How does Tether’s transparency work?

Tether (USDT) is one of the most widely used stablecoins in the cryptocurrency market, known for its 1:1 peg to the U.S. dollar. However, concerns about its transparency have been a topic of discussion in the crypto community for years. Tether’s transparency mechanisms aim to assure users that each USDT token is backed by real-world reserves. Below, we explore how Tether's transparency works, the tools it uses, and the controversies surrounding it.

1. Reserve Backing and Public Disclosures

Tether’s transparency is built around its claim that every USDT in circulation is fully backed by real-world assets. Initially, the company stated that each USDT was backed solely by U.S. dollars. Over time, this assertion evolved to include a broader range of financial instruments. These assets typically include:

• Cash & Bank Deposits: Physical U.S. dollars or equivalents held in bank accounts.
• Commercial Paper: Short-term debt from corporations.
• Treasury Bills: U.S. government-issued debt securities.
• Corporate Bonds: Debt issued by companies.
• Other Digital Tokens: Holdings in other cryptocurrencies.

To ensure transparency, Tether regularly publishes reports that detail the composition of its reserve assets.

2. Transparency Reports and Attestation

Tether provides public access to its Reserve Composition Report, which outlines the percentage of different asset classes that back its tokens. Unlike full audits, these reports are "attestations" performed by third-party accounting firms. An attestation is a confirmation that the company's claims (about reserve backing) are accurate at a specific point in time.

Key highlights of these reports include:

• Asset Allocation: A breakdown of reserve holdings by asset type (e.g., cash, bonds, commercial paper, etc.).
• Update Frequency: Tether publishes reports on a quarterly basis, though many critics have called for more frequent updates.
• Third-Party Attestations: Tether employs accounting firms like BDO to conduct independent reviews, but it has faced criticism for not providing full audits.

Example of an asset composition table from Tether’s report:

Note: The actual composition may differ based on Tether's most recent reports.

3. On-Chain Transparency

Tether uses blockchain technology to maintain transparency in the issuance and circulation of its tokens. Anyone can track the number of USDT tokens in circulation on multiple blockchains, including:

• Ethereum (ERC-20)
• Tron (TRC-20)
• Solana
• Algorand
• OMNI

You can use blockchain explorers (like Etherscan or) to verify the number of USDT tokens in existence and monitor Tether's token transfers in real time. This transparency allows users to track the flow of tokens between wallets, exchanges, and platforms.

4. Issuance and Redemption Transparency

Tether aims to maintain a 1:1 peg with the U.S. dollar. Users can redeem their USDT for USD directly via Tether's platform (though this is typically limited to large, institutional clients). Every time Tether issues new USDT, it reflects an increase in reserves, and when USDT is burned, the backing reserves are reduced accordingly.

To make this process transparent:

• Minting & Burning: Tether mints new tokens when large purchases are made and "burns" (destroys) tokens when redemptions occur.
• On-Chain Verification: The issuance and burning of tokens can be seen on public blockchain ledgers, and you can track Tether's treasury wallet movements.

5. Third-Party Verification

To build trust, Tether works with external parties for verification. Unlike a full audit (which examines financial records and compliance over a period), Tether relies on attestation reports, which only review its reserves at a single point in time. The difference is critical:

• Audit: Comprehensive review, typically spanning months or quarters.
• Attestation: Snapshot review of financials at one moment in time.

While Tether has faced criticism for not undergoing a full audit, it claims that attestation reports by reputable firms (like BDO) provide sufficient assurance of its transparency.

6. Controversies and Criticism

Tether has faced multiple controversies related to its transparency:

• Initial Lack of Audits: Critics argue that Tether’s refusal to undergo a full audit raises doubts about its reserves.
• Legal Issues: Tether settled a lawsuit with the New York Attorney General (NYAG) in 2021, agreeing to pay $18.5 million for misrepresenting its reserve holdings.
• Reserve Composition Shift: When Tether revealed that only a small percentage of its reserves were in cash, critics questioned its ability to handle large-scale redemptions.

Despite these controversies, Tether continues to be one of the most traded and utilized stablecoins globally.

Conclusion

Tether’s transparency is based on reserve disclosures, third-party attestations, and blockchain verifiability. By providing reports on the composition of its reserve assets and enabling on-chain tracking of USDT tokens, Tether aims to prove that it has sufficient backing for every token issued. While it has faced criticism for relying on attestations instead of full audits, its quarterly reserve reports and use of independent verifiers like BDO have provided some level of assurance to the crypto community. Users interested in Tether's stability and solvency can monitor these attestations and on-chain data for real-time updates.