Tether, the issuing company behind Tether tokens (USDt), has become one of the largest entities in the cryptocurrency space. USDt are an integral part of the trading ecosystem on nearly every cryptocurrency exchange: as Bitcoin and other cryptocurrencies have continued to grow, Tether has grown right along with them.
Earlier this week, Tether announced that USDt had surpassed the US$50 billion market cap milestone for the first time. Finance Magnates sat down with Paolo Ardoino and Stuart Hoegner, who are respectively Tether’s Chief Technology Officer and General Counsel, to discuss this milestone. We also spoke about Tether’s transparency, ecosystem initiatives, and future plans.
Tether Has Been around since 2014, but USDt Growth Only Turned Truly Explosive in 2020
“If you look at the history of Tethers growth, you’ll see that initially, it took a little bit of time for the Tether team to explain the value proposition to cryptocurrency exchanges,” Paolo Ardoino told Finance Magnates. “It was actually difficult to make exchanges understand why it was important to have Tether (USDt) as a replacement for USD in the crypto space.”
Therefore, it was not really until 2017 when Tether began to be adopted on a larger scale. At that point, “all the new cryptocurrencies created were listed with Tether trading pairs,” Paolo said. “That, of course, created more demand for Tether. The end of 2017 was the first time that we reached a $1 billion market cap.”
However, Paolo explained that Tether’s growth truly became explosive just over a year ago. “Actually, the big ‘boom’ that had taken place starting on March 12th and 13th of 2020,” also known as Crypto’s Black Thursday and Friday.
“The market crashed badly at that time,” Paolo said. “But, when the market crashed, there were people that saw opportunities [for arbitrage.] When crypto prices are subject to that kind of high volatility, you need to be able to act fast.”
As Bitcoin Has Become More Popular, OTC Desks Rely on Tether for Trades
“Those who had dollars could not do anything,” he said. Paolo explained that as crypto markets were crashing, financial markets beyond crypto were also reacting to the US announcements of border closings and a national state of emergency. “All the markets were crazy. Moving dollars at that time was almost impossible…everything was crashing.”
While this chaos was underway, Paolo said: “it was only those who had USDt that could act fast–that could take the opportunity to buy BTC on the cheap side and arbitrage and sell Bitcoin at higher prices.” The opportunities were of considerable size: “at some points during those times, spreads on different crypto platforms were as high as $2,000. If you were able to make quick arbitrage trades, you could make a ton of money.”
After Black Thursday and Friday, Paolo explained that Tether started receiving “an increase in demand from OTC desks, because we have seen institutions finally gain enough interest to jump in [to crypto.]” In this way, the growth of Tether was reflecting the growth of the crypto space as a whole, and Bitcoin, in particular.
“There were also changes in monetary policy in the United States and Europe,” he said. “So, at that point, more institutions started to think of Bitcoin as a ‘hedge’, or a way to differentiate their investments.” Institutions began to approach these OTC desks with requests to buy hundreds of millions of dollars’ worth of Bitcoin. As these OTC desks set about executing these trades, they used USDt.
The $50 Billion Milestone Is “A Measure of the Tremendous Ability of This Whole Industry to Grow and Offer New Possibilities.”
Stuart added that essentially, Tether was just doing what it was designed to do: “Tether is a reliable and quick liquid utility,” he said. “That has been the basis of our success.”
We asked Stuart and Paolo if Tether’s growth had exceeded their expectations. “At one point, I never would have thought that we would have that kind of a market cap,” Stuart said. “It’s a measure of our success, and it’s a measure of the markets’ (and our customers’ and counterparties’) confidence in us, and that’s tremendously rewarding.”
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Ultimately, though, “it’s just another step on the road,” he added. “It’s a big milestone, but it’s not the last one for us.”
As significant as the $50 billion milestone for Tether may be for Tether itself, Stuart pointed out that the growth of Tether is part of the growth of the crypto ecosystem as a whole: “It’s a measure of the tremendous ability of this whole industry to grow and offer new possibilities. That’s the really exciting part.”
Tether and Other Stablecoins May Have Laid the Blueprints for CBDCs
And indeed, as crypto has continued to grow, these possibilities have been expanding across the financial ecosystem. For example, stablecoins in particular seem to have played an important role in the growth of central bank digital currency (CBDC) initiatives around the globe.
“I think that Tether and other stablecoins have led the way. Now, we have central banks that are thinking about these kinds of things, and that’s great,” Stuart said. “Private stablecoins have given them a kind of ‘route map’ or a path to show them how that could be done.”
“We see it as a validation of our model, and not so much as a threat,” he continued. “It remains to be seen how central banks are going to innovate and what kind of blockchains they’re going to use to issue those CBDCs…in a sense, imitation is the sincerest form of flattery, so we see it as a good thing.”
“More generally, there’s a lot of room for different business models built on the bedrock of Tether and other stablecoins, as well as Bitcoin and other crypto. The entire fintech space is driving change and evolution in the traditional finance space.”
How Is Tether (USDt) Backed?
As Tether has taken on an increasingly important systemic role in the crypto space, we asked Stuart and Paolo about Tether’s USD-backing mechanism, as well as transparency in the Tether ecosystem.
“Tethers are 100 percent backed, full-stop,” Stuart said. “Until last month, people could use information from a number of different sources that Tethers were fully-backed: our bankers, for example, and from major customers of Tether that had spoken about the fact that they have redeemed Tethers freely over the years, and had access to their underlying funds.”
“As of last month, they know through our assurance opinion, issued by Moore Cayman on February 28th,” he said. The statement was issued “on the basis of our consolidated reserves report, [which shows] that Tethers were, at that point, fully backed, and that there were sufficient assets to cover all liabilities–not just issued Tethers, but all liabilities of the consolidated group.”
“That exercise is now being repeated in respect of March 31st, and that will be released on April 29th.” Assurance opinions will be released on a quarterly basis in the future, Stuart said.
“This independent assurance process that we’ve engaged Moore Cayman to do is how people know that all Tethers are fully-backed. As to the specific breakdown [of the reserves], stay tuned for more information on that. We will be making more information on that public going forward.”
Tether’s Support of Layer-2 Solutions for Bitcoin and Ethereum
Additionally, we asked Stuart and Paolo about Tether’s support for second-layer solutions on both the Bitcoin and Ethereum networks.
“For us, showing support to Bitcoin and Ethereum, and trying to be productive and creative members of this industry, is extremely important,” Paolo said. “We are not here to export crypto as a transport layer to make a quick buck.”
“Tether is often the first- or second-most transferred asset on Ethereum, so by itself, it will use 40 percent of the entire bandwidth that Ethereum has,” he explained. “So, you can imagine that as a responsible group of people and companies, we need to take steps and actions to improve the situation–to weigh less on the shoulders of the blockchains that we’re using. That’s the only way to reach mass adoption.”
This is why Tether has taken steps to support layer-2 solutions for Bitcoin and Ethereum “so that we could push down the cost of the fees,” Paolo said. “No one wants to buy something on Amazon but has to spend $30 in gas fees on Ethereum. It doesn’t really make sense.”
“So, for us, being part of the ecosystem is the thing,” Paolo said. “We want to be a part of the group that provides solutions and keeps growing the ecosystem until mass adoption is achieved. This is our work. This is why we are investing a lot in supporting these solutions, as well as research projects (RGB, Omnibolt), all of these are trying to create cryptographic solutions that ensure the same level of security as Bitcoin [and Ethereum],” but with lower fees and faster transactions.