Public Key Podcast

How Tether is Building Resilient and Decentralized Financial Systems: Podcast Ep. 132

October 15, 2024 | by Chainalysis Team

Episode 132 of the Public Key podcast is here! When we think about the crypto company that has cracked the real world adoption problem and given access to people internationally who want access to the US dollar and foreign currency, we have to describe Tether as being that company. In this episode we talk to the CEO of Tether and CTO of Bitfinex, Paolo Ardoino about what the future of decentralization looks like for finance, communication and the exchange of value.

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 132.

Public Key Episode 132: Beyond Blockchain: The Future Power of Resilient Tech and Finance

When we think about the crypto company that has cracked the real world adoption problem and given access to people internationally who want access to the US dollar and foreign currency, we have to describe Tether as being that company.

In this episode, Ian Andrews (CMO, Chainalysis) talks with the CEO of Tether and CTO of Bitfinex, Paolo Ardoino about what the future of decentralization looks like for finance, communication and the exchange of value.

Paolo shares his journey and the evolution of blockchain and stablecoins, addressing criticisms and highlighting Tether’s robust financial position and attestation of reserves.

He also outlines plans for decentralized communication, tokenization of financial assets as ecosystems amidst a burgeoning landscape.

The duo highlights Tether’s collaboration with law enforcement and Chainalysis and the potential implications of Central Bank Digital Currencies (CBDCs) on privacy and banking.

Quote of the episode

“I bumped into the Bitcoin White paper and I look at it and I started, you know, seeing the combination of the two things that I really liked. That is, you know, resilient networks that could resist the wrath of God and finance.”  – Paolo Ardoino (CEO, Tether and CTO, Bitfinex)

Minute-by-minute episode breakdown

2 | Paolo Ardoino’s journey from coding to leading Tether

4 | Tether’s Impact on global cryptocurrency market and real world adoption

8 | From CTO to CEO: Paolo shares how embracing resilience and independence led to success

12 | Holepunch: Revolutionizing communication with peer-to-peer technology

17 | Tether’s financial resilience amidst scrutiny and market challenges

26 | Tether’s collaboration with law enforcement and importance of blockchain transparency

32 | Alloy, Dirham backed stablecoin and Tether’s strategy for tokenizing global financial assets

35 | The future of blockchains, CBDCs and why Telegram’s TON Network is so interesting

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

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Transcript

Ian:

Hi everyone. Welcome to a very special episode of Public Key. I have with me today Paolo Ardoino, who is the CEO of probably the most important company in crypto, Tether. Paolo, thanks so much for joining us today.

Paolo:

Thank you Ian for having me.

Ian:

I’m always fascinated by how people find themselves in the world of crypto. Maybe we could start with a little bit of your background. I know you were a technical developer engineer for most of your career. What brought you into the field of cryptocurrency?

Paolo:

I started coding when I was eight, and long story short, that something that accompanied all my life. I have been working just after university as a researcher for university and for a project that I think was one of the coolest that I could work for. That was building communication systems in distressed and catastrophic scenarios. That taught me the importance of distributed computing, distributed networks and to me that was actually paramount for the rest of my career.

As always happens in Italy, researchers are not paid well, so I started learning finance and I think I learned financing the hard way. I had to code many systems, financial portfolio management systems for different hedge funds and so I saw everything from banks to options to macro to different data feeds, all the possible different data feeds, derivatives, you name it. And that was my life until 2013, I would say.

And then I bumped into Bitcoin Whitepaper and I look at it and I started seeing the combination of two things that I really like. That is, resilient networks that could resist to the wrath of God and finance. And the way in my life, I came to the realization also because I’m a big sci-fi fan and also having coded a lot, having spent lot of time in building products, I always felt, and you could see this in the newest shape and form that Tether has become in last year or so, I started feeling that technology is built for the best-case scenario.

Technology works only because the world is mostly at peace, but as soon as something will go wrong, as soon as things will, many nations will be less nice to each other. For sure there are some wars here and there, but what happened in the last century was much more dramatic, someone could say, and I think that everything that we built in terms of technology will not work, will fail the people when they need it the most. I think with Tether, with blockchain, with the new tools that live on distributed networks like distributed ledgers are much more prone to survive in the worst-case scenario. That’s the thing that I like and that’s the thing that drove me to Bitcoin, to then Bitfinex then to Tether and become the CTOs of those companies and then became the CEO of Tether, so that I could express this vision with Tether not only in the financial sector but also in the technology sector more broadly.

