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Exclusive interview with Tether CEO: Tether will enter the AI market, and auditing remains a high priority

BlockBeatsBlockBeats2024/08/13 09:06
By:BlockBeats

More than 90% of Tether's profits will be used for venture capital.

Original title: Flush With Cash, Tether Has Got Microsoft, Google, and Amazon in Its Crosshairs
Original author: JOEL KHALILI, WIRED
Original translation: TechFlow


Under new CEO Paolo Ardoino, the crypto company is investing heavily in an attempt to enter the artificial intelligence market dominated by the world's largest technology companies.



Paolo Ardoino, CEO of Tether Holdings, at the Paris Blockchain Week Summit in April 2024. Photo credit: NATHAN LAINE/BLOOMBERG; GETTY IMAGES


Paolo Ardoino, the new CEO, is facing a difficult but enviable problem: how to best allocate billions of dollars. Recently, Tether has been flush with cash and is pushing into unfamiliar new areas, such as AI. Ardoino's ambitious plan is to take on Microsoft, Google, and Amazon.


Tether, registered in the British Virgin Islands, is one of the world's largest crypto companies. Most of its revenue comes from its stablecoin USDT, which is pegged to the US dollar through a reserve basket of cash and other assets.


The model is relatively simple: Tether receives dollars in exchange for tokens that customers can freely trade in the crypto market. It keeps some of the dollars in cash, uses most of it to buy interest-bearing securities, and lends some of it out. If a customer wants to exchange the USDT token for the corresponding dollar, Tether will withdraw from the reserve, but in the meantime, it earns income from the assets it holds.


Tether's reserves are mainly composed of short-term US Treasury bonds, and its income is pegged to current interest rates, which means that as central banks raise interest rates due to inflation, the company's profitability is also increasing. Tether recently reported $5.2 billion in profits in the first half of 2024, with total reserves of $118.5 billion.


Under Ardoino, who took over as CEO in December after six years as CTO, Tether is looking for ways to put those idle funds to use. Ardoino said some of the money is going toward building a buffer in USDT reserves, but the rest is being put into Tether Evo, the company’s new venture capital arm. The company has already taken a controlling stake in neural implant technology startup Blackrock Neurotech and invested in data center operator Northern Data Group, whose infrastructure is used to train artificial intelligence models.


Tether has also courted controversy. In 2021, the company reached a $41 million settlement with U.S. regulators who accused it of misleading statements about the composition of its reserves. In 2023, Tether was accused of using fraudulent means to obtain banking services in its early history. In addition, the United Nations and blockchain analysis firms have claimed that USDT has become a tool for money laundering, terrorist financing, and other illegal activities, although Tether has disputed that characterization.


Ardoino said the company is often misunderstood. He said Tether's most pressing focus is to promote the decentralized crypto philosophy—that power should be in the hands of the many, not the few—to the artificial intelligence industry and other emerging technologies. "Having a company that is independent of traditional players is going to be very important," he said.


Ardoino spoke to WIRED by phone earlier this month. The following interview has been edited for simplicity and clarity.


WIRED: This year, Tether pushed to diversify its business model and move into venture capital. Tell me about the rationale behind this.


Ardoino: Tether has become extremely profitable over the past two years, thanks to rising interest rates. When Tether launched, the reserve yield was 0.2%, and today it's 5.5%. Of course, this may be time-limited - we hear that interest rates may be cut - but even with inflation at 3% or 4%, it's hard to get back to 0.2%.


Over the past 24 months, Tether has accumulated about $11.9 billion in profits. We could have distributed all of this money to shareholders and made everyone happy. Instead, some of it was added to the reserve to further support stablecoins, and the rest was basically kept in the investment arm.


What's your venture capital thesis? It looks like you're going beyond the crypto industry.


Ardoino: We come from Bitcoin - we are Bitcoiners at heart. Maybe we are not perfect as people, but we try to carry the Bitcoin ideals of financial freedom, freedom of speech and access to technology in every investment.


The concept of decentralization can be applied to different areas, such as artificial intelligence. We have seen that artificial intelligence has been heavily politicized. We believe that it will be very important to have a role that is independent of traditional players such as Amazon, Microsoft and Google.


The same is true for another important technology: brain-computer interfaces (BCI). This will become very important in the future. Building brain-computer interfaces that respect personal privacy - ensuring that data remains local and is not collected by the same companies that operate social media platforms - will be very important.


We are not a traditional venture capital firm. We don't throw money into companies just to find unicorns that can give us a 100x return. Of course, that would be great, but it has to be consistent with our vision. Interdependence, resilience and disintermediation - these terms are very important to us.


How much capital will Tether invest in venture capital?


