USDT’s goal is to be the dollar, not beat it, says Tether CTO
Scrutiny on the stablecoin’s reserves has intensified since USDT’s latest depegging scare. Paolo Ardoino, CTO of Tether and Bitfinex, delves into the composition of USDT reserves, explaining how the firm ensures dollar redemptions, irrespective of secondary market prices.
The role of the stablecoin is to always ensure customers get a one-to-one redemption to the dollar, says Paolo Ardoino, chief technology officer of Tether, the firm stablecoin USDT, and its affiliate cryptocurrency exchange Bitfinex. Scrutiny on the world’s largest stablecoin has been increasing in the past month due to the latest USDT depegging scare.
In a Word on the Block interview with Forkast Editor-in-Chief Angie Lau, Ardoino breaks down the USDT reserves, how the firm’s investment in U.S. treasuries is generating profits and discusses why secondary market traders can trigger USDT depegging concerns.
- USDT reserves: Tether has recently bought Bitcoins, has an exposure to Bitcoin, and we publicly provided information around that. We took a stance where we are actually accruing and diversifying investments, with excess reserves. With everything else that is the part that is backing the reserves, we keep accruing more and more T-bills because the job of Tether is, of course, is to be able to provide the reassurance that we don’t have to beat the dollar. So we have to be the dollar. We have to provide back the dollars to the users.
- How panic spreads in crypto town: The crypto industry is like a small town. It’s a small Italian town where you spread these words and everyone panics… So you get a lot of sell pressure and you get a few traders that are mounting that pressure. But actually, there are few smart traders that are making money because they are buying cheap USDT from the market, 30 basis points is a lot of profit for market makers, and they are coming to the primary market and redeem them for the dollar
- CBDCs disrupting traditional banking: If CBDCs are successful, that could completely kill the banking layer in a country. The cryptocurrency industry always said that they were trying to revolutionize the bank and kill the bank. But imagine if instead it’s the central banks that are killing the banks. Because with the CBDC, the central bank could offer loans with the CBDC. The central bank could also make transaction fees.
- Global regulatory competition: Countries are understanding the potential in terms of wealth, employment and opportunities and advancement in research that this industry could bring … No one wants to be a pirate, but also you want regulations that are actually providing a good umbrella for the technology to grow rather than trying to shut down or limit the potential of this technology.
Angie Lau: Cryptocurrencies have been facing fear, uncertainty and doubt, and included in that are digital currencies. Its most recent target: Tether.
On June 15th, the world’s largest stablecoin USDT briefly lost its dollar peg, although the USDT has stabilized since, the incident once again raised concerns about the general stability of stablecoins in an uncertain market. Stablecoins are backed by fiat or highly liquid assets or in some cases smart contract algorithms.
But are all stablecoins created equal? And why is transparency of paramount importance in the crypto industry?
We’re going to dive into all of this in this edition of Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Forkast Editor-in-Chief Angie Lau.
Well, there is lots happening and who better to break it down for us than Paolo Ardoino, the chief technology officer or CTO of not one but two companies. We have Bitfinex, one of the world’s first crypto exchanges, and Tether the name behind the world’s first and largest stablecoin, USDT. An Italian developer and entrepreneur with a passion for coding and a keen eye for finance, Paolo has been shaping the tech and crypto landscape for years and we’ve been watching every step of the way from our days back in Hong Kong. Paolo, welcome to the show. It’s really good to see you again.
Paolo Ardoino: Thank you very much, Angie, for having me yet again. It’s always a pleasure.
Lau: It’s our pleasure indeed. I look back at the past few years of the industry and the peaks and the troughs, to be sure. One could definitely say that we are far from the peak in terms of market sentiment and the market pricing.
But talk about how Bitfinex and Tether have been able to really surf that over the past couple of years. Back in 2012, I remember there were five exchanges. Bitfinex was one of them. Now there are over 500 crypto exchanges and you joined Bitfinex back in 2014. You transitioned to become the CTO of both Tether and Bitfinex. Where are we now, in your view, in the cycle of adoption?
Ardoino: We are definitely in a much different space than in 2012 or 2014. The industry grew rapidly. The last few years have been quite bumpy, as you mentioned. As of today, as of the last ten days, what is happening is quite interesting. There are a few of the largest wealth managers in the world that are considering and are filing applications to launch Bitcoin ETFs. That means that something important has changed.