Ian:

Such an amazing vision. One that I have to admit I hope doesn’t come to pass, but I’m glad that people are thinking about building for those scenarios, because I think historically you’re right. The last 80 years or so of human history has been remarkably stable relative to the hundreds or thousands of years prior to. It’s definitely arguable that we’re in an outlier period and that period is coincided with so much of the technological development that drives all of our lives today.

Paolo:

Exactly.

Ian:

I’m curious, unpack the timeline for me. Because you started at Bitfinex and there’s … I think Tether would be fair to maybe say was spawned out of Bitfinex. What was in those early days or first conversations about creating Tether, what was the goal that you had in mind in that moment? I sense that maybe Tether’s become something much bigger than the original inception, so I’m curious to hear that from somebody that was there.

Paolo:

In 2013 it was the first year Bitcoin reached the $1,000 price mark and the landscape of crypto was completely different. There were few exchanges, probably less than 10, at least less than 10 meaningful. They were all international to each other all in different jurisdictions. So while in 2014 and 2013 people were seeing those price movements and so the crypto industry was trying to become more professional, it couldn’t really, because in order to have a professional financial market, you would need one function that works very, very well. That is the arbitraging/arbitrager function. The arbitrager is the activity of a trader that sells the coin on the exchange where the price is higher and takes the dollars from the sale move the dollars on the exchange where the price is lower, buy Bitcoin on that exchange, and rinse and repeat.

With that action the price of Bitcoin across all the different trading venues becomes aligned, becomes very, very small. But instead in 2013, one exchange had at a given time as a price, and then another one has $1,100 and another one had $1,000. So this spread was incredible, and of course traders wanted to capture those spreads, but they couldn’t because if you move Bitcoin from one exchange to another, it takes ten minute, but when you try to move dollars, it could take two hours, one day, five days, there was the weekend. So it was not very efficient.

The genius behind USDT, is called Giancarlo Devasini, is the current CFO of Bitfinex and Tether. And noticed that [at Bitfinex and thought, well we have this great technology called blockchain, we have the US dollar that is the most used currency in the world, why we don’t put the dollar on top of blockchain and then we move dollars at the same speed of Bitcoin. So the generality of the idea is because it’s very simple, is very, very effective. And believe it or not, for the first two years no one understood the power of the idea. And then in 2016, I think it was Poloniex-

Ian:

Yeah.

Paolo:

End of 2016, Poloniex was the first one that actually understood it. When they listed USDT, Bitfinex and Poloniex arbitrage opportunity became the biggest one, the most efficient. So of course that was reflected in the volumes and the commissions that the two exchanges got. Then when the other exchanges realized that they also started to add USDT. You remember in 2017, there was Binance, was born through 2017 and so all the other exchanges, but now today of course USDT changed the space as you said, became something that not even us could imagine.

Started as a cryptocurrency settlement currency and feature, cryptocurrency trading settlement feature, into the digital dollar used by hundreds of millions of people around the world. And we are very humbled and I could tell you, “Oh well we knew it and it was all predicted.” But no, we are very humbled by the fact that the people in emerging markets, in entire communities started to use USDT as their digital dollar and today is growing by the day incredibly fast. So that is the best feeling is actually moving from almost a niche that is the cryptocurrency market into the real world. That is the biggest achievement that Tether and USDT have done in the last few years.

Ian:

Well, and this is why open the podcast describing Tether as the most important company in crypto because I think you’ve actually cracked this real world adoption problem that we’ve struggled with for so long. You’ve opened the door to all these people around the world who want access to dollars or want access to foreign currency that’s relatively inflation-free and safe to transact and easy to move around the world, which has been a goal I think of lots of projects have chased that and you’ve managed to unlock that, which is tremendous.

I’m curious to maybe hear a bit about your personal experience from CTO into CEO. In my experience, a relatively rare transition. Oftentimes, you’ll see technical founders step back from the CEO role into being able to focus more on product, more on engineering. You’ve gone the other direction. I’d love to hear maybe what prompted that first and then what has it been like in the year or so since taking on the role?

