The Wolf Of All Streets - Bitcoin Boom: Tether's Massive Investment and Total Transparency, Revealed by Paolo Ardoino

Starting point is 00:00:00 There's a famous saying that there are two certainties in life, death and taxes. We could probably expand that to another certainty in crypto, and that is fear, uncertainty, and doubt surrounding Tether. Now, every time we see another false Tether de-peg story or a story about an attack on Tether that they're going to collapse, I just call Paolo Arduino and we have a conversation about that's exactly what we did here today. There's some new revelations and some amazing takes in this awesome conversation another day another tether controversy being made up by the crypto community seemingly but you guys just made a huge move towards transparency. Can you talk about FOIL? Yeah, sure.

Starting point is 00:00:47 Thank you. Thank you very much, Scott. I mean, it feels like every time something happens, you and I get to talk. So, okay. Of course, the day started with some market movements. We will talk about that later. But the most recent news was 15, 30 minutes ago. Tether announced that it dropped its opposition in the FOIL matter.

Starting point is 00:01:11 FOIL means Freedom of Information Law. It's a thing in the US that allows, I think, journalists or even the wide public to ask to regulators certain information related to disputes. So, Coindesk asked that information to the New York Attorney General in 2021. on this matter to avoid that the information of our customers was going to be released and also posed on the depth of the information that was included in this report. But look, you know, two years past, that information is old, but also that information contains our banking statements, right? The bank balances, the name of the banks that we have been using for the last years. It contains a lot of information about our policies, our KYCML policies, our transparency policies, our risk management policies, investments and so on.

Starting point is 00:02:23 And contains also some information about the widely spoke commercial papers. So in these days, in these times of high uncertainty and fat and the market craziness, and we thought, okay, we have to do something. We have to show that we are different. Let's put this to bed, right? We don't have anything to hide. First of all, that information is super old. Tether changed so dramatically since then. But also even that, that information shows that Tether was always backed. That information was in fact reviewed by the New

Starting point is 00:03:00 York Attorney General for two years, right? So for two years, we kept sending this information to the New York Attorney General. And so we thought, okay, we have to release it. We have to show that we are the bigger man in the situation. And it's a good day. It's a good day because it will just reinstate the fact that transparency is king, that it will just set up the bar higher for everyone else.

Starting point is 00:03:30 So I find it exciting. I think it's really exciting. Does this put to bed the questions you've had about audits in the past? I mean, is this as transparent as having an audit if you're just releasing your statements in your books? Well, I mean, I think the, so this is a punctual information in a specific moment in time, right? So I know it is a more and more ongoing thing. But I think one thing that I'm a bit sorry about of this information coming public, that is one of the reasons why we opposed in the past.

Starting point is 00:04:01 And but, you know, in the end, you have to take some decisions, is that that information contains the list of terminated customers from Tether. So Tether over time terminates customers because either they're US people, so we can observe them, or for different reasons. And so we hope that the Coindesk will not release the list of individuals publicly, not because we have something to hide. So, you know, it's not about transparency, right? If they do it, it's not our problem.

Starting point is 00:04:32 It's the physical security of these people that is not great. But, you know, we try to warn Coindesk. We ask publicly to not do it. We'll see what they will do. Yeah, okay. So the other news that we've been talking about today, obviously, is this curve pool imbalance that's once again triggering people to talk about a tethered DPEG, causing some people to speculate that somebody knows something that maybe we don't. Seems like the usual story, but can you talk about what's happening there specifically?

