Bankless

Nation, I am very excited to introduce to Paulo Ardonio. He's the CEO of Tether, which is the largest stable coin in the world with about $100 billion in total supply at the time of recording. Paulo, welcome to Bankless.

Thank you very much, Ryan. Excited to be here.

Paulo, this is the first time we've actually done an episode with you and on Tether specifically, USDT, as the symbol is called. So I think we should start really with getting to know you a little bit. So could you introduce yourself to the bankless community? Who are you? Coindesk called you the hardest working man in crypto. I believe you've held the title of CTO. So you're definitely technical, have your share of GitHub commitments and that sort of thing. You're also now the CEO of Tether, as I understand, on kind of the business side. So just

give us a taste on who Paulo is. Well, yeah, I've been the developer for almost all my life. Started coding when I was eight, now with the first personal computers, then went to the computer science university in Genoa. I'm Italian and graduated there, worked as a researcher for university on a couple of really cool projects. One specifically related to peer-to communications in extreme situations like battlefields. Then as sometimes happens and most of the times happens, especially in Italy, you don't get paid much. So I looked outside of Italy, decided to focus on finance. I started to get a job to build financial services in Switzerland. It was 2009, around 2009. And then I started learning everything that I could around, you know, creating systems and portfolio management system for hedge funds, for stocks, options, funds, everything that you can think about, futures and so on. And then I decided that I was quite good at what I was doing. So moved to London to create my own startup. And in 2012, 13, I was reading about Bitcoin and still I had my startup. In 2014, I had the chance to meet Giancarlo De Vazzini, Bitfinex and Tether CFO. He asked my help to collaborate on Bitfinex. Bitfinex was one of the fastest growing crypto exchanges at the time. And as sometimes happens, these crazily fast growing industries require scalability on the infrastructure. So I was quite good at that side of things. So I was hired to start coding the machine engine of Bitfinex, improving it. And in 2015, I kept working on it. I was able to improve by 100x the throughput of that engine engine. 2016, Bitfinex was hacked. I was asked to become the CTO of Bitfinex, which I gladly accepted. And in 2017, I also became the CTO at Tether. And then after that, I growing the team. I kept working on the tech side of the two companies, but also started to move on a more strategical side and more strategy and business side, especially when it comes to Tether. In the last four years, also, I co-founded a project called Hole Punch that is a peer-to communication layer, resembles a little bit of a big torrent, but is made for real-time digital streams and for chat, video calls, streaming, and everything that you can think about. And recently, we launched the first product for Whole Punch called Keat, that is a peer-to video chat without any centralized infrastructure. And even more recently, just a few days ago, we launched the first, I would say, PSP operative system called Pair Runtime.

So you were an engineer by training, and certainly that seems to be the route that you took to kind of get into crypto. And I'm wondering, for some of the bankless audience that don't know about the relationship between Bitfinex, which is an exchange, and at one time was one of the fastest growing crypto exchanges in the world, and Tether, which is a stablecoin, which I'm sure many have stumbled across. Many know the term USDT or Tether. What is the relationship between these two entities? So is Tether a product of Bitfinex? Is it a completely separate entity and company? How are these two organizations related?

So the two companies are completely separated when it comes to the structure. The key story is that TylerUSDT as a product started from a necessity that was identified by Giancarlo De Vazzini in the capacity of CFO and Bitfinex. In 2014, the environment of crypto exchanges was completely different than today. So in 2014, there was Bitstamp, Kraken, Coinbase, Bitfinex, BTCC, and OKCoin, I think that I named basically almost the most important ones.

No Binance at the time, no FTX. How about Coinbase? That was sort of around that point in exchange though. Yeah, they were around. Yeah,

Coinbase was there. So there were five, six prominent exchanges and that's it. And the issue is that for any maturing industry, financial industry, you need something that is, or an activity that is extremely important that is called arbitrage. So basically you need traders that sell Bitcoin on the exchange where the price is higher, for dollars, move the dollars on the exchange where the price is lower, use these dollars to buy Bitcoin and so on and so forth. That activity is like pressuring the price and keeping the price aligned across all the different exchanges. This works only if you are able to move both the legs of a trade, so Bitcoin and dollars at the same speed. So we know that the Bitcoin block time is 10 minutes. And so you can send realistically Bitcoin from one exchange to another between 10 and 30 minutes. But it's much harder when it comes to moving fiat. You know, especially back in time, it was, if you were lucky, it could take one day. But most of the time it was taking five to seven days if you could get the wire across.

