Will Tether Crash Next?

with unstable podcast hosts. Hopefully our guests can bring some stability to the show. On this episode, number 655. Of the Bad Crypto podcast.

thanks for coming on Bad crypto.

moved to finance. To, you know, trying to make up the living. And so started working for a few hedge funds, started to build software for them, understanding all the intricacies, intricacies of finance. You know, also the bad habits of finance and the really, really bad infrastructure of traditional financial systems. So, you know, it's just to summarize, it is all cash

buy together, buy rubber and beans. In 2014, I had the privilege to start becoming and well becoming one of the developers of the Phoenix, just focusing on matching engine. The platform was more and more adopted and hence they had some sort of lags and issues with the performances of their matching engine. So I was asked to, given my expertise in parallel computing scalable applications to was asked to improve that. And in 2017 I became also the

CTO of Tether. So taking care of the security side, blockchains, integrations and you know swap of multisig and similar. So yeah, that is my energy's my story. I'm just a dude that codes.

they're looking at your background. They're saying, okay, wait a second, you're the CTO of Bitfinex and the CTO of Tether. How does that work and how does they work together?

any problems. So. Well, yeah, really. So on the on the Bitfinex side, well, we have an amazing team of engineers and I still the main developer of the machine engine. You know, it's kind of one of my passions to make sure that we can squeeze as much performance as possible. So these with this last update that we published just few weeks ago, we were able to go below one

millisecond of fool around latency. That is quite an achievement for a platform that started from crypto right in 2014 when I joined, we could process only 50 to 100 or two per second. Now we are basically at 1 million or third per second, like in 2014 crypto exchanges where felt like more e-commerce keys for bitcoin rather than, you know, our additive trading platforms. And nowadays, while the fast forward we hired not just us but the general

industry hired many professionals from other industries. And now things seem quite better from the infrastructure point of view and on the other side.

a time. There was Bitfinex, Kraken, Bitstamp, Coinbase and Okcoin. And in order to run an exchange or having, you know, in a health exchange, you need market makers. But also you want to make sure that the price of Bitcoin is pretty much the same across all the exchanges. So. In August 13 was the first time Bitcoin went above $1,000 and you had some exchanges that were trading at 1.2 thousand. Other exchanges that were trading $900. Right. Because there is in for that was that in order to

keep prices aligned across exchanges you had. You needed to have arbitrage reverse arbitrage. You're smart. Those traders that sell bitcoin on the exchange where the price is higher and buy back on the exchange where the price is lower. Of course, when you do that, you have to move dollars from one exchange to another. And in 2014, moving dollars from one exchange to another would take five days.

So the arbitrage opportunity was basically gone. So the reason of tether to exist initially was, okay, let's use this pretend technology that Bitcoin created. It was called blockchain and why we don't use blockchain to move dollars. So at least at that time you could move, well, Bitcoin in 10 minutes. Bitcoin blockchain is one one block every 10 minutes pretty much. And we wanted to just use the same thing for tether. And so suddenly we could optimized

the trading markets for four for across exchanges. So that is a symptom of a growing and more mature industry. And nowadays terror is becoming many more things. Is actually an inflation hedge for Turkey, for El Salvador, for, you know,

for Venezuela, for Argentina and so on. So basically, is this total monetary base of terror is growing because people just need to not be subject to the enormous inflation due to their, you know, national currency like the Turkish for the last 80% year on year to, you know, from monetary policies and so on. Right. So is actually being used as a way to as a lifeline for for many people around the world, especially in virtual markets and developing countries.

thing with FCX. And so I know a lot of people are out there right now talking about what happened if what happens if tether fails? What happens if Tether does not have enough in their reserves to get us through this? Bitcoin we could see sub $5,000 price in bitcoin because people wouldn't have a mechanism to easily get out. And so I guess my question to you, Paolo, would

be how do you ensure that tether never goes down? Because we need this decentralized stablecoin more than ever because we are on the precipice of this technocracy that wants to bring in these central bank digital currencies and they want to get rid of a lot of this crypto stuff. So how do we build up the faith and ensure that tether never crashes?

