The Pomp Podcast - #873 Is Tether Actually Backed By Real Money? w/ Paolo Ardoino

Episode Date: March 20, 2022

Paolo Ardoino is the CTO of Tether and Bitfinex. In this conversation, we discuss some of the controversial rumors around Tether, it's backing to the U.S. dollar, how Tether is audited and how Paolo is working to push the industry forward. ======================= Fundrise is the largest direct-to-investor real estate investment platform out there, giving you the opportunity to achieve upside of an asset class previously reserved for institutions and high net worth individuals. That’s right, Fundrise is making high-end private market real estate investing accessible to everyone via an easy-to-use, automated platform. See for yourself how over 190,000 investors have built a better portfolio with private real estate. It takes just a few minutes to get started with as little as $10.  Go to http://Fundrise.com/Pomp today and, for a limited time, get $10 when you place your first investment. That’s Fundrise.com/Pomp ======================= The Pod Pro Cover by Eight Sleep is the most advanced solution on the market for thermoregulation. It pairs dynamic cooling and heating with biometric tracking. Go to https://www.eightsleep.com/Pomp to check out the Pod Pro Cover and save $150 at checkout. Eight Sleep currently ships within the USA, Canada, and the UK. ======================= Since 2018 Copper has been at the forefront of institutional digital asset development.   From award winning custody solutions, to creating the first truly off-exchange settlement function, Copper pioneers technology, products, and services, in lock-step with a rapidly changing world.    No other infrastructure provider covers as many assets, across as many exchanges, with the speed and security that Copper can offer. To learn how Copper helps the world’s largest institutional investors secure their digital assets, head over to copper.co   Copper - the unfair advantage. =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Paolo Ardoino is the CTO at both Bitfinex and Tether. In this conversation, we talk about Tether, whether it's backed, how it's audited, what all of the rumors around Tether, what's true and what's not. I really enjoyed this conversation with Paolo, and I hope that you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. Today's episode is brought to you by Fundrise. You all know I believe that the best investors both understand and seek out extreme asymmetry. Fundrise is here to help you do just that.

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You want to know how I have relentless energy every single day? It's because I sleep on an 8sleep. Seriously, go check it out, 8sleep.com today. Today's episode is brought to you by Copper. Since 2018, Copper has been at the forefront of institutional digital asset development. From award-winning custody solutions to creating the first truly off-exchange settlement function, Copper pioneers technology, products, and services in lockstep with a rapidly changing world. No other infrastructure provider covers as many assets across as many exchanges with the speed and security that Copper can offer.

To learn how Copper helps the world's largest institutional investors secure their digital assets, head over to copper.co. Again, Copper, the unfair advantage. Check them out at copper.co today. All right, let's get in this episode. I hope you guys enjoyed this one. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions

and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Paolo, you there?

Yes, I'm here. How are you, my friend? I'm good. Thank you very much, Paolo. What about you? Well, I have a question that's a little out of left field to start with. You've been doing a lot. I know that you hear all the chatter on the internet. You've been pushing forward the work in Switzerland.

You got Bitfinex. You got Tether. You got a lot of shit going on. One of our sponsors is 8sleep. And I sleep like a baby now because they make it super cold. what's your sleep schedule how do you get all this done my sleep schedule is actually terrible so since i started working in bitfinex i you know i i sleep only at one hour chunks per night like one hour then i wake up check the phone check everything then go back to sleep and so on since like six years so i'm not the right person to talk about sleep all right that's fine we gotta get your aid sleep make it super cold and then you'll sleep like a baby and then you're like

I solved all my problems. I will try that. All right. Now let's get to, let's get to the hard stuff first. I told you that I'm going to ask you all the questions. I got nine gazillion people messaging me. I got a hundreds of people who responded to the tweet yesterday with all these questions. They basically fall down into a couple of different things. Let's first start with tether. And then we'll talk about what the work you're doing in Switzerland. And then we're going to talk about Bitfinex itself, but with tether, the big question everyone wants to know is, is it backed one-to-one to dollars and i'll ask it that way in terms of i think there's a bunch of different ways you could answer but that's what everyone wants to know is can i have confidence

if i hold tether that's actually backed one-to-one to dollars how do you respond so it the answer is definitely yes um how you know that so um it's it's in it has been in public so in 2021 so just a little bit more than one year ago, Tether settled with the New York General and then later on with the CFTC. So after the settlement, especially the first settlement, Tether started to provide what is actually the current standard for stablecoins, that is the attestation. So with the attestation, Tether shows that

every single USDT, all the Tether tokens are backed 100% by your service. So that happened pretty soon after the settlement with the New York General and after any process that is ongoing on a quarterly basis. So on a quarterly basis that there is offering these attestations and even more so after the first attestation that happened in February 2021

