The Breakdown - Tether Goes Fully American and Doubles Down on Gold

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Wednesday, January 28th, and today we are talking about Tether, launching their U.S. stable coin. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Well, friends, Tether has officially launched their U.S. Market Stablecoin, called USAT, the token is fully compliant with the Genius Act, fully backed by U.S. Treasuries, and fully ready to compete for market share.

Starting point is 00:00:48 The stable coin launched with $20 million in supply, operating entirely on the Ethereum mainnet. Infrastructure support, including issuance and redemption, is provided by Anchorage Digital. That means the stablecoin customers will be able to do business through a domestically regulated bank. Reserve custody will also be fully domestic provided by Cantor Fitzgerald. it, crypto.com, cracken, OKX, and Moonpay have already made the token available at launch. Bo Hines, former White House advisor turned CEO of TetherU.S. tweeted, The wait is over. The new era of finance begins. While many gave the obvious take that the stable coin isn't likely to replace the original

Starting point is 00:01:21 recipe Tether and it's a $180 billion market cap, it probably doesn't need to. The intention doesn't seem to be replacement, but rather a diversification. USAT gives Tether a very powerful hedge for a lot of eventualities. If another crackdown on offshore stablecoins arrives, Tether already has the infrastructure set up to go fully domestic. If tokenization takes off in a big way, Tether will be ready to supply a compliance stablecoin to regulated institutions. It also gives Tether a way to shrug off U.S. regulators while keeping their offshore product operational. Tether CEO, Pollo Ardwino, presented the product as entirely about bringing Tether into the regulated U.S. financial market. He commented,

Starting point is 00:01:57 USDT has proven for more than a decade that digital dollars can deliver trust, transparency, and utility at a global scale. AT extends that mission by providing a federally regulated product designed for the American market. Jake Brookman, the CEO of Coin Fund tweeted, everyone thought regulation would consolidate this market around circle. Instead, it fragmented it and Tether is playing in every lane simultaneously. Now, in other Tether news, the Stablecoin issuer may be partially responsible for the metals pump after becoming the largest private buyer of gold on the planet. Bloomberg reports that Tether has bought over 70 tons of gold over the past year, bringing their total to 140 tons. Part of that gold went to backing their tokenized gold product, which is now at around $2.8 billion

Starting point is 00:02:37 in market cap up from $700 million a year ago. However, the lion's share went on their own balance sheet, creating a horde of gold now worth over $20 billion. To put this gold buying in perspective, Poland was the only central bank to outpace tether and gold buying last year, purchasing 102 tons. In Q3, which is the latest data station available, tether accumulated 26 tons of gold more than any central bank. Kazakhstan was in second place, with 18 tons, followed by Brazil, with 15 tons.

Starting point is 00:03:02 China accumulated five tons, according to self-reporting, which may or may not be reliable. In an interview with Bloomberg, Paulo Arduino again made it very clear what the plan is, stating, we are soon becoming basically one of the biggest, let's say, gold central banks in the world. He predicted that the current geopolitical climate is bending towards a world where rivals of the U.S. launch a gold-backed alternative to the dollar. He seems to want Tether position to function as an independent state-level actor after that monetary schism. Arduino said that Tether had been consistently buying one or two tons of gold a week and intends to continue for at least the next few months.

Starting point is 00:03:32 He also discussed Tether's custody arrangements with physical bullion stacked up in a former nuclear bunker in Switzerland. Arduino said, It's a James Bond kind of place. It's crazy. Another interesting angle of the article was Arduino's desire for Tether to become a gold trading firm, competing directly with JPMorgan and HSBC in the premier commodity market. He said that Tether needs, quote, the best trading floor for gold in the world if they want

Starting point is 00:03:53 to continue buying bullion and capitalizing on market inefficiencies. Arduino added, our goal is to have a steady, stable, long-term access to gold. Tether is also taking positions in gold royalties companies who invest in the profits of gold mines. In that way, they're functioning a little more like a sovereign wealth fund or a family office than a central bank. But fundamentally, Tether's gold play is largely about positioning themselves for a dollar-based monetary crisis. The goal is to straddle both sides of the splintering global order. In a prior interview, Arduino has said that gold is, quote, logically a safer asset than any national currency. This week, he commented,

