Fake Tethers under fake bitcoins.
Bitcoin,  Cryptocurrencies,  Regulation,  United States

Tether gets lawyers to back up claims, but an interesting fact adds new mystery

The ‘stable coin’ issuer shows it has reserves, yet…

Tether, the embattled cryptocurrency outfit with close ties to Bitfinex, is firing back at critics. And now it has a report from a politically connected law firm stating it has the dollars to back up its tokens.

On Wednesday morning, Tether published a report from Freeh, Sporkin & Sullivan LLP (FSS). In it, FSS claimed Tether had roughly $2.5 billion in cash to match roughly 2.5 billion tether tokens in circulation as of June 1, 2018. FSS said the figures were backed by sworn and notarized statements from Tether’s banks.

Tether WatchThe “Freeh” in Freeh, Sporkin & Sullivan is former FBI director Louis Freeh, who served under President Bill Clinton. As for Sullivan, the report disclosed, “Judge Eugene R. Sullivan (Ret.), one of the partners, is a member of the advisory board of one of Tether’s banks. It was through this connection that Tether was introduced to FSS.”

Tether has been on the receiving end of charges that they haven’t been honest with their accounting. The Commodity Futures Trading Commission subpoenaed the firm, along with Bitfinex, the world’s largest bitcoin exchange, in December 2017 for reasons that have not yet been made public.

The fact that FSS chose June 1 as the date to check Tether’s balances is significant given a recent study done on how the company issues its tokens. Last week, University of Texas at Austin professors John M. Griffin and Amin Shams published their findings, claiming that tether tokens were issued—perhaps by management—to coincide with drops in bitcoin prices. Those tokens were alleged to have been used to buy bitcoins.

But there was an overlooked charge in the Griffin and Shams paper not quite covered in the press:

“If Tether is pushed out to other crypto exchanges rather than demanded by investors with dollars in hand, Tether may not be fully backed by dollars when issued. However, if the issuers wished to post monthly bank statements to shore up dollar reserves and appear fully backed, this would necessitate the liquidation of the purchased Bitcoins at the end-of-the-month (EOM). Interestingly, we find a significant negative EOM abnormal return of 6% in the months with strong Tether issuance. The EOM Bitcoin returns are highly correlated with the magnitude of Tether issuance, and no abnormal returns are observed in months when Tether is not issued.”

Later in the Griffin and Shams report:

“Relative to months with zero issuance, months with low, medium, and high issuance has a negative EOM return of 1.9%, 3.1%, and 6.1% respectively, all statistically significant.

In summary, the strong negative effect on Bitcoin prices in months of Tether issuance, suggest that Tether may induce price effects related to a need to raise month-end reserves. This finding is inconsistent with Tether being just a facilitator technology driven by investor demand because there is no reason to expect a relation between Tether printing and EOM returns in that case.”

Former FBI Director Louis Freeh at an event for Rudy Giuliani in 2007. (Kevin B. Sanders)

On May 18, 2018, 250 million tether were issued, just two weeks before the date which the FSS report covered.

In January, it was reported that Tether no longer had a relationship with its auditors, Freidman LLP.

In an interview on Wednesday with Bloomberg, Tether general counsel Stuart Hoegner said, “an audit cannot be obtained” on the grounds that “the big four firms are anathema to that level of risk… We’ve gone for what we think is the next best thing.”

On Tether’s homepage, the company states:

“Our reserve holdings are published daily and subject to frequent professional audits.”

To paraphrase Bill Clinton, it depends upon what the meaning of the word “audit” is.


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Lawrence Lewitinn, CFA was the founding editor in chief of Modern Consensus. Disclosure: Lewitinn owns no cryptocurrencies in his portfolio.