‘We’re Not Revealing Our Secret Recipe’, Tether’s CTO Says

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Buenos Aires — No other stable cryptocurrency pegged to the U.S. dollar is traded more than Tether (USDT), and whenever an investor or trader sells Bitcoin or Ethereum, there is a high probability that they will do so in exchange for this stablecoin, but which has been embroiled in numerous controversies and legal disputes in recent years.

Tether is used in cryptocurrency exchange as a ‘passkey’. In other words, as many cryptocurrencies cannot be purchased directly with traditional currencies, such as the euro or the dollar, they are exchanged for USDT, the most popular stablecoin.

Another attraction of holding this crypto asset is that many platforms offer fixed terms in USDT with significantly higher interest rates than those offered by traditional financial instruments. Also, the fees for sending USDT are usually significantly lower than those in the traditional financial system.

The main question surrounding USDT however has to do with the composition of its reserves, and whether Tether is truly backing each token with a dollar.

In February 2021, Tether agreed with Bitfinex, its sister company, to provide quarterly reports to the New York Attorney General’s Office as part of a deal to put an end to allegations that it had concealed the loss of funds and lied about its reserves in previous years.

Eight months later, the U.S. Commodity Futures Trading Commission (CFTC), an agency with federal jurisdiction, slapped it with a $41 million fine or ‘civil money penalty’, stating that “Tether misrepresented to its customers and the market that it maintained sufficient U.S. dollar reserves to back each USDT in circulation”.

The latest balance sheet available on Tether’s official website dates from September 30, and indicates that Tether had assets totaling $69 billion, according to an audit by Cayman Islands-based Moore Cayman.

However, the company has not yet made public the breakdown of the composition of those assets.

Under the Spotlight

Paolo Ardoino, Tether and Bitfinex’s Chief Technology Officer, argues in an interview with Bloomberg Línea that it was the same breakneck growth of the company and its main product, Tether - which launched in 2014 and as of early February had issued 77 billion USDT tokens - that brought it under the microscope of regulators, mainly in the United States.

“Tether is the biggest, so we expect in a sense more scrutiny than anyone else, right? You don’t put the small guy under scrutiny, you tend to look at the big guy. That’s fine,” Ardoino says.

Bitfinex suffered a hack in 2016, in which two individuals stole 119,754 bitcoins from the platform. That money, which today would equate to more than $5 billion, versus a value of $71 million at the time of the theft, was seized by U.S. authorities this month, and some Bitfinex users are demanding the return of their original holdings of the cryptocurrency.

Spokespersons for the company told Bloomberg Línea that they had no comment on the issue at this time.

USDT is also the most widely used crypto asset in Latin America for sending remittances, while its use as a form of payment is growing in countries afflicted by inflation and devaluation, such as Argentina and Venezuela.

In this sense, Ardoino affirms: “You cannot try to stop the free use of currencies by populations. They will find a solution anyway, and it is better if they can choose freely”.

The following conversation has been edited for length and clarity.

What are the main objectives for Tether as a business, and where does profitability fit into those objectives?

Paolo Ardoino: Tether started in 2014 from the simple necessity that the crypto industry had to move dollars quickly on the blockchain. At the time, wiring from BitFinex to Coinbase and other crypto exchanges took one to five days. All the possibilities of crypto arbitrage were gone after so much time. We wanted to have the same settlement speed that Bitcoin had at the time, which was 10 minutes per block, but with dollars, So, fast forward many many years. Now Tether has become the biggest stablecoin, with the 77 billion [USDT] issued so far, that has the widest adoption both in terms of of trading volume, peaking on certain days at $120 billion, and it has the widest adoption in terms of usage on blockchain, with more than five million different wallets enabled. Tether is the most traded currency in Turkey, for example, and is extremely successful in Argentina and Venezuela. Its profitability relies on having this enormous amount of money in bank accounts and investing that money in super safe and liquid assets. We have seen that Tether holds cash, or cash equivalents, treasury bonds, US Treasuries, commercial papers, and all these assets are creating more yield for Tether, but it’s enough to cover the cost and growth of the company, and increment the monetary base or basically the assets of Tether. Every single day, Tether’s assets will keep growing, and it will create an additional cushion over the 100% of collateralization that we have already.