Paolo:

Oh, just for fun, when someone asked me the question, I say that I just got the shortest throw, because at some point, it’s not an easy job. Keep in mind that Tether has been the most scrutinized company in the world.

Ian:

Yeah, absolutely.

Paolo:

And maybe still today. But I love it. But more seriously, I think that there reason why I started coding when I was so young, because first of all there was not much around me that I could do. My parents, they were working long hours, they had a farm, so I didn’t have much opportunities to meet with friends and my father brought home a computer. But for me it was a way to dream. There people that are good in drawing, there are people good in art, and in many different things … or writing. I was bad at all of that. Yeah, it’s true, very, very bad and doing everything related to art. The way I thought about coding was, and the reason why I started coding was actually to create my own worlds and help and invite people in these worlds.

So where I had always that huge imagination and so I wanted to actually bring people into my imagination. For me, being a software developer was a medium to get to the goal that I wanted to achieve. While the companies were growing, I kept coming up with many new projects, products, ideas and things we could do and I thought how we could make Tether become the champion of resilience. In a way we demonstrated resiliency many times from all the attacks. Also the company culture is all about resiliency but also the product, USDT, is about providing resilient money. We thought that the learnings that we had from the product and the company itself could be spread into different industries from AI, telecommunications education.

And if you see the new website, tether.io, we try to summarize it in that website, all my beliefs, all the what I want to communicate in terms of how technology should be, how finance should be, but that’s not my focus, our entire company. Also everyone is contributing to this idea because everyone of us feels that there is so much to do in terms of showing to the world that there are better ways to achieve technological independence. Technology shouldn’t be a tool for independence, not for dependent. And that’s what we have now. Everyone is dependent from Google Cloud, Amazon and Microsoft Azure. And ideally internet was born to give freedom to people, freedom of information, access to information independently from where they were and that went south many years ago, especially after the 2000 bubble.

And so how we can try to regain that sense of independence, I think as a single person you should be independent, as a community should be independent, as a city you should be independent, as a country you should be independent. And how we distribute the technology but also with peer-to-peer technology and we can achieve that, but we still trying to regain back the original ethos and philosophies that moved that we’re part also the cyberpunk movement that I feel we have been losing. Sorry for the long rant, but I feel like the company is really driven towards that. Everyone in the company feels that way and that’s so good, that’s our impression. That’s why when Giancarlo started something that is I think incomparable in my opinion. I’m biased of course.

Ian:

Can I challenge a little bit on the idea, the dependency and the lack of independence a little bit? I totally appreciate your point. If an Amazon region goes down, if US-EAST-1 has a hiccup, you see it cascade across the internet in terms of various software applications also going down. So there is a concentration risk there. But if I think back to mid-2000s state of technology where everyone had to host their own servers and hardware was very expensive, data center space was hard to get and maintain, that was a much smaller level of access.

We didn’t have mobile phones in everyone’s hand and pocket on the planet. So the platforms were smaller. It feels like the public clouds, while we’ve got concentration risk there, have actually lowered the price and therefore the barrier of entry to so many more people, companies who are trying to innovate and do things on this connected network of the internet. What’s the alternative to those providers that you would hope to see, I guess maybe is a better way to frame the question.

Paolo:

Yeah, in the last 13 years, well actually it’s 17, 18 years. We had the smartphone. We had a huge technological development. Today’s smartphone is much more powerful than a mainframe of 2005. So much less power consuming. We have bandwidth. Bandwidth is not very centralized bandwidth is that so internet connectivity is managed by an enormous amount of different providers and sources, but then 70% of internet traffic and information is stored in servers owned by three companies. That’s the concern that they have.

Now internet was born to be point-to-point and peer-to-peer. Anytime you connect to internet one of your devices, it will get an IP address. The IP address is like your home address. If someone wants to send you a letter at home, they put the address and that letter, they post the letter in their country, if you are in US, someone writes you from France and that letter will find the shortest path to get to your house. The idea of the internet was exactly that, so everyone would be connected to internet eventually. And actually we are achieving that. So everyone is connected to internet and our devices at home and pockets are infinitely more powerful than what we had in 2000, 2005 and 2010.