The trust of big institutional players have gone up in the last few months and few years despite what happened last year in 2022 with Terra-Luna, Blockfi, Celsius, and FTX, in the end.
This year started with issues on the banking side. We have seen Silicon Valley Bank failing, and we have seen Silvergate and Signature following the same path of Silicon Valley Bank. That showed that also in the traditional financial industry, there were issues as well.
The sum is telling us that on both sides there are still issues. Founders and the industries are trying to work together a little bit more. Again, we are seeing hedge funds trying to put their feet into the water of cryptocurrencies and cryptocurrency trading firms, including Bitfinex — Bitfinex Securities, are looking at providing more traditional financial services. So it means we are seeing the two industries almost coming together in a single bigger industry. That is, in the end, the things that make more sense. I don’t think crypto is here to completely destroy the banks. I don’t think we ever wanted that, but we want to bring some change.
Lau: I want to pick up on that point. At least from our perspective, we’ve always seen the TradFi industry merging into this innovation that we’re seeing in the digital finance space because of the underlying technology that is blockchain.
As USDT really grows, it’s going to have to really not only serve the retail and the consumer market, it’s obviously serving a lot of mid-sized and large cap firms right now internationally. But at some point when you get to the institutional level, what level of trust do you think that you’re able to really communicate to institutions? Do you think that you’re there yet? And the regulators are all circling, so do you think that you’ve got a ways to go or how are you addressing those transparency needs?
Ardoino: Tether, from 2021, made huge steps in improving transparency, not just for itself, [but] for the entire industry. We were the first stablecoin to provide the breakdown of reserves.
I don’t want to hide behind the finger — the first release showed that we had commercial papers that were criticized publicly. The FOIL (Freedom of Information Law) Act information that was sent to different journalists, it was revealed that, in fact, the commercial papers that we had in 2021 were extremely safe. They were rated for the vast majority, A1 and A2 from Standard & Poor’s. Nevertheless, Tether publicly took the stance of reducing these commercial papers to zero.
That happened basically by the first quarter of 2022. So it reduced by 90% — the exposure to commercial papers removing [and] moving everything of that value to U.S. Treasury bills. By October 2022, Tether didn’t have any single commercial paper. All those amounts were converted to U.S. Treasury bills. So now we are in 2023, and we are in a situation where 85% of our reserves are cash equivalent, of which the vast majority are U.S. Treasury Bills.
First of all, by direct ownership of U.S. Treasury bills, we have around US$56 billion, that is, I think, more than Australia and Mexico. Then if you sum the overnight reverse repos that are around US$9 billion, we go up and we are around US$65 billion. And if you add the money market funds that are also invested in U.S. Treasury bills, we are adding a few billion dollars more. The vast majority of our portfolio is in U.S. Treasury bills.
We have an allocation of gold that is also public, it is around 4% and we have few other allocations. On the transparency side, I’m speaking about all of this publicly and is part of the attestation and the quarterly attestation that is being provided and performed by BDO, a top five auditing firm in the world. So definitely things can always get better. So with Tether, we strive to always provide more information to respond to all the questions.
And I’m asked by regulators or from institutions how I can prove that Tether is in fact safe. Looking at our kind of competitors, you have the banks, they have to keep 8.5% in collateral in the bank. So on one side, you have a company that is overcollateralized in its portfolio and on the other side you have banks that are doing fractional reserves.
In 2022, Tether was subject to an attack from short sellers. They wanted to prove to the world that, in their opinion, Tether didn’t have all the money that it was seen to have. This short seller is trying to put redemption pressure on Tether — and that’s fine. We always like to have trial by fire because that is the best statement of our solidity. So in 48 hours, Tether was able to redeem US$7 billion. So that was 10% of our reserves. And in 20 days we processed around US$20 billion in redemptions. That was 25% of our reserves and we could have gone further. If you look at what happened with SVB or what happened in 2008 with Washington Mutual, they were not able to survive a 10% redemption pressure.
So it means that with Tether, we are doing something right. We are doing something that is going against the classic portfolio management of even the banking industry, which is extremely regulated, yet it fails to provide reassurance in certain situations. Also recently, it has failed to provide certainty and reassurance to its own customers.
