Before participating in cryptocurrency investments, you need to understand the truth about stablecoin reserve audits

At the beginning of this year, according to multiple media reports, the renowned accounting firm Moore Hong Kong ("MooreHK") officially began providing daily verification services for TUSD and released daily reserve proof reports. This marks the third time TUSD has changed its reserve auditing company since its issuance. Why is TUSD so insistent on verification services and reserve proof reports?

Before answering this question, let us turn our attention to the entire stablecoin market. Although the vast majority of stablecoins currently in circulation are still concentrated in dollar-collateralized stablecoins, on the other hand, the market landscape for dollar stablecoins is still undergoing drastic changes—BUSD has faded out, but it was previously embroiled in a scandal involving a massive reserve shortfall. USDC also faced a de-pegging issue in 2023 due to problems with its reserve bank, and the issues surrounding USDT have been a long-standing topic, with external doubts about its reserves never ceasing.

As a result, investors are becoming increasingly cautious in their choice of stablecoins, and the verification of reserves has become a key factor for stablecoin issuers in competing for market share. A professional reserve proof report can not only indicate whether a stablecoin is fully collateralized and detail the components of the collateral, but we can also observe some clues from the frequency of its updates.

Content and Status of Reserve Proof Reports

The first thing that most users do when entering the crypto world is to exchange fiat currency for stablecoins, and then further exchange them for other tokens. In a sense, stablecoins serve as a bridge connecting the real world and the crypto world, but is this bridge really sturdy?

The most well-known example is USDT. In 2019, the New York Attorney General's office accused USDT issuer Tether of misappropriating approximately $850 million of its reserves, and after the news broke, USDT briefly de-pegged to around $0.95. Coincidentally, according to an analysis by Jonathan Wright, co-founder of blockchain analytics firm ChainArgos, and Bloomberg, BUSD frequently faced collateral shortfall issues between 2020 and 2021, with a reserve gap exceeding $1 billion.

After experiencing a series of market fluctuations, almost everyone has realized the importance of transparency in stablecoin reserves. Stablecoin issuers can only gain user trust if they possess qualified reserve proof reports. As proof of 100% reserves for stablecoins, reserve proof reports are not only the strongest shield to weather bear markets but also the foundation for soaring in bull markets.

But what constitutes a qualified reserve proof report?

Unlike the detailed auditing standards written into laws for listed companies in various countries, the issuance of verification reports by stablecoin issuers is more of a spontaneous act to prove themselves to the market, with no unified standards. The content of different stablecoin reserve proof reports—such as the auditing company, verification content, and verification intervals—varies and is left to the stablecoin issuers or auditing firms to negotiate.

There are significant differences in reserve proof reports among different stablecoins. For instance, the qualifications of the accounting firm can be said to be one of the most influential criteria for users' judgments about stablecoin projects. Investors naturally prefer reserve proof reports from large firms when holding stablecoins, while reports from firms with fewer than ten people in the Cayman Islands or some unknown small town are clearly less authoritative. Additionally, regarding auditing frequency, we all know that quarterly audits span nearly a hundred days, so a higher frequency is evidently better. Although the saying "one day in the crypto world is like a year in the real world" is a self-deprecating remark by investors, it also highlights the rapidly changing landscape of the crypto world, making it difficult to guarantee the reliability of reserves in the next quarter based solely on the previous quarter's reserve proof report.

Analysis of Reserve Reports from Leading Stablecoins

Having understood the value of reserve reports, let us turn our attention back to the collaboration between TUSD and MooreHK.

Founded in 1975, MooreHK provides comprehensive services including auditing, verification, accounting, business outsourcing, tax, and other consulting services, and is an important member of Moore Global. Even from the perspective of the professionalism of the auditing firm and the frequency of audits, it is not difficult to see that MooreHK's daily verification services and daily reserve proof reports are the most advanced in the industry, which will undoubtedly further enhance TUSD's authority and credibility in verification, aligning with TUSD's ongoing efforts to enhance security and transparency.

According to the verification report released by MooreHK, TUSD's reserves are held in a Hong Kong custodian institution, a Swiss custodian institution, and a Bahamian custodian institution, and Techteryx (the issuer of TUSD, as noted by the author) has no right to access any funds at any time. This is a significant highlight for TUSD compared to other similar projects, as this aspect is not reflected in the audit reports of other stablecoins.

Furthermore, the verification report provided by MooreHK indicates that the dollar-denominated collateral in TUSD's reserve account does not carry risks such as liens, debts, or guarantees. In other words, these collaterals are relatively safe and reliable.

TUSD currently ranks third in issuance among dollar stablecoins, with USDT and USDC in the first and second positions, respectively. Next, we will analyze the reserve reports of USDT and USDC for comparison.

USDC currently ranks second in issuance and has released monthly audit reports since October 2018. Its verification reports were previously completed by Grant Thornton LLP and have been issued by Deloitte since the beginning of 2023. Currently, USDC's verification reports list the reserve status of USDC in the middle and at the end of each month.

As the leading stablecoin, USDT has been notoriously opaque in its auditing. Since the first verification report was issued in 2017, USDT has released only a handful of verification reports over more than three years. Specifically, it published one report in 2017, two in 2018, and none in 2019 and 2020. Moreover, the content of previous USDT reports was also very non-transparent, only stating that its reserves had dollar value, while the external world had no idea what assets constituted those reserves.

However, after facing market skepticism in recent years, USDT has gradually adopted the "good habit" of regularly publishing verification reports since 2021, and its verification reports have begun to include more details. The collaboration with the accounting firm BDO Italia has been a key step for USDT to get back on track, although it is planning to transition to monthly reports, USDT is still undergoing quarterly audits. Currently, USDT's reserves are quite complex, including cash equivalents such as U.S. Treasury bonds, precious metals, Bitcoin, and even some secured loans.

By comparing the latest audit reports of TUSD, USDT, and USDC, it is not difficult to see that the top three stablecoins view verification services and reserve proof reports as the most important aspects of their development process, and TUSD, with its industry-leading daily verification services and daily reserve proof reports, has already gained a first-mover advantage in this regard.

Conclusion

In summary, with the end of the Federal Reserve's interest rate hike expectations, the overall outlook for the crypto market in 2024 is bright and promising, and dollar stablecoins are likely to seize a wave of development opportunities.

However, the competition among stablecoins will not ease due to optimistic market expectations. The safety and transparency of dollar stablecoins will become the top priority for users. In an increasingly cautious market environment regarding investors' choices of stablecoins, the collaboration between stablecoin TUSD and MooreHK, with the latter providing professional reserve proof reports for TUSD, may become a key factor for TUSD's competitive edge in the future. However, it is foreseeable that for stablecoins, timely, quality, and compliant auditing standards are crucial. Stablecoins must focus on the safety and transparency of their reserves to further gain market trust, which is the way to break the deadlock.