that craziness about, you know, the commercial papers. Well, we we show to our community that in less than one year we could do take the $30 billion that we have in in in commercial papers and move everything to U.S. T-bills. Right. So tether listen to the community and act in the best interest of the community. So the rest of the remaining 70% of assets are extremely collateralized assets by extremely with the collateral being extremely liquid. No FTT, nothing like

that is overly overly collateralized assets. We have displayed also with Celsius with all the other companies that blew up. That tether has been the only one. Only company being exposed to these market issues has taken a risk management extremely seriously. You know, everyone is looking at obsessed by tether, but look at all the companies that are failing, right? So all the companies that we are consider the white knights, the holy heroes of the crypto industry. And yet, you know,

they all failed their customers. Tether has older reserves that are extremely liquid, was able to process $7 billion in redemptions in you know in between the 14 and 15 of May ensuing 48 hours process $7 billion silver redemption that where around 10% of our reserves. No bank in the world can do that. The first bank that tried to do that was Washington Mutual in 2008, and they went belly up that they're adding $20 billion in 30 days.

That was 30, 20, 25% of our reserves. And recently tether, tap, redeem always redemption honored no failed to honor single redemption all redeem at $1. So I mean we is not that we don't have enough information we have a ton of information about ourselves out there but also we have something that others don't have that are facts, right? So we have facts that say that we can redeem what people need in cash in dollars. Right.

People are obsessed because if you look here at the crypto market, cap tether is the number three in crypto market cap with a market cap of $65 billion ahead of U.S. DC, which is at 44 billion. On your website, you talk about transparency and say, Here's how we're backed. But the audit is is still not happening. This article in Cointelegraph goes back to July of 2021. Tether Promises Audit in months as Paxos claims USD is not a real stablecoin. So this was more than a year ago.

So I went looking. All right. Has any information been released? I ended up at BLOCK Works and the page that the headline is Tether Pushes Back Timeline and Audit Report. I get a four or four. It's gone from the website, so I had to go to archive.org to find the actual article that was captured but is no longer there. Where were you said that you promise a full review of its books and the timeline is being pushed back.

Of course, you're the you're the guy they go to for this in which you said it was likely months away still. So the question is, is why is this taking so long to get an audit?

accounting company. That was more common, right was top well, was the 12th biggest company in the world to a top five company in the world that is just out the first one outside a big four companies right that two attestations that the accounting. So we actually have the company that does accounting, that does at the stations that is the most reputable among the others Stablecoins. So also we are working. So I will let before we go there, let me explain why doing an audit with also a

big four is so difficult. Because we have contacted them and we try to work with a few of them of the big four. And the issue is that without having clear regulations on stablecoins, they don't want to take the risk for them. Is there a potential reputational risk? So how you can fully audit something that you don't know exactly how you should own it, right? Because if

there is no regulator, be great. It of course that tells you how many we each type of reserves are allowed, how many reserves, what is the type of backing that is allowed? What is there processes that you should allow and so on. Let that takes enormous risk on the shoulders of the big four. So they have too much to lose I think is unfair, but it is what

it is. We got this exact answer now. We believe that with video and there are right now, right now other companies interested in proceeding with the audit is not that we didn't try it. We are ready and we're working towards it. We have again, we changed our accounting company just to prove that we can raise the bar, and that is that remains our top priority. So again, is not something that only is this is not just our issue is an issue of the industry and definitely

have the accident didn't help. Right. So the more you make it a step forward, the more people are scared because you said, well, we have this claim to have a gap audit. FDX was, you know, so regulated and look what happened. So I can tell you that auditors are scared. So it takes time. You know, I'm the first one to say that unfortunately, is taking more time than what we wanted. We are not alone in not having an audit. And also the guys that claim to

have an audit, you know, they went belly up. So in this way, the auditing firms are extremely scared. And so we need now to regain the trust for an entire industry.

you know, this is not the first time there's been something that's that's happened that that's questionable. The attestation that was done by tether probably before you came on in 2017 showed that Bitfinex, which is a sister company, transferred 382 million to the bank account just before the attestation took place and you guys settled the case. Nobody admitted or denied. You know, the allegations were true or not,

but it's certainly suspicious. And that's I think that's why people are rightfully so concerned to ask these questions.

