Exclusive: Tether CTO Paolo Ardoino on Silicon Valley Bank, Circle and the quest to spread financial freedom

On the lessons from Silicon Valley Bank

I think one of the reasons Bitcoin was born in the first place, back in 2008, was as a way to respond to the financial crisis of 2007-2008. A way to show to the banking industry that you could achieve transparency, self-custody, freedom and control without intermediaries.

We often forget how important the history is, and why this technology, Bitcoin, the blockchain industry and crypto, how that all started. It was in fact an answer to the very same problems that I think have been experienced in the past few weeks by certain banks. 

We’re almost going back to where we started.

And, you know, it’s not just about the US banks. We are seeing similar issues in Credit Suisse, which had to get a bailout from the Swiss National Bank. 

In the end, we are going back to almost where we started where we are rediscovering Bitcoin, and cryptocurrencies, as a way to hedge ourselves. Not just as a price hedge, because Bitcoin to me is not about speculation. 

Bitcoin is about non-correlation in terms of geopolitical associations, non-correlation in terms of humans making choices for other humans. 

In a way, what we discovered in 2008-2009 was that mathematics and cryptography, and basically, math and computers are much better than humans in creating the most solid financial system ever created.

On why Circle crashed

Circle provided a lot of good public information about what happened. 

When you are a stablecoin, you are always relying on the banking industry. If you’re an asset-backed stable coin [like] the major stablecoins, you are relying on the banking system to do issuances and redemptions, and to hold your assets. And if that blows up, that is problematic also for stablecoins. 

And so first of all, it’s important to understand how we can protect stablecoins from these issues.

One of the main actions that a stablecoin can take in order to protect against these issues, and limit the exposure to a bank bankruptcy, is holding securities like US Treasury bills.

If you hold pure cash, they will be part of bankruptcy proceedings. But if you hold securities like US Treasury bills, in the worst case scenario, these securities are ring-fenced and are exempt from bankruptcy proceedings.

I think, more and more, we are discovering what we already knew, which is that we shouldn’t trust the banking system too much. We are also exploring the same in the context of stablecoins.

The classic answer would be that we will need algorithmic stable coins. But we discovered so many times that algorithmic stablecoins are either extremely inefficient, or just don’t work and are extremely pragmatic and are even more subject to attacks than, let’s say, ‘traditional’ stable coins backed by real physical assets.

On the future of the industry

If Tether remained alone in this industry. I feel like we wouldn’t be able to call it an industry anymore. And so we welcome things like TUSD gaining more traction.

We should never be in a situation where there is only one choice for people.

On what Tether did after the SVB collapse

First of all, the entire concept of a bank run is something that will always happen really fast. If you always had time, it wouldn’t be a bank run.

The weekend is also the scary part. And this is yet another reason why Bitcoin is better.

Being able to use financial services over the weekend should be part of the normal flow of communities and humanity, but the financial system arbitrarily decided that the bank should be closed on weekends and trading is closed. 

Price discovery is a really important thing, and having two days on which banks are closed, and don’t process payments, is a huge issue for a huge surface of attack. Because even if someone was maliciously to cause a bank run, that can happen. That can be well-timed.

Hopefully this new digital asset trading industry is creating new standards where assets can be traded 24/7 365.

Even the top US banks’ ability to control risk management is often questionable, to say the least.

Traders have offices all around the world. Price discovery should happen all around the world, at any point in time.

During the weekends there are certain days where there is good momentum, there is good liquidity and algorithms keep running. This is the beauty of computers, also trading algorithms.

With Tether, we have seen a massive influx of capital. And I think one of the discoveries that our community made is that, in the past, we were the ones who were thought to be taking more risky decisions, and yet we discovered that banks, even the top banks in the US, their ability to perform risk management is often questionable, to say the least.

The level of transparency that is provided with on-chain activity, with full collateralization, doesn’t have any match with what we’re seeing in the balance sheets – although audited, I must say – of certain banks.

And also, with the other stablecoins, people always wondered which stablecoin would be more resilient. And I think we just got the proof that Tether is putting risk management as its top priority, over everything else. 

We (Tether) came from a situation where we were criticized for our lack of transparency. We provided evidence of our reserves; commercial papers were known by the community and then we decided to shut down the commercial papers. Everything that was converted from commercial papers went to short dated US Treasuries. 

Now we keep going with the ways that we see fit for our community and for the crypto industry. We’re always thinking how we can make sure that any single action that we take is in the best interest of the industry. 