Ardoino: We will always prioritize the stablecoin business because risk management is very important. Right now, we have a good buffer in reserves, but if USDT continues to expand, we will expand proportionally.


But almost everything else—I would say over 90% of the profits Tether makes—we will seek to reinvest in things that are important to us and our community. We don’t need to give out large sums of money as dividends.


Some venture capital firms have done a terrible job of evaluating the character of crypto founders, and some of them (like Sam Bankman-Fried) have since been convicted of fraud. How do you plan to ensure that Tether doesn’t make the same mistake?


Ardoino:Going through every detail and doing the deepest due diligence is the only way to protect your investment capital. Not every investment is perfect, but we use our hearts and minds to ensure the best outcome.


We work directly with management; if improvements are needed, we help. Otherwise, we are prepared to replace management. The technology itself is not flawed; if a company is not doing well, it is usually because of management. We take our investments very seriously because we care deeply.


What do you think about the recent allegations against Northern Data? This is one of our portfolio companies that has been accused of securities fraud.


This will be evaluated by the courts. We have been working with Northern Data for quite some time. The company has great potential; it can provide an independent perspective on the three major companies in the data center business. I cannot comment on the allegations of several disgruntled former employees. Northern Data has responded strongly to these allegations and we stand behind our investment.


Let’s talk about the current regulatory environment. It can be said that Tether operates similarly to a bank: it accepts deposits, keeps them as cash and securities or makes loans. Why shouldn’t Tether be regulated in the same way as a bank?


Banks have loans accounting for 90% of their balance sheet, which means that they only have 10% collateral. Tether is currently collateralized at 105%. I think it’s unfair to compare Tether to a bank. It’s like saying: “The engine of a car is the same as the engine of an airplane, so we regulate cars and airplanes in the same way.”


Tether is reportedly not seeking a license to operate in the EU under the Markets in Crypto-Assets (MiCA) regime. Does Tether have plans to exit the European market?


We are formalizing our strategy for the European market. MiCA imposes daily issuance and trading volume limits on non-euro stablecoins, such as USDT. [Its aim is to prevent dollar-denominated stablecoins from replacing the euro as the main medium of exchange within the EU. ] I agree with this, because it doesn't hurt anyone.


But another limitation is the requirement for reserves. For stablecoins like USDT, under MiCA, a maximum of 60% of the reserves must be in the form of cash deposits. If you have a stablecoin with €10 billion in reserves, you need to deposit €6 billion in a bank. The bank can lend out up to 90% of this amount, keeping only €600 million. Imagine if a customer asks to redeem €2 billion (worth of stablecoins), but the bank only has €600 million. Then you have a situation where both the bank and the stablecoin go bankrupt. I don't think this is safe. In fact, this is a way for stablecoins to create additional systemic risk in Europe, rather than reducing it.


The continued lack of a full audit of Tether's reserves has led to speculation that USDT is not, or at least has not been, backed one-to-one by its reserves. Why can't Tether fulfill its promise to provide a full audit?


Audits remain a high priority for us. When it comes to stablecoins, US Senator Warren told the Big Four accounting firms that they should be cautious about taking on new crypto clients, especially after the FTX incident. [In March 2023, Senator Warren called for the creation of an accounting regulator to "stop fake audits of crypto companies."] FTX was no help at all. They were heroes in the mainstream media, but they screwed up everything.


Did the Big Four explicitly reject Tether? Did Tether apply and be rejected?


We had discussions with some of these firms.


What reasons did they offer?


Basically, it was saying that now is not the right time. If you are a Big Four accounting firm, thousands of your clients are banks. If you have a stablecoin as a client, they might not be happy. This is speculation on my part, but Tether created a digital dollar that lets people have checking and savings accounts, so stablecoins could be seen as a threat to the banking industry.


It’s not just Tether, Circle (the company that issues USDC) doesn’t have an audit either — it has a certification. This has long been misunderstood and misreported by the mainstream media. If other stablecoins are so sacred, why don’t they have audits? Even the stablecoin [USDC] that is considered the most regulated in the world doesn’t have an audit. It’s an industry problem.


[Circle is a client of Big Four accounting firm Deloitte, which checks the accuracy of its claims about the size and composition of USDC’s reserves monthly, but hasn’t issued a full audit report since 2021. ]


To be clear: has Tether ever issued USDT tokens that were not backed by USD reserves?


Tether has always been backed. In 2022, a short attack on Tether attempted to cause a bank run, and we processed over $20 billion in redemptions in 20 days. I think Tether deserves some recognition.


At least until 2024, it should be acknowledged that the initial assessment of Tether's credibility may not be entirely correct. We don't need medals, but we would like to see less criticism as we work to create the future of finance.


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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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