Our devices are very capable of storing enormous amount of information and actually dialogue peer-to-peer between each other without having a central server. Let me give you example. I am Italian. Let’s say that I live in Rome. Most of the people live in the area nearby their parents and their family. 90% of the people live nearby within 100 kilometers from their parents. But let’s say that I live in Rome and I want to send a message to my mom on WhatsApp or on Signal on Google Meet whatever. That message will go to Frankfurt and then go back to Rome. If I do a video call with them, every single data packet will travel thousands of times to go back to them. That’s not very intelligent. Humanity tries to go to Mars, we try to go to Mars and yet we pretend that every single data packet, every single text message has to travel thousands of miles. So think about how much government have been investing in internet infrastructure in a useless way because information could go from my phone to the shortest to the nearest ISP router and back to my mom.

That is the waste that we had to suffer from is due to the will, the interest of control, because we have the technology. Thether funded … I personally co-founded this project called Holepunch and at that time we built, we are funding as a company Holepunch team to keep developing this project. And basically we thought that one huge innovation that we had was BitTorrent.

As a true real peer-to-peer file sharing system. But what if we took that technology, we paired with a cryptography that we learn from blockchain and we would use it not only to share files but also for real-time communication? This recording that we are having, we could do it on and some people think, “Oh well, but if I connect my phone directly to yours, the quality will be bad and we need servers in the middle to help the quality.” And that’s not correct. Actually if we connect directly the server in the middle … imagine if everyone would start doing calls on Zoom 4K calls, 4K quality calls, Zoom has to compress the calls, has to reduce the quality for everyone in order to survive.

But even if I connect directly to you, it’s my choice and your choice. We already pay for our bandwidth. And our phones are fully capable to do 4K and high bandwidth streaming and they can store hundreds of megabytes of data and terabytes of data. We should use cloud computing for the things that really matter. Of course AI training, model training need a lot of GPUs for the moment, so you can’t do that. But I think the reason why we are in this situation is that in order … Is like a dog eating its own tail. You have these big tech companies have to force all your traffic to go through their servers in order to milk the data. Otherwise they cannot pay for the bills of their own data centers and keep building more. That’s the thing that I don’t like.

We are really, again, we are trying to go to Mars and then yet we pretended that our messages have to go around the world before just to travel 10 miles.

Ian:

Fair point. I take the criticism. Where are you with Holepunch by the way? Should we be doing this recording on Holepunch right now?

Paolo:

Keet is available on the App Store and Play Store. Everyone that tries Keet tells them two things. The video quality is insane. It feels like we are one in front the other. And the other thing is that latency So it feels like really you are in the same room. Because also if I’m around and I talk to my mom, the call data package will travel 5,000 miles. So adding maybe a half a second latent you can feel it. It doesn’t feel like real time. But instead if I can do it directly then it will make a difference because it will 10 milliseconds or five milliseconds latency. Again, it’s much better. I suggest everyone to try to download Keet. It’s not perfect, it’s still in alpha, but we are demonstrating to the world there is a Bitcoin room. We are connecting 1,700 people in that room completely peer to peer without servers that share photos, videos and all different media. That is the power what we are building. Not everyone is realizing that, but it will be a game changer.

Ian:

I haven’t tried it, so we’ll link to it in the show notes. Everybody that’s listening can go out and download it. We’ll add a few thousand more people to your Bitcoin room and we’ll try it out for ourselves.

I want to shift topics a little bit. You mentioned earlier that Tether’s been the most scrutinized company in the industry, maybe in the world. I think one of the big controversies for a long time was, well are Tethers actually redeemable for dollars. And not just one or two of them but all of them. Let’s say we had a massive run where everybody wanted to swap out of the digital asset into the traditional one. My sense as an outsider is you’ve done quite a lot of work in the last few years to make sure that you’re rock solid on this point. I just want to give you maybe a few minutes to describe when someone issues a new Tether and they send a dollar to the company, where does that go? What happens in the back end and maybe in the reverse process as well?

Paolo:

Yeah. Definitely. Historically, the controversy around Tether was first they said we don’t have the money. Then they said, “Oh yeah, you have the money but he’s invested in Evergrande.” And then third, “Oh fine, you have the money, you have lot of T-bills. But now I’m sure we’ll get to that. The bad guys are using your product.” So since there was this shift in narrative by the same people, it’s not like different people said different things, but the same people, almost the same people, same publications, same media, you start thinking that they are just moving the discussion because you are proving them wrong all the time and then eventually as we are proving them wrong, also in the last point about the bad guys, I don’t know what they will come up with. You are Italian, hence you are bad, probably is the final thing. And not that they didn’t try already. So they call us, “Oh well these Italians.”