Starting point is 00:05:07 Yeah, well, this is the good old story that we talked always about each other. So recently today, and think about it, right? So first of all, it's quite interesting as a coincidence that this happened while the information our information was shared today with different journalists so um related to the foil right so fad has always interesting timings you could see you could say so anyway um this morning five around five a.m i think ct um there was an aggressive move on some DeFi pools and on some centralized exchanges that would see USDT being sold subpar. We have seen that event happen a few other times in the past, always related to public

Starting point is 00:06:01 attempts to cause panic in the market. We always came out from those situations with fine colors. Remember, the first time it happened seriously was just after the Terra Luna event. Yeah. And Tether was able to redeem $7 billion in 48 hours. That was 10% of our reserves and $20 billion in 20 days. That was 25% of our reserves, something like that. And, you know, of course, as we see much less

Starting point is 00:06:34 pressure today in the market, the volumes of these sell pressures were quite smaller than in the past. But still, nevertheless, you could see also reported publicly, right? You could see big whales dumping, borrowing Tether and dumping in the market to cause further down pressure. That caused, of course, market makers to step in and doing the arbitrage work to buy cheap Tethers from the market and redeem them. And that's completely fine, right? So for us us the thing that they always say is it's a test right it's a stress test and stress test is good i mean i wish banks would go uh with uh would be subject to the same stress test because if you see your 10 percent of our euros there's flowing out the window in in 24 hours then then it means that and you don't have

Starting point is 00:07:22 any problems that is good right People see that that is happening. People see that your banking is able to fulfill their redemptions. So it's always exciting when it happens. I think I'm just sorry that it always comes with a lot of fad and misunderstanding, misconceptions around Tether that could harm less sophisticated people. So I saw your tweet today where you're explaining how the peg works. So the peg event happens only on the secondary market, on the exchanges, on DeFi pools. But Tether always redeems all its tokens at $1, the face value, right? So when a customer comes to us, we pay always a dollar for each token.

Starting point is 00:08:10 And so that is an important definition, right? We can only take care, as Tether, we can only take care of the primary market that is our platform, that is Tether.io, right? But we cannot control, we are not involving ourselves and we cannot also buy low, involving ourselves on the secondary markets. We cannot touch them. And so that is really important. There are market makers that will fulfill the market demand. That is also happening when, for most of the time, funnily enough, that is trading above the dollar and you don't hear so much news. Right. But that means that in that moment, the traders or the market has a lot of demand for

Starting point is 00:08:51 Tether. So there is an upward pressure. When either there is an attack or there is less demand, there is downward pressure. In market dynamics, it works pretty well so far. Yeah. And this DPEG, you know, I'm throwing up quotes for anybody who's listening, but this DPEG was a fraction of a percent. I mean, USDC last year at Silicon Valley Bank was trading on the secondary market at 87 cents, 88 cents, 90 cents on the dollar.

Starting point is 00:09:19 We're talking about 99 point something today. So totally different scenario 0.3 percent was the maximum of um of um discrepancy from the dollar and yeah again you know we have seen in the past some attempts like this I think that now market makers are more equipped to to act quickly because it's a good money for them right so they know that we are back. So they just are happy to buy cheap tatters and redeem them. So it's a good showcase on how healthy markets work in a certain way. Do you have any concern when things like this happen that in this regulatory environment

Starting point is 00:09:58 with so many people having a spotlight on the space that it could then have them focus more on you? Because I also don't think a lot of your regulators and legislators and governments understand the nuance that we just discussed they probably like everybody else just read an article and go it's deep pegging it's not safe that's a that's a great point right so the role of Tether is meeting with all regulators or all lawmakers to explain how exactly the market works, right? So it's not necessarily every single regulator understand all the dynamics of what is happening in the crypto industry.

Starting point is 00:10:34 They don't necessarily understand the difference between primary and secondary markets. So it's important from our perspective to give them the tools to understand exactly how it works and give them the data, right? Because when you look at the data, when we show how our redemptions work, when we show when a customer comes and redeem $100 million, we show them, okay, we received that money, we pay that money out. So we receive in Tether's tokens and we pay the money out. So they can see all the process. Then they understand they are much more assured. But this definitely is probably the most critical word in this particular moment in time that we can do to provide the tools to understand this technology.

