This Is What We Know About How Tether Works

there's no one. There's no one in crypto that you would like trust the way like say you trust, like putting your money at like JP Morgan or something. I think that's true, but everything in crypto is kind of relative.

So I have previously described f t X as like the Microsoft of crypto exchanges, because it was the one that people thought was kind of best practice, and it had all these connections with traditional finance and Sam Bateman Freed was lobbying for stronger crypto regulation, and everything seemed kind of like up and up, and it had this wonderful liquidation engine that everyone talked about, and clearly clearly that wasn't the case. But you're right. There are actors

in the crypto space of varying quality. Let's say, right, and you said the key word, which you nailed is relative, because sure, there are some that seemed to be kind of well run and decently well regulated, and then there are others that people have been saying, oh, this is going to collapse, this is a fraud, this is whatever for years and years, and you don't really know which

one is going to go. And it turns out that a lot of the critics of crypto may you know, get things right, but on the other hand, like don't really know which which domino is going to tumble next. It's been surprisingly hard to figure that out. Yeah, and again I hesitate to use the fun but I guess that's one of the unusual things about crypto is the guys you think aren't gonna make it can persist for a lot longer that those that you think have a

better chance. So you know, things like doge coin, it's still here yet, I know, like something that is clearly a joke still has a nominal monetary value. And then of course there is tether, yes, and so I think when ft x collapsed. Both of us sort of had the same thought at the same time, which she's like, Man, you know, it's funny again. I don't know funny is

the right word. But Tether is still here. And people have been betting against Tether or predicting its demise, or claiming that it's a fraud, or claiming that it's going to get shut down by regulators, or claiming that it's going to lose its peg forever. Meanwhile, all of these things implode that aren't tether, and Tether as of right now, which is we're recording this on December five, is trading about one to the dollar, right, So Heather is a

stable coin. One Tether is supposed to be worth one dollar at all times. It has previously dipped below that level, particularly after the big crypto blow ups in the spring of this year, when Tera Luna collapsed, and then when FTX collapsed, it slipped slightly below it's one dollar peg. But it's come back, and I think it has been

remarkably resilient when you consider that. Literally for years people have been asking about this company, how it's run, the sort of web of relationships around it, and perhaps most crucially, are there actually things backing Tether, because as I mentioned, it's a collateralized stable coin. It is supposed to be backed by dollar assets, but there's always been a lot of doubt and questioning over whether or not those exist.

In fact, last year, Tether and bitfin x we're ordered by the CFTC and also the New York Attorney a role to pay millions of dollars in fines for misleading customers, and Tether's own PR strategy when it comes to this, I think it's fair to say it's been a little bit weird, and I'm just thinking, you know, one of the ultimate ironies is I remember we had Sam Bankman freed On the f t X founder with Matt Levine, I think our first conversation with those two, and we

asked SPF about Tether, and he basically said something along the lines of like, oh, it's just you know, it's a complete mess, Like, you know, it's kind of a mess of a process maintaining this thing. And so if SPF is telling you that this thing is messy, I think it deserves its own episode, right it does? You know SPF, f t X and el Amta, they were

big Tether users he felt that. But anyway, I have so many questions about Tether, and in the wake of f t X, I thought it would be a good time to, yeah, revisit what it is, what its role is, what we know about it, what we don't know about it, etcetera, and just sort of like take stock of this pretty I think, critical piece of crypto infrastructure totally, and also why it's proven so resilient and what could actually kind

of knock it down. All right, let's go. We are going to be speaking with someone who knows the company very well, has been reporting on it and talking about it and analyzing it for a long time. We're going to get all of our questions cleared up. We're gonna be speaking to Bennett Tomlin. He is the co host of the Crypto Critics Corner podcast and he's also the head of research at protost Media, and he is an encyclopedic knowledge of the crypto ecosystem and who does what

and who is who. So Bennett, thank you so much for coming on odd lots glad to be here. All right, let's just start like really simple, who started Tether and why? That's a surprisingly challenge. I thought that would be an easy question to start with, Okay, Nominally, Nominally it was started in two thousand and fourteen by a bunch of the master Coin slash Omnique cruise. This typically Brock piers yantis Quigly Reeves and sellers came over and decided to start.

