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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Joe Wis and I'm Tracy Hallaway. Tracy, you know,

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Speaker 1: one of the funny things, I guess I don't know

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Speaker 1: if funny is the right word, but one of the

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Speaker 1: funny things with crypto is that, you know, it's shocking

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Speaker 1: when a big entity like f t X collapses, and

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Speaker 1: there have been other collapses as well, But on some level,

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Speaker 1: I don't think anyone really thinks anyone in the space

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Speaker 1: is like blue chip or like completely legit, right, Like,

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Speaker 1: there's no one. There's no one in crypto that you

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Speaker 1: would like trust the way like say you trust, like

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Speaker 1: putting your money at like JP Morgan or something. I

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Speaker 1: think that's true, but everything in crypto is kind of relative.

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Speaker 1: So I have previously described f t X as like

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Speaker 1: the Microsoft of crypto exchanges, because it was the one

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Speaker 1: that people thought was kind of best practice, and it

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Speaker 1: had all these connections with traditional finance and Sam Bateman

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Speaker 1: Freed was lobbying for stronger crypto regulation, and everything seemed

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Speaker 1: kind of like up and up, and it had this

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Speaker 1: wonderful liquidation engine that everyone talked about, and clearly clearly

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Speaker 1: that wasn't the case. But you're right. There are actors

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Speaker 1: in the crypto space of varying quality. Let's say, right,

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Speaker 1: and you said the key word, which you nailed is relative,

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Speaker 1: because sure, there are some that seemed to be kind

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Speaker 1: of well run and decently well regulated, and then there

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Speaker 1: are others that people have been saying, oh, this is

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Speaker 1: going to collapse, this is a fraud, this is whatever

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Speaker 1: for years and years, and you don't really know which

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Speaker 1: one is going to go. And it turns out that

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Speaker 1: a lot of the critics of crypto may you know,

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Speaker 1: get things right, but on the other hand, like don't

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Speaker 1: really know which which domino is going to tumble next.

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Speaker 1: It's been surprisingly hard to figure that out. Yeah, and

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Speaker 1: again I hesitate to use the fun but I guess

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Speaker 1: that's one of the unusual things about crypto is the

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Speaker 1: guys you think aren't gonna make it can persist for

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Speaker 1: a lot longer that those that you think have a

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Speaker 1: better chance. So you know, things like doge coin, it's

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Speaker 1: still here yet, I know, like something that is clearly

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Speaker 1: a joke still has a nominal monetary value. And then

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Speaker 1: of course there is tether, yes, and so I think

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Speaker 1: when ft x collapsed. Both of us sort of had

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Speaker 1: the same thought at the same time, which she's like, Man,

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Speaker 1: you know, it's funny again. I don't know funny is

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Speaker 1: the right word. But Tether is still here. And people

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Speaker 1: have been betting against Tether or predicting its demise, or

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Speaker 1: claiming that it's a fraud, or claiming that it's going

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Speaker 1: to get shut down by regulators, or claiming that it's

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Speaker 1: going to lose its peg forever. Meanwhile, all of these

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Speaker 1: things implode that aren't tether, and Tether as of right now,

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Speaker 1: which is we're recording this on December five, is trading

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Speaker 1: about one to the dollar, right, So Heather is a

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Speaker 1: stable coin. One Tether is supposed to be worth one

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Speaker 1: dollar at all times. It has previously dipped below that level,

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Speaker 1: particularly after the big crypto blow ups in the spring

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Speaker 1: of this year, when Tera Luna collapsed, and then when

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Speaker 1: FTX collapsed, it slipped slightly below it's one dollar peg.

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Speaker 1: But it's come back, and I think it has been

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Speaker 1: remarkably resilient when you consider that. Literally for years people

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Speaker 1: have been asking about this company, how it's run, the

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Speaker 1: sort of web of relationships around it, and perhaps most crucially,

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Speaker 1: are there actually things backing Tether, because as I mentioned,

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Speaker 1: it's a collateralized stable coin. It is supposed to be

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Speaker 1: backed by dollar assets, but there's always been a lot

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Speaker 1: of doubt and questioning over whether or not those exist.

