Short sellers in Tether have so far merely proven that the stablecoin can keep a one-to-one peg to the dollar, chief technology officer Paolo Ardoino asserts in an in-depth interview with Euromoney.
In May, after the value of rival stablecoin Terra collapsed, Tether’s value temporary fell to 95c on some crypto exchanges. Ardoino compares Tether’s accompanying dollar redemptions to bank runs of the past, notably the one at Washington Mutual in 2008. He says Tether’s $7 billion of dollar redemptions in two days was a similar proportion of assets – about 10% – to the proportion of deposits withdrawn from Washington Mutual in 10 days, before regulators took over that bank.
“We were put under a stress test that not even banks can succeed, and we passed with flying colours,” Ardoino says.
Sitting down with Euromoney on the sidelines of the Money20/20 conference in Amsterdam, he adds: “Our stability, our strength, is not hypothetical anymore. Of course, it was stressful because you had to keep up with the customer demand. But that also proved the resiliency of our operations.”
Redemptions
Stablecoins, reputedly backed by fiat-denominated reserves, are sometimes seen as the banks of the crypto world. They play a vital role in crypto-currency trading as it’s quicker to buy and sell other crypto-currencies with tokenized dollars than real ones. Tether is by far the most widely held stablecoin, and the third biggest crypto-currency by value after Bitcoin and Ether.
But after Terra’s almost total collapse, might short sellers have more success in future in betting against Tether, too – with potentially devastating consequences for the crypto industry?
“They can still try to short us, and then we are still going to process all their redemptions one-to-one,” replies Ardoino. “There is no chance that they would succeed with us.”
Tether redeemed 10% of its assets in 48 hours and, without the blink of an eye, we could have done much more than that
Ardoino adds that, in practical terms, its dollar peg was not broken, because Tether never refused requests for redemptions, all of which were done at $1.
“We showed that in the worst-case scenario – when there was Terra crumbling, the entire crypto market crumbling, and the stock market was going down – we got a tonne of requests of withdrawals, and we honoured them within minutes,” Ardoino says. “Tether redeemed 10% of its assets in 48 hours and, without the blink of an eye, we could have done much more than that. In total, in 10 days, it was around $11 billion or 13% of our assets and still no problems.”
Nevertheless, one Tether short seller, Fraser Perring of Viceroy Research, tells Euromoney it is only a matter of time before there’s a steeper fall in Tether’s value, as doubts about its reserves have remained, even after the attention Tether has attracted from US regulators.
Last October, the US Commodity Futures Trading Commission (CFTC) ordered Tether to pay a fine of $41 million for claiming it was fully backed by US dollars between 2016 and 2019, when most of that time it was not.
According to Ardoino, only a small proportion of Tether’s reserves are in digital assets. And in response to concern in the market about risks in its portfolio, he says Tether has cut its holdings of commercial paper, most of which is highly rated, from $40 billion to $15 billion over the past eight months. It has also moved reserves more towards securities with maturities between zero and three months.
He adds that the company has never taken out a dividend, so accrued interest adds to its reserves.
Reservations
It is because of this reserve backing, according to Ardoino, that Tether has not gone the same way as Terra, which instead tried to maintain a one-to-one rate against the dollar through an algorithm and trading in Luna, a related token. When Terra’s value fell, Tether’s value held up much better, and Ardoino says that’s because the firm has always insisted its peg is fully backed by its reserves – “extremely liquid assets that you can always sell, with no slippage, for $1.”
Ardoino says Tether is giving regular reports to the New York Attorney General Letitia James, after it agreed to do so as part of an $18.5 million settlement and state-wide trading ban in February 2021.
But Perring – a figure previously known in financial markets for shorting German payments processor Wirecard and South Africa’s Steinhoff International Holdings – is still not satisfied.
Perring says Tether could provide at least the same disclosure to the wider public as it is giving to James.
Tether could remove all the existing doubts in the market about its reserves, Perring argues, by publishing full details of how it manages its reserves and getting an audit from a much better-known firm than the one it works with today.
Tether has, in fact, started providing basic information about the breakdown of its reserves over the past two years. Ardoino says it will do more in the future – if regulators demand it and rival stablecoins do the same and to the same depth.
“We are open to provide more information,” he says. “We wish that regulators would provide clarity on what is owed to be disclosed. If we disclose a [hypothetical] 10, it’s unfair that other stablecoins disclose a five.
“The demand has to come from the regulators, not from everyone in the streets, banging on your door.”
If you market something as a stablecoin, it should be stable, full stop. You cannot have a guy who wakes up in the morning and creates a new cryptocurrency, backed by another cryptocurrency, backed by good will, and call it a stablecoin
When Euromoney asks Ardoino to clarify what advantage its competitors would have if it made information about its reserves more public, he says it is about protecting its relationships.
“The crypto world has just recently found some peace in working and collaborating with the banking industry. Until 2019, it was really difficult to get a proper banking relationship.”
Tether’s main banks are not secret, Ardoino says. Indeed, Tether has long been known to have a relationship with Deltec Bank & Trust, based in the Bahamas and memorable for its chairman Jean Chalopin’s previous career as a creator of the cartoon Inspector Gadget.
Tether is also widely rumoured to have money with Capital Union Bank, which is also based in the Bahamas.
Ardoino says: “The question is, should we also disclose all the counterparties that our bank uses? That’s a bit unfair.”
He adds: “It happens that, if a counterparty gets public, they get a tonne of questions and a tonne of calls from journalists, asking: ‘Can you tell us more, can you tell us more?’
"Eventually, they get annoyed. That happens all the time. And even the two banks that are public: there are tens of journalists every day calling them, asking if they can give information about us, a customer. This is where we are coming from. We have to be protective of our relationships.”
Audit
Today, an accounting company called MHA gives quarterly attestations of its reserves, and Tether is working on a full audit – something other stablecoins also lack – but not with one of the big four auditors, according to Ardoino, because auditors are concerned about reputational risk, due to the lack of regulatory definitions around stablecoins
“I think it’s one of the top 12, so not that bad,” he says. “The big four are a bit more cautious about providing a full audit when the rules are not clear.”
Ardoino is hopeful that Terra’s collapse will accelerate the advent of a regulatory framework for stablecoins and their backing. In early June, US Senators Cynthia Lummis and Kirsten Gillibrand put forward new proposals for the CFTC to regulate crypto-currencies such as Bitcoin, while the reserves backing stablecoins would also have oversight, potentially reinforcing their similarity to banks.
For Tether, it could be a welcome development.
“If you market something as a stablecoin, it should be stable, full stop,” says Ardoino. “You cannot have a guy who wakes up in the morning and creates a new cryptocurrency, backed by another cryptocurrency, backed by good will, and call it a stablecoin.”
