Front Burner - The Mighty Ducks, Inspector Gadget and the search for crypto billions

Episode Date: October 18, 2021

Cryptocurrency traders are relying on a stablecoin — a digital cryptocurrency backed with real-world assets — with ties to a Mighty Ducks star and the co-creator of Inspector Gadget. Today, we look at the search for the supposed billions of dollars backing its value, and what a shortfall could mean for the entire financial system.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Allie Janes, filling in for Jamie Poisson. I see another big red flag here that maybe, maybe says that it's a Ponzi scheme. There could be some serious flaws in the system. Tether has been banned from doing business in New York.

You know what that means? Anyone who knows anything about crypto considers Tether to be a huge scam. So this is a story that involves the Mighty Ducks, Inspector Gadget, and the guy who invented pop under web browser ads. They're all connected to this cryptocurrency called Tether, issued by a company called Tether Holdings Limited, a company that our guest, Bloomberg reporter Zeke Fox, has described as weird in almost every way imaginable. He'll explain this more in a bit, but Tether is what's known as a stable coin, because ostensibly, one Tether is supposed to be backed by one U.S. dollar. There are currently 69 billion tethers in circulation.

So that's 69 billion in real U.S. dollars that the company should be holding. So that anyone who wants to return their tethers can get their dollars back. But can this company really have that kind of money on hand? And what does it mean if they don't? Zeke Fox set out to answer that question. And today, he's here to walk us through what he found and explain why it matters for not just crypto holders, but the broader financial system. Hi, Zeke. Thank you so much for joining us.

Hey, thanks a lot for having me. Okay, so before we get into what Tether is exactly, I was hoping that you could help me deliver on the promise that I just made in the introduction, that this cryptocurrency story will include the Mighty Ducks and the guy who invented web browser pop-under ads. So can you just start by telling me about the founders of Tether? So there's a few guys who played important parts in the early days back in 2013 and 2014. One was Brock Pierce, who, when he was a kid, he played young Gordon Bombay in The Mighty Ducks.

Right. Right in the beginning, there's a dream sequence where he misses this penalty shot. Later, looms large in Emilio Estevez's life. But in 2013, he actually had a fair amount of money from running a company that sold video game items. you know you could sell your sword and world of warcraft to somebody else or he'd yeah or he'd even employed steve bannon the future uh trump counselor so brock pierce he has this sort of new agey hippie vibe he wears a fancy hat and lots of jewelry sort of of like Johnny Depp in Pirates

of the Caribbean. And he talks in riddles like Johnny Depp and Charlie and the Chocolate Factory. And he had this idea that was like, what if we had a cryptocurrency that was backed by real dollars and whose value would stay fixed at a dollar. And he brought in a CEO to run the company based on his idea. And the CEO's claim to fame was that he had invented pop-under ads, like you said, the ones that you wouldn't see till you went to go close your browser yeah truly one of the worst inventions probably on the internet yes although uh i'm sure quite popular the inventor's name is uh reeve collins and you you talked about you know brock pierce being like really into sort of like speaking in riddles.

Can you give me an example of that? He would, my conversation with him, I would say was intense. And he told me, I'm not an amateur entrepreneur throwing darts in the dark. I'm a doula for creation. I only take on missions impossible. Amazing. Okay. So what exactly is Tether? Can you just explain the basic premise to me? Tether is what's now called a stablecoin. How it basically works is you send Tether your $1 and they send you one Tether token, which you can then transfer to anybody you want instantly across the internet. It works like other cryptocurrencies. Then if you ever want to, you can send the company back your Tether token and they will send you your $1 back. Okay. And just keeping in mind that I know nothing about this world,

