Attestation: proving the asset is there, and pledged once

Graduate · enrolled learners

This lesson opens with The salad-oil swindle, 1963.

What happened

A trader named Anthony De Angelis ran a company that claimed to hold enormous quantities of vegetable oil in storage tanks in New Jersey, and it used warehouse receipts for that oil as collateral to borrow from dozens of banks and brokers, more than 175 million dollars. Inspectors verified the oil by measuring the tanks, and they found oil, so the receipts were attested as backed. But the tanks were mostly filled with water, with a thin layer of oil floating on top, because oil floats, and the tanks were secretly connected by pipes so that the small amount of real oil could be moved to whichever tank was about to be inspected. The attestation checked appearance, is there oil at the top when we dip the tank, not substance, is the tank actually full of oil, and appearance was exactly what the fraud produced. When it unravelled in 1963, the oil was not there, the receipts backed almost nothing, and the losses helped bankrupt brokers and shook a major financial firm that had guaranteed some of the receipts. The attestation existed and certified an asset that was mostly water.

The decision point

An attestation is a verification that an asset is there, but it certifies only what it actually checks, and it is only as good as the rigor of that check. A superficial attestation, one that confirms appearance rather than substance, can certify an asset that is not really there, because it verifies the thing the fraud is designed to produce and not the thing that matters. The salad-oil swindle is the case: inspectors who dipped tanks and found oil on the surface attested to oil that was mostly water, because the check tested for the appearance of oil, which floating oil and connected tanks trivially supplied. For a tokenized real-world asset, attestation is what makes the receipt-to-asset link verifiable to holders, but only if it actually verifies what matters: that the asset genuinely exists, in the claimed quantity, and is pledged to this token and no other, rather than confirming a surface that a determined party can fake. So the decision when structuring or relying on a tokenized asset is to demand attestation designed to defeat the fraud it is meant to catch, verifying existence, quantity, and sole pledge with rigor, independence and unpredictability, because an attestation that checks appearance is worse than none, since it lends false confidence to an asset that may be, like De Angelis's tanks, mostly water.

Recorded loss

$175,000,000

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