In-Depth Tether: The Unbreakable "Tether" in Cryptocurrency

Original Title: "Inside Tether, Crypto's (So Far) Unbreakable Buck"

Original Source: Forbes

In the survival crisis of cryptocurrency, Tether, the largest liquidity provider, has withstood multiple billion-dollar redemptions. Will competition from rivals such as USDC and regulatory pressure force Tether to be completely transparent?

On Monday, November 7th, 2022, executives at Tether received an unusual phone call from a long-time business partner, Sam Bankman Fried, CEO of FTX.

Bankman Fried, a young and scruffy cryptocurrency executive who rode the wave of cryptocurrency to amass a personal fortune of $26.5 billion, sounded desperate on the phone. Five days ago, industry media reported that his trading firm, Alameda Research, which has a highly leveraged balance sheet worth about $5 billion, issued a token called FTT, which is backed by Bankman Fried and valued at about $50 billion. FTX and Alameda are major clients of Tether. So far, Bankman Fried has issued up to $36 billion worth of USDT, a dollar-based stablecoin, accounting for almost half of the total issuance.

"He contacted us, requesting financial assistance," said Paolo Ardoino, CTO of Terther. "He did not disclose any details or specify how much he needed, but we firmly refused."

Paolo Ardoino said that the request was a bit strange, so he quickly decided to reject it.

「 He suddenly asked for something he had never asked for before, and the way he spoke indicated that he was facing a big problem. And he wasn't asking for $10 million, his request was for several billion. 」

After that desperate phone call, FTT plummeted from $26 to less than $2 in the following weeks, evaporating a market value of about $3 billion. FTX and Alameda will soon apply for bankruptcy protection. On December 12th, Bankman Fried was arrested and charged with 8 counts including money laundering and fraud.

For Tether, the demise of Bankman Fried is bittersweet. Tether is a controversial company behind the stablecoin USDT, which is valued at $66 billion and used in over 50% of global Bitcoin transactions.

But in the turbulent year of 2022 in the cryptocurrency industry, Tether persisted. In May, when the then third-largest stablecoin in the cryptocurrency market, TerraUSD, and its sister token LUNA (with a market value of $45 billion) suddenly collapsed, Tether faced $16 billion in redemption requests from panicked cryptocurrency investors. Although USDT fell to 95 cents during the panic sell-off, it met the market's redemption requirements and rebounded to full value within a week. During the collapse of FTX, about $3 billion in redemptions poured in within a few days, but Tether hardly missed any of them, and all redemptions were made at a 1:1 ratio with the US dollar.

During the recent Bitcoin bull market, the market value of USDT skyrocketed.

Tether's Chief Technology Officer, Paolo Ardoino, believes that "everyone sees Tether as a group of people who are incapable of doing anything." He is the Chief Technology Officer of Tether and the only C-suite member willing to speak to the media.

Although Tether has proven its staying power in the market, the stablecoin provider has yet to gain enough trust outside of the cryptocurrency industry. Over the years, it has been accused of market manipulation, placing customer funds in personal accounts of its executives, and propping up the price of Bitcoin. In 2021, the CFTC and the New York Attorney General forced Tether to pay fines of $41 million and $18.5 million respectively for misleading customers that USDT was backed one-to-one by the US dollar.

The company has never presented an audit report and refuses to disclose the exact composition of its collateral, which includes cryptocurrencies, loans, and other illiquid investments. In contrast, its closest competitor, USD Coin, operated by Circle Financial headquartered in Boston, publicly discloses the specific treasury bills, CUSIPs, and maturity dates supporting its $45 billion digital dollars.

However, if cryptocurrency survives the current harsh winter, its dominant liquidity provider Tether must grow up. That's why Tether has recently been working to clean up its image. For a long time, it has been accused of filling its balance sheet with problematic commercial bills. In June 2022, it promised to eliminate $30 billion worth of commercial bill assets from its reserves and replace most of them with US Treasury bonds and other cash equivalents. Then in August, it hired the Big Five accounting firm BDO for a comprehensive audit. Last Tuesday, the company announced that it will stop lending USDT by the end of 2023, with its loans accounting for 9% of its assets.

Is this enough to shut up those opponents who are even more scared of this strange stablecoin supplier after FTX's collapse?

"There is a difference between being stable and always stable," said Michael Hsu, the proxy currency supervisor. "Always stable refers to the money of the Federal Reserve and central banks. If you belong to the category of always stable, you don't have to publicly defend yourself."