Just keeping in mind that, like, I know nothing about this world. Can you just help me understand, you know, how and why this is used? Like, what is the basic problem that Tether is solving? You can think of the cryptocurrency world as like a collection of different casinos. And the main activity that people do is they want to go to the casino and gamble on the different coins. want to go to the casino and gamble on the different coins. And these casinos have historically had a lot of trouble getting bank accounts because banks were kind of scared of the crypto world. So Tether is almost like if all the casinos said, hey, before you gamble, go to this one cashier over there and trade your money for these chips. So the

tethers are kind of like the gambling chips of the whole cryptocurrency casino. So they've almost become like the central bank of cryptocurrencies, Tether has. Got it. So I mentioned in the intro, there are 69 billion tethers in circulation, there are 69 billion tethers in circulation, which is obviously a lot of money. So I mean, can you give me a sense of like how big a player Tether is in this crypto world? So that's enough money that if Tether was a bank, it would be one of the 50 largest banks in the US. On some days, more than 100 billion Tethers change its hands, which is more than Bitcoin or Ether or any other cryptocurrency. So you don't hear as much about Tether, but it's really like the backbone of the whole crypto economy.

Wow. Keeping that in mind, I think it's important to know, you know, in your article, you described Heather as a company that seems to be practically quilted out of red flags. So can you tell me about some of those big red flags? Let's start with the executives. The CEO listed on the website, J.L. Vanderveld, is a Dutchman who lives in Hong Kong. And there's so little about him on the internet that he is real. But at first, you might even wonder if he was because he's never given an interview or spoken at a conference. And I'm told that the real guy in charge is the CFO, Giancarlo De Vicini. And there wasn't that much more about him. He's a former plastic surgeon. But in Italian newspapers, I saw that he was fined for selling

counterfeit Microsoft software. So these aren't the kind of people that you'd expect to see in charge of a $69 billion company. The website for Tether, they also had an announcement saying they'd settled a case with the New York Attorney General, almost like they were bragging about it. But then if you went to the New York Attorney General and read what they said, it sounded horrible. The New York Attorney General just in February said Tether Holdings had been operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system. So that didn't give me much confidence either. And the big question of where's all this money? Do they have it? Tether has on its website, a letter from an accounting

firm that says, yes, Tether has all the money. And there was a chart that showed half the money or so, so like about $30 billion, was in commercial paper, which are short-term loans to big corporations. And that's enough that they're like a major player in that market, or they would be a major player in that market. When I asked around to people on Wall Street who are in a position to know, they're like, no, we've never seen Tether, anyone acting on Tether's behalf, buying any commercial paper. And that is surprising. Like we think we would know if they really bought all that commercial paper. We haven't seen any evidence. On LinkedIn, there are only a couple dozen employees. That's tiny for a company that has so much money to manage. Right. And it's like not even clear what banks would be handling this money, where those would be, who is regulating them, any of that, right? Right. They're just they're not giving

out those details. They like to say they're registered in the British Virgin Islands. But when I asked the regulatory agency there, the head of it said, we don't regulate Tether. So it appeared like nobody was really responsible for regulating it. And I mean, these kind of red flags have made some people suggest that Tether is basically a big fraud, right? Like basically like a massive Ponzi scheme. Since Tether was even just $1 billion or even less, there have been people online who have been saying like, this is a big scam. Where's the money? Prove it to us. Where are your audited financial statements that like a fund would have to produce and a normal hedge

fund would have to produce? Why would I not just open up my books to an auditor and say, hey, this is what we own right here. We own these T-bills. We own these commercial paper. Why would you not do that? If you don't have anything to hide, what's your downside in letting an auditor come in and look at your books? You see's to me a big red flag so tether it seemed to me would have great reason to refute all these critics and set the record straight if they really have the money why can't they just say exactly where it is why not set the record straight shut everybody up well and even their lawyer when, you know, about how he would respond to critics, used, like I'd say, some pretty colorful language to describe the company's critics. Yeah. So he said these there are these really persistent critics online.

He said he called them jihadists who are set on tether's destruction he said that you know the money's safe they have sophisticated risk management but i didn't find it so reassuring because he told me that the company had more than enough cash to cover the most money it had ever had to give back to people in one day and it's like what if people ask for money for like four days in a row? That doesn't sound that great. So I felt like he wouldn't say where the money was. You know, I asked him, he didn't want to give out any more details. And I mean, just to be clear to like the critics, the people that are concerned about this, it's not just random internet people, right? Like, you know, you mentioned the state of New York sued them.