Like sure, I mean Italy if you don’t know, created the first bank, right? It created Monte dei Paschi di Siena. So we know one or two things about the bank. But anyway, so we have the primary market, so there is a huge distinction at Tether for the primary market and the secondary market. The primary market is our platform called tether.to. It has a strong onboarding program. Very, very deep. We work with professionals. Only for professional customers we have a limit of $100,000 for because we think it’s very, very important to have direct connection only with professionals so that we can do the deepest due dilligence on every single one of the primary market customers.

Once a customer is approved through the KYC AML process, they can start issuing and printing. The issuance process is easy. The customer sends a wire, let’s say $1 million. We receive the wire. The customer has to specify which blockchain they desire to use for receiving the USDT. We send the USDT back to the platform on the desired blockchain.

Now we take the dollars that we get on wire and basically what we do is we invest in EBLs. But short parenthesis is that Tether as of today has one almost basically very close, almost breaking the $100 billion US treasury mark. And it’s crazy, so we are now comparing ourselves to countries. If we were a country would be 18th country. Now we have more T-Bills than UAE, than Spain, than Australia. We are just behind Germany. Germany sees us in their rearview mirror.And they have another $3 billion in US treasuries.

Now you could say, well, about how we know that we have those treasuries? First of all we have a quarterly attestation. The attestation is the industry standard. So every stablecoin insured publishes an attestation. Ours is published by BDO. That is one of the top auditing firms in the world. But on top of that there are two things that are very important, two events that are very important. First one, 2022, a group of short sellers led by others, I think also even Genesis, was quoting in some email saying that they were shorting USDT, but basically was this huge consortium of hedge funds and traders that even public on Bloomberg, all the newspapers, just after Terra Luna started saying, “Well we’re going to short Tether after USDT below par, below $1, because we think that they don’t have the money.

Their assumption was that first we were lying now about our reserves and second, even if we had a little bit of money, everything was invested in Evergrande. That again was very stupid. We never invested in Evergrande. And even the Chinese investment was very tiny, tiny, like commercial papers. But the rest was actually invested in all the commercial papers were rated A or AA or AAA. So we were very confident in our position. And by the way, by that time in 2022 we started shifting a lot in T-bills as well. And all the commercial papers and T-bills were short term like 90-day. But anyway, these guys thought, “Oh, you guys don’t have the money.” Or if you have the money, you have 10% of this is liquid. 90% is like in long-term maturity municipality bonds in China and class Evergrande. Like the craziest thing was the theory.

No matter how much we said it was wrong, that didn’t matter. Anyway, they started to sell USDT below $1 and 99 cents. So what happened was that when you do that, you try to cause a bankrupt, right? Because if you sell it in 99 cents, you have a market maker that buys on the secondary market. On exchanges. We talk about the primary market that is tether.to. The secondary market for USDT are exchanges and blockchains and other service providers. These traders started to sell USDT on the secondary market below $1. Market makers were buying these cheap USDT coming on the primary market, redeeming for $1, then moving these dollars back to exchanges, used to buy more USDT

In two days we redeemed $7 billion, and in one week redeemed $10 billion, and around more or less one month we redeemed $20 billion. The $7 billion was almost 10% of our reserves. Then $20 billion were 25% of our reserves. And then they stopped because they understood that their calculation was actually wrong. There is no bank that survived to more than 10% of redemptions of withdrawals. And think about in 2023, Silicon Valley Bank, and Signature went belly up, and in 2008, Washington Mutual went belly up and New York Community Bank this year went belly up, because they couldn’t not sustain more than 10% of withdrawals because the banking regulations allow banks to lend out up to 90% of their balance sheet. They all go Extinct. 10% is their blow up mark.

Now we passed that with flying colors, as I said, in between 2023 and 2024, four banks blew up. One of them, Silicon Valley Bank had $3.3 billion in uninsured cash from our main competitor. That was probably around 100% or so of their reserves, between around 15 maybe. And so without FDAC stepping in and saying in the bank also our main competitor would’ve been that. The funny thing is that all these guys were accusing us on doing the things that they in fact did with low-risk management and keeping uninsured cash in the bank. Second, the banks were accusing indirectly us, in doing and all these funds, and everyone was accusing us in doing long-term investment while they were investing in 30 years municipality bonds when the interest rates went up and so they couldn’t cope with the change of the curve.