But if they called at the time real Coin, which they advertised as this dollar batted token on the block chain that was going to use what was then called the master Coin layer and is now called the omni

layer on top of Bitcoin. Sometime in that summer of two thousand and fourteen, when they were going around pitching this idea, one Carlo Davissini, Jean Ludoviticus Vandervelt and Phil Potter got involved, and the exact timeline of their involvement and when the control of the entity fully shifted is

difficult to parse out. But by the time the first tethers were issued in October November of two thousand and fourteen, Tether was entirely under the control of one Carlo Davissini, Phil Potter, and Jean Ludovit Jean Ludoviticus Vanderbilt, the bitfin X executives. So it started by this group of people from master Coin and then taken over and really launched on to the bitfin x executives in two thousand and fourteen.

So I'm going to ask the same question in a slightly different way, but why the need for stable coins at all? Like why in crypto can't you just transact in US dollar deposits for the majority of offshore exchanges, Like why this market need that this group of very disparate people came together to serve. My understanding is that it was very challenging even for the most quote unquote legitimate of cryptocurrency businesses in this era, to get and

maintain consistent banking relationships. And so the idea with Teather is that Tether would build these relationships and in doing so allow a variety of other cryptocurrency businesses to effectively benefit from their banking relationships by allowing them to have this pseudo dollar token that allowed them to mimic trading against the dollar and all the conveniences therein without having to seek out and maintain relationships with banks that could

transact in the US dollar. Right, So this is a really key thing. Rather than if you want to set up a crypto exchange, rather than you going through all of the work to set up bank accounts in different countries and all that, you're just like, oh, you're just like create a platform that allows you to onboard Tether. Tether already has the banking relationship and instead of trading a dollar, as you trade in the dollar denominated stable coins. Now,

who is Tether's bank in the beginning. So if they're going to have this dollar denominated stable coiners they're going to hold their dollars, where were they holding their dollars? How did they get a banking relationship? Again, it's a little bit difficult to pass completely. We know at least part of the reserves were held at a variety of Taiwanese banks, many of which relied on Wells Fargo for

their US correspondent banking services. And we found this out because in two thousand and seventeen, Wells Fargo ended up cutting off correspondent banking access for bitfoin X and Tether, and bitfoin X and Tether filed a lawsuit they describe as purely to buy time against Wells Fargo at that point. So, yeah, they were banking at a variety of Taiwanese banks, and

getting correspondent banking from Wells Fargo. The reason I'm pausing is that bitfn x is and Tether's relationship with payments processor Crypto Capital Core stretches back to two thousand and fourteen, and so it is possible that some portion of the reserves, besides being held in these Taiwanese banks, was already being

held in Crypto Capital Core. Besides that, we know from the CFTC settlement with Teather that as early as six Tether was being backed by non cash assets, and so we have to expect that some portion of those were being held outside of those bank accounts as well. So this kind of gets to the question over the weird pr strategy, which I expect that's going to be sort of a theme that comes up a lot in this conversation.

But but if we know that Tether was created to allow sort of easier on boarding of dollar deposits into the crypto so um by allowing them to build and establish these relationships with various banks, why wouldn't they just be upfront about who their bank partners are. Bitfn X and Tether in whale pool team speaks and official communications have often expressed a fear that if the extent of their relationships with various banking partners is made public, those

banking relationships will cease to exist. For some reason, it seems that Tethern bit pnexes banks and the relationships therein have to be kept somewhat secret in order for tether

and bit pnex to continue to offer that. The fear when they say something like that is that the reason they need to be coy about it is because the banks are not fully aware of what they may be banking, or there is some other challenge that presents itself to these banks when it becomes public that they are banking these entities, you know, speaking of Okay, maybe the bank doesn't want you to do crypto stuff, or maybe an entity is obfuscating what it did or what its relationship

with bank the bank was when they opened the account. I seem to recall there being some video in which Sam Bankman Freed talks about having named Elma Research so that it wasn't just Alameda. Is that my hallucinating that

or did that actually happen? No, there was an interview with Sam Bankman Freed was asked why Elma Research was named Alameda Research and he talked about how when he was arbitraging the Japanese premium that having the name Elma Research and convincing people that this was a research firm made it easier for him to access and maintain banking

relationships that allowed them to arbitrage. That came. Maybe just going back to the beginning of Tether for a second, so I understand the function that Tether was serving in the crypto community, but what was their own business model? So what was the idea behind how Tether as a company was going to make money. They charged a few basis points and issuance and redemption, and I think if their reserves were going to be earning any yield in the bank accounts they were stored in, then that yield

would go to Tether the corporation. Stable coins are a challenging business model. Circle has struggled to do it profitably. So just on this note, and again we're sort of diving headlong already into one of the bigger issues with Tether.