They settled that in February. The U.S. Department of Justice is investigating them for criminal bank fraud. We just learned on Friday that Tether and the exchanges linked to are also paying $41 million to settle charges with the U.S. Commodity Futures Trading Commission. Yeah, I mean, that's a lot of investigators looking into them. It seems like practically everyone is. Even with all these red flags that you've just lined out, like there's clearly some reason people have decided to give these guys $69 billion and i know that you went to you know find some of these like true believers in tether at this massive crypto conference in miami and could you first just like set the scene for me a bit like what was that like i was expecting it to be

sort of a buttoned up kind of tech finance conference because I'd heard that crypto was going more mainstream. But that was not that was not the vibe at all. There were models walking around covered only with body paint with Bitcoin logo on it. There was on stage this crypto podcast guy got up and just started screaming. Everyone was mad at Elon Musk at the time. And he was like, F Elon. F Elon. F Elon.

F Elon. And like everyone's getting all fired up. One guy cried on stage as he was talking about how Bitcoin would save El Salvador. I went and I lived there. Sorry. It seemed unhinged but yeah i'd come there because i wanted to know had these people really sent like 69 billion dollars of real money just to get these tether tokens like it maybe there's something they understood about tether that i just didn't get so so what did you hear from them like like

i'm imagining they had to be aware of some of this sketchy stuff right yeah i mean these guys are not dumb like they know all this stuff some of it they kind of downplay but then once you got to talking with them and you were like like would it surprise you if it was a big fraud and they'd be like man i don't think so but it wouldn't be like shocking. It wasn't like they trusted Tether 100%. And some of them had their own crazy theories about Tether, like it's controlled by the Chinese mafia. Maybe the CIA is using it to move money. Maybe the government is using it as a trap to get people to use it. And then it can see what they do with their anonymous coins. And to be clear, I did not find any evidence for any of these theories. But I realized in talking to all these traders who told me that they did send billions of dollars to

Tether, it was not that they really trusted Tether 100%. It was more that Tether was crucial to their business, which was buying certain coins on some exchanges and selling them on other exchanges. They were just making tons of money doing this. And they couldn't do that without Tether. They didn't really think they'd be the ones who get stuck holding the bag if there was some issue with Tether. In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization,

empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples. I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples.

So I know that you kept digging. You know, you're trying to figure out more about Tether's Mysterious Holdings and where they might be. And you did find one financial institution that was willing to say that they're currently working with Tether and they're in the Bahamas. And surprise, surprise, this financial institution is also run by quite the character.

Yes, so this is Deltec Bank and Trust. It's in Nassau in the Bahamas and its chairman, Jean Chalapin, was in an earlier life, the co-creator of the cartoon Inspector Gadget. And this for real, like he's like the writer, like the head of the company that produced it. Not some tangential connection,

like made his fortune on the 1980s trench coat wearing cyborg policemen cartoons. He's now 71. Since then he'd moved to the Bahamas. First he bought a castle outside Paris, like a legit crazy castle. Then he bought a pink colonial in the Bahamas, which if you've seen the 2006 James Bond movie Casino Royale, you saw his house briefly. It was the villain's house. Then he was banking at Deltec and he befriended the founder and he invested in the bank and

eventually became for a time it's CEO and and then its chairman. What he said is that he checked out Tether very thoroughly before he agreed to take them as a client. And that a couple of years ago, when he accepted them, he checked out whether they really had the money that they claimed. And he says that they did. He was surprised by all the critics and that they weren't satisfied by the evidence that Tether produced because, you know, he was satisfied. And he I mean, as he told me, frankly, the biggest thing was at the time, the money doesn't exist. We knew the money exists. It was sitting here. But I asked him, do you know for sure that all the money is safe now? He said the portion he holds is safe is only in cash and extremely low risk bonds.