One, the following one contained another piece of information that at that time no one was offering, that was the breakdown reserves. So we went one step further and started to provide the breakdown reserves, so showing how the portfolio was composed, right? So we could not have done that, but yet we did. And then, of course, that raised some questions, especially on the commercial paper side. And then we went one step further and we also provide a breakdown of the ratings of this service right now. It was made public that the vast majority of all commercial papers are actually A2 or rated A2 or better or both. So A2, A1, A8, by, you know, not just by a random guy, but by the Standard Poor's, that is the agency that rates almost everything in this world, including the treasuries. So the point we have been always making is if you trade, if you trust Standard Poor's with the ratings that they provide to all the capacity instruments,

you should also rely on this on this evaluation when it comes to understanding the risk of tether also we have provided we have been providing the this information also to the new york attorney general in a quarterly basis and so on so long story short that all the tether tokens are more than 100 percent back and when i say more than 100 percent back it means that tether has additional reserves that are kept. So all the activity that Tether has been doing over the last years, all the profits have been kept in the company

to increase the backing so that there is an additional buffer, a cushion for backing the Tether tokens. Awesome. When I give you dollars and I get Tether back, what do those dollars go? Are they being lent out? Are they being held?

Are they being invested in bonds or some types of securities? That's the second big question everyone has. It's like, what happens to the dollars when they go in? And as a way, I think most people are trying to underwrite what risks they have. So when someone buys Tether from Tether.io, so you register on the website, you go through all the KYC and all these procedures to ensure that you are a good participant for the Tether primary market. Then these dollars go into Tether Bank accounts. From there, they will be allocated to the portfolio. So just one important information, right?

We talk about the breakdown research that showed that we had a concentration of commercial papers. That also we claimed six months ago that given the feedback we got from the community, we would start decreasing the allocation of commercial papers. And in the last six months, the allocation of commercial papers went down 50%. Why am I saying this? Because the dollars that have been sent to Tether, where do they go, right? So they go in this portfolio that is composed by cash, equivalent to treasuries, commercial papers, and so on.

So, the way we address the risk is through a team of people that have decades of experience in managing portfolios. They also run a really thorough risk approach. So, we, on a weekly basis, we analyze the risk of the portfolio using all the Black Swan events, including the 2008 crisis. and we know that in all these situations, all the Tether will be redeemable. Also, it's important to know when, again, you asked about risk, it's important to know that Tether never refused one redemption at any point in time.

Even when 2020 was March, I believe that we just recently got the anniversary, it was the 12th of March when Donald Trump closed the inbound flights to US. the stock market and also the crypto market started losing a ton of value up to 50%. And also at that point in time, we never had an issue in processing and redemption. Can you talk a little bit about what the impact of Tether on the market has been? Obviously, there's tons and tons of people around the world that want to use these new types of payment rails, but they want stable value.

So for whatever reason, whether they're right or wrong, They view Bitcoin or Ether or any other cryptocurrency as volatile in U.S. dollar exchange price. And so they want that stable value, which Tether was the first to provide at scale globally. What has been the impact of global adoption here? Well, Tether was born in 2014 and was the first stable coin, right? So nowadays, everyone talks about stable coins, about CBDCs. We are discussing with the regulators, with central banks as well. And yeah, it was created as a simple idea, actually, because the idea of Tether was, let's take the brilliant innovation that was blockchain, that was powering Bitcoin, and apply it to the dollar.

So Tether is a dollar and a blockchain. It really sounds simple now, back in the time when all the exchanges in 2014 were sending back and forth wires and swearing because the wires were blocked or lost or taking several days to clear. That was a brilliant innovation. And so Tether was born as a way to optimize the trading strategies of crypto traders. Because back in time, in 2013 was the first time Bitcoin price went above $1,000. And we were seeing spread across exchanges that were massive.