But it does seem like if you're expecting Tether to maintain the peg with dollar denominated assets, but the company itself is making money by generating yields from those assets that would seem to be almost immediately a conflict of interest, right, or at least a temptation to potentially invest in higher yielding, riskier assets to generate more money for the company itself. Well, I think that Bloomberg Business Week's reporting seek Fox is

reporting on this really kind of points to that. Specifically, where you see when they're banking at Noble Bank and Trust founded by John bettson brock Peers, supposedly one Carlo Davissini going to John Betts and pleading asking for ways that they can earn additional yield on their reserves. And I think this is consistent with one Carlo Davissini, the chief financial officer of Tether and Silvano di Stefano, the chief investment officer of Tether, being partners together in Blue Bit,

the cryptocurrency hedge fund. Right, is that around this period we have pretty solid reporting that Tether was very much interested in going out and trying to find additional ways to earn yield, and that if we look, even if we take Tether completely at their word, if we look at their attestations today, their reserves are far riskier than

they were promised to be back. When Tether was started in two thousand fourteen, the original promise was that every single Tether issued would have a corresponding dollar in a bank account to back them. Now the promise is that there is a dollar of value in some nebulous collection of assets that backs that tether. And so I think that it's very clear it has presented a conflict of interest and that Tether has continued to move further and further away from their initial promise as a way to

generate additional yield and income for the people running Tether. Yeah, you mentioned the word nebulous, and I remember there was this great note from Barclays from their money market and credit guys basically saying that Tether was using language around its investments that no one in the financial industry had ever seen. They kept referring to something called a reverse repo note, and then yeah, they seemed to imply it was some sort of like structured credit note but also

a reverse repo, which was all very very strange. So speaking of language, you know, I want to get a little bit more to the bank, the post Wells Fargo or post Taiwan bank banking relationships, but before gone what is an attestation? Because I know that Tether does not get a formal like audit, but they say they published an attestation. What is that? So I'm not an account intern, auditor or a lawyer, and so I want to get

that off the jump. But based on the auditors I've talked to about this, and attestation is a much lower level of assurance where the auditor or accountant is looking at a set of records compiled for them by the management of the entity, and they are attesting that the records they have received match up with whatever they're supposed to. Generally, they don't involve the same kind of controls testing as

an audit. They're generally done point in time and are not looking at necessarily the flows leading up to that point in time, which has historically been a problem with Tether's at the stations. And so they provide some level of assurance, but notably less than like a full financial audit.

So let's go back two things, I guess, but you know, after the they lost the ability to use the correspondent the banks that had a corresponding relationship with Taiwan or sorry without Wells Fargo, with whom did they start banking, and can the the assets that Tether claims it has can they be seen on published regulatory filings of those banks. So after they lose correspondent banking from Wills Fargo, Tether's

banking becomes a bit of an enigma. They held little over sixty million dollars at the Bank of Montreal in Stuart Hogner's account their general counsel. The remainder of their banking from that period until they opened their account at Noble Bank was supposedly a receivable from Bitfinex's account at Noble Bank, which was the international financial entity started brock

Pearson John Betts in Puerto Rico. The issue with this is that if you look at Bitnex's account at Noble Bank during this period, and this is based on the New York Attorney General investigation, bitfn x only received deposits from two other institutions, and neither of those institutions purchased tethers.

The amount in Stuart Hogner's account over this entire period did not change at all, and yet the number of tethers in circulation exploded during this period, and so it is incredibly difficult to figure out what the flow of funds was during this era and how they were directly

backing Tether. My guess is that many users were interacting with Crypto Capital Court, the payments processor that both bit pohn X and Tether depended on, and that they were sending both tethers and dollars to Crypto Capital Court to issue and redeemed tethers, and these were then marked like on their accounting records as funds that were then owed to the account at Noble Bank, which was nominally holding the reserves of Tether despite being in the name of

bitfn X. This continued until it was time for Freedman LLP to finally give their September fifteenth at testation to Tether's reserves. On the morning of September fifteen, Tether finally got an account at Noble Bank and Trust, and they transferred hundreds of millions of dollars from bitfnex's account that morning to Tether's account on that day, and then that evening Freedman LLP comes in and attest to the state

of Tether's reserves. Then from that point on the bank believed to be largely continuously at Crypto Capital Court and Noble Bank until Noble Bank starts to close down in

