Angie Lau: In times of turmoil switch to stablecoins, they say. How important are stablecoins to the overall crypto market? Is Tether a placeholder for a U.S. digital dollar? And how much transparency are we seeing from Tether today?
Welcome to Word on the Block, the series that takes a deeper dove into blockchain and the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Forkast Editor-in-Chief Angie Lau.
Well, it’s been about three months since crypto exchange Bitfinex and its sister firm Tether settled with the New York attorney general for US$18.5 million. Since then, the world’s largest stablecoin Tether’s USDT has exploded in growth. Almost doubling in market cap and expanding to various blockchains, including the recently announced Avalanche.
Bitfinex and Tether have taken some steps to provide transparency since the New York case closed, including a recently released report of its reserves. Now, some say Tether is the most important factor that could sway market sentiment. Tether reveals for the first time the reserve it has since settling with the New York attorney general revealing what Tether is really backed by and it’s not only the dollar.
Bitfinex CTO , Paolo Ardoino, joins Forkast right now for his first on camera interview since the release.
Paolo, Welcome to the show. It’s great to have you on.
Paolo Ardoino: Thank you very much, Angie, for having me today.
Lau: It’s really an opportunity to answer very candidly. We’re going to give you the opportunity to do that. It’s going to be a very candid and transparent conversation. So we appreciate it. And let’s get things on the record.
Starting from when Bitfinex was born here in Asia, as we’ve monitored and paid close attention to Bitfinex, very much part of the community, born in Hong Kong in 2012 and then registered offshore [in] British Virgin Islands. But where is Bitfinex all based now?
Ardoino: So we decided to bring Bitfinex to be a decentralized company. Bitcoin is the reason why we are all here, right? This is what really started this industry. We believe that going full decentralized as a company is a way to be true to Bitcoin itself.
Bitfinex started in 2012 with two or three people. So it was a really, really tiny exchange and it grew quite a lot, especially in the last few years, but we thought that maintaining this level of decentralization, basically not having offices, would allow us to promote diversity in the company, to promote cultural inclusion and also allow us to grow better. And, of course, since we are a global business to cover better the 24 hours.
When we took this decision, it was many years ago. In a world where the pandemic makes lockdowns unpredictable. Now, it turned out to be the right choice. We see many other companies that are following our steps now. I can say that although a few of our guys and girls that work with us have been affected personally, the overall ability of the company to handle the situation was quite good given our history of being fully decentralized.
Lau: Decentralized is one thing for a decentralized workforce — and you’re absolutely right — we are all that these days. But when you are a market cap exchange of US$60 billion, for those wondering where jurisdictionally Bitfinex lies and on a regulatory kind of a framework, why British Virgin Islands?
Ardoino: British Virgin Islands is just a place that has the correct amount of regulations that has good banking that doesn’t have tier-one banks, of course, but has banks big enough to support the growth of Bitfinex and Tether. Especially, you have to think about the fact that we moved there when we didn’t have US$60 billion under management. Of course, things are growing. We are opening more bank accounts. We are opening more relationships with banks across the world. But when we moved there, we were smaller, both as an exchange and a stablecoin.
Lau: Do you think that will ever change? As we’ve seen the industry grow, a lot of jurisdictions like BVI, like Caymans, like Seychelles, Malta, Gibraltar, these kinds of smaller jurisdictions provided some sort of regulatory framework.
Increasingly, we’re seeing people going back to the gold standard here in Asia — Hong Kong, Singapore — obviously in Europe, potentially it could be Switzerland — where you are — and then, of course, in the U.S. Why not any of these jurisdictions? Do you think there would be a point at some point in your future for Bitfinex and Tether that you would move jurisdictions to what is perceived as a more international, higher standard of regulatory compliance and framework?
Ardoino: Well, yes and no. So we as a company are seeing that there is an increased level of regulations that are being proposed by different countries across the world. And first of all, we welcome those regulations because only with regulations you can get to much of the market. So the fact that we are registered in BVI does not mean that we are not going to apply to get licenses in different jurisdictions. We know that, for example, South Korea, Canada, U.K., and all, there are plenty of jurisdictions that now are setting up a more clear and long-term regulatory framework. Basically, you cannot choose easily one single place and say, “It will be regulated by that specific regulator.” If you want to serve customers across the world, especially in two, three, four years, five years from now, you have to apply for multiple licenses, have multiple licenses so that you can ensure that you can meet the regulatory requirements in the biggest jurisdictions in the world.