I think it’s very poetic of what happened, at least from my point of view, is like you accuse us of something that you’re doing inside your house. So it was very, very fun. And then the other thing that happened this year was 2024, there’s a guy called Howard Lutnick, he’s the chairman of Cantor Fitzgerald. It was January when in Davos and Bloomberg TV he said four words talking about Tether, “They have the money.” And he said it aloud and then Bitcoin 2024 this year, Nashville, talk about the difference between us and our main competitor, but also said, “They have the money. They have more money because we have been published in the interstitials.” So we showed that in the last two years we made basically $12 billion in profits. He said, “They have more money than the total issued tokens.” And he said also, “I did two years of due diligence on that. I’ve turned every rock. And on top of that I see they have the T Bills with me.”

It’s like having Larry Fink from BlackRock saying it’s Fink caliber. And if you read the story of Howard, it’s incredible. His reputation is impeccable. And so that I think really helped people put things in perspective and understand that there is one thing is the speculation. The other thing is having actual facts. The trial by fire in 2022, having someone like Howard and Cantor really vouching for us. I think we are in a very good position when it comes to, they have the money.

Ian:

They have the money. Howard also said that on stage at the Chainalysis Links conference in April, so I just wanted to shout that out as well. We’ve seen him do it in person. He’s done an incredible amount of analysis I think of your business and gone through all the details and is very confident in his statement when he says they have the money, he means it with all his heart.

Let’s tackle then the other big criticism. You said it already, right? You work with the bad guys. I happen to know because Chainalysis is supporting you in some of this. You guys collaborate really closely with law enforcement and you’ve actually taken on the bad guys. But I’d love to hear the story from your perspective. How do you respond to some of those criticisms?

Paolo:

Yeah, I was reading, I think it was announced about first of all the, of cryptocurrencies as a stablecoin, as part of cryptocurrencies for illicit deeds and it was actually a tiny drop in the ocean compared to the usage of US dollar for illegal deeds. Now, the reason for that is that cash US dollar or even the traditional banking system are very flawed. I’d imagine that you are law enforcement agency and you have to trace an activity across wire, across three different jurisdictions, good luck with that because you are not seeing any movement. There is no transparency in the process.

Ian:

None. I’ve had that conversation with law enforcement agents frequently when they see the money go to a foreign bank, they see that as almost certainly a dead end, but at a minimum multi-month delay in information gathering because they have to file an MLAT, a multilateral assistance request and get foreign government to influence the local bank to then share the information about where did that wire actually go. It’s incredibly difficult compared to what we’re all familiar with in the world of blockchain.

Paolo:

Yeah. I think one of my colorful statements is that if you use USDT or general crypto to do any illicit activity, you’re a very stupid criminal because you will be traced and you’ll be caught. You guys and the Bitfinex and Chainalysis have a long, long time collaboration. Also, you helped us with tracing the Bitcoin of the Bitfinex hack in 2016. That’s another story.

While the hackers were moving the fund, they were leaving traces and eventually they got caught that shows is very, very compared to the cash traditional function system is very, very hard. No matter how much money you have, to get away with it, no matter who you are, because every single action is on chain. And the beauty of blockchain is that you cannot delete it, you cannot tamper with it, you cannot change it. It will remain there for the rest of  eternity

Now with Tether, we have realized from the beginning, first of all, we are a centralized stablecoin. We never try to say otherwise. As a centralized stablecoin that needs to rely on banking. We need to make sure that we are doing the best we can, and above that in order to have a proper safe ecosystem. What we did also partnering with you guys through the ecosystem monitoring tool and all the different tools that we refined over the last few years, now we are able to collaborate very quickly in real time with more than 140 law enforcement agencies across more than 40 different countries. So which other financial institution can do that, right? I don’t think any.