I mean, the banks take holidays too, don't they? Yeah. I mean, whereas crypto is 24-7, right? There's some days where it's just like the banks aren't open. You can't get things through.

Exactly. So especially, as you said, during the weekends was terrible because the spread across exchanges was ballooning a lot. So the really simple idea around USDT was, let's reuse this brilliant technology called blockchain. And let's just put the most used currency in the world on top of it, so US dollar. And at that time, it was before Ethereum. So the only available transport layer was called OmniLayer. That was basically a color coin solution on top of Bitcoin. And

color coin for people who don't remember is sort of like a tokenization type of a solution just built on top of Bitcoin. Right. So this is pre Ethereum, as you said. Yeah,

exactly. And so, you know, much more limited programmability compared to Ethereum, right? It was only a solution. Omnilayer was designed only to make tokens, right? Not anything else. And so from there, basically, so Tether was founded. There was a team of developers that started working on the product. And the two entities are segregated and they have some overlapping of shareholders. But over time, one is exchange, one is a stablecoin. They completely took different routes and strategies. And you can see how Bitfinex now is focusing on institutional traders outside of the US. Tether started as purely stablecoin. now is becoming kind of a behemoth when it also comes to financial markets, investments, and energy production, communications, and many other areas. I'm

certainly not as aware of those many other areas, actually, Paolo. So maybe through the course of this conversation, we can get to some of those areas. But I want to maybe start with the thing Tether is most known for, which is the stablecoin itself. Can you talk about the stablecoin? So we've come a long way from the Omnichene colored coin days where Tether was primarily kind of a token on Bitcoin. Now, of course, it's an ERC-20. It's across many chains as well. It's on Tron. It's on Solana. It's kind of spread throughout the entire blockchain ecosystem. There's about $100 billion worth of Tether. And so one Tether coin, one USDT equals kind of $1, right? So it's about $100 billion stablecoins. Owns about 70% of the market, I would say, in terms of the total stablecoin market. I mean, you correct me if any of these numbers are inaccurate. So it's come a long way since those early days. Can you just describe, like, I guess, what it is as a product today, right? So you described sort of the early days of 2014. And it was very useful because, you know, the fiat banking wire system and ACH transfer system, that was slow, that was not updated, that was not suited to the fast-paced nature of crypto. How is Tether being used primarily today? Is it still kind of that use case? Have there been other use cases added to it? Take us forward to 2024 and where USDT, like what it's useful as. Yeah,

I would say that in 2020, there has been a turning point, not just for USDT, but in general for the entire world. So we have seen the pandemic. And with the pandemic, I think there has been an acceleration in the financial instability, especially in emerging markets and developing countries. So we have seen how there was an acceleration of the devaluation on national currencies. Let's think about the Turkish lira or the Argentina pesos. So right at that time, we started seeing the shift of the usage of USDT from being a settlement currency for crypto trading transactions to a checking account, basically. So more and more, USDT has been growing as the alternative to fiat money for all emerging markets and developing countries. So today you go in Argentina, you're going in Brazil, you're going in Turkey, Vietnam, Venezuela, and Middle East, all the communities in these countries, there is a lot, especially in South America and in certain parts of Asia, you have more than 70% of the population that is unbanked. Not because there are bad people, just because they are not profitable enough for the banks and to bring the bank infrastructure. The bank infrastructure is outdated, relies on technology that was built 40 years ago, went through decades of rubber and band patching. So it's extremely expensive to keep it running. And so finance and transactions is an activity that is fundamental in people's life, in day-to people's life. So, you know, the usage of Tether grew so much there. And I wish I could tell you because that happened because we were really good and we had an awesome strategy. Actually, it happened because USDT as a product is useful. So Tether didn't have a marketing team before 2022. And so with that, we didn't have a business development team. So people started to use it just because they need a solution, right? So this was a life-saving necessity for people in these countries. I have a friend that lives in Turkey and told me multiple times that with the Turkish Lira, even, you know, you're a father, you work the entire year. And at the end of the year, if you save only in Turkish Liras, you are poorer compared to the beginning of the year. Just because the Turkish Lira devaluates 80% against the US dollar, that is the measure for all the imports of any goods in the country. And so of course, people are looking around, they are trying to find solutions to not get strewed by their government. And same thing happened to Argentina. Now in Buenos Aires, you can see many places, many physical shops and online places are all accepting

