The Breakdown - Tether’s Half-Trillion Dollar Valuation

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 gone on, guys? It is Wednesday, September 24th, and today we are talking about Tethers Monster fundraise. 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, AI has been having altogether too much fun relative to the world of valuations and big investments and investor focus. And Tether has now kicked down the door and said, no, thank you. You don't get all the money. Yes, Tether is reportedly seeking external funding at a massive

Starting point is 00:00:53 half a trillion dollar valuation. Bloomberg reports that Tether is courting outside investors for the first time and reportedly looking to raise between 15 and 20 billion in exchange for 3% of the company, making their implied valuation 500 billion. Cantor Fitzgerald is acting as the lead advisor and selling the deal, extending their relationship with Tether even further. Cantor is, of course, the investment bank that used to have Commerce Secretary Howard Lutnik as its CEO. They've also been managing some unknown portion of Tether's reserves for at least the past year. One of the sources for the report did note that the numbers involved in the deal were top-end

Starting point is 00:01:24 targets and eventually could come in lower. The deal is reportedly in the earliest stages, so all the details are subject to change. Still, the deal does seem to be real in something that CEO, Paulo Arduino is happy to speak about. On Tuesday, he tweeted, Tether is evaluating a raise from a selected group of high-profile key investors to maximize the scale of the company's strategy across all existing and new business lines. Stable coins, distribution ubiquity, AI, commodity trading, energy communications media, by several orders of magnitude. The tweet concluded with three pawn emojis in case that means anything about the chess game that Paolo is partaking in. He also signed off with Tether, the stable company, which is a turd of phrase we haven't heard before.

Starting point is 00:02:00 Now, it goes without saying that this kind of fundraising is completely unprecedented in the cryptocurrency. industry, and frankly, until about five minutes ago, with everything happening with AI, basically any other industry either. Tether has never publicly raised outside capital before, although we know their genesis involved a group of early crypto investors bankrolling the project. It's unclear if they've taken on further investors over more recent years, but if they have, it is definitely not at anything like this scale. Half a trillion dollars is a huge valuation for a private company. That is what OpenAI's recent tender sale has been at, and the list of companies at anywhere near that size is basically just OpenAI, SpaceX, and ByteDance when it comes to privates. As another comparison, FinTech

Starting point is 00:02:36 startup Stripe topped out at around $100 billion back in 2021. It's also worth reflecting on how wildly unlikely this outcome was. We've been covering Tether on this show since the very beginning, and there was a period there where it was not guaranteed that they were going to make it. Between 2019 and 2021, they fought a lawsuit against the New York Attorney General, who claimed that BitFinex had used Tether to cover up an $850 billion hole in their books. Throughout the legal proceedings, Tether repeatedly failed to deliver audited financials, and there was a long-running suspicion that Tether didn't have the reserves to back their stable coin. That sentiment is no longer prevalent. Tether is in a completely different era.

Starting point is 00:03:09 Pala Arduino is free to visit Washington and meet with administration officials, and Tether is planning to launch a fully regulated stable coin in the U.S. The news sparked a wide range of responses, one of the most common being why a profitable company would need to raise money. Tether's most recent financial disclosures have claimed the company is making around $5 billion a quarter, making them one of the most profitable private companies ever. It is crazy to me, and I'm sure we we'll explore this more on the Friday 5, that this would even be a question. The thing that companies do, especially companies that are good enough to get to where Tether has gotten, is grow. They build more stuff. They do more things. They move into orthogonal areas. They take over

Starting point is 00:03:42 stuff. And yes, Tether has a big old balance sheet to self-fund a lot of that motion. But if you could raise $20 billion for 3% of your company and increase your ambition by 100%, the trade seems very clear to me. Now, there are other some more mechanical reasonings. One possible explanation, for example, is that Tether needs to set an independent valuation, either for their own purposes or for the benefit of shareholders. This year, for example, you see a ton of crypto money coming back into the regulated financial system via products like the Bitcoin ETFs and treasury companies, and it's not completely absurd that some Tether shareholders might want to take loans against their equity. To do that, they're going to need an independent valuation. For example,

Starting point is 00:04:18 Cantor Fitzgerald themselves reportedly owns a large chunk of Tether as a strategic investor. The Wall Street Journal reported last November that Cantor owns a 5% stake, and the report stated that Cantor valued it themselves at $600 million. If this deal goes through, that equity stake would be worth $25 billion, clean and clearly valued by outside investors. There is a huge amount of value in establishing that stake as good collateral in the banking system. Notably, the reporting said that this fundraising would involve issuing fresh stock, in other words, this is an exit liquidity for existing shareholders. The deal could also drastically change a lot of numbers across the industry. Circle, which isn't that much smaller a business than Tether, is currently worth around $30 billion in

Starting point is 00:04:55 market cap. Even Coinbase is only an $80 billion company. We have no idea how finance was valued when Abu Dhabi's MGX invested $2 billion in March, but it probably wasn't half a trillion dollars. Udi Wertheimer noted that the valuation of Tether the company is higher than Ethereum's. Mike Dutas of Six-Man Ventures pointed out that the valuation is outsized even looking at the mega-financial institutions. He tweeted, Tether would be the second largest bank in the world by market cap. Tether is worth two Goldman Saches. Now, there were, of course, the usual claims that Tether is raising because they still have a hole in their balance sheet. Frankly, if that were the case, it's a terrible idea to be doing a press tour and leaking the news to Bloomberg.

