Inside USDT’s ongoing battle with FUD


CryptoSlate’s James Van Straten and I sat down with Paolo Ardoino, the CEO of Tether, at BTC Prague this month. In one of Paolo’s most transparent to date, he addressed several critical topics related to Tether, including FUD surrounding Tether, its holdings in US treasuries, and competition in the industry.

2022: A Year of Challenges and Resiliency

Paolo reflected on 2022 when I first met him at Paris Blockchain Week, labeling it as significant for both good and bad reasons. He acknowledged that while the year saw the exit of many bad actors from the crypto industry, it also provided Tether an opportunity to demonstrate its resilience. He recounted:

“When we met it was I think 2022 was an incredible year for good and bad, in my opinion. The good thing is that many actors that were eventually recognized as bad actors have left the crypto industry for good. It also was a good moment for Tether to prove its resiliency. And that, in my opinion, is, was very, very crucial.”

Paolo noted that the events of 2022 served as a trial by fire for Tether, allowing it to prove its stability and reliability under pressure. At the time, he publicly predicted the downfall of Terra Luna, a competitor in the stablecoin market. He faced criticism for this prediction, as many believed competitive interests drove his comments. He explained:

“At the conference at the Blockchain Week in Paris in 2022, was before the Terra Luna fallout. I publicly said, I think Terra Luna is going to go bust. And I was criticized about that because people were telling me, oh, of course you are saying that because it’s your competitor is going to eat your lunch.”

He clarified that his concerns were based on the inherent issues he saw in Terra Luna’s model. According to Paolo, Terra Luna’s stablecoin was backed by another token they created, a structure he compared to a “Fugazi” (something fake or insubstantial). He contrasted this with Tether’s principle of ensuring they could always redeem its stablecoin for its face value, emphasizing the importance of liquidity and reliability for stablecoin issuers.

Bank Run and Short Attack on Tether

Paolo detailed this led to a coordinated attack against Tether, where attackers attempted to short the stablecoin and create a bank run to prove that Tether did not have sufficient reserves. He explained that these attackers borrowed large amounts of USDT and sold it at a discount, aiming to cause panic and a rush for redemptions. Paolo described the situation:

“So we discovered that they had around 7 billion USDT and they started selling it at 1 percent discount and and also they started creating panic. So they had 7 billion plus all the panic that they could gather was around another 15 billion.”

He illustrated how market makers bought the discounted USDT, redeemed it for its full value, and continued this cycle, demonstrating Tether’s ability to handle massive redemptions. He highlighted that Tether successfully redeemed about 25 billion USDT in less than a month, showcasing its liquidity and resilience.

The Tether CEO drew parallels between Tether’s successful handling of the attack and traditional banking failures, specifically mentioning Washington Mutual’s collapse in 2008. He used this comparison to emphasize Tether’s robustness compared to traditional banks. Paolo stated:

“And there is no better trial by fire than that, right? So to prove that when banks failed, we saw Washington Mutual in 2008. They failed and they were asked to redeem 10% of the money of the reserves. They failed. They went bankrupt.”

By highlighting Washington Mutual’s inability to redeem a significant portion of its reserves, Paolo spotlighted Tether’s capability to manage large-scale redemptions without faltering, proving its financial stability in challenging situations.

US Bank Failures and Competitor Issues in 2023

Paolo transitioned to discussing the subsequent events of 2023, focusing on the failures of major US banks like Silicon Valley Bank, Silvergate, and Signature, where other stablecoin issuers had relationships. He pointed out that these banks failed due to poor risk management, specifically its investments in illiquid long-term municipality bonds. Paolo mentioned that a major competitor of Tether had significant uninsured cash deposits in Silicon Valley Bank, leading to a depeg when the bank failed. He elaborated:

“By the way, they failed because they were investing the majority of their reserves in long term municipality bonds. Like, imagine take, we are in Prague now, imagine take like ten, tens of small towns outside Prague and imagine that billions and billions of dollars are invested in, in 10, 20, 30 years municipality bonds.”

Paolo contrasted this with Tether’s strategy of maintaining a simple and liquid reserve balance sheet, primarily consisting of US Treasury bills. He shared an interesting metric about Tether’s holdings:

“As of today, is the third biggest owner. Holder of three months T bills in the world. First, there is UK. Second, there is Cayman for all the hedge funds. Third, there is Tether.”

Paolo discussed how Tether’s substantial holdings in US Treasury bills have helped solidify its relationships with key financial institutions and custodians, such as Cantor Fitzgerald. He emphasized the importance of perfect decision-making in managing large sums of money and these partners’ critical role in Tether’s operations. Paolo explained:

“When you move from, 10 billion to 112 billion as of today, the game changes, right? So you have to be perfect, right? You have to be perfect all the time. You have to make sure you take every single decision.”

He highlighted Cantor Fitzgerald’s support and credibility, noting how its CEO publicly endorsed Tether’s financial stability, significantly contributing to the trust and confidence in Tether within the financial community.

Dealing with FUD and Tether’s Naivety

Reflecting on Tether’s past challenges with FUD and how it had to change its communication strategy to address public concerns and improve transparency, Paolo acknowledged its previous naivety in believing that merely doing good work would eventually dispel doubts. Paolo stated:

“I understand that part of the FUD, the Tether FUD, was also due to the fact that we were naively thinking that we could just keep our head down, work, and if we were proving that we were doing good to the world and that we were useful, all the FUD would go away eventually, right?”

He emphasized the importance of being more public and transparent about its operations, which led him to take a more prominent role in communicating Tether’s actions and financial health. Paolo reiterated the importance of the “don’t trust, verify” motto, encouraging people to ask questions and seek verification of Tether’s claims.

Paolo discussed Tether’s audit and attestation practices, specifically its partnership with BDO for quarterly attestations. He highlighted the thoroughness and diligence BDO applies in scrutinizing Tether’s operations, which helps ensure transparency and trust. Paolo explained:

“Look, really openly doing attestation on a stablecoin, especially if the stablecoin is named Tether, of course brings a lot of attention and a lot of risk management. Rightfully so, right?”

He also mentioned the challenges posed by regulatory pressures, such as Senator Warren’s call for auditors to avoid crypto companies, making it difficult for Tether to secure a full audit from a Big Four firm. Despite these challenges, Paolo expressed confidence in its ongoing efforts to prove Tether’s legitimacy and financial health. He conveyed gratitude for public endorsements of its economic practices, which have helped mitigate some skepticism around Tether’s reserves.

Paolo Ardoino’s frank and open conversation with CryptoSlate gave insights into Tether’s battle with FUD from powerful adversaries and its commitment to Bitcoin, stating that it was focused on using Bitcoin as a reserve for profits rather than stablecoin backing. The full interview will be published along with a series of clips on CryptoSlate’s X account.

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