Amid crypto’s existential crisis, its largest liquidity provider, Tether, has withstood multiple multibillion-dollar redemption runs. Will competition from rival stablecoins like USDC and regulatory pressure force Tether to finally come clean?
ONMonday, November 7, 2022 Tether executives received an unusual phone call from a long-time business partner, FTX CEO Sam Bankman-Fried.
Bankman-Fried, the youthful moppy-haired crypto executive who rode the crypto wave to a personal fortune of $26.5 billion sounded desperate. A news story in the trade press five days earlier revealed that underpinning the highly leveraged balance sheet of his trading firm Alameda Research was some $5 billion worth of a token Bankman-Fried had essentially invented called FTT. FTX and Alameda were big customers of Tether. To date Bankman-Fried had already minted $36 billion worth of its U.S. dollar based stablecoin USDT, almost half of the total amount created.
“He contacted us and asked for economic help,” says Ardoino. “He didn’t disclose details or exactly how much he needed, but we categorically refused.”
Ardoino says that something didn’t smell right about the request and that it was an easy decision to say no. “He suddenly asked for something that he had never asked for before, and he wasn’t talking about $10 million. The way he was talking suggested that he had a big issue. His request was in the billions.”
Within a few weeks of that desperate phone call FTT had fallen from $26 to less than $2, evaporating some $3 billion in market value. FTX and Alameda would soon file for bankruptcy protection and on December 12th, Bankman-Fried was arrested and indicted for 8 counts of money laundering and fraud.
For Tether, the controversial company behind the $66 billion stablecoin USDT, used in more than 50 percent of all bitcoin trading worldwide, Bankman-Fried’s demise was bittersweet.
FTX was Tether’s largest customer, but unlike Bankman-Fried who cultivated the media and hobnobbed with politicians, Tether has defiantly resisted regulatory scrutiny and is a constant source of media scorn.
But through crypto’s tumultuous 2022, Tether has persevered. In May, when TerraUSD, crypto’s then third largest stablecoin and its sister token LUNA, accounting for $45 billion in market value, suddenly collapsed, Tether was faced with $16 billion in redemptions from panicky crypto investors. While USDT dipped to as low as 95 cents during the panic selling, it met its redemptions and bounced back to full value within a week. During FTX’s more recent collapse some $3 billion in redemptions flooded in over the course of a few days, but Tether barely missed a beat. All of the redemptions were met 1:1 in US dollars.
USDT MARKET CAP SURGED DURING THE RECENT BITCOIN BULL RUN
“Everyone was looking at Tether as just a couple of Italians that are incapable of doing anything right,” argues Paolo Ardoino, Tether’s chief technology officer, and the only member of its c-suite willing to speak to the media.
While Tether has so far proven its staying power in the marketplace, the stablecoin provider has yet to gain trust outside of crypto. Over the years it has been accused of everything from manipulating markets and placing customer funds in the personal accounts of its executives to 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 falsely claiming among other things, that USDT was backed by U.S. dollars one-for-one.
The company has never produced an audit and it refuses to disclose the exact mix of its collateral, which includes crypto tokens, loans, and other illiquid investments. By comparison its closest competitor USD Coin, run by Boston-based Circle Financial, publishes the specific Treasury securities, CUSIPs and maturity dates that support its $45 billion digital dollar.
But if crypto survives the current brutal winter, Tether, its dominant liquidity provider, must grow up. That is why Tether has recently been on a campaign to clean up its image. Long accused of padding its balance sheet with questionable commercial paper, in June 2022 it pledged to eliminate all of what was once $30 billion of the asset from its reserves and put most of that into US Treasury bills and other cash equivalents. Then in August it hired top five accounting firm BDO with the goal of undergoing a full audit. Last Tuesday the company announced that it will stop lending out USDTs – whose loans amount to 9% of its assets – by the end of 2023.
Will this be enough to silence detractors who are even more skittish about the squirrely stablecoin provider in the wake of FTX’s collapse?
“There’s a difference between usually stable and always stable,” says Acting Comptroller of the Currency Michael Hsu. “Always stable is Fed money and central bank money. And if you’re in the always stable category, you don’t have to publicly defend yourself.”
