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Tether Review Claims Crypto Asset Fully Backed – But There's a Catch

Nearly six months after parting ways with its auditor, Tether has finally produced a third-party report proclaiming that its cryptocurrency is fully backed by U.S. dollars – with some big caveats.

The state of Tether’s reserves has been the subject of controversy for months, with online critics claiming the company has been issuing more tokens than it had dollars in the bank – printing money, essentially. Tether has consistently denied this, but has not produced conclusive evidence that it is reserved 1-for-1.

The matter has broad implications for the crypto markets, well beyond the holders of the so-called stablecoin, known as USDT, whose market cap stood at $2.6 billion on Tuesday.  

For starters, many have alleged that Bitfinex, the cryptocurrency exchange that shares common owners and managers with Tether, uses USDT to artificially drive up the price of bitcoin. An academic paper released last week supported this view, and the Commodity Futures Trading Commission reportedly subpoenaed Bitfinex and Tether in December.

Also, USDT, which despite the lingering doubts generally trades around $1, has functioned as a substitute for U.S. dollars. Traders use it to quickly move money between crypto exchanges rather than using bank wire transfers, which can be slow and hard to come by.

Given USDT’s importance to the ecosystem, then, an independent confirmation that the coin is in fact fully collateralized might be welcome news, undermining the manipulation claims and bolstering market confidence.

But the three-page memorandum released Wednesday is probably not going to settle the debate, given its ample disclaimers and limited scope.

First off, the report is not an audit. It was prepared by a law firm – Freeh Sporkin & Sullivan, LLP (FSS) – not an accounting firm. 

That’s not for lack of trying, according to Stu Hoegner, Tether’s general counsel.

“The bottom line is that an audit cannot be obtained,” Hoegner told CoinDesk, claiming that this problem is not unique to his company but one faced by the entire cryptocurrency industry.

He went on:

“The barriers to getting audited are simply too big to overcome right now, and not just for us.”

Those barriers include a steep learning curve for auditors in an emerging industry; accounting standards that predated the advent of cryptocurrency, creating uncertainty about how the rules apply; and the resulting need for auditors to exercise judgment, which is “anathema to a lot of large accounting firms. As a CPA, I understand that,” Hoegner said. 

In this situation, he said, “we’ve gone for next best thing.”

Although FSS used different procedures than an auditor would, Hoegner said, he argued that the “key conclusions are similar to what an audit would generate” – a snapshot of bank balances at a point in time.

But that highlights another issue with the FSS report: it covers only one such point in time, June 1.

On that date, the law firm said, it is “confident” Tether had more money in the bank than tokens in circulation (specifically, $2.55 billion of U.S. dollar reserves, held at two separate institutions, to cover $2.54 billion USDT). But the report says nothing about the level of collateralization on any date before or since.  

In other words, it doesn’t purport to show that USDT has been consistently secured over time – or that it is fully backed today.

The big guns

FSS, the Washington, D.C., law firm that Tether hired to assess its reserves and write the report, has no shortage of gravitas. It was founded by three former federal judges, one of them a former director of the FBI, Louis Freeh.

Another of the firm’s partners, retired Judge Eugene R. Sullivan, is on the advisory board of one of Tether’s banks, and was introduced to the company through that connection, according to the report. His ties to the bank also helped FSS do the review “in a timely and comprehensive manner, ensuring that no pertinent information was overlooked,” the report says.

To prevent any gaming of the process, FSS chose the date for which it would confirm its client’s balances at the two banks “without prior notice to or consultation with Tether,” the report goes on. The law firm got sworn and notarized statements of the balances from the bankers.

Likewise, FSS didn’t tell Tether the account balances it had received from the bank for June 1 when it asked the company for sworn statements certifying the amount of USDT outstanding on that date. (Those statements matched the number given by Tether’s website.) The law firm also said it conducted in-person and phone interviews with senior personnel at Tether and the banks and reviewed hundreds of pages of documents.

Yet the report is rife with qualifications such as this one:

“FSS procedures performed are not for the purpose of providing assurance.”

The law firm stressed that its confirmations should not be mistaken for an audit and were not conducted following generally accepted auditing or accounting standards. And it “makes no representation regarding the sufficiency of the information provided to FSS,” noting that it all came from Tether and its bankers.

And as noted above, even assuming that information was correct, it was only one day’s balances.

“FSS has not performed any procedures or made any conclusions for activity prior to or subsequent to June 1st, 2018, Close of Business,” the firm says in its report.

A call to the number on FSS’ website was not returned by deadline. But Hoegner said the law firm had “unfettered access” to Tether’s bank balances beginning in March, even though the report only addresses the balances of one day.

Whether such a limited snapshot changes any minds is “for the market to determine,” he said.