Many other companies failed. So what I'm saying is that questions are always fine, right? So, absolutely. But the problem is that what I find I'm finding myself and a little bit bitching about it is like being single out or like being like that. This black sheep, when you know all the mighty heroes are failing around. I don't know that they're necessarily going after you or targeting you like that. They're just trying to see transparency

within the space. Right. And my thing would be this is that I don't know how what tethers do or if they're doing anything wrong. I trust tether I have USD. If it collapsed, I would be very sad boy. Right. But what I would like to see is some sort of proof of transparency within exchanges, right? So it could be pretty pot proof of transparency. And any time I'd like to look at and see, oh look you know tether has this Binance has the oh look the USD are USD. Oh I can look and see and it's

almost like this power if you know in my mind. Right. And I think a lot of people's mind is if I give you $10,000 or I'm buying tether with $10,000, that $2,000 just going to a bank account or something. Right. So you could almost be like, oh, we have $65 million our and there it is. And I, I probably shouldn't be so hard if those are the off those deposited funds from users are there and not in distributed places.

That's why a layman would look at that and say, so, you know, $65 billion worth of assets, there should be $65 billion over here, as long as there's not fractional reserve banking going on of some sort and leverage.

that we can read this, release it month. Right? So we started from three months and it was taking 45 to 50 days to do the attestation and to collect all the information and provide the information to the auditors and do the attestation. Now we are going below the 30 days so that we can release this monthly. So it's not like we don't have anything. We have exactly what the other stablecoins have. And also we if you look at the length and the details of our attestation

is much is far higher than the others. Also, we did the very same thing with Bitfinex. With the next we release the proof of reserve. So we showed, we displayed and we provide all the hot and cold wallet

addresses of bitfinex. And also we have developed ourself a tool I developed with a couple of guys myself, a tool called Anthony, that also does proof of liabilities with a merkle, with a Merkle tree, and we'd bring signature type style of, of, of accounting so that people with privacy can verify that what we claimed it should have in the in the in the assets is effectively on bitfinex.

So I agree that the transparency of this industry should keep crazy that I'm I'm battling with that I'm working also I'm helping my team to achieve that. So I again, I'm not saying that we shouldn't be more transparent and more transparent. The market transparency shouldn't be asked to everyone in this industry. One is right, has the right to be scared, especially in this moment. So not saying not to.

What you are, what they are claim. I'm explaining the journey that we had in order to achieve what we have today. And also, I'm saying that the journey is not finished yet.

months away. Can you give us like what is a drop dead date that you think we can expect to see this?

So the most important so we didn't just prove that tether is solid, right? We also proved that the bank, our banks are solid. We also proved that our KYC and email is solid because it's not like, okay, someone has already made money and that's safe, right? The biggest redemption that we had in one day as a one single transaction was $700 million. Right. So it means that, you know, if the receiving bank will see, you know, a wire for $700 billion, we'll likely question what that

is about. And no questions were asked because the KYC, AML processes our reporting to regulators, our ability to work with law enforcement. We froze, by the way, also with FDX, we were the only stablecoin to act immediately and help both Bahamas and other law enforcement agencies to freeze assets immediately. And we returned more than $200 million to their two illegitimate customers within the last two years due to hacks and stuff. Right. We are always there. We understand that

people are relying on tether. And also, I know that you understands the scene for their side. So definitely we are working towards an audit to answer your question. I don't want to give you a specific date. I don't know what will happen with the regulators now with FDX. So we'll we'll see. We'll have I'm I'm seeing a lot of questions around not just stablecoins crypto in general. The committee from regulators will say severely impact our industry. So we are going we are going to be and

we are laser focused on the audit. But it will take time.

that they can continue doing what they do? I bet people have that question.

