Tether’s Paolo Ardoino on Reserves, Regulation and Evergrande

  • In an interview, stablecoin Tether’s tech chief Paolo Ardoino lays out the case for holding commercial paper in its reserves.
  • This comes as the Evergrande debt crisis and rival stablecoins shine a spotlight on Tether’s reserves again.
  • He also shares his expectations on stablecoin regulation and competition.

Stablecoins are rarely on the tips of investors’ tongues when it comes to talking about the volatility-filled headline-grabbing crypto market.

But the relatively staid coins are making up a growing proportion of the overall market, with a value of around $127 billion.

Stablecoins are cryptocurrencies that are pegged to fiat currency on a one-to-one basis. They are, in theory, backed by reserves, such as short-term government bonds and the currency itself.

This stability means they offer an accessible – if boring – entry and exit point to the crypto world.

Unless of course it’s Tether (USDT).

As one of the first stablecoins, Tether’s experienced its fair share of controversies, particularly surrounding the reserves that back its eponymous coin.

However that’s not stopped its popularity. Tether’s market capitalization surged 357% in the last year to around $69 billion.

“It’s impossible to reach these levels of success in such a short time without genuine organic interest and really wide demand from the broader crypto trading industry,” Paolo Ardoino, Tether’s chief technology officer, told Insider in a recent interview. 

Ardoino joined Tether back in late 2015 as a developer before being appointed chief technology officer around a year later. He is also now CTO of cryptocurrency exchange Bitfinex.

His role is much broader than tech chief. He takes the lead in the majority of the company’s communications, while the CEO and CFO stay firmly in the background.

Even the chance to speak to Ardoino is rare. But tether’s growth of around 3,350% since early 2019 is seen as reason to celebrate.

“While old information about Tether’s reserves and so on is public, it keeps growing,” Ardoino said.

For Ardoino and the team, this highlights the crypto community’s faith in Tether.

At the same time, hot topics such as regulation, competition and the Evergrande debt crisis are shining a spotlight on that “old information”.

What’s the deal with Tether’s reserves?

When Tether launched in 2014, it said every tether coin was fully backed by US dollars in bank accounts.

As demand for tether grew, market participants started to question whether that was the case. To counteract that line of questioning, Tether secured attestations on its financial statements – a review from an independent accountant, rather than a full audit – on the reserves.

But these have frequently raised more questions than answers.

Earlier this year, Tether and Bitfinex settled one of those battles over its reserves with the New York state Attorney General. As part of that settlement, Tether received a $18.5 million fine, agreed to no longer operate in New York and pledged to provide quarterly reports on its reserves for the next two years.

The most recent report from accountant Moore Cayman shows more than 50% of the assets backing a tether coin were commercial paper and certificates of deposit, rather than dollars, or short-term government paper. According to the Financial Times, this makes Tether one of the world’s largest investors in the US commercial paper market.

Why do commercial paper holdings matter?

Commercial paper is a form of unsecured, short-term debt issued by companies that doesn’t need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months.

This type of debt financing is back in the limelight as China’s second largest property developer Evergrande teeters on the brink of default. Reuters described Evergrande as “the biggest issuer of commercial papers”.

Ardoino clarified that Tether does not hold Evergrande’s commercial paper. The most recent attestation states the average credit rating of its commercial paper holdings is “A-1” – an investment grade based on the ratings scale of Moody’s Investor Services, a ratings agency. 

Since Evergrande’s potential collapse could have broad implications for the commercial paper market and Tether’s most recent attestation contains no breakdown of either the geographical exposure or investment category of the paper it holds, market participants are concerned about the risks to Tether’s books.

“The case is you have two choices, you trust the rating agencies, or you don’t trust them. But these are the same rating agencies that are rating the US Treasuries,” Ardoino said. “So if A1 commercial paper rated by a US Agency is considered safe [then] why is where the issuer located matters?” 

“The only interest of Tether is maintaining a liquid and extremely safe portfolio,” he said.

Commercial paper typically has low default rates. But since it’s unsecured, there is also very little recourse for investors if an issuer does default.

What about that audit?

Many stablecoin companies have followed Tether’s lead both with attestation and the use of commercial paper. Now, the second-largest stablecoin, circle (USDC), is heading in a different direction, choosing to only use cash reserves and cash equivalents.

Tether still expects to be the first to secure an external financial statement audit, which it has been exploring since 2017, but it won’t necessarily be from one of the Big Four accountants.

“There is an entire world outside of the US,” Ardoino said. “I think that it’s a little bit aggressive, or cocky, to ask that everyone in the world use US agencies, or US auditing companies – otherwise it does not matter, or is not fine,” he said. 

“We are working with an amazing counterparty that is extremely professional and has a deep knowledge of traditional finance and also crypto markets and the blockchain industry and so on. We are completely confident.”

Stablecoin regulation

Investors aren’t only looking at audits, there’s also regulation. The US Treasury is expected to release an in-depth report on stablecoins any day now.

Ardoino wouldn’t comment on whether the Treasury directly spoke to Tether for the report. But he did lay out his timeline expectations for regulation. 

“We are always working with regulators and we are expecting additional or proper regulations coming in the next few months, to one year,” Ardoino said. “In the end, this industry is more than $2 trillion and it’s important to have clear guidelines and clear rules and so on. With Tether we are welcoming all that. We believe that this is the only way that these technologies are really created and can become mainstream.” 

And despite it seeming as though the stablecoins are in competition, Ardoino believes this will be key to success with regulators.

 “An industry is not an industry if there is only one player, instead having many players with different offerings with different use cases is really helpful in a moment when you have to talk with the regulator,” Ardoino said. “So Tether is extremely glad that there is a USDC, that there is Paxos and all the other stablecoins, because that is how we become an industry.”


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