Erstwhile auditors

Stepping back, it’s important to remember that before it engaged FSS, Tether previously worked with an audit firm, Friedman LLP.

That firm produced an interim report in September 2017 that found the company had $442.9 million of cash as of Sept. 15 to fully back the USDT tokens. However, like the new report from FSS, Friedman’s memo was extensively hedged. For example, it said the account where the cash is held is in the name of a trustee, and that it could not vouch that Tether had any enforceable agreement with the trustee.

Friedman was supposed to produce a full audit, but Tether said in January that its relationship with the firm had “dissolved,” without specifying which side broke it off.

Hoegner would not discuss the severing of ties with Friedman. However, he said Tether hasn’t given up on the audit process. We continue to be in discussions with a number of professionals and firms about what can be offered and when,” he said.

Indeed, a law firm’s report is unlikely to carry as much weight as an audit firm’s would, and not only because of the obvious difference in skill sets.

That’s because, at least under U.S. law, audit firms also are generally accountable not only to their clients but to third parties whose decisions rely on their integrity.

Auditors tend to be broadly liable more frequently than attorneys do with the reports they issue,” said Michael K. Shaub, an accounting professor at the Mays Business School at Texas A&M University.

Tom Selling, a CPA and former academic fellow in the chief accountant’s office at the Securities and Exchange Commission, said that auditors “have specific standards for independence they have to adhere to,” whereas when lawyers say they are conducting “independent” investigations for companies, “nobody knows what that means.”

Put differently, “99 percent of the work a law firm does is advocacy for the client,” whereas “100 percent of the work of an accounting firm is to hold themselves out as independent,” Selling said.

Tether image via Shutterstock.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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XBRL Reporting Standard Co-Founder Joins Blockchain Startup

Blockchain startup Auditchain has added the co-founder of a widely used business reporting standard to its leadership team.

The new hire, Eric Cohen, will serve as head of XBRL architecture for the New York-based firm, as announced today at CoinDesk’s Consensus: Invest event.

Auditchain is developing an accounting ecosystem centered around blockchain-based tokens, and utilizing one of its own (called AUDT) that will serve as a means to access and pay for services.

Cohen is perhaps best known as the co-founder of XBRL, a reporting standard required by business regulators like the U.S. Securities and Exchange Commission and similar agencies in Europe and abroad. He also spent more than 17 years working for professional services firm PwC.

Auditchain co-founder Jason Meyers told CoinDesk that Cohen’s involvement traces back to an event at Rutgers University that focused on continuous auditing.

“I was ecstatic when I met him, and for him to join us totally vindicates what we’re doing,” he said.

In an email to CoinDesk, Cohen framed his work with blockchain as part of a broader, decades-long focus on auditing technology.

“Leveraging [blockchain]/DLT technologies to provide a fantastic new foundation, enabled by layers of abstraction, can enable new payment channels, and securely hook in resources of all sorts,” he wrote, adding:

“It’s really not new theory; it goes back to the 60s, just fleshing out the tools that makes it practical. “

That Cohen would link up with Auditchain is perhaps unsurprising, given his stated interest in blockchain technology and related commentary on platforms like Twitter.

According to his personal website, Cohen has also played a role in the development of standards around blockchain, including an ongoing effort spearheaded by the International Organization for Standardization (ISO).

Accountant miniature image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

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Libra Eyes Institutional Investors with Crypto Tax and Accounting App

Blockchain startup Libra has today unveiled a new compliance application for the institutional market, targeting businesses like crypto funds, market makers and exchanges.

Called Libra Crypto Office, the app is being pitched as a way to both connect to the broader ecosystem of cryptocurrency services and automate the real-time gathering of critical information for compliance purposes.

According to Libra CEO Jake Benson, the product came about after discussions with people working in the tax, compliance, and risk assessment fields. Amongst the issues raised, he said, were concerns over scaling due to increasingly complicated processes.

“Further, we found without the right systems and processes, institutional investors were unwilling to allocate significant investment into the industry,” he continued. “With the introduction of Libra Crypto Office, we hope to continue industry efforts to upgrade information accuracy, transparency, and compliance practices.”

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

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Top SEC Accountant Wants Auditor Eyes on Crypto

The U.S Securities and Exchange Commission’s top accountant has a message: private practitioners need to hone their cryptocurrency skills.

That recommendation of sorts was featured in a speech today by Wesley Bricker, who serves as chief accountant for the U.S. securities regulator. Bricker revealed that his office is investigating “cryptocurrencies, coins, tokens and so forth,” as well as the ways in which they are exchanged and traded.

