Casey Wagner

Circle, the company behind the USDC stablecoin, released its “state of the USDC economy” report, in which it emphasized the importance of dollar-backed cryptos and attempted to ease worries about the state of its reserves. 



“Our history of pioneering transparency underscores our commitment to providing USDC holders and the general public with open, timely reporting on how we minimize risk and maintain liquidity in the USDC reserve,” Circle said in the <a href="https://6778953.fs1.hubspotusercontent-na1.net/hubfs/6778953/PDFs/2301StateofUSDCEconomy_Web.pdf" target="_blank" rel="noreferrer noopener">report</a>, released Tuesday. 



Circle said it will now partner with Deloitte, Coinbase’s accounting firm of choice, for audits on its proof of reserves. A Binance spokesperson told Blockworks in December they were under the impression the “Big Four” accounting firms — known to be Deloitte, Ernst &amp; Young, KPMG and PricewaterhouseCoopers — were <a href="https://blockworks.co/news/crypto-auditors-call-it-quits">“currently unwilling”</a> to conduct a proof-of-reserves audit for a private crypto company. 



Circle, while currently privately held, was considering entry into the public market through a special purpose acquisition partnership (SPAC) with Concord before <a href="https://blockworks.co/news/circle-kills-spac-plans">abandoning its plans</a> last month in the wake of the FTX collapse. 



“We are disappointed the proposed transaction timed out, however, becoming a public company remains part of Circle’s core strategy to enhance trust and transparency, which has never been more important,” Circle CEO Jeremy Allaire said in a <a href="https://www.prnewswire.com/news-releases/circle-and-concord-acquisition-corp-mutually-agree-to-terminate-proposed-business-combination-301694560.html?tc=eml_cleartime" target="_blank" rel="noreferrer noopener">statement</a> at the time of the announcement.



Circle, who for years partnered with firm Grant Thornton for its audits, makes the switch as various accounting firms have exercised caution over audits of crypto companies.&nbsp;



Mazars Group and Armanino <a href="https://www.forbes.com/sites/emilymason/2022/12/15/ftx-accounting-firm-armanino-ends-crypto-audit-practice/?sh=54b386bd362f" target="_blank" rel="noreferrer noopener">reportedly</a> dropped <a href="https://blockworks.co/news/ftx-auditor-proof-of-reserves">their crypto clients</a> last month. Mazars, which handled proof-of-reserves audits for exchanges KuCoin, Binance and Crypto.com, elected to stop providing the services because of “concerns regarding the way these reports are understood by the public,” according to <a href="https://www.cnbc.com/2022/12/16/mazars-suspends-all-work-with-crypto-clients-including-binance-cryptocom.html" target="_blank" rel="noreferrer noopener">reports</a>. 



<h3>Regulating USDC Reserves</h3>



Circle’s report comes as the industry continues to wait for more regulatory guidance from Congress, which <a href="https://blockworks.co/news/stablecoin-regulation-congress-priority">will likely come to the stablecoin sector first</a>, experts said.&nbsp;



“The first Congressional focus point will no doubt be stablecoins,” Katherine Dowling, general counsel and CCO at Bitwise Asset Management, told Blockworks last week.&nbsp;



Stablecoin regulation, namely about reserve reporting and liquidity requirements, has been a long time coming, Dowling said, pointing to the <a href="https://blockworks.co/news/bipartisan-stablecoin-regulation-has-a-slim-chance-of-passing-this-year">bipartisan bill lawmakers failed to pass</a> last session. With much of the legwork already done, Dowling said stablecoin legislation has the potential to be an early win for Congressional members looking to solidify some sort of crypto policy.



“Regardless of where members of congress are on the crypto spectrum — pro or con — or on the learning curve, there is a general sense that something must be done here,” Dowling said.&nbsp;



Allaire agreed, noting in the report that Circle is prepared on a regulatory front and is watching developments closely.&nbsp;



“Policymakers globally are sharpening their focus, ushering in much-needed regulation for how trusted digital currencies can be supervised — in a consistent and harmonized manner — by banking and payments regulators,” Allaire wrote.



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Circle Taps Deloitte as New Auditor, Doubles Down on Proof of Reserves 

Ben Strack

As former popular proof-of-reserve audit firms Mazars Group and Armanino discard <a href="https://blockworks.co/news/ftx-auditor-proof-of-reserves" target="_blank" rel="noreferrer noopener">their crypto clients</a>, the industry is left wondering who might fill the gap in the space. According to Binance, none of the big firms are yet willing to step up. 



