Open letter to Tether: 6 easy steps to build trust

We applaud Tether’s intention to create a stablecoin — we feel a successful stablecoin is an important initiative to assist with the next phase of development of the crypto-ecosystem.

However, there are a number of concerning reports relating to Tether, including whether or not it actually holds the USD required to support the value of USDT. Some of these reports raise concerns over potential fraud, others simply request increased transparency.

Rather than criticise Tether, we’ve set out 6 actions that Tether (and Bitfinex, it’s operator) can do to provide better governance and oversight over Tether. We feel this is imperative given the scale of Tether ($800M+ market cap) and the high profile role of Bitfinex (a leading exchange).

There are many critical observers of blockchain technologies and cryptocurrencies, and it is important for senior members of the community to maintain high levels of integrity, to avoid scams and scandals, and to assist with increasing adoption and growing the number of users.

The Action Plan

When designing our own stablecoin — Arc Reserve Currency — we applied experiences gained over many years in asset management; being a trusted custodian of other people’s hard earned money and savings. Some of the governance features of Arc are included below in our suggestions for improvements for Tether.

Action 1: Name the underlying banks

Tether lost its relationship with Wells Far go a while ago, and has not publicly named the banks which hold the USD reserves behind USDT.

Holders of USDT are taking credit risk on these unknown banks. As the balances held by Tether are well above any central bank guarantee (e.g. FSCS), the holders of USDT are effectively providing an unsecured loan to these banks. To understand the value of USDT, the credit risk needs to be known and the banks should be disclosed.

Difficulty: Easy

Cost: zero

Time: one minute

Action 2: Disclose balances held in each bank account

Tether does not maintain a publicly viewable display of the balances in each bank account. At the moment, there is no way of viewing the total balance held in USD that is required to underpin the value of USDT.

Difficulty: Easy (or Medium if through an API)

Cost: zero (or negligible)

Time: 5mins (or 1 day if API)

Action 3: Conduct regular independent audits

Tether has conducted one partial audit, which has not been updated since.

An audit is helpful to verify the balances (when disclosed), but should go further to ensure that those balances aren’t held for any other purpose — for example, pledged as security for a second purpose (e.g. double spend). It would be beneficial to publicly disclose the terms of engagement with the auditor.

Difficulty: Easy to Medium

Cost: USD $25k–75k per audit (well within the financial reach of Bitfinex).

Time: 1–2 weeks per audit.

Action 4: Appoint a third-party supplier to report balances and Tether amounts

Appoint an independent technology or fiduciary services provider to maintain and publicly disclose balances.

Difficulty: Easy.

Cost: less than $100k annually.

Time: 2–3 days each year.

Action 5: Update Tether minting code to include Proof-of-funds and Proof-of-reserves

To issue Arc Reserve Currency coins a number of tests must be met, which includes:

— Proof-of-funds: to confirm that the subscriber has paid funds for the newly issued coins

— Proof-of-reserves: to confirm that the coins are issued at the correct price (e.g. $1 per USDT).

By including these tests in the code for Tether, coinholders could trust that all coins are being issued at full and fair value, and the requisite funds are being deposited in an appropriate bank.

Difficulty: Easy to Medium

Cost: $5k–10k

Time: 2 days (including testing)

Action 6: Create a legal relationship and rights for the coinholders

Creating a Subscription Agreement (or similar) which sets out the rights of coin-holders will provide holders of USDT with confidence that they can reverse their transaction in the future — sell USDT and receive USD in return.

There may need to be some practical restrictions, such as completing regulatory checks on the recipient of USD prior to completing the transaction, and setting repurchase thresholds at a de-minimus amount, but these are solvable and shouldn’t be used as reasons for not creating a legal relationship.

Difficult: Easy to Medium

Cost: $50k–100k

Time: 2–4 weeks.

Conclusion

This note is intended to serve as an invitation for Tether to adopt better governance and transparency. Not because it *has* to; but because it *should* do.

Particularly if it wants to be considered an appropriate and valid tool for participants in the crypto-ecosystem.

Until then, Tether will likely continue attracting suspicious reports and negative sentiment.

In the context of the resources of Bitfinex (and its parent iFinex) none of the suggested steps are prohibitive in terms of complexity, cost, or time.

We hope that Tether steps forward and adopts these steps to strengthen its approach to operating a stablecoin, and helps to negate some of the negative sentiment surrounding USDT.

Disclosures

I am a co-founder / collaborater of the Arc Reserve Currency stablecoin.

I do not hold any USDT, or any short positions against USDT.