two thousand and eighteen. Then we get to the period where they start relying really heavily on Crypto Capital Core until Crypto Capital Core ends up having about eight hundred and fifty million total dollars seized, and we eventually in the summer of two thousand and eighteen into the fall of two thousand and eighteen, get more and more into

their reliance on del Tech Bank and Trust. In the Bahamas, Dell Tech Bank and Trust, you were able to see a large inflow of deposits based on a Central Banka Bahamas regulatory records showing that Dell Tech was receiving a bunch of assets that they had not had before, suggesting that Tether was moving something into there at that point. So we kind of have a couple of things to look at when it comes to trying to figure out

what tether is actually doing. So we have the at of stations, you know, which may or may not be accurate, but we also have just the sheer volume of tether in existence, because we know that every tether issued is supposed to be backed by you know, it used to be one dollar and now it's one dollar of dollar denominated assets. But what does the sort of expansion of tether supply actually tell you about what the company has

been doing and experiencing. I don't know that the expansion of tether supply really gives us that much information, except that it's supposed to indicate that actual dollars are flowing from other entities in this as into Tether's accounts, and

then tethers are being issued. And so it's primarily interesting because there should be a corresponding like, there should be corresponding flows through the banking system for all the tethers that have supposed that they ever been issued and redeemed, and that is a reasonably large amount of money to

have been flowing through the banking system. So just on that note, and also kind of going back to the Barclays analysts who were talking about, we've never heard anything called a reverse repo note, but there is this expectation that if tether is out in the market with you know, fifty or sixty billion dollars worth of assets that it's investing, that someone in the traditional financial system would know them and be familiar with them, and that people you know,

on repo dusks and things like that would be familiar with them as a customer, and yet if you talk to people in traditional finance, that doesn't really seemed to be the case, Like no one is talking about how they're transacting with Tether on a regular basis. What's going

on there. That's a really fantastic question, Tracy, and I think it was last year that Financial Times went out after Tether announced that they were one of the seven largest holders of commercial paper in the world and asked a whole bunch of commercial paper trading desks, hey, have you noticed this new entrant into the commercial paper market? And they all universally said who. So, yeah, that's a

fantastic question. Where is Tether in these markets? It's possible that Tether is transacting using entities that aren't called Tether, like, for example, blue Bit Capital, the cryptocurrency hedge fund that one Carlo da Vissini and Silvannod Stephane were partners in. Could be del Chain, the cryptocurrency focused offshoot of Dell Tech Bank and Trust that Paulo Ardoino used to be an executive director of. It. Could be full ger Alpha, the cryptocurrency hedge fund spun off from del Chain that

was onboarded onto bitfin x well. Paulo was a director it bell Chain. There's a possibility that just these deaths don't recognize the name of Tether because Tether isn't transacting in the name of Tether, or it could be a lot of other things that we don't have visibility into yet. But it is challenging to figure out just where is all this money coming from, where is it going, and why is no one noticing it coming or going? You know, I wanna talk compare and contrast Tether a little bit

to other stable coins. The other like really big one is u S d C, And in fact, just today December five, we got the news that they're actually canceling. Circle is no longer doing it's back, so that's kind of interesting timing. But like, okay, with with something like us d C, do we have very clear visibility into where their money is and like compare like the sort of level of transparency we have with Tether versus these other stable coins, which my understanding is they seem to

be people are less suspicious of them. I'm generally less suspicious of Circle than of Tether. Part of this is because Circle has made fewer misrepresentations in public than tether has, though to be clear, there was a period where coin based was advertising USDC is fully backed by cash after they had started using other assets, including treasuries and commercial paper to back it. But broadly USDC and Circle have

been much better at their disclosures than tether has. They are not being forced by the New York Attorney General to do attestations, but are doing them monthly instead of quarterly. They have a more expected mix of assets. You don't see the lending encircles, books, you don't see the reverse

repos or produced produciary deposits. You don't see bitcoin backing Circle, you don't see investments in Sampson Mao's gaming company Exordium backing Circle and like Circle itself, and they were preparing for theirs back did go out and get audits for their firm as a whole, And so there is kind of that structural difference. Over time, the claimed asset mixes

for the two have moved closer together. Tether has claim to ditch commercial paper in favor of increasingly relying on treasuries, and the mix of like treasuries to cash and stuff for Tether is now much closer to Circle than it was like a year ago. So I think broadly the difference between the two is the level of disclosure, the

level of openness, and the history of deceit. There's also like both Circle and Paxos in the United States have started the process of trying to acquire banks or apply for bank charters, likely anticipating that at some point some kind of legislation is going to pass that is going to move stable coins into the broader banking regulatory framework.