Indeed, he noted that his team is “journeying with a compass” by researching applications of the tech through the lens of the SEC’s accounting and auditing requirements. And according to Bricker, those accountants in the private sector need to do the same.

He was quoted as saying:

“I suggest that it is warranted for the accounting profession to also invest time in understanding these areas. I have not heard particularly good rationales for turning off – or never turning on – the profession’s lamps at this time.”

Bricker’s comments come months after he, in another address, said that both ICO organizers as well as those who contribute need to be mindful of relevant reporting requirements.

“An entity involved in initial coin or token offering activities will need to consider the necessary accounting, disclosure and reporting guidance based on the nature of its involvement,” he said at the time.

Calls for deeper investigation within the accounting industry have been made in the past, including a recommendation in May from the the Association of Chartered Certified Accountants (ACCA). The group said in its report that the technology could reshape the way in which accountants make money.

Image via Elizabethtown College/YouTube

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

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Transparent ICOs? Blockchain Projects Prove Value with New Accounting Tech

With new initial coin offerings (ICOs) now being announced on an almost daily basis, it’s been challenging for investors to decide where to invest, or what exactly they’re getting for their money.

Valuations have largely been determined to date by trust in founders, the white papers they write and the strength of target use cases. But with more than $2 billion having already flowed into token sales, blockchain startup Balanc3 thinks it’s time to make ICO accounting more sophisticated.

Last week, in the first live demo of its new accounting platform, the company gave more than 200 people from the “Big Four” accounting firms, other blockchain startups and regulatory agencies a glimpse into a new way to value ethereum-based token sales.

In an exclusive interview, Balanc3’s Griffin Anderson told CoinDesk:

“It really allows the industry to begin to hold accountable these token sales that have essentially almost gone public, and the markets will be able to use this information to more accurately price what these token sales are worth.”

While this would be good for investors, it’s not as easy as just switching this functionality on to provide such insight. ICO issuers will have to sign up with Balanc3 and turn over all addresses associated with the offering. Balanc3 then aggregates that data into a single account where project bookkeepers can provide line-by-line categorization (such as payroll, inventory, sales, business travel etc) of all transactions entering and leaving those accounts.

While it might seem hard to imagine a company that has conducted an ICO opening up its books to investors, Balanc3 believes investors might start demanding that transparency to gain the security of knowing where their money is being used.

Currently working on the beta version – with hopes of it going live in early November – Balanc3 is trying to figure out how best to feed the information ICOs put into the system to investors.

Crypto accounting

In the demo, live financial statements were revealed for token sales from early adopters Aragon (valued at $56 million), Digix (valued at $140 million) and Gnosis (valued at $142 million). Included in the data were expenses such as wages and travel, and a breakdown of other crypto-assets owned by the companies.

“For those that operate at the highest level of standards,” said Anderson, “this may actually increase their value and market cap, depending on how the market sees it.”

Aside from possible bumps to their market cap, ICO holders might also adopt the platform for its features, which Anderson touted as saving both time and costs.

For instance, the categories and other metadata tacked onto transactions can aid the automated reconciliation of accounts, which should make transactions more easily identifiable and, in turn, cheaper to track.

While accountants using the alpha release are still expected to manually add the appropriate descriptions, Anderson said that eventually that process could be automated.

“Going forward, there will be no input from the accountant or bookkeeper. It will be completely automated in real time,” he said. “You’ll be able to see and view the financial information in real time and get a real-time evaluation of these underlying protocols using blockchain technology.”

The other possible benefit of the Balanc3 platform is the so-called triple-entry accounting (from where Balanc3 took its name). Transactions are not only logged to show the money received in one account and deducted in another, but are also recorded on a cryptographically protected ledger.

Originally conceived in 2005 paper by Ian Grigg, triple-entry accounting gained more momentum with the advent of blockchain technology, which creates a cryptographically secure public account.

Self-regulating industry?

The hype and subsequent growth of the ICO market has not only caught the attention of startups and investors, though. It’s also piqued the interest of regulators.

After years of waiting to provide formal guidance, the U.S. Securities and Exchange Commission (SEC) recently issued a trove of documents and most recently created an entire unit dedicated to policing token-based investment vehicles. Other jurisdictions around the world are also starting to weigh in, some extending an accommodating hand and others taking a harsh stance.

Anderson believes the Balanc3 platform, among other things, shows the industry is interested in proactively taking steps to hold companies accountable and keep investors safe, which could influence how future regulatory hammers come down.

“Regulation may still be needed, it’s a little unknown right now,” Anderson said, concluding:

“But what you’re starting to see is the first step to the industry saying, ‘we’re going to take charge, we’re going to hold ourselves to a higher degree of standards and accountability’.”

Live demo image via Michael Del Castillo for CoinDesk

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Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.