In fact, stablecoins like Tether need to exist in all aspects, which indicates that Bitcoin and other cryptocurrencies have obvious weaknesses. More than a decade later, the original cryptocurrency is still very unstable. In just the past 18 months, the price of Bitcoin has approached $70,000 twice, only to fall back more than 65% to the recent $17,000. Daily price fluctuations of 5% or more are not unheard of.

The invention of stablecoins is to solve this problem, while cryptocurrency investors have long faced another problem: most cryptocurrency exchanges, especially those overseas, are shut out by banks, so conducting business in US dollars and other fiat currencies, while not impossible, is difficult. Stablecoins survive and transfer on various blockchains, just like Bitcoin, avoiding central bank control. As for USDT, which exists only in digital form, it is pegged to the US dollar.

If you feel uneasy about stablecoins that exist outside of the global banking industry, consider one of the world's leading stablecoin providers, Tether, which is operated by a group of not very transparent individuals.

Its Chief Technology Officer, Paolo Ardoino, is the spokesperson for Tether. All media information about Tether goes through him. According to sources familiar with its financial situation, Tether's Chief Financial Officer, Giancarlo Devasini, is the controlling shareholder of the company, estimated to own 40% of the shares of Tether's parent company, while DigFinex also owns the cryptocurrency exchange Bitfinex.

According to the official resume on the Bitfinex website, Devasini, born in Turin, Italy, is 58 years old and a successful pioneer in the semiconductor market. Before he sold his business shortly before the 2008 financial crisis, his annual revenue had grown to 113 million euros. However, a survey by the Financial Times in July 2021 found that Devasini's business empire had only 12 million euros in sales in 2007 and entered the liquidation phase in June of the following year. In addition, Devasini's company, Acme, was sued by Toshiba for patent infringement on DVD format specifications. (Tether stated that the lawsuit was baseless and did not result in any adverse conclusions.)

Many sources have reported that Devasini, who once studied to become a doctor, is the planner of Tether and played a direct role in issuing Tether tokens for major clients such as Alameda. The exact location of Devasini is unclear, with various sources claiming he is in locations such as the African island nation of Sao Tome and Principe, the Bahamas, Italy, and Riviera, France.

The CEO of Tether is a Dutchman named Jan Ludovicus van der Velde. According to insiders familiar with Tether's financial situation, he owns 20% of the merged entity and resides in Hong Kong. He also avoids interviews and stays behind the scenes.

If Devasini is the behind-the-scenes manager of Tether and Bitfinex (registered in the British Virgin Islands), then Jan Ludovicus van der Velde is more like a figure responsible for maintaining high-level strategic relationships with banks and regulatory agencies. According to Paolo Ardoino, since the outbreak of the COVID-19 pandemic, Jan Ludovicus van der Velde has visited the European police several times to explain how Tether operates. Jan Ludovicus van der Velde also helped the company obtain a digital securities issuance license in Kazakhstan and is leading efforts to establish new banking relationships in Europe and Turkey.

除了共同的所有权，Tether and Bitfinex都有相同的CEO、CFO、CTO和总顾问。Bitfinex和Tether的首席运营官实际上是Paolo Ardoino的妻子，尽管她在福布斯看到的文件中没有被列为股东。Tether总共有大约50名员工，而交易所Bitfinex有200名。

There are two ways to obtain Tether tokens, also known as USDT in the cryptocurrency industry. They can be purchased from any of the hundreds of cryptocurrency exchanges worldwide that list digital assets, or they can be obtained directly from Tether through smart contracts that are controlled by Tether and run on several different blockchains. The latter method is reserved for high-interest borrowers, and each transaction must be for more than 100,000 USDT. It is said that Devasini has participated in these large transactions, and Sam Bankman Fried has personally made phone calls to issue large amounts of USDT for Alameda. Sometimes the issuance can be as high as 500 million US dollars.

This business can be said to be very profitable. In terms of revenue, the issuance and redemption of USDT is an important source of profit for the company. It charges a fee of 0.1% for each transaction. Forbes estimates that since its establishment in 2014, Tether has received no less than $109 million in transaction fee income, most of which has been earned in the past two years, during which its market value has soared from $5 million to over $84 billion in May 2022.

But the real wealth comes from Tether and how it invests the billions of dollars it receives to issue USDT. In theory, Tether should only be storing customer funds in cash and government bonds, fulfilling its promise of a reserve ratio of 1:1 with the US dollar. However, Forbes discovered that Tether began creating a diversified model of reserve assets as early as 2015.

