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Stand by for a masterclass in cryptocurrency – and stablecoins – from industry veteran Paolo Ardoino, chief technology officer and spokesman of Tether, the world’s largest stablecoin. BizNews editor Alec Hogg caught up with Ardoino in Davos to unpack the collapse of competitor Terra; the brief breaking of Tether’s link to the US dollar (hint: targeted by short sellers); why more countries are likely to follow El Salvador and the CAR by making Bitcoin legal tender; the reason he is calling for regulation; and a riposte to Warren Buffett’s recently reaffirmed assertion that cryptocurrency is “rat poison”. Fascinating, educational, eye-opening. – Alec Hogg
Paolo Ardoino on reports of Tether is suffering huge losses and the accuracy of those statements
Losing is probably not the right word in the sense that the work of a stablecoin is a sort of a cryptocurrency linked to a national currency. In the case of the US, it is linked to the US dollar. So the job of a stablecoin is to take money in. When someone wires you some money to acquire your stablecoin, you have to issue a stablecoin, you keep the collateral and the reserves, but you also have to keep it when there is a redemption. You have to, of course, offer that redemption. I think what happened is that the general market cap of crypto went down a lot and there was a lot of fear of the Terra Luna issue. Part of the money went away from the crypto market. Being the biggest stablecoin in the market, we had to give liquidity back and had to give the money back.
There were redemptions and it went out of the crypto market. You can argue that our biggest competitor grew only a little compared to the actual size of their redemptions because those went outside of the crypto market; parking on the sidelines to wait for probably either the right time or just, you know, sitting in the bank gaining interest.
On whether stablecoin (Tether) is backed 100% by fiat currency for those unfamiliar
Tether is a stablecoin that is backed 100% by a portfolio of assets. Our composition of assets is public, so every quarter we provide an attestation. We started providing attestations from 2021 that show the breakdown in reserves, which is, basically the portfolio composition. We started to be a little bit skewed: we had cash, bank deposits, US Treasuries and commercial papers. The commercial papers were around 40 billion and we heard the concerns of the community. Although, these were highly rated commercial papers; so A1 and E2 rated by Standard & Poor’s.
On the terminology of commercial
[Commercial] is a short-term loan. Short term usually means between zero and three months or between three and six months.
On the use of stablecoins
People use stablecoins for different reasons. They use stablecoins as a currency, so they don’t provide interest. We earn interest as the stablecoin company, but we don’t provide interest. Stablecoins are used to transact in different types of industry and eventually stablecoins started to have more use cases, initially during the crypto trading. If you want to trade across different exchanges and particularly cryptocurrency exchanges, you have to move quickly – Bitcoins and dollars – because if you are arbitraging, you need to move Bitcoin dollars quite quickly. If you have to move dollars between crypto exchanges, it takes one day or five days. So, in order to move them faster because. In one day, even in one hour. But let’s say in one day, your arbitrage opportunity is gone.
The tether was created to move dollars on the blockchain. You move dollars at the same pace as Bitcoin. So, in 10 minutes, you can move dollars from one exchange to another and do your average activity extremely efficiently nowadays. The most interesting use case is in developing countries, in emerging markets. If you go to Turkey, Argentina, Mexico or Venezuela, you will find that you can use tether and pay with tether as a dollar.
On whether it is a store of value rather than a transaction
It is both because people prefer to accept tether rather than their national currency. And the use cases are growing by the day. This is why we are pleased. I mean, that is why we think our work matters so much, because we don’t see ourselves talking with the CEOs of the biggest banks of the world or the prime minister and financial ministers of the world. Our work is providing a tool to people; a safe tool that allows them to send remittances. One of the biggest use cases of tether is remittances.
You have people working in Europe sending money home and they get a haircut of 17%. And that is unfair. They are using tether to escape that enormous fee. They, of course, want to keep the majority of their money they are making for themselves, or their families.
On the balancing act of activism and being a technologist while opening eyes to potential new ways of dealing with the financial crisis
I think it is important. This entire movement of cryptocurrencies was born in 2008 as a rebellion to the financial crisis. I entered this industry and my business partners are in this industry. They’re working day by day, doing everything for the company and working hard because it is important to many people. So that is the highest achievement you can have in your life. It’s not all about money.