USD for the same, very same reason. How does this work practically, Paolo, for people who can't imagine somebody using, I think many people are in the West who have access to like a decent banking system. I mean, we complain about it. There are a lot of problems, but they still generally are banked, the bank population of the world. I think they have a hard time putting themselves in the shoes of somebody who's using Tether as their checking account. As you said, how does this work in practice? Are they using something like, let's say, Ethereum, or maybe Ethereum gas fees are too expensive, something like a Tron, let's say, which has, I believe, over $50 billion worth of Tether right now on the Tron chain. Are they using something like that? And when you say they have a checking account, they're basically using their Tron private key, public key as their bank account, essentially. And rather than use their local currency, whether it's a peso or the Turkish lira, they're just using Tether as kind of their unit of account and store of value and medium of exchange directly on a blockchain. Is that practically how it works? So

I think there are two types of users. There is the user that is a bit more experienced and so has downloaded a wallet on his phone. Could be Metamask, could be TrustWallet or many other wallets that are fairly popular nowadays, Ledger, so on. And so those are the bit more experienced users that know how maybe to back up their private keys. And then there is, I would say, still the majority of the users that are using as proxy centralized custodians. So they keep the USDT on these custodians and they are just using the custodian services to do payments. And there is a growing distinction also across that use centralized custodians. We have started seeing a growth of a user base that doesn't have an account with crypto exchanges for trading. They don't care about trading. They just get paid in USDT and they would use that account on the exchange to pay in USDT all the services and their bills. For example, in Brazil, now there is, in Brazil, there is something called PIX, that is a standard payment system that is spread in all shops online and offline and all the banks, right? So you can pay, it's basically a QR code that every single banking app in Brazil supports. And you can see that people have built bridges between the PIC system and USDT. So now there are apps that allows you to scan the PIC square code and pay any invoice that in Brazilian areas through USDT. So they do the conversion, they do everything. And so now we have 60,000 ATMs in Brazil that allows to cash in and cash out USDT throughout Brazil. And it's all happening independently just because really people need these type of solutions. So

there's the two sets you said are kind of the crypto natives, which many bankless listeners will probably be with their own kind of like crypto wallets, Metamask account. But there's probably an even larger audience that is essentially using some sort of local custodial type service. And it sounds like there's some innovation going on where you almost start getting like fintech type of companies, like custodial type of companies, building solutions rather than on kind of their traditional banking layer in their jurisdiction. They're just doing this based on kind of like Tether and a blockchain. But, you know, because they're a custodial service, it's easier UX. They can kind of integrate into other areas of an individual's life. And you're starting to see some uptick on that sort of usage. And that's been unexpected, you said, Paolo.

Well, not that it's unexpected, right? So, but when I think how we started with USDT, thinking that fast forward a few years, the market cap of USDT is approaching 97.8 billion. It's mind-blowing. So we have our team extremely committed to the values of Bitcoin, of decentralization. And so we are just doing our best to keep bringing these values and philosophy with us throughout our journey. And even at a much bigger size that like we are today.

It's interesting because I think in the early days of maybe 2014, a lot of people in crypto thought that Bitcoin would be the currency that would sort of bank the unbanked. Why has it not been? Why are stable coins like Tether a bit more popular in some of these emerging areas like Brazil, let's say?