Why does Tether need to invest in risk assets beyond US Treasury bonds and money market funds? Paolo Ardoino said that Tether has an obligation to earn profits in order to obtain certain business licenses.

"One of the most important things for our company, and what sets us apart from Circle (the issuer of USDC), is ensuring that our business model remains profitable,"

Ardoino said he expects the stablecoin company's revenue to exceed $600 million this year. In the third quarter of 2022, Circle, which touts itself as "transparent and stable," reported a profit of $43 million and revenue of $274 million - its first profitable quarter since its founding in 2018.

Like other stablecoins, the majority of Tether's reserves have always been "cash and cash equivalents, as well as other short-term deposits and commercial paper." According to its current reserve classification, 82.45% of its assets are cash and cash equivalents, of which 70% are US Treasury bonds. The remaining 17.5% is invested in various higher-risk assets, including secured loans, and Tether has long been unwilling to disclose details in this regard.

Tether has never undergone a clear audit of its $66 billion reserve, and its website only lists so-called proofs, which are snapshots without any actual tracking of fund flows or serious due diligence by accounting firms.

According to a company familiar with Tether's business, some of its trading partners include cryptocurrency trading companies Jump Crypto and Cumberland/DRW. In addition, the company provided a loan of $841 million in Bitcoin collateral to the now-bankrupt cryptocurrency lender Celsius in 2021. Paolo Ardoino said that Celsius' loan has been fully repaid. The company did not say whether other trading partners were affiliated companies.

In a recent article in The Wall Street Journal, a company spokesperson stated that the company holds all collateral for outstanding loans itself.

Tether's other asset holdings (about 4%) are invested in tokens and equity of private cryptocurrency companies, including Blockstream, Dusk Network, and Renrenbit. It also invests in ShapeShift, OWNR Wallet, STOKR, LN Wallets, and Exordium Limited. Given that the total market value of cryptocurrencies has already dropped by 63% this year, these assets are likely to have been greatly impacted.

Although Tether is taking steps to become more transparent, Paolo Ardoino believes that no matter what the company does, it cannot meet the demands of its critics.

"Genesis has recently suspended withdrawals. Voyager is a publicly traded company, as you know, and Celsius and BlockFi, which are behemoths praised by all parties. Three Arrows, considered a perfect trader," said Paolo Ardoino. "Everyone is always better than Tether."

Surprisingly, Paolo Ardoino pointed out that Tether reached a settlement of $18.5 million with the New York Attorney General's Office in 2019, proving the company's enduring strength. In the case, Tether secretly used its customers' collateral to provide emergency loans of $850 million to its sister company Bitfinex, as the cryptocurrency exchange had its funds seized by government regulators at Crypto Capital, a bank in Panama. Tether stated at the time that "the loan was made to ensure the continuity of Bitfinex's customers. It has since been fully repaid, including interest. At no time did the loan affect Tether's ability to process redemptions."

People asking questions is good," Ardoino said, "but constantly proving our innocence while the other party avoids the topic means they have ulterior motives.

Meanwhile, Paolo Ardoino has not lost any sleep over how to meet other people's expectations for how Tether should operate or disclose. Tether has no plans to become a public company, and its management structure is not expected to change.

For Ardoino, Devasini, and van der Velde, the more serious issue is the state of the entire cryptocurrency market, and Tether is one of the key liquidity providers. Stablecoins are crucial for active traders, but in the crypto winter, Tether's market value has dropped by more than 25%. With interest rates significantly higher, there are now many options for traders to park idle cash reserves outside of cryptocurrencies and DeFi, which exacerbates the situation. On major cryptocurrency exchanges, the yield of USDT currently averages 2%.

If cryptocurrency rebounds, Tether may see other competitors vying for its position. This includes USDC, which already has 29.8% market share and is favored by Wall Street companies such as BlackRock and BNY Mellon Bank. In addition, the large exchange Binance has created its own stablecoin, BUSD. Another possibility is that at some point, a digital dollar backed by the FDIC or central banks may be offered.

" We don't intend to be the largest stablecoin on the market forever. If tomorrow JPMorgan decides to create their JPUSD or something else, they will surpass us in two seconds, " said Ardoino. " We hope that Turks, Venezuelans, and Argentinians can all use Tether. For us, the only important thing is that our product is used by people in emerging markets and developing countries. They are the ones who urgently need to use the US dollar. "

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