What percentage of Tether transactions can be attributed to Latin America, and what are the main uses of it here?

The use cases of tether in Latin America are different. We are seeing successful use of USDT in the peer-to-peer (P2P) trading markets. We are seeing more and more people start accepting Tether as a payment for their services, as a payment for goods and so on. The main feedback that we have is that it offers a faster on-ramp solution than the U.S. dollar, and is a faster exchange mechanism, and people prefer it to the local currency in general because it offers more protection from depreciation. The trading volumes of Tether are still between 90-95% on exchanges and DeFi projects, but there is a good 5%, which basically the entire trading volume of our biggest competitor, that is P2P trade, actual transactions, actual payments that take place between merchants, customers, or remittances. People working in Europe need to send money back home, they have families in Brazil, in Argentina, or in Turkey, and they are using Tether as a way to escape from the 10-12% fees that some money processors apply.

On one end of the spectrum, countries like El Salvador are accepting Bitcoin as legal tender. But do you think there’s a risk in the region of countries banning the use of crypto for such transactions?

There is a movement that is pushing to adopt crypto as an alternative, not a replacement. I believe we are in a free world, and we are talking about creating an alternative. We are seeing El Salvador, and we as we are also in touch with other governments that our interested to hear our advice and our feedback on actually adopting Bitcoin and other majors, other cryptocurrencies and stablecoins as legal tender there. I believe that El Salvador and other cases are showing how if you embrace crypto, you can actually create additional wealth for your country. There is so much interest in crypto, and so much money as well, we are talking about a US$2-3 trillion market, and all this money can be deployed. It does not need to remain all in Shiba Inu or Doge. This money can be deployed to build infrastructure in all these countries that are brave enough in a certain sense to start adopting crypto.

What makes Tether different from other stablecoins such as USDC or DAI, and why is it the most-used stablecoin in Latin America?

First of all, our aim. Tether was born for pure utility, and is still an asset that does not aim to compete with Bitcoin, or with anything else. We believe it’s a utility for people to try to de-intermediate from expensive counter parties, to help people that are unbanked to actually have access, and better and cheaper access, to financial services. You probably never heard Tether saying we want to go public, that is not our intention. Of course, Tether is an extremely profitable company, but we didn’t build it to make 10 rounds of investment and then go public and then exit and do something else. We built it because we believe in crypto, in Bitcoin and our mission. All these two billion people are not bad people, they are normal people that crazily enough are too poor to have a bank account. Banking costs and infrastructure are so expensive, that they make it impossible for many, many people in the world to have access to basic financial services, and that is what Tether stands for. We believe Tether is a product that is actually attracting a lot of capital into the U.S. dollar. At the same time, it’s helping all these people that find it hard to get a loan or a mortgage to have the same possibilities that other people in maybe in Europe have.

Stablecoin. El logo de Tether. Fuente: Bloomberg.(Bloomberg/Andrew Harrer)

Why do you think Tether hasn’t been able to dispel the sense of unease that has arisen around its reserves? In the sense that every time information is disclosed about those reserves, it seems that more questions arise, and there seems to be an issue of transparency.

Tether has been extremely transparent regarding its reserves. In early 2021, after settling with the New York Attorney General, Tether started to produce quarterly reports, and which show that all the Tether USDT tokens, and all the the other ‘flavors’ of Tether, are 100% backed. After the first attestation we have shown the breakdown of reserves. No other stablecoin at that time was doing anything similar. So no other stablecoin had an audit. All the other stablecoins had attestations, but no one had a breakdown of reserves. Tether was actually the first. After that, we went one step further, and we presented the breakdown of all the ratings of all the different asset classes that we have in portfolio. And that pushed our competition to do the same. Nowadays of course Tether is the biggest one, so we expect in a certain sense more scrutiny than anyone else, right? You don’t scrutinize the small guy, you tend to look at the big guy. That is fine. We are happy to keep going and provide more and more information. But I believe it’s unfair to say that Tether was not transparent enough. Also keep in mind that Tether is a private company. Tether made public much more information than I believe most other public companies in the world. We didn’t have to do that, but we did it anyway, because we wanted to put our community at ease. So, of course, there are other steps that we are looking into for the future. We are working toward having full audits, we are working to expand our banking partners, we are thinking of releasing additional information in the coming months, and so on. And this is a process, right? So it’s not like you wake up one day and say: “Okay, let’s give everyone access to all our books”. There is an important point here. Tether is doing really well something that other stablecoins might not be doing so well. In fact, we are seeing other stablecoins keep raising money, while Tether is extremely profitable. So we don’t want to give away our secret recipe so easily.