At some point, there were spreads around 20%. And in any financial industry of respect, you need to ensure one thing that is called arbitrage. So the arbitrage activity is the thing that will keep the price of the same asset in line across multiple trading venues. But in order to do so, you need to be able to move to transfer funds. Actually, the two legs of a trading pair like Bitcoin-US dollar is composed by two legs, the Bitcoin side and the dollar side. So in order to have a proper trading market and a proper arbitrage across multiple trading values, you have to be able to transfer Bitcoin and dollar at the same speed. In the traditional financial markets, you would send your stock holdings and your transfer dollars in the same way because it's a cross-custodian transfer. But with Bitcoin, it's not the same thing.

So you can move Bitcoin in 10 minutes from one exchange to another. The average block time for Bitcoin is 10 minutes. But dollars were taken from one day to five days to clear. And your arbitrage opportunity was gone. And arbitrage means basically that you want to sell Bitcoin on the exchange where the price is higher and then move back the dollars that you're earning that way to the exchange where the price is lower and then buy Bitcoin with those and transfer Bitcoin way back to the exchange where the price is higher. So you do this back and forth with important masses, and then you keep the price in line of across all the exchanges, right?

And Tether kept growing due to this interest because, you know, Tether went a little bit flat between 2014 and 2016. But then in 2016, exchanges like OKEx and then OKCoin, actually, then eventually UOB, and then I recall Poloniex was actually the biggest exchange at that time that started to lease Tether or all their pairs, all the crypto pairs, all the new ICOs against USDT. And then Bitfinex had the same thing. So we started to see enormous arbitrage opportunities that were eaten up by all the new professional trading firms that were coming into crypto. And they were all starting to use Tether. And now today, Tether is being traded across almost every single exchange. I would say every single exchange in this world. We have seen recently in the last year or so that also Coinbase started to accept Tether and allow Tether to trade.

So Tether started as a simple instrument, a simple tool for traders to optimize their trading activity, to allow arbitrage. But now, in the last two, three years, has been established as a cross-border payment solution, as a remittance solution, as a micropayment solution. With the growth of the adoption of different blockchains, especially ones with lower fees, Tether is more and more used as an instrument for fast payments. And of course, it's also considered an instrument of freedom. freedom, we are seeing that in Ukraine, officially by the Ukrainian government, and also in the Democratic Party, the Democratic movement in Myanmar, they claim that the Tatar was for them a legal tender.

So it is, of course, spreading in many different directions, or really, honestly, many more directions that we originally mentioned. When you start to think about kind of moving forward here, CBDCs are coming from various governments. Is that something that would be competitive with Tether? Could Tether be adopted by a country? How do you think about the way that CBDCs interact with Tether in the future? So this is one of the most interesting questions, because of course, the first thought that people have is CBDCs could kill private stablecoins,

right? Privately issued stablecoins like Tether, like USDC. I don't think it's the case. So, first of all, Tether is or privately issued stablecoins are the ones that are running on public blockchains. So,

I doubt that the Central European Bank would issue Ethereum or Tron or Algorand. directly. So, privately issued stable coins are the ones that would wrap potentially CBDCs and issue on public

blockchains. But also, I come from the traditional banking world. Before joining crypto, I spent my time in work in London, building software for banks, hedge funds, and the custodians and so on. And the reality of things is that the entire technology that runs the traditional financial world is terrible, is outdated, and, you know, it runs on a technology that was built 30 years ago, and there are, it's full of rather rubber bands. Now, I think that

one of the most interesting things and innovation that CBDCs could bring is actually finally replacing the interbanking settlement layer that is, you know, again, has been parched, span and in a really complicated way for so many years, that could be replaced by a blockchain. The beauty of a blockchain from a technological point of view is that everyone is looking at the very same thing, right? I look at the balance, at the number, I'm synchronized with the blockchain, with the node, I see a balance, you see the very same balance, right? So that would solve many of the issues of the reconciliation issues that banks have, as well as will reduce dramatically the cost of maintenance of all the technological infrastructure of these

of central central banks and all the banking system all the you know small medium size and top tier banks they have so it will in a certain way it will reduce the cost of banking dramatically just switching the the transport layer for money for traditional money so to summarize i don't think that there will be, CBCs are in direct competition with privately issued stable coins, they can definitely push this. Joe, what questions you got? And my question would just be around the adoption of Tether and Bitcoin in general. Obviously, we saw with El Salvador, Bitcoin was made legal tender last year. I know that you were a huge part of doing a similar process in Switzerland. What does success look like

for you there? Is it a certain number of transactions done with crypto? Is it something else? Is it startups funded? Just talk through a little bit of kind of how you're measuring success. So I think that success for me is, first of all, awareness and education, right? So is ensuring that the majority of the people in the country or the city, they know that they have choice so uh also i i can talk about switzerland so what is being done in switzerland is actually setting up a process for which and a set of funds for which we we don't we can provide technological and legal support to all the small medium and big businesses in the area So that no one gets left out, right?

