Paolo Ardoino: Tether's Stress Test

S US DT. The largest stable coin by market capitalization recently witnessed a de pegging moment that rattled investor confidence. Since then, the firm has stressed its continued commitment to transparency. Was this an attack on tether? Will us DT maintain its dominance? And what do tether's reserves look like? Coming up on word on the block. Paolo Arduino, Chief Technology Officer of Bit and Tether dives deep into those topics and a whole lot more cryptocurrencies have been facing fear, uncertainty and doubt and included in that is also digital currencies. Its most recent target Tether on June 15th, the world's largest stable coin US DT briefly lost its dollar peg. Although the US DT has stabilized since the incident once again, raised concerns about the general stability of stable coins in an uncertain market. Now, stable coins are backed by fiat or highly liquid assets or in some cases smart contract algorithms but are all stable coins created equal. And why is transparency of important in the crypto industry? We're gonna dive into all of this in this edition of Word on the block. The series that takes a deeper dive into Blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. That's what we cover right here on forecast. I'm forecast editor in chief Angie Lau. Well, there is lots happening and who better to break it down for us than Palo Arduan, the Chief Technology Officer CTO of not one but two companies. We have bit fin, one of the world's first crypto exchanges and tether. The name behind the world's first and largest stable coin us. DT, an Italian developer and entrepreneur with a passion for coding and a keen eye for finance Paolo has been shaping the tech and crypto landscape for years and we've been watching every step of the way from uh our days back in Hong Kong Paolo. Welcome to the show. It's really good to see you again. Thank you very much. Thank you for having me yet again. And it's um always a pleasure. It's, it's our pleasure indeed. You know, I look back at the past few years of the industry and the peaks in the troughs um to be sure. And, and one could definitively say that that we are far from the peak um in terms of market sentiment and the market pricing. But talk about how bit FX and Tether has been able to really surf that over the past couple of years. Um Back in 2012, I remember there were five exchanges. Bit was one of them. Now there are over 500 crypto exchanges and, and you joined. Bit back in 2014, you transitioned to become the CTO of both tether and bit. Where are we now in your view, in the of adoption? Well, we are um definitely in a much different space than 2012 and 14. The, the industry grew rapidly. Um I think the last few years has been quite bumpy as you, as you mentioned. Um as of today, uh as of the last uh 10 days, the uh what is happening is uh is quite interesting. There are a few of the largest wealth managers in the world that are um considering and are uh filing applications to launch uh Bitcoin ETF S. So that means that something I think um important has changed, the trust of the big in institutional players have gone up in the, in the last uh few months and few years despite what happened uh last year in 2022 with uh Tana with uh block five, with the, with the in the end uh this year started with um issues. Um on the banking side, we have seen Silicon Silicon Valley Bank, we um failing, we have seen uh silver gate and and signature um uh following the same path of uh Silicon Valley Bank. So that showed that also in the traditional financial industry, there were issues as well. So um the sum is kind of um um the the the sum is um uh telling us um that uh uh on both sides, there are still issues. Uh There, I think we, there is a lot way to um still prove from founders and uh both and the, and the, the industries, I think the industries are trying to get to work together a little bit more. Again, we are seeing um hedge funds trying to put their feet into the water of cryptocurrencies and the Cryptocurrency trading firms including Bit Phoenix and Bit Phoenix securities are looking at providing more traditional financial services. So it means like we are seeing the two the two industries almost coming together in a single bigger industry that is in the end, the things that make more sense in the end, I don't think crypto is here to completely destroy the banks. I don't think we ever wanted that, but we want to bring some change. III I want to pick up on that point. Absolutely. We are starting to see and we've always, you know, at least from our perspective, we've always seen the financial trad industry merging into this, this uh this innovation that we're seeing in the digital finance space because as us DT you know, really grows, it's, it's going to have to really not only serve the retail and the consumer market, it's gonna grow up and it's obviously serving a lot of uh mid-sized and large cap uh firms right now internationally. But at some point when you get to the institutional level, that level of trust. Um Do you think that you're able to really communicate uh to institutions? Do you think that you're there yet? Um And you know, the the regulators are all circling? Uh So do you think that you've got a ways to go or, or how are you addressing uh that those transparency needs? Sure. So I think from 2021 made um huge steps in improving transparency, not just for itself for the entire industry, right? So we were the first um stable coin to provide the breakdown of reserves. Um uh you know, I don't want to hide behind a finger. The the first release uh showed that we had commercial papers that were criticized publicly, although they were as was demonstrated recently with the reveal after the the Foil Act information that was sent to different journalists. Uh It was revealed that in fact, the commercial papers that we had in 2021 were extremely safe. The the they were rated for the vast majority, a one and a two from standard and