What can we observe from USDT’s five-year audit report?

On June 30, 2022, Tether, the leading issuer of stablecoin USDT, released a new third-party attestation report. Compared with the last attestation report on March 31, Tether still holds a large amount of U.S. Treasuries (T-Bill). Taking the liquidity of Coinmarketcap on June 30 as the denominator, the holdings of treasury bonds account for 43% of liquidity*. The attestation report on March 31 calculated that the holdings of treasury bonds were 48%. In addition, the attestation report on June 30 added reverse repo, which accounted for 45% of liquidity. There was no reverse repo in the attestation report on March 31. In addition, Tether's cash holdings increased by approximately US$1.3 billion, and its commercial paper holdings were reduced by more than half.

These data are not much different from the previous review reports. What do the contents of these review reports represent? What industry trends does each column reveal?

Tether Censorship Report Analysis

The audit report is a document that some stablecoins invite third-party accounting institutions to review in order to prove the value of the currency. This kind of document is similar to the third-party audit report and the three major financial statements issued by ordinary companies hiring accounting firms. The difference is that the company's reports basically have unified standards and requirements in various countries, and companies generally hire reputable and well-known accountants if their financial resources allow. Large listed companies generally only hire the Big Four accounting firms and well-known accounting firms. At the same time, ordinary company reports need to list many items, and audit reports, financial statements, etc. are often dozens of pages long. At the same time, companies must publish reports of different lengths regularly and regularly according to compliance requirements.

The length, time interval and content of the review reports of stablecoins are inconsistent according to different projects and review companies/accountants, and there is no standard. The content listed in the review report is also determined by the stablecoin issuing or management company and the accountant. The main purpose of the review report of stablecoins is to prove that the stablecoin project is indeed reliable, especially for fiat currencies or stablecoins linked to commodities. The generation of each coin needs to correspond to an equivalent asset on the books. If the company cannot prove that there are actual assets behind each of these stablecoins, investors or stablecoin users can completely question the stablecoin, because stablecoin users buy/produce stablecoins, but there is no asset to guarantee it. A stablecoin company can completely collect money and leave. This is not uncommon in the stablecoin market. Even the central stablecoins of large stablecoins (the top 20 stablecoins) that regularly publish review reports have also experienced depegging or the inability of book assets to redeem stablecoins.

Since the global regulatory authorities do not actually have strict regulatory provisions for stablecoins, which is different from ordinary companies (company audits must strictly follow regulatory standards), there is no standard for audit reports. When to publish the audit report depends on the company's mood. How much water these audit reports have, whether the audit company is reliable, and what content is published in the audit report are actually a matter of opinion and vary greatly.

As the world's first stablecoin, Tether is used by hundreds of millions of users as the base currency for trading other digital currencies. Its traffic and market value far exceed other stablecoins. Tether is also notoriously opaque in its review. Tether released its first review report in 2017, and has released some reports from time to time since then. In the five years since 2017, Tether has released a total of 10 review reports. Among them, there was one report in 2017, only two reports in 2018, and no reports in 2019 and 2020. The content of the report is also very opaque. The review reports before the report on June 30, 2021 did not list the specific details of Tether's book dollars in detail. The review report only listed the "dollar value". Such reports are not uncommon in the stablecoin market. Its significance can only prove that there are indeed so many US dollars on the books of stablecoin companies, but users do not know what form the US dollars exist in. If the form of the US dollars does not know, it may not be very meaningful to know that there are a certain number of US dollars on the books. Starting from June 30, 2021, Tether's audit report began to show details, listing how the US dollars on Tether's account exist. Subsequent audit reports basically follow the framework of that time and list the main contents.

Before March 31, 2021, Tether's audit report did not explain the form of US dollars in detail. After that, it began to disclose in detail. On June 30, 2022, many reverse repurchases were added, which is also a form of becoming a creditor of the US central bank. Note that on September 28, 2017, Tether still had very few euro assets on its books. For the convenience of calculation, this article converted them into US dollars at the exchange rate of that day.

Disclosures from Tether’s recent audit report.

The review report on June 30, 2021 shows that the US dollars on Tether's account exist in the form of cash, commercial paper, reverse repurchase, US Treasury bonds, secured loans, corporate bonds, and others (including other digital currencies). Among them, cash has the best liquidity, commercial paper is also a liquid and safe asset, and US Treasury bonds are a safe and stable US dollar investment. Most of the US dollars on Tether's books are US dollar investments with good liquidity and little or no risk. Corporate bonds and other forms of US dollar investments do not account for the main asset allocation of Tether's US dollar assets. Such asset allocation can ensure the safety of Tether's book dollars. When Tether is attacked by a run, there is enough stable, safe, and liquid US dollar support on the books.

In the subsequent review report, Tether added some other small-scale items on its books, such as money market funds, other national government bonds, etc. Tether has also gradually reduced the proportion of cash, and has greatly increased its holdings of U.S. Treasury bonds since the review report on December 31, 2021. Previously, U.S. Treasury bonds accounted for about 25%, and then U.S. Treasury bonds accounted for about 45%.

At the same time, as Tether's market value expands, the circulation and asset value of these currencies are also increasing. However, the USDT circulation on June 30 this year was about 66 billion, which was nearly 15 billion less than the approximately 81.9 billion on March 31.