What digital assets are in Tether’s reserves, are there any commercial paper holdings tied to Chinese companies, and what Tether do with the yields that are generated from its reserves?

We have disclosed enough, in our opinion. Of course, I cannot give further details on what is in the holdings. I believe that just the fact that we disclose the holdings and that, by the way, we didn’t have to. We will have to provide additional information in the coming months, but I believe that for now, I can respond to your latter question, what we are doing with the interest? Tether at this time has never removed any of the interest earned from its assets, because Tether wanted to increase its monetary base to increase even farther than 100%. The vast majority of all the earnings due to the interest that Tether received and invested in the portfolio are still in the company, because we believe that it is important that although 100% of Tether tokens are backed 100%, keeping all the interest earned so far will help to increase the backing even farther than 100%, and so far you can see on the website, there are $160 million in assets, more than liabilities. That is more collateral that we have in the company, and that increases the backing even further.

Who are the counter parties for other secured loans?

I cannot provide additional information at this time on this point. Also, that is part of our internal information. It is important to understand that Tether performs weekly assessments of all the risk matrix and variables around our portfolio. So, we have a team of experienced people that have decades of experience in traditional markets. We have delivered all this information regarding the backend investments and so on to different regulators over time. So, again, I understand why there is curiosity around it, we are a private company. One other important point is that yes, there are many questions, but definitely many questions should be asked to the industry in general, rather than just Tether. Plus, Tether is trading on many different exchanges, so the old top crypto exchanges have the USDT versus U.S. dollar pairing, and on all those exchanges Tether trades hundreds or millions of dollars per day. And there are many occasions when the price of Tether is five to 10 basis points higher than one on those exchanges. And the reason is that although there are a few voices that tend to say that Tether might not be as transparent as it should be, the real fact is the free market. The fact that we call them free markets is because people can buy and sell whatever they want at the price they want. And if Tether is parity or trades just above one, it means that people are trusting Tether.

Stablecoin, returns-wise, tends to be significantly higher than traditional financial instruments, which generates a lot of skepticism about how there can be 10% annual returns on such deposits. What what is your answer to that skepticism about those those high returns on crypto deposits?

I have mixed feelings. I believe that crypto is definitely in a boom moment where it’s growing. It has been growing for many years. So there is definitely interest from traders from OTC desks and from institutions to borrow stablecoins in order to gain exposure to crypto. So I think in a certain sense it’s expected, these really high interest rates, but at the same time, I believe that over time, with the proper regulations, the yields will go down, maybe not perfectly aligned with the traditional banking system, because as long as crypto remains a highly speculative ecosystem, the yields will remain higher. Personally, I believe that it is important that users understand that these high interest rates cannot go on forever. It’s fair for everyone to expect a normalization.

Do you envision a future in which the majority of people in countries that have had major issues with currency stability, like Venezuela and Argentina, conduct the majority of transactions in stablecoins such as USDT? And do you think that could be something that bothers regulators and governments?

Definitely I could see why it could be hard for a government looking at its national currency being less used because of other currencies, but to my knowledge this is already happening with the dollar. In the countries where there is a higher rate of devaluation of the national currency, then the population uses the dollar or another foreign currency. So, stablecoins don’t create a new problem. They are just a different solution to the same problem. They are a different transport layer, because Tether USDT is actually the dollar, so an Argentine that prefers to use dollars rather than pesos can, instead of using the cash or bank dollar, use Tether. It’s nothing new, just the transport layer that helps people to pay less in transaction fees, to have faster settlements and more control over their own wealth. We are seeing this not just in Latin America, but in many other places around the world. And if it’s not USDT, people will look at Bitcoin. You can’t really try to stop the free usage of currencies by the population. They will find a solution anyway, and it’s better if they can choose freely. But with the right customer protections, of course. We shouldn’t live in a world in which governments ban cryptos, because they’re good alternatives for people, especially for the poorest people.

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