Lau: And of course, let’s address the elephant in the room — the US$18.5 million settlement signed by the New York Attorney General, where Bitfinex and Tether were under investigation. Do you see a return to the U.S. and being compliant where many say that Bitfinex and Tether got a slap on the wrist?
Ardoino: From a business perspective, in the U.S., there are plenty of exchanges and there are plenty of stablecoins. It’s just from a few days ago that there was news that the newly rebranded Libra is working with the bank in the U.S. There is USDC, and then there is Paxos and so on.
From a business perspective for us, the world is big enough for everyone. We are thriving in markets like Asia and and Europe and and so on. We don’t have — in this moment — the interests in reentering the U.S. market. We are growing impressively without that.
For us, it is not a problem of pride or whatever. It is just that if we can grow in the places that we are more familiar in, it’s easier, it is faster, and competition is always welcome. The U.S. in general is overcrowded both from the exchange side. You have Gemini, Coinbase, Kraken, Bitstamp and Bittrex and so on. It’s becoming a little bit crowded for the stablecoin side as well.
Lau: So I want to ask you about the backing. Originally, it was the statement from Tether that it was backed by the U.S. dollar one to one. What is it actually backed by?
Ardoino: It’s backed by cash and cash-equivalents and reserves. Tether is 100% backed. It means that we have the cash, cash equivalents like treasuries and things like that. Then, we have a percentage in precious metals. It’s important to understand that all this information has been previously shared with all the regulators we work with. So, of course, this is the first time we announced it publicly, but was really well known to regulators as well.
Lau: You got a lot of backlash, a lot of concerns that one characterized it as a glorified hedge fund where the volatility of your portfolio holdings wouldn’t necessarily be a stable security for US$60 billion worth of market cap. How do you respond to that?
Ardoino: First of all, people cannot really comment on that without having the perfect exact breakdown of all the different investments that have been made. So without knowing the average cost price of the precious metals reserves, or without having the breakdown of the commercial papers and so on, is really — first of all — is unfair. But and you cannot claim that that is an issue when you don’t have all the details. Of course, I think that when you become big, you have to expect some sort of jealousy from the competition. It’s part of the game. It really is. The competition and also the general public that has to see that something is not right when it’s actually right. So for us, we have taken more steps than anyone else.
We have competitors, for example, that do the same thing and keep their reserves in banks. That might not be banks in general, might not need to keep a certain amount of cash in the bank or they can actually provide loans outside. The fact that we have full control of our reserves and we are public about the allocation is something that is unmatched. I understand the competition. I understand haters. Honestly, we don’t care too much. We did many steps. We are going to do additional steps. We are working towards an audit. We are discussing with more and more regulators, believe it or not. Well, I would say that is pretty clear — the fact that we are so open is really bringing us a ton of business and is opening us many more doors. And all these new counterparties, of course, are questioning our state. We never encountered a problem when we disclosed our details.
Lau: So why not be a little bit more detailed if people don’t have the full picture or the full story or the full details, why not share it?
Ardoino: Well, a part of it is that, first of all, things can change rapidly, and so we roll over strict investments and also commercial paper, keep getting rolled over and so on. If you share too many details, you give out your secret sauce. There are plenty of competitors that want to know how we do it and [how] we do things if we grew so much.
One important thing is, we publish this information, and yes, there were some backlash. But don’t you think that if people were really scared and people that were actually holding billions and billions and tens of billions of Tether would have actually bought Bitcoin or sold it for some other stablecoin? That really didn’t happen, because you can see that the peg — especially you see yesterday, the market went down and all that — Tether price was 1.007 [USD]. Everyone was going to into Tether. Why? Because people trust Tether. The more we are public, the more we become solid and people trust us more. Of course, and you get more haters. It’s part of the game.
Lau: Let’s talk about that major crypto market meltdown. We talk on the day after. So a week ago, May 13th, total market cap stood at, US$2.4 trillion. One week later, which is today, we’re speaking today. One week later, it’s now US$1.6 trillion as we speak. That’s a trillion dollars lost for investors around the world. What do you think happened in the crypto markets and what did you experience at Bitfinex. What did you see? We heard the moves into Tether. But in your view, what happened?