Lau: Alright, Paolo. Hold on to that thought because when we come back from this short break I want to dig a little deeper into what exactly is inside the underlying securities. The basket that is the foundation behind the one-to-one peg to the US dollar. Word on the block continues. We’ll be right back.
You called the depeg a good stress test for the company, but still, that was a scary time during a time where the industry really wouldn’t want to invite that type of concern, especially as there’s just so much uncertainty overall from the marketplace on crypto and digital assets. How did it depeg and I note that it’s recovered since then, but what was that instance where it did depeg and how do you internally look at creating a position where stability is maintained in preventing that from happening again?
Ardoino: So this is a really good point and something that I like to elaborate on because I think there is a little bit of misconception when it comes to depegging events.
The price of USDT went 30 basis points, so 0.3% below the dollar on a few cryptocurrency exchanges. Our main competitor had a similar issue three months ago and their price went 13% below the dollar on the very same exchanges. So I said that was a good stress test for Tether for this reason. Tether is in charge of the primary markets. The primary markets are basically Tether.to, a platform where we process issuances and redemptions.
The role of the stablecoin is to always ensure that all the customers have a redemption that is always one-to-one to the dollar. So a customer comes to the primary market, they want to redeem dollars and they always get the dollar back. So that is what we have to do as a stablecoin. That is stability. So if we always maintain and we always honor every single redemption at US$1, then the market is stable.
So as a stablecoin, we cannot control the secondary markets. The secondary markets are all the cryptocurrency exchanges that are using USDT as their main liquidity source and as their dollar. But on these exchanges, you can find short sellers, you can find people that are speculating, you can find every type of person — and the crypto industry is still young, it’s still small.
So when there is FUD, when there is uncertainty in the market, you always find people that are trying to leverage these events to create panic. The crypto industry is like a small town. It’s a small Italian town where you spread these words and everyone panics. It’s really true. It’s like that. Crypto Twitter has a lot of memes for that. And so you get a lot of sell pressure and you get a few traders that are mounting that pressure. But actually, there are few smart traders that are making money because they are buying cheap USDT from the market. Thirty basis points is a lot of profit for market makers, and they are coming to the primary market and redeeming them for the dollar and they are doing this back and forth so they can make the revenue for the day. So what I want to say with this is that we cannot control the secondary markets.
Lau: At the end of the day, that trust discrepancy was leveraged by the secondary market participants, but at the primary level where people wanted those redemptions, you were able to redeem but question that sometimes the discrepancy in the markets, especially in the Bitcoin market.
You’ve said that you hold a percentage of the underlying collateral in Bitcoin and other assets. We live in a very volatile macro environment right now where different asset classes and pools of securities are going up and down beyond that margin of error of 3%, a normal margin of error. In crypto, it could be definitely 10x that. How are you keeping abreast of just where to accelerate into which currencies and just to make sure that that peg is one-to-one?.
Ardoino: So that is another great point. So one, I want to clarify that, yes, Tether has recently bought Bitcoins, has exposure to Bitcoin, and we publicly provided information around that. We took a stance where we are actually accruing and diversifying investments, with excess reserves. With everything else that is the part that is backing the reserves, we keep accruing more and more T-bills because the job of Tether is, of course, to be able to provide the reassurance that we don’t have to beat the dollar. So we have to be the dollar. We have to provide back the dollars to the users.
Few years ago, Tether was super healthy. But we didn’t make all the money that we are making today. We are making all the money we are making today because the yield on the Treasury bills has gone up incredibly. We are not taking out all those profits that are given by this U.S. Treasury bills yields for the vast majority are still in the company because we understand that things can change. We don’t want to run on a thin margin. We keep accruing additional stability for the company and for all our users.
Lau: The spread of trust into stablecoins is growing. And it really supports this future of tokenization. It offers unparalleled opportunities to shape our digital future. Paolo, I want you to stay right there because when we come back, a lot of countries are advancing on the development of their own CBDCs, including China, Hong Kong and the UAE. And so I want to ask you about CBDCs. Is it a threat to stablecoins? Join us when we come back.
Welcome back. We are here with Paolo Ardoino, CTO of Tether and Bitfinex.
Paolo, I had to grill you on the holdings and the stability of USDT. And hats off to your CIO and your CFO. The team is doing well. Every team right now that’s trying to create stability in the marketplace deserves a nod of respect. These are volatile times yet. But really it’s building towards a future in tokenization of assets beyond cryptocurrencies.