Tether has not started those moves, and I expect would have a difficult time getting approval for a banking charter or approval to buy a bank in the United States.

You know, you mentioned the word to see, and I think certainly at a minimum you could say that Tether has pursued a rather weird strategy of disclosure and public relations where you know, sometimes it seems to intentionally be kind of coy with information or maybe outright deceiving people, but it doesn't really seem to have mattered to the people who are still using Tether to do a lot of crypto transactions. And you know, at various times Tether has been described as a sort of lynch pin in

the environment that is the crypto universe. You know, it is the thing that allows a lot of transactions and trading and betting to take place. Why why does it not seem to matter that much to people who are using crypto. Well, tether has existed since two thousand and fourteen and has been mostly worth a dollar since two thousand and fourteen. Like I, I can talk and list many very specific lies in things that tether has done.

But the truth is that over most of that time, for most of the people who used tether, it was worth what they expected it to be worth, It was able to be transferred from exchange to exchange, and it broadly represented about a dollar's worth of value. There's also the dynamic that many of the largest issuers and redeemers of tether, like all me to research who was the largest heads of November one, they did not hold on

to the tethers for very long. They were often selling them directly into the market, using them for trades, and so their overall exposure to tether was more of like the systemic exposure of this thing existing, rather than like the exposure to them specifically, if they're token suddenly becoming valueless The other thing with Tether and bit for next that becomes part of a channel is that after they were hacked in two thousand and sixteen, they issued their

BFx token, and many of those tokens, rather than eventually being redeemed for cash, were redeemed for equity in the parent company for bitfn x, and so many people who had been trading on bit for x in two thousand and sixteen ended up becoming equity owners and having a vested interest in these entities being successful and growing because it directly benefited them. So there's a whole bunch of

kind of different competing dynamics. One, it's that Tether has been largely good for what it was supposed to for the time it's existed. Tether has been around and has connections to many of these other entities in the cryptocurrency industry, and then a decent portion of people in the industry, especially those who have been around for several years, have at least some vested interest in these entities being successful.

You know, I saw a tweet right before we started recording this episode, and it was someone saying, my pet theory is that an amazing amount of crypto is going to turn out to be twenty dudes and an army of shell companies. And when you when you describe this sort of web of relationships, it does seem and this is something that came up with f t X and Alameda clearly, but it does seem so incestuous the entire industry.

I wanted to ask you specifically about Celsius as well, what the relationship was between f t X and Celsius, and also just generally how much of crypto is just collateralized by more crypto because Tether is sort of the ultimate collateral in the ecosystem, and you do get a sense that there is a lot of leverage built on that foundation. You asked about the relationship between f t X and Celsius, I'm gonna start the relationship between Tether

and Celsius. So Tether was the lead investor in Celsius Series A round. According to the lawsuit by Jason Stone, one of the former traders at Celsius, Tether's loan to Celsius in was effectively a bailout to allow celsie Is to continue operating. And we know that Tether continued to have these secured loans that they extended Celsius as they went.

Celsius's exposure to ft X and Alameda has been a little bit more challenging to figure out, especially with Massinsky's tweets the last couple of days trying to muddy the water. But it was clear that Alimated Research was lending from Celsius and they were trading together, but the full extent of the relationship is not entirely clear now as to how much of the industry is like crypto collateralized loans, loans to related party and things like that, I think

it is quite large. And that tweet you were talking about, it was from a conversation from a couple of years ago, and what we were talking about at that time was Crypto Capital Core, the payments processor for bitfin x, Tether, Quadriga c X, and then they also provided services for

several other exchanges crack in, bitmas, etcetera. And we were talking about them because the directors for that, even Manuel Molina, Lee As Josef and the rest, were directors for a ton of other small companies around the world, including like nominally mining companies, resource companies, these other things, but they all primarily existed to provide banking to cryptocurrency companies, and so we were talking about when in that conversation with people who made the tweet about how all of these

different things that we're providing payment services to, all of these different cryptocurrency exchanges, were these couple of individuals around the world who were just starting up tons of different companies and trying to get access to bank accounts for them.

And I think we've now seen, moving back to your question about like cryptoclateralized stuff, we saw the FTT collateralized loans, We've seen a variety of other cryptoclateralized loans, and we've even seen a ton of large lending desks, including ones like Black five, who were claiming not to do unsecured lending.