Ardoino: Well, first of all, I believe that the markets went up a lot in the last four months and a lot of capital entered crypto. But the truth to be said also there, I believe that crypto was over-leveraged. So you started getting all these futures, perpetual swaps, and so on, and with really high leverage on all the possible projects. Not just Bitcoin and Ethereum that are pretty solid, well known with strong fundamentals, but you get to actual futures with 100x leverage on all the smallest coins. Or well, let’s say the top 100 tokens are likely to have a future from 50 to 100x leverage. And that’s kind of risky because you get a lot of inflow due to all of retail due to the news. We know that Tesla bought Bitcoin, Elon Musk owns Bitcoin personally. Then you get MicroStrategy — there is a big high that is focused on Bitcoin. But this drags so many other projects that make the market really over-leveraged because people instead of holding may be the underlying asset directly used futures and leverage products in general.
When the first time there were a series of news, you get to Elon Musk that says that Bitcoin is using too much dirty electricity and then you get potential China banning again Bitcoin news. If you sum up all these things, many of the retails and new people that are entering this market that we’re not used to 2017-18 start to panic and they start selling. Liquidations start to happen. You get basically a dog that eats its own tail. So the more liquidation happens. The more they push down the price and then the more liquidation happened and so on. And that is basically what we saw yesterday. With the over-leveraged situation, you get a meltdown — as you well described — as we had yesterday.
Lau: Here’s what’s interesting. US$7.5 billion worth of Bitcoin long positions were liquidated yesterday, May 19th. US$3 billion dollars in Huobi, a big China exchange. What were investor volumes like at Bitfinex? I’m taking a look, but of course, you’re the man who knows. But I’m seeing that it was only a fraction of the sell-off of Bitcoin at other exchanges. But what was your experience at Bitfinex?
Ardoino: Bitfinex historically has been and is still the most liquid exchange for Bitcoin spot and margin markets. We offer a 100x on leverage and we have perpetual swaps as well. Our clientele — our user base is more institutional. So you don’t get people that are longing Bitcoin with 50x — there are just a few of them, but with not really big positions. Bitfinex has positioned itself over the years as the place to be for professional traders, for high-frequency traders, and so on. Most of our traders — are the big whales or the high-frequency traders — are really maximum 5x leverage. That means that, of course, they have to have more collateral on the exchange, but also the risk of these meltdowns in liquidations is much smaller.
We made enormous volume. Yesterday was the biggest volume we made in all our history. We topped the US$7.8 billion in spot only that we made in December 2017. You could see that actually on our books were hypnotic yesterday. You could see our order books, they were like dancing and it was so good to see. We were there where at some point there was a wall of 1,000 Bitcoin at around US$37,000 that was eaten through really quickly and kept [getting] replenished until the user, the traders bought 4,000 Bitcoin and then that wall was completely wiped out and the price went down.
So you could see all these dynamics in real-time in the market was so beautiful to see. We are really strong on spot and margin markets where our top margin market that is Bitcoin/USD has maximum 10x leverage. Yes, and we have as another offering our perpetual swaps at 100x, but also the perpetual swaps are traded between five and 10x leverage for institutional professional traders.
Lau: I just wanted to understand that right. Our research showed that just around US$103 million sold off long positions in Bitcoin from Bitfinex. What you’re telling me is because predominantly you have mostly institutional and professional traders that kind of sell-off was kept fractionally lower compared to the rest of the sell-off. Is this what I’m hearing?
Ardoino: That’s correct. You have users that are leveraged 50x compared to users that are average 5x. If the market moves 1%, you liquidate everyone that is basically leveraged 50x, but it has to move much more to liquidate someone that is leveraged 5x. The thing is that if you use less leverage, you have time when the markets move to send more collateral to your position and you have time to the Bitcoin, Ethereum and Tether to support your position. So that’s basically basic ABC risk management.
Lau: And back to the breakdown of what actually backs USDT. It’s very public. Avanti Financial Group CEO Caitlin Long argued that Tether’s reserve actually mattered a lot during the sell-off.
I’ll just have you directly answer. It’s really an opportunity here. ‘When Tether disclosed how it invests reserves and it was a big negative surprise,’ this was in a tweet, ‘not previously knowable at this level of detail. Why was it a risk? Because now risk managers at crypto hedge funds almost certainly will require haircuts on Tether, which means traders had to sell crypto to reduce their total risk exposure.’ How do you respond to that? That actually by revealing what’s in your reserves and USDT as people took a look at their own exposure, felt that they had to reduce their total risk exposure because of the portfolio of assets that actually back USDT.
Ardoino: There are different ways we can respond to this. The easiest thing is to see actual heads of hedge funds responding to her with funny memes saying, ‘Are these risk managers that require a haircut in the room with us now?’