I want to talk about that a little bit.
According to the latest Bernstein Research, tokenization opportunity could be worth over US$5 trillion in the next five years. And that opportunity will be led by stablecoins and CBDCs and with a perspective that about 2% of the global money supply can be tokenized via stablecoins and CBDCs. How are you viewing that opportunity?
Ardoino: Well, that is one of the reasons for the existence of Tether in the first instance. In 2014, we created this industry of tokenization of traditional assets, starting with the most used asset in the world which is the dollar. But we always look at other opportunities.
First of all, tokenizing stocks and bonds is going to be the next big step. So that is a market that is so big.
Another thing that, at Tether, we are doing, we launched a product called Tether Gold that is already making waves among cryptocurrency exchanges, and we are seeing more and more interest and adoption around the world
Lau: I wanted to ask you about the CBDC. Obviously, you see the landscape of countries turning their fiat into a digital version of it via central bank-backed digital currency. So then why the need for stablecoins?
Ardoino: Well, that is a great question. Sometimes I have the opportunity to talk to central banks and central bankers. The reality of things is that CBDCs have created some concerns from two points of view. The obvious one is the consumer. Normally you are like a consumer, you are a person, you want to open a bank account, you choose a bank, you pick a bank that you want. There are many banks. You pick one. When you get a credit card or a debit card from this bank or you do wires, the information of which coffee, where you bought the coffee, which books you bought or like where you bought your books, and all these things remain for the majority between you and your bank.
Now, in a scenario with a CBDC, that information will be seen directly by the central bank. That is a bit more centralized at the government level. So it means that every time you buy a book and so on, the central bank could trace you. Could know exactly what you did every single day in your life at the second level. So every single second of your life, the central bank will know everything. And so that is kind of scary. It’s kind of Orwellian in many ways. And so that is the fear on the consumer part.
But also — and this is quite interesting — there are two fears at the central bank level. So the first fear is that if CBDCs are successful, that could completely kill the banking layer in a country. The cryptocurrency industry always said that they were trying to revolutionize the bank and kill the bank. But imagine if instead it’s the central banks that are killing the banks. Because with the CBDC, the central bank could offer loans with the CBDC. The central bank could also make transaction fees.
Also — this is even trickier — CBDC could also replace cash. Cash at this moment doesn’t hold any interest. In Europe, until like two years ago, you had a negative interest on your bank deposits.
Lau: And it’s tied directly to that country’s monetary policy versus a stablecoin in a private market would be tied to the market. The global market. Simply supply and demand. I wanted to ask you about that added opportunity, one that we’re seeing emerge out of Hong Kong and with the regulatory rails that really are establishing the marketplace, the momentum is really growing from that region.
But also, where do you think the regulators, the institutions as they are coming in, you had mentioned at the beginning of our conversation the BlackRocks, the Fidelitys, the institutions that are coming in, now with the regulators and especially across the Asia Pacific and Europe, and now what we’re seeing in potentially the United Kingdom coming in and creating very specific regulatory rails. What kind of world are we going to find ourselves in 12 months from now, 18 months, two years?
Ardoino: I think we are going to see a world that is where there will be regulatory competition. So I cannot believe that the timing between the U.S. increasing pressure on cryptocurrency firms and UAE, Hong Kong, Singapore actually opening up to the industry.
So you could argue that actually, countries are understanding the potential in terms of wealth, employment and opportunities and advancement in research that this industry could bring. So regulators and probably governments are talking to regulators to see how they could invite these opportunities into their countries. It’s extremely exciting because then you could argue that, and since we are all in a way digital nomads, companies will start looking at multiple opportunities and will start moving and will start bringing their expertise, bring their wealth, bring their employees in countries that are more open regulations because of course, regulations are important.
No one wants to be a pirate, but also you want regulations that are actually providing a good umbrella for the technology to grow rather than trying to shut down or limit the potential of this technology.
Lau: Thank you for giving us the opportunity to let you know our audience really own it and understand it a little bit more and and grow their perspective. And Paolo, I really want to thank you for joining us today. It was great to have you on again.
Ardoino: Thank you very much, Angie. And I cannot wait for our next time.
Lau: Next time. Any time. All right. That’s a wrap, everyone. Thank you for joining us on this latest episode of Word on the Block. I’m Angie Lau. Forkast editor-in-chief. Until the next time.