But recently, Tether had kind of outgrown his bank and started using other banks, too. So he could only really vouch for the 15 billion or so that was at Dell Tech. Okay, so after you talk to this Inspector Gadget, banker guy, you go back to the States, and you actually obtain a document that shows a detailed account of Tether Holdings Reserves. So what did that show you? So at the time, there was a lot of speculation that maybe Tether's money was tied up in Chinese investments. And what this document said was, yes, they made billions of dollars of short term loans to large Chinese companies. like a money market fund in the US, almost none of them would buy it because it's viewed as a lot riskier than loans to large American or Canadian companies. And at the moment in China, one of the largest property developers, China Evergrande Group is on the verge of collapse. So people

are really worried about the safety of any loans to Chinese banks and property developers. If you're a holder of Tether tokens, this would give you reason to worry at least a bit that the money would be safe if you ask for it back. The interesting thing is, this is all out there and Tether is still trading for a dollar. So people clearly are willing to take on some level of risk to be able to use Tether because they find it very useful. Right. So because what happens if, you know, everyone who's holding Tether starts to freak out and like cash out right away? Right. Like even if they don't lose that much of the reserves, if people start to freak out and they start asking for their money back, I mean, it's what you call

a bank run. Tether would have to sell its investments really quickly in order to get the money to pay people back. They've gotten so big that if they were to dump all these Chinese loans really quick, that might drive down the price of Chinese loans and make them take more losses and make it harder and harder for them to pay back the people who wanted their money back. So, you know, in the intro, I said, like, this could not, this might end up mattering not just for crypto people, but for the broader financial system, too. So Tether is actually on the radar of people like US.S. Treasury Secretary Janet Yellen. She had this whole meeting about Tether with these other, you know, top financial regulator types in the summer. And actually, I just want to cite this line you wrote in the piece about this, which

was beautiful. It was as if a playground snowball fight had escalated so wildly that the Joint Chiefs of Staff were being called in to avert a nuclear war. So what are these financial regulators worried could happen here? So as far as they're concerned, the size of Tether's supposed dollar holdings is so big that it'd be dangerous even assuming they're all real. Because if there was a panic, Tether the company could have to liquidate all its assets at a loss. And that could cascade into the regular financial system by crashing credit markets. Okay. So it could be pretty destabilizing for the wider financial system. What do they want to do about it?

So the U.S. right now is working on a report about stablecoins that is going to recommend some sort of cause of action for regulation. It's possible that stablecoins like Tether could be regulated like banks or like money market funds. Some people in the financial regulation world have even suggested that the government issue its sort of competing product and issue a central bank digital currency that would sort of be a token like Tether, but very tightly regulated and backed by the government. John Cunliffe, he warned that like Bitcoin or Ethereum, that they could trigger a financial meltdown if they're not regulated. What does that say to you? There's just so much money flowing into cryptocurrencies right now. And the Bank of England pointed out that it doesn't necessarily take that much to create problems in the larger economy. And they compared the amount of money that's flown into cryptocurrencies to the amount that had gone into U.S. subprime mortgages before the financial crisis a decade ago. And it's kind

of similar. I think that the regulators around the world are just realizing like it doesn't seem like this is going away. So it's probably time for us to like make some rules. Zeke, thank you so, so much for making the time to talk to us. It's super interesting. Thanks for having me on. So after Zeke's article was published in Bloomberg Businessweek, Tether put out a statement on their website refuting the reporting. In part, it says, quote,

This article does nothing more than attempt to perpetuate a false and aging story arc about Tether based on innuendo and misinformation, shared by disgruntled individuals with no involvement with or direct knowledge of the business's operations. They also say, quote, all Tether tokens are fully backed as we have consistently demonstrated, and that, quote, the company has taken a leadership position in transparency. That's all for today. I'm Allie Janes. Thanks for listening to FrontBurner, and we'll talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.