poors. But nevertheless, Tatar publicly took the stance of reducing these commercial papers to zero. That happened uh basically by the first quarter of 2022 that didn't have almost so it reduced by 90% the exposure to commercial papers of moving, moving everything of that um uh that value to uh us treasury bills by October 2022 Tatar didn't have any more, any single commercial paper and everything. All, all those amounts were all converted in us treasury bills. So now we are in 2023 and we are in a situation where 85% of our reserves are cash and cash equivalent of which the vast vast majority is us treasury bills. If we do an exercise that is called. So first of all, by direct ownership of us treasury bills, we have around $56 billion.56 billion dollars that are I think more than Australia and Mexico, right? Then if you sum um the uh overnight reverse repo that are around $9 billion we go up and we are around 65 billion dollars. And if you are the money market funds that are also invested in us treasury bills, uh we are adding a few billions dollars more. So the vast majority of our portfolio is in us treasury bills and we have an allocation of gold that is also public is around 4% and we have a few other allocations. Um On the transparency side, I think, and as I said, I I'm speaking about all of this publicly and it is part of uh the attestation, a quarter at the station that is being um um uh uh provided and, and performed by BDO, that is the top five auditing firm in the world. So definitely things can always get better right. So with, with we, we we strive to always provide more information to respond to all the questions. We always start to provide also information on how we think we want to manage our exchange of reserves. Right? When I'm asked from regulators or from institutions, how I can prove that data is in fact safe and looking at our kind of competitors, you have the banks that you know, they have to keep 8.5% in in collateral in the bank. So on one side, you have the company that is over collateralized in its portfolio. And on the other side, you have banks that are doing fractional reserve. But on top of that, you know, 2022 you at the beginning of, of the our conversation, you, you you talked about um the last uh years, right? In 2022 Tatar was subject to an attack from a short sellers. They wanted to prove to the world in that, in their opinion, Tatar didn't have all the money that it was seen to have. Uh these short sellers is trying to put redemption pressure on Tatar and that's fine, right? We always, we always like to have a trial by fire because that is the best statement of our solidity. So in um in 48 hours, Tatar was able to redeem $7 billion. So that was 10% of our reserves. And in 20 days, we processed around $20 billion in redemptions that was 25% of our reserves and we could have gone farther. If you look at what happened in, in, in with S PB or what happened in 2008 with the uh with the Washington modal, then we are not able to survive to a 10% redemption uh pressure. And so it means that with, we are doing something right, we are doing something that is going against the, the classic portfolio management of, of or even the banking industry that is extremely regulated and yet it fails to provide reassurance to um in certain situation. Also, recently it fails to provide um uh certainty or assurance to its own customers. All right, Paul, hold on to that thought because when we come back after the short break, I want to dig a little deeper into what exactly is in the underlying securities. The basket, uh that is the foundation behind the 1 to 1 peg to the US dollar word on the block continues. We'll be right back in today's volatile macro environment. Investors are demanding greater disclosure and liquidity when it comes to stable coins. Teer claims all their tokens are pegged in a 1 to 1 ratio to fit and backed 100% by reserves. We dig deeper into what's backing us GDT. And is it enough? If you don't understand the future, you'll never see your place in it, introducing forecast plus covering all things, Blockchain, independent reporting, insights and access from Asia to the world being cut through the noise, where technology insights and access meet where smart conversations happen, make friends with disruption forecast. Plus. All right, welcome back. We are here with Palo Arduan CTO of tether and Bit and you, you called the deep peg a good stress test for the company. Uh But still, you know, that was, that was a scary time during a time where the industry really uh shouldn't work, wouldn't want to invite that type of concern. Uh especially as uh there's just so much uncertainty overall from the marketplace on crypto and digital assets. How, how did it de peg? Uh and, and I, I know that it's recovered since then, but what was that instance where it did de peg and, and how do you, you know, internally look at creating uh a position where uh stability is maintained and preventing that from happening again? So this is a really good point and something that I like to elaborate because um I think there is a little bit of misconception when it comes to this. Um the pegging events, right, the price of UCT went uh 30 basis points. So not so 0.3% below the dollar on few exchanges, on few Cryptocurrency exchanges, our main contain con um our main competitor had a similar issue um three months ago and their price went 13% right? 