Starting point is 00:11:19 Are there doors open in every single country for you to take those meetings? Are there places where you can't get in the door? I mean, we know for a fact Brian Armstrong can't even get a meeting with Gary Gensler, who is the head regulator in his own country. Right. So is it problematic for you to even get the opportunity to educate those regulators? Well, I would say, well, I think the SEC case is particular. Right. So it's kind of saddening because it feels just wrong that, you know,

Starting point is 00:11:47 a country like the U.S. that historically has been pushing innovation forward, right? So I'm Italian. I was living in Europe. I've been living in Europe for all my life, right? And, you know, in all the movies, U.S. has been the driver, the driving force of innovation, right, in every single technology. And then, you know, this seems an exception, a weird exception to me. And also the capital that there is in the US, right,

Starting point is 00:12:14 to support this technology is a shame that this is happening this way. But, you know, I um regulation should have been happening proactively rather than regulation by enforcement but in general what we are seeing right so also it happens that um so i talk to regulators in both in in in europe but also in in the us um and everyone is always excited to talk to us. I mean, it's crazy enough about today, they hear so much about Tether, that when the CFA's when they understand how it works, you know, they of course ask questions and also really hard and thorough questions.

Starting point is 00:12:57 Well, that's their job, right? But in the end, we end up the conversation in a positive light. I think that makes sense. Because once they understand it, they understand that it's actually end, we end up the conversation in a positive light. I think that makes sense because once they understand it, they understand that it's actually a pretty boring business. Yes, it is. It's a business that doesn't require so much manpower. So we are a company that is quite lean. We have 60 people in the company spread all around the world.

Starting point is 00:13:25 And it's important because all our customers are all the emerging markets so you are so we are so spreading in in the in our users rather than customers right because our customers are the primary market customers but our users are like in Turkey in Argentina in in Brazil in Venezuela in in Vietnam in the everywhere right so in in Africa, so we have people around the world, we show how careful we are in our risk management, in our liquidity management and so on. So I think it's exciting. Really, I think TEP Tether since two years ago took amazing steps in terms of transparency and we learn a lot. Also, when I talk to regulators, I never hide the fact that we have been, we settled with the New York Tony General, we settled with CFTC. There is, I mean, we are not ashamed, right?

Starting point is 00:14:21 So we know our history. We know that we always want to do better. We are fighting for this technology, for Bitcoin to become a resilient tool for people, a resilient financial tool for people. So we decided that we have to put everything that we have in this thing. I can't remember if we've talked about this before, but I was pretty astounded when I was looking into, well, A, the volume of Tether being moved around the world is absolutely astounding, but I was actually pretty surprised to see that the bulk of it was happening on Tron. Well, it makes sense, right? Because keep in mind that Ethereum fees are pretty unpredictable. You just need a guy minting a few NFTs that the fees are...

Starting point is 00:15:09 It blows up the whole network for two days. Exactly. And so keep in mind that maybe $5 are not much for... Well, are still a lot of money for a single transaction. But maybe a European, a person living in the US or Canada can afford those. But for a person maybe living in Nigeria or a person living in another country, they cannot afford it. So Tron has much, much lower fees. And keep in mind one thing, Tether is a centralized stablecoin, so because it relies on the banking system, using decentralized transport layers, but it remains centralized.

Starting point is 00:15:52 So the fact that it uses strong, it uses strong just because it's fast and cheaper than Ethereum. It doesn't change, it doesn't affect its decentralization because anyway, Tether is not decentralized in the first place. Tether is centralized. Yeah, makes perfect sense. I think most people just want fast and cheap and they'll go wherever they can get it. Were you at all surprised, because I was, that in the Binance suit filed by the SEC that they named BUSD,d a stable coin as a security