Again, did anyone see the peg of Tether moving in any way? Don’t you think that if everyone was so scared, first of all, you would see Bitcoin going through the roof? On Binance, there are like US$15 billion of Tether. Instead of having a sell-off, people that could have been scared should have bought Bitcoin with those Tethers to avoid — or at least 10% — to reduce the risk, you can buy Bitcoin or you can buy another stablecoin. But really, if you see our competition didn’t grow really much and we kept growing after the news of the reserves. When we published the reserves breakdown, we were US$56 billion. Now we are US$58.5.
The risk manager said this is not the case. There are also people that were really skeptical that said, well if you had such a good portfolio, why didn’t you share it before? We got a lot of positive news. But of course in these situations, haters and people that are against [us] make more noise than people that are supportive. But if you see the thread from Caitlin Long, you can see many people actually commenting and showing how she’s wrong. And also, isn’t she doing something that can compete with Tether in Wyoming? So are we sure that there is not some sort of personal interest in her attack? I don’t know.
Lau: Paolo, to be candid, a lot of people are paying attention because of just the obtuseness of where Bitfinex has felt for a lot of people, including the New York Attorney General’s office investigation. We’re now past that. So here we are. What is the frustration that you have most with people’s perception of what they think you are, and how would you like that clarified? There’s just a lot of — as you said — noise out there. What is the one that bugs you the most that you’d like to refute very candidly and very clearly?
Ardoino: In the beginning, when I started doing this role, and especially when I became basically the public face of the companies, it was really bugging me a lot that people were attacking us so hard. Some people were actually right. Asking for more transparency is good. We have shown we settled, we did an attestation, we published the reserve breakdown. Of course, people want more and more. But it’s not that we are doing nothing. People should give us time to see if we are still committed and what we can do to improve that level of transparency.
The fact that we are in this situation now, it doesn’t mean that we are now sitting on our chair looking at the numbers and not doing anything at all anymore. There is still a lot we can do and we are discussing [it], we will take decisions and we will show [them] to the community. Now, I believe that we are on the perfect track of transparency. Attacking now, saying that, we could have done more — yes, but look at where we were six months ago. Look at what we did. People were saying, “you are going to be dead, you are going to jail, you are going bankrupt,” and so on. “You are not backed.” Yet we got regulators looking at our numbers. We got an attestation. We published the breakdown. So it is not nothing. It’s a lot. It’s more than anyone else. And we will continue to do that.
I was not experienced. I code 90% of my time, so public speaking and discussing and picking fights on Twitter is not really my role. I just like what I’m doing. I’m the type of person that just tends to react. I want to be public myself because I don’t like people — my friends, people that work with me, my family getting attacked and trashed when we are actually doing something really good for the ecosystem.
We created the idea Tether [which] is the first stablecoin. In 2014, Tether was created. No one knew what a stablecoin was. And today we have central banks talking about stablecoins. We have many competitors and all came from an idea of people that get trashed now. And that’s so bad. The misunderstanding is huge and what I’m doing in the time I’ve known code, my team is trying to pass this message. We are good people, good people. We have families. We work really hard. We basically don’t sleep. We do everything that we can to support Bitcoin. I really don’t see why all these… I mean, fine.
You wanted more transparency. Here we go. You have it now. Now, give us a little bit more time. We will figure out what else we can give to you. We will keep you in that. So that’s basically the message that I think is important to share.
Lau: I guess the next step is an independent audit, and that’s been tough to get for any stablecoin in fairness to the industry. Where are you on that?
Ardoino: So we are actually working to find a company that would work with us to audit our books.
Lau: And when do you think we’ll see that is that this year thing? Is that something potentially next year?
Ardoino: It’s likely that we will be able to get an audit by next year. The auditors take a long time also because we don’t want to audit only one year, but also going back in time a little bit. That’s really what we are trying to do now.
Lau: Stablecoins have just exploded in growth. It has become the conduit for a lot of investors into DeFi. DeFi, giving people the onramp to get yield when the rest of the world that wasn’t possible and really creating this new metaverse, as it were, of opportunity. Where do you see stablecoins going in DeFi? How do you regard the future market in that space? And do you think the regulators are coming and does that scare you?
Ardoino: So first of all, I would like to start with the regulators. I believe that regulators will definitely look at DeFi projects. They hold billions and billions and tens of billions of dollars under their management in their projects. A simple thing to think about is your project is basically an automated market maker, a liquidity provisioning system. You can really think how a regulator can see that as, imagine to provide liquidity to the wrong set of persons. So regulators want to prevent money laundering, want to prevent terrorism. The fact that there is so much money in DeFi and the fact that there is no sort of KYC is likely to trigger at least a review of the debt sector of the industry, in my opinion.
