising).
They’re not even the second or third.
Here is a short list associated with cryptocurrencies of companies who participated or contributed to the audit of the financial statements:
- QuadrigaCX, a canadian cryptocurrency exchange, conducts quarterly and annual audits for several years.
- In the state of new York, rules Regulations require annual audited financial statements. That is, all three licensed companies also passed the audit, or at least are in the process of its implementation, otherwise their licenses would be revoked.
- Greyscale Bitcoin Investment Trust traded on the securities market and publishes audited financial reports in 2015. Oh yeah, their custodian also conducts regular audits!
- There is a company called Libra, which is engaged in the development of accounting and tax software for companies working in the field of blockchain technology and cryptocurrency.
- There is even an audit firm specializing in the maintenance of all hedge funds in the field of scriptaction (by the way, is much more difficult to audit than Bank account).
- Probably there are other examples – I did not set myself a task to list them all.
To lie about this strange, and the only rational explanation for this, in my opinion, is that they really can consider yourself first.
But, even assuming that this statement is sincere, I have still the question remains: why did you start bragging about being the first cryptocurrency company, through the audit without completing the first test?
The strap on this market is low so that the simple expression of the intention to undertake an external audit is enough to satisfy users?
If so, then Tether, of course, deserves an award for participation for its attempt to hire an auditing firm.
#3: Complacency Tether is painful character
Another good point of their statements:
“Precedent, starting from which, it would be possible to construct a process or control value, which could be used to measure the degree of success achieved does not already exist”.
No precedent? Every year audits are millions of Bank accounts.
I repeat again, in other words: the process of auditing the balances of Bank accounts are clearly defined and that job-level interns. Generally accepted benchmarks for evaluating the success of this audit is the fact it is successful and whether it was completed within a reasonable time.
#4: there is No good way to justify “the failure to complete the audit within a reasonable time»
I still don’t quite understand what effect the representatives of the Tether was hoping to achieve by such a statement. It remains unclear which party was responsible for her inability to complete the audit, so let’s think about the possible reasons for this.
Before the audit, before any operation, the parties shall sign the letter-agreement. This is a contract between the management team and the audit firm that describes the responsibilities of each party. The main end product is an audit report. Receipt of this signed detention – the main and, to a large extent, the sole purpose of the audit.
The best that can be hoped for is certainly positive conclusion – that is, all digits from the point of view of all performed audit procedures and any accounting rules you have to comply, correct.
The inability to complete the audit within a reasonable time can take place in several situations:
- when the auditor cannot obtain sufficient appropriate audit evidence;
- in respect of the client’s business there is significant uncertainty;
- when the auditor in a conflict of interest.
In any of these cases, the auditor would have published refusal to conclude a – that is a documented decision about the disclaimer of opinion on financial statements – even if they were hired to take it.
This is a really bad situation and it happens incredibly rarely. Financial statements in this case, in General, useless, as the auditors did not receive sufficient evidence to make certainly positive conclusion.
Did Friedman LLP their procedures only in order to render the rejection of the conclusion (the publication of which is obviously disadvantageous Tether)?
Whether they were involved in the audit (whether signed an agreement letter)?
Maybe audit partner managed to lose the audit report?
Tether if I really wanted transparency, they could at least make it clear to everyone, how their audit could not be completed in a reasonable time instead to talk about the subjectivity of “success”.
So what does all this mean? Unfortunately, we still have no adequate answers.
As far as we know, Tether is sitting on an insane amount of money, and later we all can feel like idiots because I doubt their solvency. It wouldn’t be the first time I was wrong.
However, many important questions still remain unanswered, that does not inspire confidence in relation to the company, presumably having in their accounts of more than $ 2 billion.
There are many simple ways in which Tether could prove that they acted in good faith and that their tokens are fully backed by real dollars… but we don’t see anything from them, except, in General, useless consulting report, diversionary tactics and broken promises.
Nevertheless, most people still have no interest in the subject.
Maybe after so many break-ins, fraud, extortion and Ponzi schemes we’ve become insensitive towards such things? Even $ 2 billion cannot be called just a drop in the bucket, but as we already know… life goes on.
Or maybe it’s because we have more important things to worry about – such as anonymity, scale and preservation of the decentralization?
Whatever the reason, I think ultimately not so important, have Tether the money to the extent they’re talking about.
If not, then, in my view, short-term pain is a small price to pay for eliminating the next group of unscrupulous members of the community and it is hoped that we will learn from this situation, several important lessons about transparency and accountability.
Well, if they do have these $ 2 billion with small, you can easily return to the decision about what color suit from Versace will better match your Lamborghini.