The fact that stablecoins like Tether need to exist at all points to glaring weakness in bitcoin and other cryptocurrencies. After more than a decade the original cryptocurrency remains wildly volatile. In the last 18 months alone, bitcoin’s price approached $70,000 twice, before retreating more than 65% to a recent $17,000. On a daily basis it is not unheard of for its price to swing 5% or more.
Stablecoins were invented as a solution to this problem and another one crypto investors have long faced. Most crypto exchanges, especially those located overseas, have been shunned by banks, so doing business in U.S. dollars and other fiat currencies, is difficult if not impossible. Stablecoins live and move on top of various blockchains, just like bitcoin, avoiding central bank control. In the case of USDT, which only exists digitally, it is pegged to the U.S. dollar.
If stablecoins existing outside of the global banking industry makes you uneasy, consider that Tether, the world’s dominant stablecoin provider, is run by a cabal of shadowy characters.
Its chief technology officer, Paolo Ardoino is Tether’s front man. All information about Tether to the media runs through him. Tether’s chief financial officer, Giancarlo Devasini is the company’s controlling shareholder with an estimated 40% of Tether’s parent, DigFinex, which also owns crypto-exchange Bitfinex, according to sources familiar with its finances.
According to his official bio on the Bitfinex website, Turin, Italy-born Devasini, 58, was a successful pioneer in the semiconductors market, whose business grew to 113 million euros in revenues annually before he sold it shortly before the 2008 financial crisis. But a Financial Times investigation in July 2021 found that in 2007, Devasini’s business empire had just 12 million euros in sales and went into liquidation the following June. Additionally, a Devasini company called Acme was the subject of a patent infringement suit from Toshiba over DVD format specifications. (Tether says the lawsuit was meritless and resulted in no adverse finding.)
Numerous sources say that Devasini, who once studied to be a doctor, is Tether’s mastermind and played a direct role in the digital “minting” of Tethers for large clients (like Alameda). Devasini’s exact location is unclear, various sources place him in locales ranging from the African island nation of São Tomé and Príncipe to the Bahamas, Italy and the French Riviera.
Tether’s chief executive officer is a Dutchman named Jan Ludovicus van der Velde. He owns 20% of the combined entities and resides in Hong Kong, according to sources familiar with Tether’s finances. He too shuns interviews and stays in the background.
If Devasini runs Tether and Bitfinex, which are incorporated in the Virgin Islands, from behind the scenes, van der Velde operates as more of a figurehead responsible for maintaining high-level strategic relationships with banks and regulators. According to Ardoino, van der Velde traveled to Europol on multiple occasions since the onset of the pandemic to explain how Tether operates. Van der Velde also helped the company obtain a digital securities issuance license in Kazakhstan and is leading the effort to obtain new banking relationships in Europe and Turkey.
Besides common ownership, both Tether and Bitfinex share the same CEO, CFO, CTO and general counsel. Bitfinex and Tether’s chief operating officer is actually Ardoino’s wife though she is not listed as a shareholder in documents seen by Forbes. In total, Tether has about 50 employees, while exchange Bitifinex has 200.
There are two ways to obtain Tether, known as USDT in crypto parlance. It can be purchased on any of the hundreds of crypto exchanges around the world that list the digital asset, or it can be minted directly from Tether itself using a smart contract it controls that operates on several different blockchains. The latter approach is reserved for high-rollers, a minimum of $100,000 of USDT must be minted per transaction. Devasini is said to be involved in these large transactions and Sam Bankman-Fried for example was known to personally call to mint large amounts of USDT for Alameda. Sometimes the issuances can be as high as $500 million.
Such a business can be highly lucrative. On the revenue side, the minting and redemption of USDT is an important profit center for the company. It charges a 0.1% fee per transaction. Forbes estimates that Tether has taken in no less than $109 million in fee income since inception in 2014, most of that coming in the last two years when its market capitalization soared from $5 million to more than $84 billion in May 2022.
But the real money comes from how Tether invests its billions it receives to mint USDT. Theoretically Tether should merely take customer funds and park them in cash and Treasurys fulfilling its pledge that its reserves are backed 1:1 to the U.S. dollar. However, Forbes found that Tether began creating models for diversifying its reserve assets as early as 2015.