On being fined 41 million by the US Commodities Future Trading Commission (CFTC)
We did two settlements; one with the New York attorney general and the other with the CFTC. The one that you brought up, we settled without an omission of wrongdoing.The issue was that they claimed tether did not have the entire backing of tether and was not in bank accounts, in Tethers name. We explained why in 2017. First of all, their findings are related to until mid 2019. Although the settlement was in 2021, they didn’t have any issues with our operations after 2019 or after half of 2019; we were open. Why that happened was because, in 2017, being a crypto company was really hard. Bank accounts were shut down and so on. We had to use third-party payment processors. As soon as there was a more regulatory framework – we are also making the banking industry more comfortable with accepting customers such as us – we moved everything back to two bank accounts and we haven’t had any issues since. You are in a new industry, growing fast and sometimes you get pushback from the traditional financial world. We had a lot of that; not just us as a tether, but as an industry. But we didn’t throw in the towel. We kept going. We had problems but we fixed them.
On the Terra (LUNA) collapse and its difficulties
Terra, first of all, was attacked, right. So, someone was borrowing. We don’t know who but someone was borrowing this Luna and selling them short in the market. It seems that Luna was the token backing Terra. There was a cascade, causing the entire Terra USD stablecoin to crumble. Tether USDT was borrowing and trying to shorten the market, probably to cause an additional crumble or, even to test us, you never know. Right? That happens normally in the traditional financial world. You try to test or you try to make money on the short.
In their case, they were selling Tether below $1. That is quite dangerous because you create an issue on certain exchanges that don’t have enough liquidity so the price can go down. We redeemed $7bn in 48 hours; a bit more over the entire period, around $10bn. Right. When people ask me, as you ask, was it difficult, I say, no, it was not and there is a good reason for that. We have been in the news so many times, people were always questioning our backing and so on and so forth. We provided the facts we have provided well, we provided the attestation, we provided everything.
We are one of the few institutions that has demonstrated publicly that it is able to process 10% of their assets as withdrawals or redemptions. We are held to a much higher standard than a bank and we proved that. And not only have we proved we are safe as a stablecoin, but also that our banking system – which we are keeping an eye on – is also safe. So for me, it is marketing in a sense as there is no other stablecoin that was put through a bank run test like that scenario.
On his view on the regulation of the whole cryptocurrency space
Well, I think cryptocurrencies have a really important role to play, as we spoke about in terms of freeing people in many ways. But it cannot be the Wild West. With the Terra USD and Luna thing, many in retail got injured and that is not fair. Not everyone has the same level of understanding of the financial markets as someone who is really deep into it. That is one of the most important things; having the right categorisation of stablecoins because you cannot have a random guy who wakes up in the morning, creates a cryptocurrency and markets it as a stablecoin. We need regulations that ensure stablecoin follows certain parameters. Regulation should not hamper the technology, shouldn’t prohibit the technology, but should provide a framework to use the technology to enhance the lives of millions of people, but in a controlled way.
On Warren Buffett’s comments about cryptocurrency being rat poison and general fears
I think there are definitely many people upset about a currency that they cannot control.. I’m just talking about Bitcoin, in this case. There is a lack of education. I believe you cannot dispute how this technology can be used for wonderful things. So, considering it a rat poison shows the lack of understanding of the potential of such important technology. Regulations should help to fix these issues as happened with Terra.
On the future of Bitcoin and emerging markets potentially replacing the US dollar as the global reserve currency
I think that in the future Bitcoin will be adopted by more and more emerging markets. We are seeing at first El Salvador and now the Central African Republic. So it is clear they are seeing El Salvador taking advantage of this new technology and thinking, okay, why not us? I think it will grow. It will grow and in a regulated form eventually. You know, all these crypto industries will merge, will be in asset class rights and we’ll join the global regulations. But it is important that people in certain countries can rely on the fact that if they own Bitcoin, no one can take it away from them.
El Salvador is using Bitcoin as an option, not as a replacement. So no one wants to replace the dollar, but we are talking about giving the option to people to use something else. Making legal tender is like having another foreign currency. So if you go to Davos and buy something and you have a debit card in Japanese yen, your debit card provider will apply for a fax rate but you can still buy stuff from a grocery store. Basically, what the government is saying is, please start accepting that you need to equip yourself to accept this currency. It is not a fight against the dollar. There will always be the need for the dollar. Gold is comparable to Bitcoin. Up till the last century, all the major national currencies were based on the amount of gold you had in your reserves. So it is nothing new. This is just a digitised version of something that has the same property as gold, can be moved more easily than gold and is an option.
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