Mazars Group, which handled proof-of-reserves audits for exchanges KuCoin, Binance and Crypto.com, elected to stop providing the services because of “concerns regarding the way these reports are understood by the public,” according to <a href="https://www.cnbc.com/2022/12/16/mazars-suspends-all-work-with-crypto-clients-including-binance-cryptocom.html" target="_blank" rel="noreferrer noopener">reports</a>.&nbsp;



A Mazars spokesperson did not immediately return a request for comment.&nbsp;&nbsp;



The “Big Four” accounting firms — known to be Deloitte, Ernst &amp; Young, KPMG and PricewaterhouseCoopers — are “currently unwilling” to conduct a proof-of-reserves audit for a private crypto company, a Binance spokesperson told Blockworks.



Deloitte currently works with Coinbase, which went public via direct listing in 2021, for its auditing and accounting services. Ernst &amp; Young on Friday <a href="https://www.ey.com/en_gl/news/2022/12/ey-announces-alliance-with-taxbit-to-support-tax-reporting-requirements-for-digital-assets" target="_blank" rel="noreferrer noopener">revealed a partnership</a> with crypto tax and accounting technology provider TaxBit.



Spokespeople for the four companies did not immediately return requests for comment.&nbsp;



Mazars <a href="https://twitter.com/binance/status/1600468894191210496" target="_blank" rel="noreferrer noopener">published a report</a> on Binance’s proof of reserves last week as various exchanges sought to ease investor concerns following the crash of FTX. The report appears to have since been removed from the sites of Binance and Mazars. Read more: <a href="https://blockworks.co/news/what-are-proof-of-reserves-and-can-they-build-back-trust" target="_blank" rel="noreferrer noopener">What Is Proof of Reserves and Can It Build Back Trust?</a>



Binance also faced a “stress test” this week, a spokesperson noted, during which it fulfilled $6 billion of net withdrawals over a three-day span “without breaking stride.”



“That said, we embrace additional transparency and we are looking into how best to provide those details in the coming months,” the Binance spokesperson said.&nbsp;&nbsp;



The representative added that Binance would go forward with Merkle Tree proof of reserves efforts to show that its assets exist on the blockchain and are safely under the control of the exchange.



“The benefit of having the [proof of reserves] verified by an independent audit firm is that it can provide additional validation that exchange assets are equal to or greater than the exchange’s liabilities to its customers,” the Binance spokesperson told Blockworks. “We have reached out to multiple large firms…and we are still looking for a firm who will do so.”&nbsp;



<h3>Armanino says adios to proof-of-reserves</h3>



Armanino, the auditing firm for crypto companies such as FTX US and Kraken, is also <a href="https://blockworks.co/news/ftx-nexo-auditor-armanino-to-quit-crypto-after-8-years-report" target="_blank" rel="noreferrer noopener">set to exit</a> the crypto space, <a href="https://www.forbes.com/sites/emilymason/2022/12/15/ftx-accounting-firm-armanino-ends-crypto-audit-practice/?sh=54b386bd362f" target="_blank" rel="noreferrer noopener">Forbes reported</a> Thursday.&nbsp;



The company conducted a <a href="https://www.kraken.com/press/releases/kraken-launches-proof-of-reserves-audits-allowing-clients-to-verify-crypto-balances" target="_blank" rel="noreferrer noopener">proof-of-reserves audit</a> for Kraken in February, as well as <a href="https://blog.kraken.com/post/15002/kraken-proof-of-reserves-audit-expands-to-include-five-new-assets/" target="_blank" rel="noreferrer noopener">another</a> one for the crypto exchange in August — expanding its coverage beyond bitcoin and ether to include tether (USDT), USD Coin (USDC), ripple (XRP), cardano (ADA) and polkadot (DOT).



An Armanino spokesperson did not immediately return a request for comment.&nbsp;



Kraken has touted its efforts of proving reserves and liabilities, saying in a <a href="https://blog.kraken.com/post/16592/proof-of-reserves-or-proof-of-nothing-there-is-no-in-between/" target="_blank" rel="noreferrer noopener">Dec. 12 blog post</a> that certain transparency initiatives by other industry players have fallen short.



Thomas Perfumo, Kraken’s head of strategy, told Blockworks that the company planned to include additional assets in its future proof-of-reserves audits and publish such disclosures multiple times per year.