Why does Tether need to invest in risky assets outside of U.S. Treasury’s and money market funds? Ardoino says that Tether is obligated to make a profit in order to obtain certain business licenses. “One of the most important things for our company, and one that speaks about the difference between us and Circle (USDC issuer), is making sure that the business model remains profitable,” says Ardoino, who expects the stablecoin company to earn in excess of $600 million this year. In the third quarter of 2022, Circle, whose motto is “transparency and stability,” reported $43 million in profit on $274 million in revenues–its first since inception in 2018.
Like other stablecoins, the biggest portion of Tether’s reserves has always been in “cash and cash equivalents and other short term deposits and commercial paper.” According to its current reserves breakdown, 82.45% of its assets are in cash and cash equivalents of which, 70% is in treasuries. That leaves 17.5% invested in various riskier assets, including secured loans, which Tether has long been loath to disclose details on.
Tether has never had a definitive audit of its $66 billion in reserves, and its website only lists so-called attestations, which are just snapshots without the accounting firm actually tracking fund flows or doing any serious due diligence.
According to firms familiar with Tether’s business, some of its counterparties include crypto trading firms Jump Crypto and Cumberland/DRW. In addition, the company provided an $841 million loan in 2021 to now bankrupt crypto lender Celsius, collateralized in bitcoin. Ardoino says that the Celsius loans have been repaid in full. The company did not say if other counterparties are affiliated companies.
In a recent Wall Street Journal article a company spokesperson said that the company held all the collateral for its outstanding loans itself.
Other parts of Tether’s assets (some 4%) are invested in the tokens and equity of private crypto companies including Blockstream, Dusk Network, and Renrenbit. It also has investments in ShapeShift, OWNR Wallet, and STOKR, LN Wallets and Exordium Limited. Given that crypto’s total market capitalization has fallen by 63% this year, it is likely that these assets have taken massive hits.
While Tether is taking steps to become more transparent, Ardoino believes that no matter what the company does, it will never be able to satisfy its critics.
“Genesis recently halted withdrawals. Voyager is a public company, then you have Celsius and BlockFi, which was this behemoth praised by many parties. Three Arrows, which was seen as the perfect traders,” says Ardoino. “Everyone was always better than Tether.”
Astonishingly, Ardoino points to Tether’s $18.5 million 2019 settlement with the New York Attorney General’s office as proof that his company has staying power. In that case, Tether secretly used its customers’ collateral to give sister company Bitifinex an $850 million emergency loan because the crypto-exchange’s bank Panama’s Crypto Capital had its own funds seized by government regulators. In response Tether said at the time, “The loan was made to ensure continuity for Bitfinex’s customers. It has since been repaid early and in full, including interest. At no point did the loan impact Tether’s ability to process redemptions.”
“It is fine for people to have questions,” says Ardoino, “But moving the goalposts because we are continuously proving yourselves wrong just means to me that there is an ulterior motive.”
In the meantime, Ardoino isn’t losing any sleep worrying about how to meet anyone else’s expectations of how Tether should operate or make disclosures. Tether has no plans to become a public company, nor does it anticipate any changes in its management structure.
Of more serious concern to Ardoino, Devasini and van der Velde, is the state of the overall cryptocurrency market, of which Tether is a key liquidity provider. Stablecoins are critical for active traders, but the crypto winter has seen Tether’s market capitalization fall by more than 25%. This is exacerbated by the fact that significantly higher interest rates now provide numerous alternatives outside of crypto and DeFi for traders parking idle cash reserves. Yields on USDT at major crypto exchanges currently average 2%.
If crypto recovers Tether is likely to see other competitors vying for its spot. Besides USDC, which already has 29.8% market share and is preferred by Wall Street firms like BlackRock and BNY Mellon, mega exchange Binance itself has created its own stablecoin BUSD. Then there is the prospect that at some point a big FDIC-insured bank or central bank offers a digital dollar.
“We don’t plan to be the biggest stablecoin in the market forever. If tomorrow JPMorgan decided to create their JPUSD or whatever, they will be bigger than us in two seconds,”says Ardoino. “We want to be used by Turks, Venezuelans, and Argentinians. The only thing that matters to us is that our product is getting used by people in emerging markets and developing countries. They are the ones that really desperately need access to the dollar.”
MORE FROM FORBES