We're doing large amounts of unsecured lending as well, not even cryptoclateralized, just giving out money, right, And so I think that it is quite likely, and I think we're going to continue to see as the FTX bankruptcy progresses, that a lot of entities were doing this kind of lending and had various exposures that would seem atypical or surprising to people in the traditional finance industry. Speaking of

the web of the web, everyone connected. What's the deal with this tiny bank that like FTX I bought a steak in and like I think Washington State that had like three employees. The New York Times reported on it. What's that all about? And I think there's a tether connection there. Yeah, So that is Farmington State Bank in Washington. And Protest was actually able to get an interview with Hanvir Schalapin, the chief digital officer of that bank, where

we got some additional context on this. So as of a couple of years ago, it was an incredibly small bank, like ten million total in deposit deposits, putting off a total of like six d K and revenue per year, had a few dozen accounts, three employees, tiny little branch, like one of the thirty smallest banks in America. And that was true until the head of Deltech Bank can Trust in the Bahama US, the bank I already mentioned was banking Teller and elm to Research went out and decided, sorry,

they didn't go out. They've been very careful to say they didn't go out, so I should be careful as well. The chairman of their bank went out with no connection to the bank. He's a chairman of and decided he wanted to purchase a U S bank for no reason that had anything to do with his bank in the Bahamas. And he found this bank in Washington, again with nothing to do with his bank in the Bahamas, and was able to get eleven point five million dollars from ELM

to research to go out and buy this bank. They were giving it like a post money valuation of like a hundred and twenty million dollars and ten million in deposits, which is an absurd bank valuation. But continuing, they rename it Moonstone Bank and Trust, according to han Vir, because they wanted to bank cryptocurrency assets which were going to the Moon, and cannabis assets, which as we all know, are great for getting you stone their entry into the

I didn't know that about the stone part. Oh yes, that really why the second half. So the Moon is crypto and the stone is cannabis. Yes, Oh my gosh, Oh my gosh, that's so good. I just got that. I'm glad I didn't. I'm glad I stopped and plauses there because that is a great detail that I wouldn't have wanted anyone to miss. Okay, the Moon's don't Okay, sorry, that's good. And so then they get four new accounts.

Their deposits go from like ten million to thirty million with these four new accounts, and they were able to get Federal Reserve approvals, start using fed wire and things like that, and this tiny little bank in Washington got this investment from Alemida Research and suddenly became much much larger. First of all, can I just say it's incredibly impressive the way you are able to keep this very very complicated web of relationships and names in your head, because

I certainly wouldn't be able to do it. But but I just wanted to ask a really obvious question, and I suspect I know the answer, but I think it's kind of important to touch upon. But who regulates Tether if any one? Well, I mean they have one money transmitter license in the United States to an old Taiwanese entity that they don't really use anymore, so finn sent right. But more seriously, there is no like single regulator overseeing

Tether's operations. There's I think a variety that could try to make a claim that they have jurisdiction over Tether, but they're going to have to probably do that via enforcement actions. It's a British Virgin Islands and a Hong Kong domiciled company, so nominally the British Virgin Islands regulators and the Hong Kong regulators might have a claim over it. Part of the challenge with any of these cryptocurrency companies is that they are very deliberately set up with the

goal of avoiding regulators and most regulatory tactics. They pick locations where they think they can gain regulator approval or avoid regulator ire and then they try to structure their operations and even their executives in a way where it's going to be challenging for countries with more active regulators to pursue them or to stop them from doing what they want. I want to just go back to the question that Tracy asked, because I still feel like I I think there's a lot of hair on tether, so

to speak, all these questions, etcetera. I get why. In the beginning, maybe you know, various entities used te tether to trade and it did the job, and maybe they had an interest in seeing tether success due to other equity exposures that they may have had. But today, in

given the sort of relative level of transparency. Given the perceived level of scrutiny that faces tether, why do you think there's still so much demand for using it both as a money transfer device between exchanges as a base pair for trading, Like, where where is the demand coming from today? Well, I mean, I think first we should be very clear that it seems like the demand for

Tether has plummeted over the last several years. Like if you look at the relative stable coin dominance from like April nineteen when the New York Attorney General filed their injunction and two now, Tether's dominance has vastly decreased among stable coins, right. And if we look at the like broader defy area, we often see Tether being priced at a discount, valued at a discount to other stable coins.