1 3% below uh the dollar on, on the very same exchanges. So I said that was a good stress uh test for tater. For this reason, Tater is in charge of the primary markets. The primary markets are basically tater teter dot to platform. That is a platform where we process each one use the redemptions. The role of the stable coin is to always ensure that all the customers have a redemption that is always 1 to 1 to the dollar, right? So a customer come to the primary market, they won't redeem the dollars and they always get the dollar back. So that is what we have to do uh as a stable coin that is the stability, right? So we if we always maintain and we always honor every single redemption at $1 then the market is stable. So as a stable coin, we cannot control the secondary markets. The secondary markets are all the Cryptocurrency exchanges that are using us DT as their main liquidity source and, and uh as their, their, their dollar. But all these exchanges, you can, you can find short sellers, you can find the people that are speculating, you can find every type of person and they can, you know, the the crypto industry is still young, is still small. So when there is thought, when there is uncertainty in the market, you always trying to find, you always find people that are trying to leverage these events to create panic the crypto industry is, is like a small town, right? It's a small Italian town where you, you spread a few words and panic, right? And so, you know, you, you, it's, it's really true. It's like, like that crypto Twitter has a lot of means for that. And, and so you get, you get a lot of sell pressure and you get few traders that are mounting that pressure. But it's actually there are few smart traders that are making money because they, they are buying cheap us DT from the market. Uh 30 basis points is a lot of profit for market makers and they are coming to the primary market and redeem them for the dollar and they are doing this um back and forth so they can make, you know, the, the the revenue for the day. So what I want to say with this is that we, we cannot control the secondary market is that is wouldn't be also fair and legal to control them at the end of the day, that trust discrepancy was leveraged by the secondary market participants. But at the primary level where uh people wanted those redemptions, you were able to redeem sometimes the discrepancy in the markets, especially in the Bitcoin market. You've, you've said that you hold a percentage of the underlying collateral in Bitcoin and other assets. We live in a very volatile macro environment right now where different asset classes, uh different pools of, of um of securities are, are going up and down beyond that, uh uh you know, margin of error of 3% 3% is a, is a normal margin of error in, in crypto. Uh you know, it, it could be, it could be definitely 10 X that. How do you, how are you keeping abreast of just where to, you know, accelerate into which currencies and just to make sure that, that peg um is 1 to 1. And then on top of that, you have the inflationary pressures around the world from a fiat perspective. So all of this comes into play, you're, you're, you're kind of trying to juggle 20 plates in the air, prevent any, you know, none of them from falling and they all have to be at the same level spinning at the same time. It's, it's, it's, it's a, it's a, it's definitely a juggling act but, but how are you doing that? So that is another great point, right? So one I want to clarify that. Um Yes, Tatar has both recently. Um Bitcoins has an exposure to Bitcoin and we uh publicly provided information around that. We took a stance where we are actually accruing and diversifying investments, but we would excess of reserves because everything else is starting, we are starting to approach uh a really, you know, we, we keep buying with everything else. That is the one that um that, that is the part that is back in the reserves. We keep accruing more and more us t bills because the job of is, of course, is to be able to provide the assurance that, uh you know, we, we didn't, we don't have to beat the dollar, right. So we have to beat the dollar. We have to provide back the dollars to the, to the users. A few years ago, Teter was super healthy. Yeah, it, it was still, it was a really super healthy company and we, but we didn't make all the money that we are making today. We are making all the money we are making today because the the the yield on the US treasury bills has gone up. Incredibly, we are not taking out all those profits, right? All those profits that are given by these US treasury bills yields for the vast majority are stay in the company because we understand that things can change, right? We don't want to run on a thin margin. We we are keeping accruing additional stability for the company and for all our users, the spread of trust into stable coins is growing and it really supports this future of tokenization. It offers unparalleled opportunities to shape our digital future. Paula. I want you to stay right there because when we come back, a lot of countries are advancing on the development of their own CBD CS, including China, Hong Kong and the UAE. And so I want to ask you about CBD CS is it a threat to stable coins. Join us when we come back, stable coins are digital assets tied to real world money like the US dollar Central bank backed digital currencies or cdcs. On the other hand, are a digital form of the country's legal tender issued by a central bank. As more and more countries speed up their CDC developments. Could they become a threat to stable coins more when we come back? All right, welcome back. We are here with Paolo Arduan CTO of Tether and Bit and Paulo, I had to grill you on uh you know, the holdings and the stability of us. DT. Uh And uh I have to hats off to your cio and your CFO the, the team is doing uh well, every team right now that's trying to create stability in the marketplace deserves, deserves a nod of respect. Uh It's, these are volatile times. Yes, that really it's building towards a future, right? Tokenization of assets uh beyond currency, beyond cryptocurrencies. And I want to talk about that a little bit, you know, um according to latest Bernstein research tokenization opportunity could be worth over $5 trillion in the next five years. And that opportunity will be led by stable coins and CBD CS. And uh with a perspective that about 2% of the global money supply can be tokenized via stable coins and CBD CS. How are you viewing that opportunity? Well, um I think that