So that is the business that can decide, the business owner can decide whether or not they will accept crypto, Bitcoin, Tether, and so on. And the beauty of it is that it's all about freedom, right? So I don't think that you should force people to accept a technology that they don't understand or they don't want. What I like about the approach that we're taking

is that it's education first. We are also providing funding for 500 scholarships in the three universities in the area to provide enough education also to young minds and kids to learn about the technology and then growing and helping them and pushing them to help businesses on the territory to understand the technology as well and understand the impact that this technology could have. First of all, is, again, a better transport layer for money. So that will reduce also the cost, not just on a global scale, like we were talking about CBTCs, but also on a local scale. And also, in my opinion, one of the most interesting things is the opportunity. Right now, everyone, many countries and potential cities are talking about supporting Bitcoin. But no one actually is developing a framework for this to happen. So the plan B in Switzerland was actually this framework, right?

So a series of clear steps to bring adoption to the local community. Because after the announcement we made on the 3rd of March, you can imagine like a grocery in Lugano scratching his head and the owner of such groceries scratching his head thinking, how, okay, it's all nice, it all sounds good, but how I can connect, how I can accept Bitcoin and moreover, how I can accept Bitcoin and integrate that with my own point of sale or with my accounting software. So it's not just about accepting Bitcoin, but accepting Bitcoin in a transparent, in a way that will make comfortable

business owners to integrate in their existing payment flows because they might have employees, they have to pay these employees, they need to understand the effects, risk, and so on. So it is about education and it is about also providing funding because I believe that one of the best experiments that someone can do is to provide enough funding to allow business owners to do this job without any financial risk. So they can, instead of asking them to invest in the technological resources to accept Bitcoin payments, we want to cover that angle for them so that we can see on a global scale how a city could potentially benefit from the adoption of Bitcoin. So, you know, also we all know that, first of all,

the funding that we are putting together across multiple companies is an important amount of money. At the same time, you know, it's money that, you know, with the Blinkon and I would flow in Shiba or some other, you know, other token, new token. So there is no reason why companies like us and in other places maybe could start devoting a small part of their revenues to help local businesses and cities

to start adopting Bitcoin. So that is our angle, right? So, you know, we have two successful companies. If we are not actually trying to put the money we earn at, you know, to keep sustaining the industry that helped us to succeed, then, you know, it wouldn't be nice. It would be being in for the money

and not for the technology. And, you know, many says that they are in for the technology, but only when you actually dedicate yourself to achieving the goal and, you know, you're investing in the technology, you can actually say that. So when it comes to, and I believe that there is an interesting comparison between Switzerland and El Salvador, because Switzerland is going, is looking at the integration and support of Bitcoin differently from El Salvador, right? Lugano is a rich city, so they would support Bitcoin and Tether because of the financial opportunities that could derive from that. For example, increased tourism. We know that our industry, for better or worse, is a religious industry. So you have people, there are tribes. So these people, also myself, right, I would like to be able to spend directly Bitcoin or Tether in a place.

So I would more go to a place, to a hotel more gladly if I know that I can spend, I guess, Bitcoin. And like me, there are a ton of other people. And that could be ideally in Europe and in many other and in all the other continents. So I believe that trying to attract the people, the crypto folks that want to spend first in crypto, remain in crypto, like a circular economy in crypto, then that could dramatically change also the tourism landscape of a small city like Riga. And back to the comparison with El Salvador, that is the other interesting part, right? El Salvador is a country that is not rich, right? So they are actually looking at Bitcoin as an opportunity to have actually a bank account, right? So many of the people, of the citizens in El Salvador, they don't have a bank account.