I'm a Bitcoiner, but nevertheless, I'm also quite pragmatic. So I wish we will see in the future an hyper Bitcoinization and, you know, the overcoming of fiat currencies. you know, the limited supply tokens are the only ones that I think can provide certain type of guarantees to their users. Of course, now we don't have a crystal ball, but maybe in 50 years we will look at it differently and, you know, someone on Twitter will say, well, zoom out and look at the big picture, right? Yes, in the first period of time, you had the usage of fiat proxies like USDT. And eventually, you know, a few cryptocurrencies will become the ultimate currency resource for humanity. But for the time being, right, you cannot pretend that things happen from one day to another. And the reality is that communities have problems, right? People have problems. The people that don't have our time, my time, your time to dig into technology, they have real life problems. Like they have to pay the bills, they have to protect their family's money. And so how they do it is they need to do it quickly. They need to do it securely. And that's why the thing that they know the best throughout the last 200 years is the US dollar, that and gold. So we cannot pretend that Bitcoin replace especially, well, both the US dollar and gold with a snap of a finger. It requires education. I think the beauty of it is that when people are going and start using USDT through a wallet, then they might be more prone to explore also other digital assets. So I think this is onboarding basically humanity on digital currencies is the first step to get also wider adoption for Bitcoin. So I think everything has a time and we shouldn't be stressed because, you know, we are annoyed by the fact that it's not happening at the pace we, as, you know, lucky guys working in this beautiful industry want.

I do think you're right there, Apollo, like stable coins are kind of the gateway drug to all of the rest of crypto and certainly to some of the more crypto native assets. That's for sure. Can we talk about Tether itself and the backing of Tether? So ever since I have been in crypto, Paulo, there has been some question as to like, what are the assets that back a USDT? And are they really there? We can address maybe kind of the FUD and why Tether seems to be a lightning rod for that a little bit later in the episode. But I want to hear from you directly. So when someone were to split apart a dollar of USDT, what do they find inside of it? Like what is backing it? I think you have this page on the Tether website. It's a transparency page. And it shows both the current balance of how much USDT is issued right now on top of, you know, blockchains. And right now, yeah, you were right, you mentioned the number 97 billion or so almost 98 billion. And you've got this other tab called reports and reserves, which are independent auditor reports from an auditor called BDO. Okay, I don't know all of the auditors in this type of a field, maybe you can kind of explore it, but it has a reserves breakdown. And there are a few different categories of assets that are the reserves, the backing for USDT. 84% according to this cash and cash equivalents, a tiny amount 0.05 corporate bonds. Then you've got some precious metals, 3.6% precious metals, 2.9% bitcoins, other investments, 3.8%, and then secured loans, 4.9%. That, according to this report, is what backs a USDT and all of the $98 billion worth of USDT. First of all, can you just broad strokes, tell us about kind of the backing of Tether? How do we know that these assets are actually backing Tether? What is the auditing process? And then maybe we'll go through this in a couple of the main categories here. But first, the backing itself. Sure.

So Stablecoins historically never had too much luck in having a full audit. So the industry standard at the moment is called attestation. So that is what we have with Tether done by BDO. Although if you look at our attestation, you can see that the auditors of BDO went through enormous efforts, not just to take our word on the existence of the numbers of the assets that are back in Tether, but also they went through independent contacts to the different custodians in order to confirm these numbers. So that is, I think, one of the most important points, right? So yes, you're right. Taylor throughout the history had been considered the black sheep in the industry. But, you know, think about 2020. Imagine a room full of people, okay? And the people in this room are all the greatest names of our industry. Then fast forward those four years. Well, and go back to that room. And you can imagine in that room, all the people were looking at each other and then looking at us and whispering, oh, yeah, those guys are the black sheep. Those guys, they are going down. And then you fast forward four years in that room, you don't hear whispering because basically there is only us. All the greatest of the industry apart, maybe a couple, went past in 2022 and 2023. All those people were the ones that accused Tether to do the exact things that they were doing.