Maker Dow won't even use Tether as collateral for a lot of their things, right, And you see that across some other lending protocols and things like that, where Tether will be priced materially different than USDC. There has been a certain repricing of tether risk over the last several years.

I think, just broadly, it is an old instrument that's existed for a long time, and that one of the more recent things that really drove tether's growth before b U s D and before finance across collateral was that like when finance launched their collateralized futures products, the easiest way to collateralize those was with tether's and so there was this massive increase in the issuance of tethers from these firms like Alimated Research in Cumberland Global and these

that wanted to trade futures on finance and needed to collateralize those positions. And so because Binance chose tether for that, you saw this massive increase in the number of tethers issued during that period, so these firms would be able to trade that product. Once finance switched to cross asset collateralization and started favoring b USD and stuff for those assets, we started to see a lot of the dominance and

position for tether and those markets start to decrease. So why is tether still used Because it's been used for

a long time. There's a lot of them out there, and tether is perceived position in the industry, especially outside of the United States, is that that they have been around for a long time, and some even see their ability to survive a New York Attorney General investigation and a CFTC investigation and continue operating as proof that there must not have been anything so abjectively criminal that those organizations wouldn't choose to try to get them shut down.

You know, you mentioned the fact that for most of its history it's been able to maintain the one to one peg with the dollar as another you know, sort of selling point for people in the crypto ecosystem. I guess my question is, like, what would be the thing

that would prompt the peg to start to fall apart? Because, as we mentioned in the intro, we have seen it dip below one at various times in history, notably during the Spring crypto blow up when Tara Luna collapsed, and recently in November with f TX, but it hasn't really dropped to the extent that I think a lot of critics of tether might have expected it to. Yeah, so when tether is below a dollar, those who are able

to redeem tethers should be redeeming tethers. It's free money that's sitting out there right if you can buy it up for less than point nine cents and give it back to tether for nine point nine cents. You're making easy money in that trade. And that's what we've seen a lot of firms do. During the tera to pegging. Almeda Research was very actively arbitraging the tether peg, buying up tethers and sending them back to the treasury, presumably

to redeem and make those that easy money. If one of those firms that does the arbitrage sends it back to tether and the process is even more abnormally messy than Sam Bankman Freed would normally claim it is, then they may decide that whatever money they're making from that arbitrage is no longer worth trying to make. And when those firms decide that and they stopped trying to arbitrage the peg, then whatever is causing it to deviate continues

to deviate. The fact that we've seen it return suggests that there are entities that have been able to buy up and redeem tethers and make that trade. What would cause it to break would be something that makes that no longer true, where people are trying to extract that value and are not receiving it. In turn, part of

a strange dynamic for me with tether. That makes this a more complicated question is that it's supply dynamics don't necessarily match what we would expect, like it doesn't seem to expand and contract in time with the rest of the cryptocurrency industry. And yeah, this is why I was asking you about the sort of outstanding number of tethers before, but go ahead, yeah, and this is this. Yeah, And so like we see tether for a long time, it

basically just monotonically increased with like one brief decrease. And we've seen more redemptions now than we have historically, but still generally tether tends to be slower to start decreasing in market capped than the other stable coins. And the reason for this has not been entirely clear. For a while, it looked like the explanation was that many tethers were destined for purchasers and entities who were not likely to redeem.

So for a long time there was an active demand for tethers in like the Chinese over the counter trading market or are for Chinese bitcoin miners and things like that, and many of these entities preferred having the tethers because of the ease of transacting them, then the corresponding dollars and the relative risk of tethers was like acceptable for their purposes, and this seems to have been a pretty important like sink for tethers. We see this in like

the decrypt reporting on the Babbel finance blew up. We're supposedly in a manner very similar to the Celsius bailout. Tether stepped in and bailed out the bailed out Babbel finance. Right now, it's a little bit less clear to me why we don't see tether expand and contracting quite the way we expect, And I think that's part of the challenge in figuring out why tether doesn't lose its peg

in the way people expect. I think there are people for whom tethers are worth more than the dollar backing them because of some additional convenience they provide, and that some of these people who are interested in these tethers

are people who are unlikely to redeem them. So because there's this kind of demand sinc for tethers, these tethers that go out but that are unlikely to ever come back in, there's a little bit of a cushion and Tether's operations that make it easier for them to handle the remaining entities, who are the larger cryptocurrency market making funds and quantitative trading funds who are actively redeeming, issuing,