In addition, Tether's accounting firm is also quite interesting. The qualifications of the accounting firm can be said to have a great impact on users' judgment of stablecoin projects. Although many stablecoins have audits, the audit company is likely to be an unknown small accounting firm in the Cayman Islands or the Bahamas, with perhaps only 10 employees. Therefore, although some stablecoins have audits, the audit qualifications are extremely irregular, and the audit report may not necessarily show content that can reassure users. If readers want to invest in a company, of course they will trust the audit report of the Big Four more than the report of an unknown accountant in a county.

Tether's audit report on June 30, 2022, came from BDO, the world's fifth largest accounting firm headquartered in Brussels; Tether uses BDO in Italy. Tether's previous audit came from an audit company in the Cayman Islands called MHA Cayman, formerly known as Moore Cayman. Its parent company is MHA MacIntyre Hudson, a leading registered accounting firm in the UK, which was also investigated by the UK Financial Conduct Authority in January 2022.

In addition to Tether’s USDT stablecoin, Tether is also the issuer of Tether Gold (XAUT), a gold stablecoin. The audit of XAUT and the audit of USDT are in the same document, listing the value of the equivalent amount of gold on Tether’s books.

*Note: In order to maintain a 1:1 relationship with fiat currency, fiat stablecoins generally hold more fiat assets than actual stablecoin assets, that is, the relationship between fiat assets and stablecoin assets is greater than 100%, which is a case of overcollateralization.

Audit reports of other major centralized currencies

USDC, the second largest stable currency, has issued an audit report every month since October 2018. Its audit report is audited by Grant Thorton, the sixth largest accounting firm in the United States. USDC's audit report lists the equivalent of the US dollar value of USDC on the date of the audit report and publishes some details. According to USDC's audit report on July 31, 2022, the stable currency's US dollar assets are mainly composed of US Treasury bonds, with a small amount of cash. Since the issuer of USDC is the US technology company Circle, the compliance of Circle will also affect USDC. Overall, USDC has made great efforts in compliance.

Disclosure of USDC’s recent audit report.

Stablecoin BUSD has also issued audit reports every month since September 2019, and its audit reports are audited by Withum, an American accounting firm. Unlike USDC and USTDT, BUSD's audit report only lists the equivalent of the US dollar value that BUSD has on its books on the date of the audit report, without any details. The audit report shows that BUSD's US dollar assets exist in the form of "US government guaranteed instruments." Although the specific asset instruments are not shown. However, since the issuer of BUSD is Paxos, a registered company in the United States, and Paxos's compliance is also good among many stablecoins, it can be speculated that the US dollars on BUSD's books are in the form of US dollars mentioned above under normal circumstances. In addition, Paxos is also the issuer of USDP and commodity stablecoin Pax Gold (PAXG). The audit of USDP is also done by Withum, which is consistent with the audit form of BUSD.

Disclosure of BUSD’s recent audit report.

TUSD released audit reports from March 31, 2018 to March 31, 2020. The audit reports were audited by Cohen & Company, an American accounting firm. TUSD's audit report also only lists the equivalent of the USD value of BUSD on the date of the audit report, without further details. The footnote indicates that the USD on the books is legally stored in storage institutions in the United States and/or Hong Kong. After March 2020, TUSD changed its audit mode and became a real-time audit, which is provided by the American accounting firm Armanino LLP on its official website. The real-time audit content can be seen in two bar charts, the left side is the circulation and issuance of TUSD, and the right side is the amount of assets in TUSD's USD account, which is displayed in USD. However, the real-time chart is the same. You can only see how many compliant USD there are, but you can't see in what specific mode these USD exist.

Disclosure of the TUSD real-time audit report (as of press time, August 29, 2022). The blue on the left is the TUSD supply market value, and the black on the right is the TUSD book value. TUSD did not disclose a detailed breakdown of its USD assets. You can only see how many USD assets there are in real time.

The Present and Future of Stablecoin Asset Review

After the collapse of UST, global regulation of stablecoins has increased dramatically. The EU's stablecoin regulatory bill MiCA clearly states that a certain amount of reserves must be kept on the books of fiat stablecoins, and the operating model is similar to that of banks. From now on, the requirements for issuing stablecoins in Europe will be very high, and reserves are the first major hurdle for project issuance.

The world's major stablecoins can be divided into fiat stablecoins, algorithmic stablecoins, digital currency stablecoins, and commodity (gold) stablecoins. In fact, the top stablecoins are fiat stablecoins, and the main fiat currency is the US dollar. Since the US dollar stablecoin must maintain a 1:1 relationship with the US dollar, the stablecoin issuer/operator must ensure that there are high-quality US dollar assets with sufficient liquidity and low risk on the books. US compliant currencies issued by US compliant companies have natural advantages in compliance and US dollar asset selection. For example, Paxos, the parent company of BUSD, has always been proud of publishing "transparent" monthly audits.

Tether, whose parent company is a Hong Kong company, is far behind the stablecoins in terms of compliance and audit transparency. However, as Tether maintains its leading position and expands, users and regulators are also raising their expectations. Tether's audits have significantly improved the quality and frequency of audits year by year, and have made detailed breakdowns of its assets. These are all responsibilities that Tether needs to bear as the world's number one stablecoin.

Although many of the top 30 stablecoins in the stablecoin market do not have regular audit reports or sufficiently qualified accounting firms, many small stablecoins still have users. Users use these stablecoins based on trust from elsewhere, and the frequency and possibility of other stablecoins depegging are also increasing year by year, so whether users become "leeks" depends on their own judgment. However, it is foreseeable that the regulatory authorities will focus on the top stablecoins because these stablecoins represent most of the traffic used in the stablecoin market. For the top stablecoins, audit standards that are timely, qualitative, and in line with audit standards are crucial.