Starting point is 00:04:24 we believe that the world is going towards darkness, we believe that there is a lot of turmoil. Tethers gold buying hasn't been a secret throughout the past year, but this Bloomberg article really laid everything bare and generated a ton of discussion. VBL's ghost honed in on Paula's prediction of a bricks gold-backed currency commenting, this statement is unusually direct for a private sector executive. On its surface, it reads as a competitive observation about foreign monetary behavior. At a deeper level, it reveals something more consequential. A private issuer of digital money openly framing its strategy around nation-state monetary conflict. That framing is neither casual nor rhetorical. It signals participation in a geopolitical

Starting point is 00:04:59 contest over the future architecture of money. It is quite possibly the most important and most revealing thing that an executive is said about the current world situation monetarily ever. Alexander Nichai of the founding partner of funders VC noted that Tether now holds more gold than Denmark, Qatar, or South Korea, adding, while others build ecosystems, Tether is building its own gold standard. This creates the most collateralized digital dollar in the world. Investor Felix Hartman commented, Tether becoming one of the most powerful and important companies in global finance is such poetic closure to a decade of being called a scam by the media every three to six months.

Starting point is 00:05:32 BitWi-CIO, Matt Hogan, meanwhile, simply tweeted, Who's the Central Bank now? Meanwhile, the argument over Stablecoin yield continues to rage, with standard chartered weighing in on financial stability risks. In a new report, Jeff Kendrick, the bank's head of digital assets research, argued that the hub-up around Stablecoin yield is a reminder that Stable Coins pose a risk to banks. Kendrick wrote, We estimate that U.S. bank deposits will decrease by one-third of stable coin market cap.

Starting point is 00:05:56 Current market cap is around $300 billion, but Kendrick based his estimate on his 2030 projection of a $2 trillion market cap. Rounding it down slightly, Kendrick concluded the total outflow risk is $500 billion. Now, there are a few different moving parts to this report that are worth unpacking separately. Of his $2 trillion projection, Kendrick argued that half would come from emerging market bank deposits fleeing into digital dollars. It's difficult to find an aggregate number for all emerging markets, but to give a sense

Starting point is 00:06:20 India has around $2.7 trillion in bank deposits, and Chile has around $200 billion. It's certainly possible that a trillion dollars in capital flight would be enough to shake the financial stability of some emerging market banking systems. That's especially likely to be the case for individual countries already facing currency collapse. We saw this play out in real-time in Nigeria in 2023 when Binance was accused of facilitating capital flight and exacerbating the Naira crisis. For developed markets, it's less clear that capital flight of this scale would be a major problem. Assuming the $500 billion figure is in the right ballpark, and comes entirely from the U.S., that's only around 20% of J.P. Morgan's 2.5 trillion in bank deposits.

Starting point is 00:06:56 Fred Data pegs total U.S. bank deposits at 18.6 trillion, so around 2.6%. Kendrick also wasn't just talking about the U.S. This $500 billion figure was his estimate of total deposit flight across all developed markets. It's difficult to say whether this amount of deposit flight is enough to cause a financial issue in the U.S. presumably it wouldn't happen all at once, but rather over the course of a few years as people change their banking habits. Intuitively, it seems like this is the kind of structural adjustment that could be managed, similar to the introduction of money market funds in 1971. Kendrick also notes that deposit flight will impact regional banks much more than large banks

Starting point is 00:07:29 due to their reliance on deposit funding. That part of the argument could hold some water. Regional banks are likely to face some serious challenges and will need to adjust quickly to defend their position in the market. However, regional banks also typically aren't the ones offering 0.1% interest on savings accounts, so presumably will be better positioned to compete with stable coin yield. If anything, the report seems to be an exercise in presenting a number that sounds gigantic at first, but actually isn't all that relevant compared to the massive scale of the global financial system.

Starting point is 00:07:57 Kendrick was assuming 7x market cap growth for stable coins over the next five years, and it's still a drop in the bucket compared to global bank deposits. Mike Dutas of Sixth Man Ventures tweeted, this is less than 0.5% on a more than $100 trillion bank deposit base in industrialized nations, literally the least disruptive change you can imagine if this projection holds, but with incredibly outsized benefit to customers. So that's the stablecoin story, which seems to be the main story these days right now. And that is going to do it for today's breakdown.

Starting point is 00:08:24 Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.

The Breakdown - Tether Goes Fully American and Doubles Down on Gold

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