and transacting in these instruments. So I just want to sort of reiterate this point because I think it's really important. If you have tether or usd T, you can redeem it directly with tether itself, but I believe you have to set up an account and there's like a minimum of a hundred thousand worth of tokens or something like that um in order to transact directly. So what most people would do is you would go into the secondary

market and just sell there. And in the secondary market, the peg is maintained through you know, basically market mayers who kind of operate like exchange traded funds, would where if there is an arbitrage opportunity, if Tether is trading below the one dollar peg, they would go in and sort of arbitrage that and make money in order to

keep it close to that peg. So what you're saying is if the market makers are no longer able to fulfill that capacity, if they're having balance sheet issues, if they're risk averse that kind of thing, then that could be what would trigger a substantial deep pegging event for tether. Yeah, basically, And I think part of that is like when Sambankment Freed came on here, he talked about how the process of redeeming tethers was sometimes messy, and like, that's not

generally or necessarily what you would expect for this. You would expect that element to research sends the tethers back to the tether treasury and tether from their bank account wires,

element to research the corresponding number of dollars. Right. That doesn't seem like it should ever be a messy process, But we know from one of the largest tether issuers and redeemers that it was, And so whatever is causing that messiness in the process is the thing that I would expect Mike someday, cause it so that one of the firms that does the arbitrage will blink and choose

to stop doing it. Bennett, I think we could go on for a pretty long time, because this is like a fascinating conversation and your knowledge of the detail is great. But I think that is also a great place to stop it. So thank you so much for coming out offl thanks for having me. That was really great, Unet, that was amazing, Tracy. I thought that was really fantastic.

And again, you know, this sort of the web and the degree of like interconnectedness among and we only we only looked at a slice, but it really is striking the agree to which every entity seems to have some sort of relationship with every other entity and crypto totally. I kept getting, um, what's that meme of the guy and he's like standing in front of like a board it's always sunny. Yes, it's always sunny in Philadelphia. I think that's it. And he looks kind of crazy but

he's onto something like that's yeah. I kept getting images of that in my head. You know. One of the I guess again fun. One of the interesting things about crypto it because so much of it happens on chain, it does seem like there is this role for like the sort of like crazy Internet detective to sort of like this is so, this is Tether's wallet and this is el amede as wallet, and you can sort of do it for real because like people have always been trying to do that, but in crypto you actually can

legitimately do that to some extent totally. Or you can also just point out the obviously insane things like naming your bank moon stone that cryptos going to the moon, and you can use it to get stoned. That's nuts, um.

But the other thing I mean, I thought Bennett's explanation of the whole thing was fantastically impressive, in particular the way he laid out the sort of relationship between the market makers slash arbitrage ers and the messy process and this idea that well, in theory it really shouldn't be this messy, but it is in practice, which kind of

suggests are points to future vulnerabilities, you would think. But that said, I also think, you know, just going back to this idea of why tether has so far proven relatively resilient, Like, I also think there is this overarching theme of I liquidity, right, and if people just like aren't transacting with it as much, then it can stay at one for far longer than you might expect. And this idea that you know, the a lot of interesting stuff on that question too, because like, even if you

were to take the attestation at face vailue. You know, like a lot of assets have declined a lot in failure, including treasuries and including like anything that has any sort of credit element over the Chinese commercial paper. I mean, like everything is sort of we're there, But then ben Atts point maybe there's some Tether's out there that will never be redeemed and that creates some sort of buffer.

I don't know, it is very interesting. You know. Another thing is that like and that sort of makes the persistence of tether as this important vehicle. I mean he mentioned that Tether's dominance within crypto, within de fire within crypto has gone down, it's still bigger than USDC by a substantial margin according to corner Coin market cap sion verse forty three billion, So it's still I mean, it's

still really big. Um. But you know, there's also all this everyone knows, like there's all this scrutiny over it, and they have been sued, etcetera. So the persistence of tether is still just like in itself, like a fascinating story. Absolutely. Um. So I guess we will. We'll see how how long it goes on for U see how long it's share? Shall we leave it there? Let's leave it there all right. This has been another episode of the All Thoughts podcast.

I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't Thal? You can follow me on Twitter at the Stalwart. Follow our guest Bennett Tomlin. He's at Bennett Tomlin. Follow our producer Carmen Rodriguez at Carmen armand, as well as Dash Bennett at dashbot. And check out all of the podcasts at Bloomberg under the handle at podcasts and some other housekeeping. We're gonna be doing an a M A episode where you, the listener,

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