So they are actually using Bitcoin as a first necessity to be connected to the financial system, to have access to financial services. So the beauty of it for me is that we have two stories. One is a rich city and the other is not a rich country. And they are both looking at Bitcoin for potential growth of their better life, growth of local businesses and so on. This to say, finally, that Bitcoin, the beauty of it is that Bitcoin is for everyone. John, what do you got for us? Paolo, Tether is a clear leader in the stablecoin space.

Its market cap is around $80 billion. dollars why do you think and what has led to tether success and then in regards to the other stable coins are they more competing with tether to be the leader or are they complementary to tether so i think that tether uh you know one of the things that i'm more proud about tether and maybe i shouldn't say that but is the fact that for a long time we didn't have any any marketing team so everything that's been achieved right we are seeing the normal growth of Tether in Turkey, Venezuela, in Argentina, and all this country where the inflation is high, the success is not due to our merits, but just because Tether created an usable

tool. That's kind of making me proud because one thing is getting success if you are investing a ton of money in marketing. Another thing that I believe is more beautiful, if you are getting to success, if you are actually, if you are just because your product is useful. Of course, now we are, as you might have seen, we are improving communication and we are forming a really strong team. But the success of Tether is due just to the fact it's like a super simple product. It's useful to many people. And our approach has not been focusing

on on rich countries actually um it has been starting from you know the last right so uh in general you know bitcoin um and uh and and tether and stable coins for me are products for for the people that for all those people that don't have access to a bank account right so not because there are more than two billion people that don't have access to bank account not just because, not because they are, you know, maybe bad people. It's just because they are too poor to have a bank account. And that is quite sad, right? Because just even say that someone is not rich enough and he does not even

arrive to the threshold, to the bar, to have his bank account open, that's quite sad. And I believe that Bitcoin and Tether are helping to fix that. First of all, also, we always thought to Tether, as not a replacement for bitcoin so we would never pretend that that there is a centralized um stablecoin it represents a dollar and is like a mere servant of bitcoins is the thing that is helping the onboarding of fiat money into the into our industry it will it is smoothing this onboarding and the realization of that the fact that we are not trying to replace

Bitcoin with a stable coin, but actually our aim is to be complementary to Bitcoin, is I believe what is driving adoption and driving trust in our community and so on. It's like we are quite humble in that sense. And the fact that we are, again, we are concentrated, we are focusing on all our energies in the emerging markets because they are the ones that need more help. So, of course, we as Tether, we are not servicing U.S. customers. If you are a U.S. person, you cannot buy Tethers from Tether. And so that tells a lot about our strategy. It's better for us to leave the U.S. market to U.S.-based table coins like USDC,

there is Paxos and some others that I'm forgetting. and we won't just focus on the rest of the world that needs more of our help. Paolo, before we let you go, what's your message to everyone in terms of the work you're doing in Switzerland, Tether, Bitfinex, et cetera? If you had to sum up in one sentence,

what is your goal in the Bitcoin and cryptocurrency world? I think that everyone can make the difference. I mean, I know that it sounds obvious and yeah, it sounds obvious, But what we wanted to do in El Salvador and in Switzerland is trying to help from a smaller scale, right? It's really harder to orange peel a huge nation and powerful nation like the U.S. I know that there are many people that are also succeeding in getting the Bitcoin world into the U.S. and at any level, right? But I believe that there are many of us that have connections with small cities, with the administration of small cities.

And every little bit, every drop in the ocean helps, right? So if we all focus to indication in directing resources that can be, you know, just time resources, financial resources, if possible, and putting maybe in connection players like ourselves, but many others in the crypto industry, to provide help, to provide financing to, you know, to cities that want to explore the adoption of this new financial system, the better financial system, in my opinion, that will matter. They will matter a lot. That's an amazing answer.

Where can we send people to find you on the internet before we let you go? On Twitter at Paolo Arduino. Thank you very much for having me today. You killed it, my friend. Please keep pushing the pace. I think you're doing fantastic work. obviously the results speak for themselves and we'll definitely have you back on again in the future thank you so much thank you guys everybody thanks so much for listening to today's episode i

really hope you guys enjoyed this one make sure you're subscribed on apple spotify or your favorite podcast player and if you're looking to try to transition to get a new job in the bitcoin or crypto industry we've got you covered head over to palms crypto course.com we've developed a curriculum with the top teams across the industry it's a three-week intensive training program with over 50 events packed into that three week time period. Go to pompscryptocourse.com to learn more and I'll meet you guys for the next episode.