is one of the uh the reasons of existence of data. In the first instance, we have in 2014, we created this industry of uh tokenization of uh of traditional assets, starting with the most used asset in the world. That is the dollar, but we always look at other opportunities. So first of all, it's um uh I think tokenize stocks and bonds is gonna be the next big step. So that is the market that is so, so big. Um And uh even like the dollar token, the dollar is another, another thing that, that we are doing, we launched a product called Tater Gold that is already making the waves in um um among the Cryptocurrency exchanges and we are seeing more and more interest in and adoption uh around the world. Yeah. No, II, I wanted to ask you about the CBD C. Um You know, a lot of, a lot of um uh people saying, and you know, obviously the, the, you see the landscape of countries uh turning their feet into uh a digital um version of it via the central bank backed digital currency. So then why the need for stable coins? Well, that is a great question and um sometimes I, I have the uh the opportunity to talk to um central banks and central bankers. And um the reality of things is that CBD CS have created some concerns from two points of views. The obvious one is the consumer. So you, normally you are like a, a consumer, you are a person, you want to open a bank account, you choose a bank, you pick a bank that you want there in, in, in, in countries, there are many banks, you pick one and when you get a credit card from or a debit card from this bank or you do wires, the information of which coffee where you bought the coffee, uh which books you bought or like with where you bought, you bought your books. Um And all these things remains for the majority between you and your bank. Now, in a scenario with um with the CBD C, that information will be seen directly by the central bank, right? That is a bit more uh centralized at the government level. So it means that every time you buy a coffee, every time you buy a book and so on, uh the central bank will could trace, you could know exactly what you did everything day in your life at, you know, at the second level, right? So every single second of your life, the central bank will know everything. And so that is kind of scary. It's kind of vellum in many ways. And so that is the fear on the consumer part. But also, and this is quite interesting, there are two fears at the uh at the central bank level. So the first fear is that if CBD CS are successful, that could completely kill the um the uh the banking layer in a country, right? So we told, well, the Cryptocurrency industry are always said that they were, you know, that they were trying to, you know, revolutionize the bank and kill the bank. But imagine if instead the, the it's the central bank banks that are killing the banks because they with the, with the CBD C, you know, the central bank could offer loans with the CBD C, the the central bank could, could make transaction fees. Exactly. And also this is even trickier. Uh CBD CS could also replace cash. But what if so cash in this moment doesn't hold any interest. So now uh in Europe, uh until like two years ago, you had the negative interest on your on on your bank deposits but you don't have negative interest on cash. Yeah, and it's tied directly to that country's monetary policy versus a stable coin in a private market would be tied to the market, the global market um simply supply and demand. No. Um wanted to ask you about then that added opportunity, one that we're seeing emerge out of Hong Kong and um with the regulatory rails that really are establishing the marketplace, the momentum is uh is really growing um uh from that region. But also where do you think the regulators, the institutions as they are coming in? You had mentioned at the beginning of our conversation, the black rocks of the day, the institutions that are coming in now with the regulators and uh especially across the Asia Pacific and Europe. And now what we're seeing in uh potentially the United Kingdom coming in and creating very specific um regulatory rails. What kind of world are we going to find ourselves in in 12 months? From now? 18 months, two years, I think we are going to see a world. Uh that is um that where, where there will be regulatory competition. So I cannot believe that there is um the time, the timing between you know, um us uh increasing pressure on the Cryptocurrency firms and uh UAE Hong Kong, Singapore actually opening up to the industry. So you could argue that actually um countries are understanding the potential in terms of wealth, uh employment, uh and opportunities and advancement in research that this industry could bring. And so regulators and probably governments are talking to regulators to see how they could invite these opportunities into, into their countries. And so I think it's extremely exciting because then you could argue that companies and since we are all in a way, digital normals, companies will start looking at multiple opportunities and will start moving and will start um uh bring their expertise, bring their wealth, bring their employees in countries that are more open with more open regulations. Because of course, regulations are important. No one wants to be a pirate, but also you want regulations that want that are actually providing a good umbrella for, for the technology to grow rather than trying to, you know, shut down or limit the potential of this technology. Thank you for giving us the opportunity to uh let you know our audience really uh own it and understand it a little bit more and uh and, and grow their perspective. And Paul, I really want to thank you for joining us today. It was great to have you on again. Thank you very much, Angie and I cannot wait for our next time, next time any time. All right. That's a wrap, everyone. Thank you for joining us on this latest episode of Word on the block. I'm Angie Lau forecast editor in chief until the next time.