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Speaker 1: In fact, last year, Tether and bitfin x we're ordered

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Speaker 1: by the CFTC and also the New York Attorney a

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Speaker 1: role to pay millions of dollars in fines for misleading customers,

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Speaker 1: and Tether's own PR strategy when it comes to this,

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Speaker 1: I think it's fair to say it's been a little

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Speaker 1: bit weird, and I'm just thinking, you know, one of

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Speaker 1: the ultimate ironies is I remember we had Sam Bankman

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Speaker 1: freed On the f t X founder with Matt Levine,

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Speaker 1: I think our first conversation with those two, and we

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Speaker 1: asked SPF about Tether, and he basically said something along

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Speaker 1: the lines of like, oh, it's just you know, it's

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Speaker 1: a complete mess, Like, you know, it's kind of a

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Speaker 1: mess of a process maintaining this thing. And so if

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Speaker 1: SPF is telling you that this thing is messy, I

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Speaker 1: think it deserves its own episode, right it does? You

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Speaker 1: know SPF, f t X and el Amta, they were

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Speaker 1: big Tether users he felt that. But anyway, I have

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Speaker 1: so many questions about Tether, and in the wake of

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Speaker 1: f t X, I thought it would be a good

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Speaker 1: time to, yeah, revisit what it is, what its role is,

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Speaker 1: what we know about it, what we don't know about it, etcetera,

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Speaker 1: and just sort of like take stock of this pretty

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Speaker 1: I think, critical piece of crypto infrastructure totally, and also

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Speaker 1: why it's proven so resilient and what could actually kind

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Speaker 1: of knock it down. All right, let's go. We are

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Speaker 1: going to be speaking with someone who knows the company

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Speaker 1: very well, has been reporting on it and talking about

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Speaker 1: it and analyzing it for a long time. We're going

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Speaker 1: to get all of our questions cleared up. We're gonna

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Speaker 1: be speaking to Bennett Tomlin. He is the co host

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Speaker 1: of the Crypto Critics Corner podcast and he's also the

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Speaker 1: head of research at protost Media, and he is an

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Speaker 1: encyclopedic knowledge of the crypto ecosystem and who does what

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Speaker 1: and who is who. So Bennett, thank you so much

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Speaker 1: for coming on odd lots glad to be here. All right,

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Speaker 1: let's just start like really simple, who started Tether and why?

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Speaker 1: That's a surprisingly challenge. I thought that would be an

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Speaker 1: easy question to start with, Okay, Nominally, Nominally it was

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Speaker 1: started in two thousand and fourteen by a bunch of

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Speaker 1: the master Coin slash Omnique cruise. This typically Brock piers

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Speaker 1: yantis Quigly Reeves and sellers came over and decided to start.

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Speaker 1: But if they called at the time real Coin, which

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Speaker 1: they advertised as this dollar batted token on the block

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Speaker 1: chain that was going to use what was then called

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Speaker 1: the master Coin layer and is now called the omni

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Speaker 1: layer on top of Bitcoin. Sometime in that summer of

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Speaker 1: two thousand and fourteen, when they were going around pitching

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Speaker 1: this idea, one Carlo Davissini, Jean Ludoviticus Vandervelt and Phil

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Speaker 1: Potter got involved, and the exact timeline of their involvement

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Speaker 1: and when the control of the entity fully shifted is

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Speaker 1: difficult to parse out. But by the time the first

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Speaker 1: tethers were issued in October November of two thousand and fourteen,

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Speaker 1: Tether was entirely under the control of one Carlo Davissini,

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Speaker 1: Phil Potter, and Jean Ludovit Jean Ludoviticus Vanderbilt, the bitfin

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Speaker 1: X executives. So it started by this group of people

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Speaker 1: from master Coin and then taken over and really launched

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Speaker 1: on to the bitfin x executives in two thousand and fourteen.

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Speaker 1: So I'm going to ask the same question in a

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Speaker 1: slightly different way, but why the need for stable coins

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Speaker 1: at all? Like why in crypto can't you just transact

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Speaker 1: in US dollar deposits for the majority of offshore exchanges,

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Speaker 1: Like why this market need that this group of very

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Speaker 1: disparate people came together to serve. My understanding is that

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Speaker 1: it was very challenging even for the most quote unquote

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Speaker 1: legitimate of cryptocurrency businesses in this era, to get and

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Speaker 1: maintain consistent banking relationships. And so the idea with Teather

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Speaker 1: is that Tether would build these relationships and in doing

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Speaker 1: so allow a variety of other cryptocurrency businesses to effectively

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Speaker 1: benefit from their banking relationships by allowing them to have

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Speaker 1: this pseudo dollar token that allowed them to mimic trading

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Speaker 1: against the dollar and all the conveniences therein without having

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Speaker 1: to seek out and maintain relationships with banks that could

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Speaker 1: transact in the US dollar. Right, So this is a

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Speaker 1: really key thing. Rather than if you want to set

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Speaker 1: up a crypto exchange, rather than you going through all

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Speaker 1: of the work to set up bank accounts in different

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Speaker 1: countries and all that, you're just like, oh, you're just

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Speaker 1: like create a platform that allows you to onboard Tether.