A representative did not immediately comment on how Kraken would proceed with such audits now that Armanino has reportedly halted its work in the sector.&nbsp;&nbsp;&nbsp;



Stablecoin issuers in the space are currently report working with traditional auditing firms.  Circle publishes its own monthly reserve report with attestations from Grant Thornton, the company <a href="https://www.circle.com/blog/new-levels-of-detail-in-the-monthly-usdc-attestation" target="_blank" rel="noreferrer noopener">said</a>. In August 2022, Tether hired Italian accounting firm BDO Italia to produce its monthly stablecoin reserve reports.



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As Crypto Auditors Call It Quits, What Will Take Their Place?

Sebastian Sinclair

<div id="highlights-block_630c89461bc02" class="highlights">
 <ul>
 <li>Tether’s CTO, Paolo Ardoino has pushed back the timeline for his company to undergo a full financial audit</li>
 <li>The stablecoin issuer recently said it would issue monthly attestations, more frequently than called for under a 2021 settlement with the NYAG</li>
 </ul>
 
</div>



Tether Holdings Limited continues to move the goal posts on a full audit of its reserves backing the industry’s largest stablecoin.



Chief technology officer Paolo Ardoino — the public face of the company on nearly all matters — said Friday a review of what exactly backs the stablecoin issuer’s coin (USDT) is still “likely months” away, according to a report by the <a href="https://www.wsj.com/articles/tether-says-audit-is-still-months-away-as-crypto-market-falters-11661568971" target="_blank" rel="noreferrer noopener">Wall Street Journal</a>.



Tether has repeatedly promised a full audit of its stablecoin reserves for over five years. A spokesperson for Ardoino did not immediately respond to a request for comment.&nbsp;



The company does release quarterly attestations, separate from a thorough audit, as required by <a href="https://cms.blockworks.co/tethers-settlement-with-the-nyag-a-positive-for-industry/" target="_blank" rel="noreferrer noopener">a 2021 legal settlement</a> with the New York Attorney General’s Office. Following the hiring of its new accounting firm, BDO Italia, earlier this month, Tether said it intends to release them on a <a href="https://tether.to/en/tether-announces-alignment-with-top-five-accounting-firm-and-confirms-attestations-will-now-be-completed-by-bdo-italia" target="_blank" rel="noreferrer noopener">monthly basis</a>, beginning early next year.



The world’s largest stablecoin by market capitalization ($67.6 billion) consists of various reserve holdings that back the coin’s one-to-one US dollar-pegged value. As of June 30, Tether and its subsidiaries had roughly $66.4 billion in consolidated assets to $66.2 billion in liabilities, with a roughly $200 million buffer, according to a <a href="https://assets.ctfassets.net/vyse88cgwfbl/2xJyKdUKicdRUWpC9buRWR/6fe2987698dbbf39b947af718d736ddb/Std_ISAE_3000R_Opinion_30-6-2022_RC134792022BD0303.pdf" target="_blank" rel="noreferrer noopener">report by BDO</a>.



Those include cash and equivalents, loans, corporate bonds and digital assets, among others. USDT’s reserves also include unsecured debt via commercial paper, making up more than 15%, according to its <a href="https://tether.to/en/transparency/#reports" target="_blank" rel="noreferrer noopener">website</a>.



BDO earlier this month <a href="https://tether.to/en/tether-releases-independent-auditor-report-from-top-5-accounting-firm-bdo-reinforcing-its-dedication-to-transparency-and-revealing-another-major-cut-to-commercial-paper-holdings" target="_blank" rel="noreferrer noopener">confirmed</a> the issuer had trimmed more than 58% of its commercial paper from the prior quarter, from $20 billion down to $8.5 billion. Tether <a href="https://cms.blockworks.co/the-historic-significance-of-tether-16b-bank-run/" target="_blank" rel="noreferrer noopener">intends to reduce</a> that figure to zero.



For some time, no one knew for certain what exactly of its reserves backed its stablecoin which repeatedly drew criticism from skeptics.



The issuer has come under repeated fire from industry participants, law enforcement agencies, government and legal professionals over the veracity of its claims.&nbsp;



Of the issuer’s $66.4 billion in assets, around $28.5 billion are in US treasurys with a further $6.8 billion in money market funds. That’s in addition to the $8.5 billion in commercial paper.&nbsp;



Roughly $5.4 billion are in cash and bank deposits, $397,000 in non US-treasury bills, $3.4 billion in corporate bonds, funds and precious metals, while $4.4 billion reside in unsecured loans.



More than $5.5 billion stem from the opaque “other investments” category, which, following an audit, would hope to reveal greater transparency there.