category of stablecoins that I represent. So we have two ways of making revenues because the first thing when you you talk with a regulator, the first thing that they ask you is, is your business model viable and will remain viable. So the first way for us to make revenues that is unique to tether is issuances and redemption fees. We have ten basis points issuance and redemption fee. That is really important because when interest rates are bust, our

are low. You need to maintain a viable business model. The in this moment, interest rates on T-bills are really high, approaching almost 4% on, you know, a low maturity like 3 to 6 months. And so, you know, you can make that calculation, right? So how many assets we are have under management and multiply by, you know, 3%, let's say, on the worst case scenario. Right. So you can understand that tether is an extremely profitable business and doesn't need

to do anything bad in order to make money. We don't need to, you know, commingle customer assets. We don't need to do crazy things. It's just we hold the funds in our bank account. Every time someone wants to acquire tether, we make money. When someone wants to redeem tether. We didn't make money because we need to also guarantee that if, for example, last year interest rates were really low, we needed to maintain a viable business model. But you can see that if someone so issuing $85 billion of

tether that was our peak made $85 million in revenues. Right. And so then when people redeem you, make money and so and so is import. That is the first part. And then again now the biggest money, the biggest returns are on the interest rates because they are the ones that are providing that. Well, since the Fed increased interest rates, now they are not the most prominent part in terms of earnings.

when I pay attention to global politics, right. And I do kind of see some things that are happening, it looks to me like the dollar is losing power worldwide as its reserve currency. Right? It looks like because historically, you know, if you wanted to buy oil in your country, you have to buy dollars first and then you buy oil. Right. And then I saw what was happening with Russia and Ukraine.

Everyone saw that. But what I saw was the price of the of the rupee of the ruble, excuse me, was dramatically lower than I thought it should have been. I mean, for $1, it was like 115 rubles. And I was like, Oh, my God, I would take a lot of my stablecoins right now and put them in a rueful stablecoin. And if I had done that, I would have doubled my money. I can see that happen, but I don't have access to a rubles that is stablecoin. I didn't see that I have access to a Chinese stablecoin.

I don't have access to a Brazilian. The BRICS economies. Brazil, Russia, India, China, South Africa. I don't have access to Stablecoins in those. So when is it going to be a forex component to this where I could see, I don't know that I trust the U.S. dollar. So in my mind, if the US dollar collapses, USD would collapse because there's that similar or that similar value there. But at that moment I would say I'd like to get out of my USD moving in the rupee A Rupal didi even the

Indian one or the Russian one, right? How is that coming? Is that something we're going to be able to do, and why is it that we're not able to use Stablecoins in other currencies effectively yet?

emerging markets, everyone wants the dollar, right? So is they don't care about anything else they want.

what is the best hedge bet for your crypto? If the dollar is not the best bet, why would you tie them all up in stablecoins tied to the dollar? That's my question. But if you're saying most people don't

give a shit about that, then that tells me most people aren't paying attention.

So we are around $500 million of market cap with with tether gold that is not fully backed by.

for audits on USD t, Where is the gold?

to be crazy. So, you know, we can ship only in Switzerland and so you can come get your gold bar and go away and ship it complying to, you know, the rules of your own country.

for gold throughout the history in years. So but that is the thing with gold is that I come from Italy and now you know it's gold is extremely well understood by emigrants from the populations that have always to have something, you know, under their pillows because they have a you know, they're that geopolitics of debt that those eras where kind of weird and crazy. The same happens with India, with the with Turkey, with, you know, Venezuela and the others. Right. So I think that gold is

is quite interesting for that aspect. But really, no, no way that I mean, from what we are seeing, no other national currency has any shot against the dollar. Honestly,

if you can.

that's reflected in the price. So if of course, if you hold like a gold node or a future that is different because you know, you sell it on the market and you know, there is there is no actually carrying on the underlying, but the, if you will, actually selling a piece of a gold bar that has certain requirements that also are physical requirements.

excess duty versus the price of gold. Comparatively, it would seem like it seems a little bit lower, but they'll pay for gold is such a problem. Paolo. I mean, what is it for Every real physical ounce of gold, there's like 500 fake paper ones from COMEX, and it's very similar to that with silver for every silver physical ounces,

200 plus some odd, some fake ones. And so the fact that you're actually pulling in physical ones and stating that definitively that is a much bigger thing because realistically there's about 500 times less gold in the world than the claim and about 200 times less silver than they claim overall. Right?

kept stable anymore. And that could be an interesting event. Right. So, you know, you can say the very same thing goes for for Bitcoin, Right. So the size of the future markets, I mean, it's.

only the weird people can stay in crypto like us.

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