And also we are, I would say, extremely humble. Since 2014, when we created the first stablecoin, we’ve learned a lot. We went through many different journeys and adventures, we had some issues, and hopefully we will always get better and more efficient.

I must say that the work that our team has done in the last 12 to 18 months has been astronomical.

On what Tether has learnt over the years

I think it’s really important to have a refresher. 

Since May 2022, when Terra Luna blew up, Tether has been under even more stress and stress tests. 

In the 48 hours after Terra Luna, we redeemed $7 billion. Certain detractors thought that Tether didn’t have all the money it was supposed to have. The famous ‘Tether shorters’ thought that was their ‘haha moment’, like ‘gotcha’.

They soon discovered that in fact Tether had all the money, it was strong, was liquid, and it had the reserves to cover everything.

But they also discovered the banking system – and that is the important part – even the banking system of Tether has been extremely resilient, through all the attacks that Tether has gone through over the past several years. 

Also, the KYC, AML, and all these processes allow Tether to have safe, quality banking all around the world in order to perform its operations and protect users and customers

To the detractors who asked me ‘why are you not using the US banking system?’ This is why. 

So I think, you know, you are subject to such an amount of stress and scrutiny. You know that every single thing you do has to be perfect and perfection probably doesn’t exist.

But every day we wake up in the morning, we are looking to see if there’s a storm or trouble on the horizon. And we start thinking okay, if that happens, how can we fix that? How can we be safe?

Because, as we’ve discovered over the last few weeks, not even the US banking system has been considered safe.

And so all the detractors who were asking me all the time, ‘why are you not using the US banking system? Why are you using other banks around the world?’ Well, this is why, right?

On looking for storms

It’s what we always do.

Part of our job is making sure that we have and we collaborate with as many banking partners as possible, and part of our job is to do enormous due diligence with our banking partners to ensure the quality of their operations and so forth.

So I think we are in a good situation. Again, our job, and the learning I think that everyone should take away from the past few weeks, is ensuring that stable coins are going to keep basically everything in securities and keep the bare minimum in cash, in order to be able to fulfil redemptions in the best way possible. 

Even if you keep everything in bills and use things like repos, and so on, you’re still paying to sell the t-bills with no slippage with the highest liquidity market in the world.

Of course, it is important to underline the fact that Tether has super-short maturity in US Treasuries. And this helps to use these bills exactly as cash.

The good thing is that if the bank for any reason has issues, these securities – because the US Treasury bills are securities – these are going to be assigned obligated by you and they’re not going to be part of the bankruptcy proceedings. 

And that is one of the very important things to protect stablecoins, and I think more and more that others are going to follow this direction because it’s quite evident. 

So if you are still going like Tether, we posted $950 million of equity. That is basically shoulder equity accrued by interest on the T-bills and so on. So, that accrues on the collateralisation of the stable coin.

Tether posted $700 million in profits in Q4 2022. This quarter is going to be great as well.

You can see that on one side, we are not taking any risks in leaving assets that can be claimed in bankruptcy, and on the other side we have assets and even more assets than liabilities by at least another $50 million.

Tether has been working during winter and summer to accrue value that remains an additional cushion for its users.

I can’t share the numbers for the first quarter of 2023 yet, because it’s not finished. But I think even in the last quarter of 2022 Tether posted $700 million in profits and this quarter, the first quarter 2023, is going to be great as well. So you know, step by step, we would plan to increase this cushion, this safety measure for our users.

So we think that is the way to go. 

And in the past few days, last week, we have also seen an enormous uptake of Tether in DeFi.

Tether was never the most used stablecoin in DeFi, but we are seeing projects that in the past preferred to have exposure to a single stablecoin realising that that was never a good idea to start with. 

First of all, it’s important to give options to your users and customers. So if you basically don’t have options and you rely only on one thing, that is kind of against the entire decentralisation concept.

But you know, we (Tether) never never pushed for it right? We never pushed projects to Tether.

I’m of the view that if a project wants to support Tether they are more than welcome to do so and we will, of course, be happy to do whatever we can to support it.

But at the same time, you know, our strategy was never trying to get every single DeFi project supporting Tether. We have a more relaxed approach to adoption.

We have seen how Tender has been adopted in emerging markets, developing countries basically, without Tether itself being very involved. I believe that when you create a product that actually works, people will use it no matter what. 