Last year, Tether was barred from operating in New York following an <a href="https://ag.ny.gov/press-release/2021/attorney-general-james-ends-virtual-currency-trading-platform-bitfinexs-illegal" target="_blank" rel="noreferrer noopener">$18.5 million</a> settlement with the NYAG over allegations it had been involved in an $850 million cover up with then shadow bank Crypto Capital in 2017.



The settlement, along with other requirements, obliges Tether to release the quarterly attestations which — unlike a more thorough audit — only guarantees the accuracy of its balance sheet, as tabulated by Tether itself, at the time of the accounting firm’s report.



Circle, which maintains the $52 billion market cap US Dollar Coin (USDC), <a href="https://www.centre.io/usdc-transparency" target="_blank" rel="noreferrer noopener">releases monthly attestations</a> of its reserves, approved by Grant Thornton LLP.



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Tether Pushes Back Timeline on Audit: Report

<div id="highlights-block_61294c8f20ede" class="highlights">
 <ul>
 <li>FTX&#8217;s trading model differs from other cryptocurrency exchanges in that it allows for trading of tokenized derivatives</li>
 <li>“It is something that we&#8217;ve been working on for a couple of months, and we are really excited about it,” said Brett Harrison, president of FTX.US</li>
 </ul>
 
</div>



Both FTX and FTX.US have completed requirements to pass the US Generally Accepted Accounting Principles (GAAP) audit, which checks for a set of accounting principles, standards, and procedures in accordance with the Financial Accounting Standards Board (FASB).&nbsp;



FTX CEO and founder Sam Bankman-Fried announced the news via Twitter Friday.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Excited to announce that <a href="https://twitter.com/ftx_us?ref_src=twsrc%5Etfw">@ftx_us</a> has officially passed its US GAAP audit! Both <a href="https://twitter.com/FTX_Official?ref_src=twsrc%5Etfw">@FTX_Official</a> and <a href="https://twitter.com/ftx_us?ref_src=twsrc%5Etfw">@ftx_us</a> have passed US GAAP audits and plan to continue getting audits going forward.&mdash; SBF (@SBF_FTX) <a href="https://twitter.com/SBF_FTX/status/1431087427154849795?ref_src=twsrc%5Etfw">August 27, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



While this is a first for FTX, Coinbase and Kraken have historically passed US GAAP standards. FTX&#8217;s trading model differs from other cryptocurrency exchanges in that it allows for trading of tokenized derivatives.



“It is something that we&#8217;ve been working on for a couple of months, and we are really excited about it,” said Brett Harrison, president of FTX.US. “While we might not be the first crypto exchange to do so, we are excited about demonstrating to the crypto world and also to regulators in general that we are serious about transparency.”&nbsp;



The GAAP comes as regulators around the world have moved to bring further oversight to the cryptocurrency industry. FTX does not see the possibility of greater regulation as a negative, Harrison said. 



“We have been in pretty constant contact with regulators, from a number of different agencies looking to form collaborative and cooperative relationships with them,” he said. “In general, FTX.US, especially is excited about, not just helping to shape the regulatory landscape for crypto, but also to get into other forms of regulated trading activity.”&nbsp;



<h3>Token classification </h3>



One of the biggest issues affecting all US exchanges, Harrison explained, is the question of whether or not specific tokens should be classified as securities. Exchanges operating in the US are typically regulated by The Financial Crimes Enforcement Network under the money services business sector. 



“If a token is a security, then you cannot offer an unregistered security for trading to an unaccredited investor,” said Harrison.&nbsp;



This is the central question in the ongoing Security and Exchange Commision vs Ripple lawsuit, Harrison pointed out.&nbsp;



“The main subject of the Ripple case right now is trying to determine whether Ripple is actually a security, and we&#8217;re watching that closely to see what effect that&#8217;s going to have on the industry,” he said.&nbsp;



FTX is also watching the SEC and Chairman Gary Gensler, who has said he <a href="https://cms.blockworks.co/sec-chair-gensler-prioritizes-crypto-platform-crackdown/" target="_blank" rel="noreferrer noopener">plans</a> on making cryptocurrency regulation a priority, for clarification about the classification of digital assets, Harrison said. 



“One thing that excited us coming out of the debates on the Senate floor is the appetite for education about crypto,” he said. “In our conversations with regulators, we are in general happy with and pleased with how much they know and are educating themselves on the industry and how much they want to work with us to put in fair and tough regulation, but also to allow for continued innovation in the space.”



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