Starting point is 00:16:27 well i mean um i i don't know exactly the mechanics of of um of usd um but um as you could see uh usdt was not uh named as security as a security so we take a lot of pride in in you know um um differently from others we we make sure that we do the things by the pride in, you know, differently from others. We make sure that we do the things by the book. And, you know, that I think is being recognized by regulators. I think so. When you meet with the United States, with the government regulators, companies here, do they understand that Tether is effectively helping the dollar and helping dollarization,

Starting point is 00:17:06 or do they still see it as destabilizing? What's the opinion there when you meet with people in general? Because you guys are a huge buyer of the United States treasuries, right? Yeah, I think we have. So as direct exposure, right now we have around 56 billion in US treasuries. And as indirect, I mean, through the money market funds we are investing in, we are like 60 and something billion in U.S. treasuries. And so when I explain our portfolio composition, I also explain that we are not here to trying to steal the work from the banks in Europe or in the US. And that's true, right?

Starting point is 00:17:48 So I don't have to preach to the Pope, right? So Europe and US has pretty good financial infrastructure, right? So and banking infrastructure, people, most of the people have a bank account. But there are places in the world where people don't like 70% of the people don't have a bank account. And because the banking infrastructure is poor, they are forgotten, or not interesting for the banking infrastructure. And so that is where we thrive. So in a way, we are not competing with the US and European banking industry. So we are not stealing jobs, we are not stealing fees from them. But we are also tackling a market

Starting point is 00:18:26 that is really important for the US and is helping the hyper-dualization. And this knowledge, this information is really reasoning with the people I'm talking to because it's seeing this light, right? So always, of course, when you see this disruptive technology, you as a lawmaker or like a person like in, you know, as a lawmaker, you want to make sure that you protect your companies

Starting point is 00:18:54 inside your country, right? So you want to make sure that you maintain the healthiness of all these companies. But actually, we are not putting them in harm. We are actually creating more and more value for the US dollar. And I think it's the big difference that when explained, just makes sense. So we've seen a lot of talk about legislation around Bitcoin, crypto in general, in the United States. But when you really zoom in on it, it seems like stable coins are the first thing that they're keen to regulate. I don't know if that's because it's low-hanging fruit, it's something they understand and

Starting point is 00:19:27 it's easier. But do you think that we could get some stable coin clarity in the United States in the not so distant future? For me, I think of anything in crypto, that's the most likely thing we may see some legislation around. Yeah, well, first of all, think about the fact that stablecoins are the entry point for crypto, right? So if

Starting point is 00:19:50 you regulate stablecoins, you basically regulate the crypto market to a certain extent, but still you are already regulating the gates. So, but I agree with you, stablecoins seem to be the most likely thing that will be regulated both in Europe and in the US pretty soon.

Starting point is 00:20:10 In Europe, actually, there is this Mika license that is progressing fairly well. It should be entering in circulation, full circulation, full force by the 1st of July 2024. In the US, if you see all the new bills that are submitted, you could see that they are always referencing stablecoin and the will of regulating stablecoins. Did anything in Mika surprise you guys? Does it change how you have to operate or do you get to pretty much continue as you were doing? Well, Mika is a tricky animal in a way because basically it imposes a limit of assurance for payment stablecoins. And the payment stablecoins definition is not well explained or well defined in the legislation. So for example, Tether is both a settlement stablecoin, but also can be used as a payment stablecoin, right?

Starting point is 00:21:11 Or like a reserve store of value. So understanding how to comply with the regulation might be proving quite tricky. And also the limit is difficult to enact because it will require all the VASPs that are virtual asset service providers. So all the different counterparties that are accepting, for example, USDT to communicate to us how much volume that we're making per day so that we could regulate or limit how much we issue, right? So it's kind of a weird dynamic that we are trying to understand, but it's not

Starting point is 00:21:47 fallacious, right? So we are voicing our concerns to be a good actor and give proactive guidance. And for us, it's important, of course, to see in any way the final result. Yeah, I mean, if it's complicated for you, I can't imagine how complicated it is for them. I would imagine that it's not necessarily them being evil or angry or anything, but probably just don't understand the market well enough. And you're talking about a bunch of bureaucrats, right? So just pass something like that. Are there jurisdictions where you've seen stablecoin specific laws that you find are encouraging or that could be copied or mimicked