Secondly, Tether can have a really interesting opportunity there, because I know that we are working with certain projects that are interested to have KYCed version of liquidity pools. So we are working with them to provide KYC services, but also to provide the potential potentially a faster to acquire or to integrate with tether. So that’s that is really what we think that could be the future for defined stablecoin.
Lau: The regulators, at least governments are already stepping in and not yet on U.S. stablecoins but right here in Asia, Thailand recently placed a ban on Thai-pegged stablecoins. Concerns there because it potentially contradicts efforts by governments on their own central bank-backed digital [currencies]. Do you think a fight is coming between stablecoins and government-backed central bank-backed digital currencies?
Ardoino: Well, I think that there won’t be a fight. There is space for everyone. I believe that the governments are catching up with the space, and so the easiest thing is trying to place a hold or a ban, but we have seen that many regulators state maybe ban something, they tend then to re-analyzed the problem and maybe unban but to regulate. We want better regulations, clearer regulations. That’s the only way our market, our industry will continue to grow.
For people that say, “well, when there will be an official euro stablecoin or dollar stablecoin and so on, there will not be the case for private-issued stablecoins.” It’s not just Tether. There is Paxos, USDC, and many others. I don’t believe that is true. It is a little bit naive to think that the Central Bank, European Bank will issue on Ethereum. The way I see stablecoin and government-backed stablecoins is that actually, a stablecoin is a digital currency that moves on a blockchain.
Before joining Bitfinex and Tether, I worked a lot in hedge funds and with the hedge funds as a developer, my role was actually — at the end of the day — to reconcile the numbers of all the trading activity, all the settlements, all the cash movements and so on. So that process was tedious and that was one of the reasons why I looked at Bitcoin in the first place.
I was looking at Bitcoin, saying, ‘This technology is an open ledger, a public ledger. There cannot be errors.’ There cannot be [any] confusion. Reconciliation is fast, is simple, and is transparent. Imagine if banks, instead of having their complex central banking mechanism and so on, could use actually a ledger, a public blockchain with smart contracts. That would be beautiful. The cost of maintaining the entire infrastructure will drop down a lot. The maintenance will be easier and people can be developers that are actually maintaining that infrastructure can help to build more tools, more frameworks on top of it, rather than trying to use rubber bands and trying to spend their time scratching their head and trying to find the problems due to some human error. Most of the errors were actually human, at least in my work.
Governments will really want to use blockchain as a technology to bring freshness to the infrastructure of their national currencies but they will have their private blockchain that is a permission blockchain. While we expect that our role as privately issued stablecoins will be servicing Ethereum, servicing Bitcoin, servicing EOS, and servicing Polkadot and Avalanche, and so on. You cannot expect the European Bank to issue on Avalanche.
Lau: So two systems in place. And you mentioned the government and the need for regulatory clarity in the US proposed legislation called STABLE Act, which would require stablecoins like Tether to obtain full banking licenses. If they pass that, are you prepared to do something like that or would you not participate in the U.S. Market altogether?
Ardoino: Well, we are actually not participating in the U.S. market. At the same time, I see a lot of concerns from our colleagues, from the other stablecoins in the STABLE Act. Regulations are welcome, but they should be well-thought regulations. Banishing something for not having really well understood it is the wrong approach. You really want to analyze the problem well and then regulate it. We have seen that with Bitcoin leaving aside stablecoins. We have seen that with Bitcoin. Usually, it’s ‘ban, ban, ban’ — then, ‘Oh, that’s really a nice thing so let’s try to support it.’ So I think that will happen in the same way with stablecoins.
Lau: Well, Paolo, thank you so much for just spending this much time clarifying and being really frank about a lot of the hard questions. There’s no doubt a lot of people still have questions and are still seeking a little bit more clarity. But to your point, we wait. When you have that clarity, the market is waiting for it. Until then, the stablecoin market, you remain dominant in that space. I welcome you back any time, Paolo. This was a pleasure and we really appreciate the opportunity to get on the record with you.
Ardoino: Thank you very much, Angie, for your time today and for the invite.
Lau: Absolutely. That was Palo Ardoino, CTO of Bitfinex and Tether, joining us on this latest episode of Word on the Block. And I want to thank all of you for joining us on this episode. I’m Forkast.News Editor-in-Chief Angie Lau. until the next time.