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Speaker 1: Tether already has the banking relationship and instead of trading

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Speaker 1: a dollar, as you trade in the dollar denominated stable coins. Now,

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Speaker 1: who is Tether's bank in the beginning. So if they're

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Speaker 1: going to have this dollar denominated stable coiners they're going

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Speaker 1: to hold their dollars, where were they holding their dollars?

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Speaker 1: How did they get a banking relationship? Again, it's a

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Speaker 1: little bit difficult to pass completely. We know at least

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Speaker 1: part of the reserves were held at a variety of

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Speaker 1: Taiwanese banks, many of which relied on Wells Fargo for

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Speaker 1: their US correspondent banking services. And we found this out

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Speaker 1: because in two thousand and seventeen, Wells Fargo ended up

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Speaker 1: cutting off correspondent banking access for bitfoin X and Tether,

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Speaker 1: and bitfoin X and Tether filed a lawsuit they describe

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Speaker 1: as purely to buy time against Wells Fargo at that point. So, yeah,

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Speaker 1: they were banking at a variety of Taiwanese banks, and

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Speaker 1: getting correspondent banking from Wells Fargo. The reason I'm pausing

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Speaker 1: is that bitfn x is and Tether's relationship with payments

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Speaker 1: processor Crypto Capital Core stretches back to two thousand and fourteen,

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Speaker 1: and so it is possible that some portion of the reserves,

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Speaker 1: besides being held in these Taiwanese banks, was already being

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Speaker 1: held in Crypto Capital Core. Besides that, we know from

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Speaker 1: the CFTC settlement with Teather that as early as six

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Speaker 1: Tether was being backed by non cash assets, and so

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Speaker 1: we have to expect that some portion of those were

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Speaker 1: being held outside of those bank accounts as well. So

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Speaker 1: this kind of gets to the question over the weird

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Speaker 1: pr strategy, which I expect that's going to be sort

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Speaker 1: of a theme that comes up a lot in this conversation.

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Speaker 1: But but if we know that Tether was created to

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Speaker 1: allow sort of easier on boarding of dollar deposits into

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Speaker 1: the crypto so um by allowing them to build and

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Speaker 1: establish these relationships with various banks, why wouldn't they just

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Speaker 1: be upfront about who their bank partners are. Bitfn X

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Speaker 1: and Tether in whale pool team speaks and official communications

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Speaker 1: have often expressed a fear that if the extent of

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Speaker 1: their relationships with various banking partners is made public, those

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Speaker 1: banking relationships will cease to exist. For some reason, it

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Speaker 1: seems that Tethern bit pnexes banks and the relationships therein

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Speaker 1: have to be kept somewhat secret in order for tether

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Speaker 1: and bit pnex to continue to offer that. The fear

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Speaker 1: when they say something like that is that the reason

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Speaker 1: they need to be coy about it is because the

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Speaker 1: banks are not fully aware of what they may be banking,

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Speaker 1: or there is some other challenge that presents itself to

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Speaker 1: these banks when it becomes public that they are banking

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Speaker 1: these entities, you know, speaking of Okay, maybe the bank

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Speaker 1: doesn't want you to do crypto stuff, or maybe an

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Speaker 1: entity is obfuscating what it did or what its relationship

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Speaker 1: with bank the bank was when they opened the account.

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Speaker 1: I seem to recall there being some video in which

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Speaker 1: Sam Bankman Freed talks about having named Elma Research so

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Speaker 1: that it wasn't just Alameda. Is that my hallucinating that

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Speaker 1: or did that actually happen? No, there was an interview

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Speaker 1: with Sam Bankman Freed was asked why Elma Research was

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Speaker 1: named Alameda Research and he talked about how when he

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Speaker 1: was arbitraging the Japanese premium that having the name Elma

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Speaker 1: Research and convincing people that this was a research firm

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Speaker 1: made it easier for him to access and maintain banking

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Speaker 1: relationships that allowed them to arbitrage. That came. Maybe just

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Speaker 1: going back to the beginning of Tether for a second,

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Speaker 1: so I understand the function that Tether was serving in

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Speaker 1: the crypto community, but what was their own business model?

