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 Wednesday.

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.

FSS Account Snapshot Statement by CoinDesk on Scribd

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