And so all eyes turn to Tether. After the collapse of Terra and the implosion of FTX, the stability of the world’s third biggest cryptocurrency by market capitalization is now at the top of the cryptoworld’s worry list. The New York Times has described Tether as “the coin that could wreck crypto” and rumors have long swirled about the security of a coin that could be responsible for as much as 70 percent of all Bitcoin trades.
Talking to the Bad Crypto Podcast recently, Paulo Ardoino, Chief Technology Officer of both Tether and Bitfinex, attempted to provide some reassurance. Watch the full length interview with Joel Comm and Travis Wright, below.
Stablecoin origins
Tether, he explained, was created back in 2014 as a way of enabling arbitrage. Bitcoin was traded across four or five top exchanges, including Bitfinex and Coinbase, and arbitrage ensured that the price across each of those exchanges remained roughly the same. But moving dollars from one exchange to another in those days could take as long as five days, wiping out the arbitrage opportunity. Bitcoin, on the other hand, could move across a blockchain in ten minutes. A digital coin pegged to the dollar would bring blockchain speed to Bitcoin arbitrage markets.
Tether as an inflation hedge
The use of Tether has expanded since those early days. “It’s actually an inflation hedge for Turkey, for El Salvador, for Venezuela, for Argentina and so on,” said Ardoino. “Tether is growing because people just need to not be subject to the normal inflation due to their national currency.”
But Tether can only work as a hedge if its own value is stable—and that means holders need to be confident that they can withdraw and convert their funds at will.
According to Ardoino, 82.5 percent of Tether’s assets are cash or cash equivalents and the remaining 17 percent of assets are “extremely collateralized…with the collateral being extremely liquid.”
“So there is a huge difference between Terra and all the other stablecoins that failed and Tether,” Ardoino said. “We showed our community that in less than one year, we could take the $30 billion that we had in commercial papers and move everything to US T-bills.”
So liquid are Tether’s reserves, Ardoino added, that between the 14th and 15th of May, the company was able to redeem $7 billion, around 10 percent of the reserves. “No bank in the world can do that.”
Waiting for proof of reserves audit
An audit would provide even stronger reassurance though, and here Tether has come up short. The publication of an audit has been long postponed, a delay Ardoino puts down to the difficulty the Big Four accounting firms face when reviewing the accounts of a new industry they don’t understand.
“How can you fully audit something that you don’t know exactly how you should audit?” he asked. “There is no regulator that tells you how many and which type of reserves are allowed, what type of backend is allowed, what are the processes that you should allow and so on. That takes enormous risk on the shoulders of the Big Four.”
The issue, he argues, affects the entire industry but Tether is working towards a solution. He also pointed out that a number of the firms that went bust had received clear audits.
And so eyes remain on Tether but even more eyes will be on the audit when it is, at last, published.