Starting point is 00:05:30 Others instead pointed to a huge range of new positions that Tether is hiring for, giving at least some credence to the idea that they're expanding new businesses and commodity trading, energy, and communications. Presumably Tether will have no shortage of investor options, but we'll still stay tuned to see how richly they're valued once the deal closes. For now, Moon Overlord had just one big takeaway tweeting, if you're trading badly lately, just remember. There was a guy on here who spent years making his entire personality and anti-tether one, and now they're worth $500 billion. In other fundraising news, ZZ has denied that his venture fund is taking on external investors.

Starting point is 00:06:03 On Tuesday morning, the Financial Times reported that CZ's $10 billion fund, YZ Labs, was considering opening up to outside investors. YZ Labs was formerly known as Binance Labs and spun off from the exchange in January. The reporting even included a quote from Ella Zhang, identified as the head of YZ Labs, who said, there's always a lot of external investors interested and we will eventually consider turning it into an external-facing fund. We just think it's not there yet. In AI and biotech, we're still early. We're forming our team. When we have that expertise, we have the confidence level will open up for external investors. Zhang also said that the SEC had sought a private demo showcase of some of the

Starting point is 00:06:36 companies backed by the fund. Apparently, CZ feels completely different about the situation, taking to Twitter to proclaim completely false news from the FT. Oldheads will be shocked that he didn't show a picture of himself holding up four fingers. ZZ continued, WISY Labs is not raising external fund. There is no demo. WTF is a demo for a fund. There is no pitch deck for WISE Labs ever, not even preparation of one.

Starting point is 00:06:57 WISI Labs, since rebranding, has not sought a single external investor, no requests, no discussions. There has been no demo, no communications with Chairman Paul Atkins from WISE Labs or me. He ran through a series of other disclaimers, largely about the FT characterizing his criminal charges as money laundering rather than compliance violations. Zizi concluded, FT tried for a long time to lure me to a lunch interview, promising it will be a positive coverage. I almost did it last week, but I was busy last minute. So Ella had lunch with them first, and this is what came out. It was a trap, canceling that lunch now.

Starting point is 00:07:26 Zhang also checked in and disclaimed the story stating things were still all good between her and CZ. Tigran Gambari on a finance compliance officer who spent eight months in a Nigerian prison on trumped-up charges last year commented on the journalistic integrity at the FTE, tweeting, hang in there and stay strong, they tend to do that. If you roll with CZ, they'll come after you. Now, aside from being an utterly bizarre story, the week has really cemented that CZ is back to being a main character in crypto after lying low for a while after his prison sentence.

Starting point is 00:07:51 As he was going to jail, CZ resigned as the CEO of Binance and said that he would be moving on from crypto to focus on biotech investing and an education startup. He's back to tweeting every day and the tone of the coverage is reminiscent of the last cycle. We also now know that CZ has a $10 billion venture fund investing in a mix of crypto and biotech. So is this a temporary resurgence of CZ onto the crypto sphere or something more sustained? We will have to just wait and see. Speaking of Paul Atkins, who got a passing mention from CZ, the SEC is considering an innovation exemption to fast-track crypto products. In an interview with Fox Business on Tuesday, SEC Chair Paul Atkin said that the SEC was looking to finalize crypto

Starting point is 00:08:25 rulemaking over the coming months. As one example, he said, we're looking for an innovation exemption to try to get that in place by year end. The SEC uses exemptions to allow various capital market activities which wouldn't otherwise be allowed. One notable example from the past decade was the crowdfunding exemption that was adopted in 2015. To get a sense of how powerful these things can be, that exemption created the entire phenomenon of Kickstarter-style businesses and other similar methods of microfunding for small ventures. Closer to home, many crypto projects issue their tokens under exemptions that allow unregistered securities to be sold to qualified and foreign investors.

Starting point is 00:08:58 Atkins didn't elaborate on exactly how the innovation exemption would work or what would be allowed. However, he said the idea is that it would allow crypto firms to quickly, quote, bring on-chain products and services to market. Atkins also covered the generic listing standards for crypto ETFs, which were recently adopted, saying, there were another example of how we can move forward. It's not just an ad hoc type of approach. trying to give the marketplace some kind of stable platform upon which they can introduce new products.

Starting point is 00:09:21 Besides all that, Atkins mentioned that the SEC is moving at full speed. He commented, my hands are full right now, and we are working hand and glove right now with the CFTC. So harmonization is really what I envision. Speaking of the CFTC, that agency is launching a new initiative to allow tokenized collateral on regulated venues. In February, the agency tapped Coinbase Circle, crypto.com, moonpay, and ripple to take part in a pilot program. Under the terms of the pilot, they would offer non-cash collateral using distributed ledger technology. In announcing, the new initiative acting CFTC chair Caroline Pham, said that the use of tokenized collateral had the potential to increase efficiency and transparency. Cutting through the jargon, the point is to

Starting point is 00:09:55 allow stable coins and potentially other crypto assets to be used on registered derivatives exchanges. The thought is that traditional derivatives markets could benefit from the faster liquidations that are utilized on crypto exchanges. It would also allow crypto venues to offer regulated markets in the U.S. while keeping the infrastructure that makes crypto derivatives more efficient. Alongside the initiative, the CFTC is asking for public comment from industry stakeholders, with the comment period closing on the 20th of October. FAM struck a fairly certain tone, however, commenting, the public is spoken, tokenized markets are here and they are the future.

Starting point is 00:10:24 The CFTC continues to move full speed ahead at the cutting edge of responsible innovation, and I appreciate the support of our industry partners. So, friends, lots of interesting things happening. I am certainly very excited to see what happens with this big tether deal. For now that that is going to do it for today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.

The Breakdown - Tether’s Half-Trillion Dollar Valuation

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