Ian:

I wouldn’t imagine any do. It’s an unusual scale of participation. I think the other thing that’s important to note here too, you touched on this primary versus secondary market, where you obviously KYC all of the people that are able to issue or redeem Tether directly with the company, but that secondary market is very, very large. That’s where a retail user like me might swap some Bitcoin for some Tether on an exchange. I think historically most stablecoin issuers have said, well, the secondary market is somebody else’s problem and wash their hands of it. And I think you’ve taken the approach to say no, no, we need to make sure that the system holistically is safe and trustworthy. And so you’re now proactively monitoring that secondary market and the collaboration with law enforcement extends to stopping illicit activity in the secondary space as well.

Paolo:

Look, I mean hiding under the sand is not helpful. We count to have around more than 250 million users on the secondary market. These people are living in high-inflation countries. In Argentina, in Turkey, Vietnam in so many countries. And these are families that they cannot rely on their national currency. They need to have access to the dollar. And since banking is not present there or high percentages, more than 50% of unbanked in those countries, not because they’re bad people, they’re just too poor of being interest of the banking system, because they cannot generate enough fees to sustain a bank account.

If we didn’t monitor properly the secondary market, we would put So our ecosystem would be full of threats. Instead, we want to make sure that these guys, that they need the lifeline this moment, because after the pandemic, so many countries have even more issues with the high inflation and so on. That’s why we are doing it right, it’s the right thing to do. Tether is centralized, it’s not Bitcoin. Has the means to help and monitor its ecosystem and we have to do it and we have to do it the best way we can and having the tools and be prepared with tools to do so is very crucial of course.

But we proved also we collaborating with you guys that we could proactively find people that were abusing the system and trying to scam others through pig butchering scams. But even think about the exchange hack, we froze many USDTs stolen from exchanges or from DeFi protocols and that helped thousands and thousands of people to eventually get back their money. If you have that power to do good, I think you are in the position to do good and again, we are just a US dollar on a transport layer that is decentralized. So it’s just that blockchains are transport layer for Tether. It’s like people on blockchain.

That’s why we’re very proud when we see recently department of justice sending positive note saying that to were thanking for our collaboration, because we see as an advancement also not only of us as a company but also to show to the world and to regulators as well that this is the way to go. But also that this technology as blockchain is actually improving the incredible intransparency of the financial systems so far.

Ian:

It’s been an incredible moment of maturation I think for the company and something I would encourage listeners who have maybe been skeptical of your company to re-examine some of the facts here because I think the dollar amount sees the active collaboration with law enforcement, the monitoring of the secondary market. It’s a very different situation than say four or five years ago.

I want to close our conversation, because I know we’re running out of time here and I want to keep you on schedule today with maybe a rapid fire round. I’ve got a bunch of questions about different elements of strategy. One is on the topic of tokenization. So I think most people equivocate Tether the company and USDT the US dollar based digital asset. You’ve always had other assets that you’ve offered, but lately it seems like you’re accelerating. You’ve announced a Dirham backed token that will be launched in the UAE. I would imagine given the MECA regulations, you’re probably exploring Euro backed assets. You also launched something called Alloy. Give us the big picture strategy there. Do we eventually see everything tokenized by Tether, every possible asset or is it narrower than that in scope?

Paolo:

Well, I think what we’re doing is first of all, when it comes to stablecoins, we’re focusing on the ones that we think are meaningful. So dollar is the dollar, right? Everyone wants the dollar. Outside the US everyone is desperate to have the dollar. The second other that is having quite some success is Tether Gold tokenized gold bars. It’s now at $700 million market cap. Still far from USDT. USDT is $119 billion. So it’s quite far, but still it’s very and uploaded by the community. I must say that Euro stablecoin didn’t do well and I think Europe is a very … the way I describe it is that stablecoins are much more powerful outside of the country that relates to the national currency that is type two. So USDT is much more powerful outside the US rather than inside the US. But that works only because the US dollar is very adaptive outside the US.

But if you go outside Europe, no one’s wanted the Euro. It’s trickier for Euro stable coin. But I think your stablecoins will be powerful when it comes to inter-financial institutional settlement to produce barriers and move money faster.

Now, why the Dirham stable coin is that Dubai and Abu Dhabi are becoming center of finance in the world and there is a huge interest of holding the UAE Dirham outside of UAE because it’s first of all, it’s packed to the dollar, and also is heavily … there is huge corridor of remittances between India and UAE and other countries. We think there is a huge potential there. But we understand that we cannot tokenize everything ourselves. So we are launching a platform. I will not unveil the name yet, but that platform is white labeling all the technology that Tether built in terms of tokenization, KYC, AML, KYT, that platform will bring you many customers I believe as well that because will have the connection to you guys.