We are seeing in Turkey, we are seeing in South America, how much Tether is used. And it’s not because there are lots of banners or we bought some stadiums in Turkey or South America. It’s just because people need a solution, need a product, that fulfills the needs of saving them from the huge inflation of their currencies. 

They looked around and the best thing that they had was using Tether. 

In fact Tether has become, in many cases, the third currency traded in the entire country, where the first one is the national currency and the second one is usually the US dollar. 

So it’s not all about marketing. It’s also about the fact that we had the first-mover advantage, and now, after the pandemic, we have a really difficult geopolitical solution and people are in need of solutions.

On why Tether is a good choice for DeFi

Well, first of all we are technologists, and myself as part of Bitfinex as well. We’re always researching ways for delivering non-custodial trading, for example.

First of all comes the technology. First of all comes believing in Bitcoin and believing in the ambition and the ethos that Bitcoin set for the financial system. 

For myself, making sure that people can get access to financial services, independent of their wealth, is extremely important. 

DeFi is a way to solve real, physical problems.

Those who have followed me have probably heard me talking a lot about the unbanked situation. And in a way, the unbanked situation is becoming more and more of a problem, because there are like two billion people that don’t have a bank account. And that number is ever-growing. And there are multiple reasons for that.

First of all, the number of financial intermediaries is so high that the cost of financial services is taking more and more of a cut of people’s money, right? And the second thing is the reliance on a rubber-band financial system built 30 years ago, 40 years ago. Banks are still using COBOL and a few other languages that no one would touch with a long stick anymore! 

And so all these costs, all these inefficiencies, all these intermediaries are adding up, to the cost of ordinary people.

If a bank charges $5 per month, or even $10 per month for your bank account, that’s not the end of the world. But then there are countries where people cannot afford these costs and the end result is that they will remain unbanked. That is a really sad situation and that is what DeFi is supposed to do, and should be doing.

Having your money in your own wallet, or on your own phone or laptop, that is what these people need and what DeFi should be taking care of. DeFi for me is a way to solve actual, real physical problems for people around the world. And I think that vision is extremely well-aligned with Tether.

At Tether we are not operating in the US, we are not serving US customers, and we are not really looking to have customers in first or primary markets.

We don’t need Tether to have Wall Street as a customer. We don’t need to teach Wall Street how to send dollars around. They already have the best rails. But there are many countries that have a desperate need for the dollar. And that’s what we’re focusing on.

And it’s not only the fact that these countries need Tether. They also need better financial instructure.

And that’s why, with DeFi focusing on intermediary services, infrastructure, allowing people to protect their own wealth and have control over their own wealth, that is the way to go. That’s what DeFi should be focusing on and that is what Tether is definitely focusing on.

On how recent events will affect USDC long-term

I think USDC will likely recover. And I hope it will recover. As I said, it’s not good to be in an industry where basically you are alone.

On the lessons others can learn from USDT

Well, I think history proves that Tether has been resilient to any amount of black swan events.

I remember on March 13, 2020, when the US discovered the aggressivity of the pandemic and Trump closed inbound flights. The stock market started crashing and the crypto market started crashing even farther, even more.

Tether was there to process redemptions, process some issuances, and that was one of the bloodier days in the history of the financial markets.

Then in May 2022 Tether was able to redeem $700 billion in 14 hours and $20 billion in less  than 30 days. And then after FTX, Tether came under attack, and we were able to redeem $700 billion in a few days again.

So we are proving our resiliency more and more.

On what really matters for Tether’s long-term future

I’m a CTO and not a fancy CFO, I don’t have that Wall Street polish. But I think that what matters is how much passion you have and how much precision and scientific approach you put into running your company.

We know that if we fail, it’s not just that we fail. Millions of people are using our product and that’s probably the hardest thing that we would have to live with.

Final thoughts

It is important that people try to read around and do their own research. 

What I would say is that Tether hasn’t even started on its journey.

Now we are in a situation where we are focusing on many products, like Holepunch, which we co-founded. We want to expand communications as well, and we want to continue expanding our communities.

The real quality of Tether is our team, the people, the knowledge… not just the financial knowledge but also the relationships, the communities, the way we’re working with countries like Turkey. I cannot be more proud. 

It’s not all about the money, it’s about sending a message. And the message is that if we start forgetting about the history, about why Bitcoin started, and we focus only on speculation, and start fighting each other on who has the coolest liberal coin, it’s going to all be pointless. We go back to square one, where we have only the banking system.

But I think we’ve proved that Tether is stronger than its competition and that, to me, is one of the most important actions and proofs that we can give to our users.