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Speaker 1: So what was the idea behind how Tether as a

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Speaker 1: company was going to make money. They charged a few

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Speaker 1: basis points and issuance and redemption, and I think if

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Speaker 1: their reserves were going to be earning any yield in

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Speaker 1: the bank accounts they were stored in, then that yield

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Speaker 1: would go to Tether the corporation. Stable coins are a

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Speaker 1: challenging business model. Circle has struggled to do it profitably.

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Speaker 1: So just on this note, and again we're sort of

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Speaker 1: diving headlong already into one of the bigger issues with Tether.

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Speaker 1: But it does seem like if you're expecting Tether to

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Speaker 1: maintain the peg with dollar denominated assets, but the company

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Speaker 1: itself is making money by generating yields from those assets

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Speaker 1: that would seem to be almost immediately a conflict of interest, right,

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Speaker 1: or at least a temptation to potentially invest in higher yielding,

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Speaker 1: riskier assets to generate more money for the company itself. Well,

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Speaker 1: I think that Bloomberg Business Week's reporting seek Fox is

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Speaker 1: reporting on this really kind of points to that. Specifically,

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Speaker 1: where you see when they're banking at Noble Bank and

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Speaker 1: Trust founded by John bettson brock Peers, supposedly one Carlo

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Speaker 1: Davissini going to John Betts and pleading asking for ways

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Speaker 1: that they can earn additional yield on their reserves. And

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Speaker 1: I think this is consistent with one Carlo Davissini, the

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Speaker 1: chief financial officer of Tether and Silvano di Stefano, the

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Speaker 1: chief investment officer of Tether, being partners together in Blue Bit,

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Speaker 1: the cryptocurrency hedge fund. Right, is that around this period

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Speaker 1: we have pretty solid reporting that Tether was very much

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Speaker 1: interested in going out and trying to find additional ways

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Speaker 1: to earn yield, and that if we look, even if

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Speaker 1: we take Tether completely at their word, if we look

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Speaker 1: at their attestations today, their reserves are far riskier than

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Speaker 1: they were promised to be back. When Tether was started

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Speaker 1: in two thousand fourteen, the original promise was that every

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Speaker 1: single Tether issued would have a corresponding dollar in a

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Speaker 1: bank account to back them. Now the promise is that

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Speaker 1: there is a dollar of value in some nebulous collection

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Speaker 1: of assets that backs that tether. And so I think

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Speaker 1: that it's very clear it has presented a conflict of

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Speaker 1: interest and that Tether has continued to move further and

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Speaker 1: further away from their initial promise as a way to

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Speaker 1: generate additional yield and income for the people running Tether. Yeah,

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Speaker 1: you mentioned the word nebulous, and I remember there was

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Speaker 1: this great note from Barclays from their money market and

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Speaker 1: credit guys basically saying that Tether was using language around

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Speaker 1: its investments that no one in the financial industry had

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Speaker 1: ever seen. They kept referring to something called a reverse

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Speaker 1: repo note, and then yeah, they seemed to imply it

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Speaker 1: was some sort of like structured credit note but also

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Speaker 1: a reverse repo, which was all very very strange. So

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Speaker 1: speaking of language, you know, I want to get a

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Speaker 1: little bit more to the bank, the post Wells Fargo

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Speaker 1: or post Taiwan bank banking relationships, but before gone what

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Speaker 1: is an attestation? Because I know that Tether does not

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Speaker 1: get a formal like audit, but they say they published

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Speaker 1: an attestation. What is that? So I'm not an account intern,

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Speaker 1: auditor or a lawyer, and so I want to get

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Speaker 1: that off the jump. But based on the auditors I've

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Speaker 1: talked to about this, and attestation is a much lower

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Speaker 1: level of assurance where the auditor or accountant is looking

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Speaker 1: at a set of records compiled for them by the

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Speaker 1: management of the entity, and they are attesting that the

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Speaker 1: records they have received match up with whatever they're supposed to. Generally,

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Speaker 1: they don't involve the same kind of controls testing as

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Speaker 1: an audit. They're generally done point in time and are

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Speaker 1: not looking at necessarily the flows leading up to that

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Speaker 1: point in time, which has historically been a problem with

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Speaker 1: Tether's at the stations. And so they provide some level

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Speaker 1: of assurance, but notably less than like a full financial audit.

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Speaker 1: So let's go back two things, I guess, but you know,

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Speaker 1: after the they lost the ability to use the correspondent

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Speaker 1: the banks that had a corresponding relationship with Taiwan or

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Speaker 1: sorry without Wells Fargo, with whom did they start banking,

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Speaker 1: and can the the assets that Tether claims it has

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Speaker 1: can they be seen on published regulatory filings of those banks.