Starting point is 00:22:25 by any of these other regulators? We are seeing Hong Kong, for example, is making waves and in general also in supporting crypto. And the timing is interesting, right? So on one side, you get the US deciding to close on crypto. And you know on the other side you see china that initially decided to ban um cryptocurrencies also to with the with its connection to hong kong is is interesting that hong kong um is now reopening to crypto is in a way is um allowing crypto in hong kong as a testing phase but also as a way to attract companies with a lot of capital that are in this moment deciding to leave the US. Yeah, it's a simple way of saying that the United States slammed the door. So China decided to open

Starting point is 00:23:17 it even though they were in a country that was banning it. I mean, even today, the Hong Kong government, I don't want to quote exactly who it was, but basically said, or the bankers said, hey, all of those companies, actually, they were telling their own banks to open the doors to companies that were shut out of the United States in the banking system, like with Silvergate and Signature and such. Huge. Yeah. In the end, this industry at its peak was a $30 trillion industry. So, of course, you have to put rules because you don't want to attract scammers. Yeah. In the end, this industry at its peak was a $30 trillion industry, right? So, of course, you have to put rules because you don't want to attract scammers. But at the same time, if you have open rules that allow the technology to thrive at the same time to protect individuals,

Starting point is 00:24:02 and you embrace this technology, you can create a massive inflow of capital. That is basically what every single nation wants. Let's talk about you guys buying Bitcoin before I let you go, because that was the other most confusing FUD story that I've seen, where everybody said, they're going to buy Bitcoin. It's just like Luna. Anyone with a brain realizes you weren't saying you were going to back Heather with Bitcoin. They did.

Starting point is 00:24:24 But I'll give you the chance to explain it, but also more importantly, why you're choosing to buy Bitcoin. So let's start with how it works, right? So Tether in this moment has around 83.5 billion issued tokens. And Tether has 83.5 billion in the reserves on top of these reserves so um tether has kept in the company its profits the majority of its profits so so far uh give or take as of today we would have around 2.8 billion dollars on top of the 83.5 billion that we need to have in order to back 100% of the tokens. So those in a classic Silicon Valley company, they would have been already shared as dividends, disputed as dividends to the shareholders.

Starting point is 00:25:18 But Tether decided to keep them in the company to further provide stability to its stablecoin. So, you know, just when I see these attempts to try to bring down Tether with some selling the market and say, okay, we have even more money than what we should have, right? So, you know, good luck with that. Anyway, we are now in a situation where with the part of the excess reserves, these are these additional $2.8 billion. Yeah, we decided to buy a portion with a portion of it. We decided to buy Bitcoin because we believe that is a good hedge against all the craziness that is happening in the world. We are Bitcoiners at heart anyway.

Starting point is 00:26:00 We believe that Bitcoin is the most liquid thing in the crypto industry. So it is the only thing that makes sense for us to buy. And someone today reported that BlackRock is even thinking to file an ETF on Bitcoin. So it's the thing that everyone is looking at, right? So there is not really enough liquidity, honestly, to buy it. And we believe that there is nothing like Bitcoin anyway. So we wouldn't buy anything else apart from Bitcoin.

Starting point is 00:26:36 We'll talk about a BlackRock ETF another day because it's not like companies have not been applying for those already. But I would bet that if one gets approved, it will probably be BlackRock. But I know you have to go. You have a hard stop here. I'll say I really love talking to you, but I hope we don't have to do it too soon again. Yeah. Thank you very much, Scott, as always. Thanks, Paolo. Let's go.

The Wolf Of All Streets - Bitcoin Boom: Tether's Massive Investment and Total Transparency, Revealed by Paolo Ardoino

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