Ian:

Yeah. Yeah.

Paolo:

The support for channels and is a platform where that you can use to create your own stablecoin, but also tokenized stocks, bonds, shares of funds, everything that you … even reward point and all the crazy things you have in your mind.

Ian:

That’s amazing.

Paolo:

We plan to launch it in October, so we’ll see.

Ian:

From recording now, we’re only a few weeks away, so maybe by the time we publish the episode people can go read about it. Different topic. Blockchains. It seems like the number of blockchains, particularly roll-ups or layer twos as they’re often referred to is exploding. Every exchange seems to be creating their own roll-up. We’re getting app-specific roll-ups. We’re also getting some unusual ones like the TON Network that exists almost as an adjunct to the Telegram messaging service, which I think you recently announced support for.

How do you think about where the ecosystem goes? Is the future thousands of app-specific chains? Are we just in a weird moment and we’re going to see consolidation and a number of chains die off and go away? Where are we going?

Paolo:

Blockchains are becoming the solution to all the illnesses of the board and that’s not the way to go. Blockchains are so inefficient. Again, peer-to-peer is fine. That’s what I believe is important to push. But peer-to-peer does not need blockchain. Blockchains are slow. You should use blockchains only for the most important critical tasks like storing something that you want to have forever or you want to decentralize, even in a small group, access to information.

Now uncertain information, you cannot store terabytes and petabytes of data on blockchain. I believe that so most of these layer tools, they don’t have a use because they are growing just because of the incentives. They come up with a new token that they print out of thin air, they share it, they give this token to as an airdrop and then they die off when there is a new chain that will create the new airdrop and then they rinse and repeat. The reason why I like TON is that they have an ecosystem. Telegram has 1 billion users and so there is no other chain that has that ecosystem. So distribution is the most important thing in basically any business.

Ian:

That’s right.

Paolo:

To me, Telegram is the distribution for TON. It’s very rare. There are a few other cases, of course, of good distribution platforms, but that’s very rare. I think that most of these chains will die off.

Ian:

Yeah. It seems likely to me as well. It’s hard to pick the winners at the moment, but your point about distribution is exactly how I see the market. Distribution rules everything here. If you can command reach, you have such an advantage. All right, last one. CBDCs. These central bank digital currencies, are those meaningful? Should we be paying attention to these CBDC projects or is that going to be in anachronism of history in a few years?

Paolo:

Well, I think that there are some countries that are looking at CBDCs and I think that I’m happy to see US trying to push against users with CBDCs. The reason is there are two main reasons. The main one is privacy. Today if you have a credit card or debit card, you go and buy coffee somewhere that transactions stays between you and the issuer of the credit card.

Now, of course, if there is a court order, there is a subpoena, the information will be shared, rightfully so. But imagine a future where you remove the intermediary, that is the issuer of the credit card, and the government will have direct information of what every single transaction you make. Now, the government can geolocate you anywhere in the world. The government can understand exactly what are your interests, habits, preferences. That becomes very, very scary and dystopian.

For example, Europe is going to do a CBDC. I think is very, very dangerous. But also Europe has some crazy laws on privacy that should … Who knows? But even that, the other problem is what happens to banks? And coming from me is weird, but I think that banks are good intermediaries. They should do a better job in risk management and stop blowing up even in Switzerland like Credit it’s not great example, but banks should act or be treated as intermediaries or shields between the government and people’s money. In my opinion, even in blockchain war, banks needs to renew themselves and reform themselves, but they still have a place. And CBDCs could have impact the banking world, removing the banks. First of all, many jobs will be lost, but at the same time, people’s privacy in the eyes of the government will be lost and that is a very slippery slope.

Ian:

Yeah, great perspective. Paolo, this has been a fantastic conversation. I appreciate you taking the hour with us to unpack the business. We’ve got a lot of follow-ups. We’re going to keep an eye out for the tokenization platform when that launches in a few weeks, we’re all going to go try Holepunch and the peer-to-peer video chatting app. Anything else you want to mention before we let you go?

Paolo:

No, just thank you for having me and hearing me ranting about everything.

Ian:

Fantastic.

 

 

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