Tether (USDT), the much-publicized "stablecoin," has been in the limelight in recent months for all the wrong reasons, leading to questions about its viability and authenticity as a proper stablecoin. The most significant one being: Is tether backed by sufficient reserve fiat money as claimed? A new report produced by a cryptocurrency network company tries to address these questions, though with some caveats.

Questions Over Tether's Reserves

Cryptocurrencies have been accused of having high volatility in their valuations, which has limited their adoption as a mainstream method of payment. To circumvent the problem, a new breed of cryptocurrencies called stablecoins came into existence. They are supposed to work by issuing only a limited number of crypto tokens depending on the reserve money or collateral they maintain in real world fiat currency. For instance, tether is pegged 1-to-1 to the U.S. dollar and the company is supposed to issue tether cryptocoins only to the extent of real U.S. dollars it maintains with the custodian. (See also: Is Stablecoin the Answer to All Cryptocurrency Problems?).

The reserves are expected to be regularly reviewed by a designated audit firm to ensure the necessary backing for the cryptocurrency. But Tether announced in January that its relationship with audit firm Friedman LLP was terminated, raising questions about the company’s finances. Tether also has affiliation with Bitfinex, a leading cryptocurrency exchange. Following the declaration of the audit firm’s pullout, both Tether and Bitfinex were issued subpoenas by regulators. (See also:  Tether and Bitfinex Crypto Companies Subpoenaed by US Regulators.)

New reports emerged recently about alleged wrongdoings by Tether and Bitfinex, which led to price manipulation in the popular cryptocurrency bitcoin. (See also:  Bitcoin's 2017 Rise Was Market Manipulation By Tether: Study.)

Tether’s Recent Reserve Report

The company released a three-page memorandum Wednesday to quell fears around its reserves. The report claims that the company has $2.55 billion of U.S. dollar reserves, held at two separate institutions, to cover $2.54 billion USDT in circulation, reports CoinDesk. Essentially, the company has more fiat currency backing than the cryptocoins in circulation. However, a few questions linger as the report does not count as the kind of “real” audit that the industry, investors and users were looking for.

First, the report is not prepared by an accounting or audit firm but by the law firm Freeh Sporkin & Sullivan, LLP (FSS). Second, the report only describes the available funds at a specific point in time: June 1, 2018. There is no mention about the level of necessary collateral available with the company a few days prior or later, which does not cohere to standard auditing methods. A proper audit requires that USDT has secure and necessary collateral over time.

Due to a lack of necessary clarity about the applicable accounting or auditing standards for the cryptocurrency world, Tether appears to have gone for the next best thing possible in given situation. Stu Hoegner, Tether's general counsel, told CoinDesk, "The bottom line is that an audit cannot be obtained," claiming that this problem is not unique to his company but one faced by the entire cryptocurrency industry.

For now, Tether seems to have attempted to fill the void partially with a standard report, though questions will continue about the auditing methods for it and for the entire cryptocurrency world.