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Speaker 1: So after they lose correspondent banking from Wills Fargo, Tether's

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Speaker 1: banking becomes a bit of an enigma. They held little

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Speaker 1: over sixty million dollars at the Bank of Montreal in

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Speaker 1: Stuart Hogner's account their general counsel. The remainder of their

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Speaker 1: banking from that period until they opened their account at

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Speaker 1: Noble Bank was supposedly a receivable from Bitfinex's account at

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Speaker 1: Noble Bank, which was the international financial entity started brock

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Speaker 1: Pearson John Betts in Puerto Rico. The issue with this

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Speaker 1: is that if you look at Bitnex's account at Noble

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Speaker 1: Bank during this period, and this is based on the

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Speaker 1: New York Attorney General investigation, bitfn x only received deposits

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Speaker 1: from two other institutions, and neither of those institutions purchased tethers.

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Speaker 1: The amount in Stuart Hogner's account over this entire period

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Speaker 1: did not change at all, and yet the number of

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Speaker 1: tethers in circulation exploded during this period, and so it

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Speaker 1: is incredibly difficult to figure out what the flow of

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Speaker 1: funds was during this era and how they were directly

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Speaker 1: backing Tether. My guess is that many users were interacting

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Speaker 1: with Crypto Capital Court, the payments processor that both bit

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Speaker 1: pohn X and Tether depended on, and that they were

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Speaker 1: sending both tethers and dollars to Crypto Capital Court to

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Speaker 1: issue and redeemed tethers, and these were then marked like

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Speaker 1: on their accounting records as funds that were then owed

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Speaker 1: to the account at Noble Bank, which was nominally holding

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Speaker 1: the reserves of Tether despite being in the name of

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Speaker 1: bitfn X. This continued until it was time for Freedman

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Speaker 1: LLP to finally give their September fifteenth at testation to

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Speaker 1: Tether's reserves. On the morning of September fifteen, Tether finally

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Speaker 1: got an account at Noble Bank and Trust, and they

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Speaker 1: transferred hundreds of millions of dollars from bitfnex's account that

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Speaker 1: morning to Tether's account on that day, and then that

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Speaker 1: evening Freedman LLP comes in and attest to the state

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Speaker 1: of Tether's reserves. Then from that point on the bank

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Speaker 1: believed to be largely continuously at Crypto Capital Court and

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Speaker 1: Noble Bank until Noble Bank starts to close down in

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Speaker 1: two thousand and eighteen. Then we get to the period

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Speaker 1: where they start relying really heavily on Crypto Capital Core

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Speaker 1: until Crypto Capital Core ends up having about eight hundred

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Speaker 1: and fifty million total dollars seized, and we eventually in

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Speaker 1: the summer of two thousand and eighteen into the fall

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Speaker 1: of two thousand and eighteen, get more and more into

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Speaker 1: their reliance on del Tech Bank and Trust. In the Bahamas,

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Speaker 1: Dell Tech Bank and Trust, you were able to see

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Speaker 1: a large inflow of deposits based on a Central Banka

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Speaker 1: Bahamas regulatory records showing that Dell Tech was receiving a

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Speaker 1: bunch of assets that they had not had before, suggesting

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Speaker 1: that Tether was moving something into there at that point.

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Speaker 1: So we kind of have a couple of things to

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Speaker 1: look at when it comes to trying to figure out

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Speaker 1: what tether is actually doing. So we have the at

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Speaker 1: of stations, you know, which may or may not be accurate,

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Speaker 1: but we also have just the sheer volume of tether

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Speaker 1: in existence, because we know that every tether issued is

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Speaker 1: supposed to be backed by you know, it used to

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Speaker 1: be one dollar and now it's one dollar of dollar

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Speaker 1: denominated assets. But what does the sort of expansion of

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Speaker 1: tether supply actually tell you about what the company has

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Speaker 1: been doing and experiencing. I don't know that the expansion

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Speaker 1: of tether supply really gives us that much information, except

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Speaker 1: that it's supposed to indicate that actual dollars are flowing

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Speaker 1: from other entities in this as into Tether's accounts, and

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Speaker 1: then tethers are being issued. And so it's primarily interesting

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Speaker 1: because there should be a corresponding like, there should be

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Speaker 1: corresponding flows through the banking system for all the tethers

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Speaker 1: that have supposed that they ever been issued and redeemed,

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Speaker 1: and that is a reasonably large amount of money to

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Speaker 1: have been flowing through the banking system. So just on

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Speaker 1: that note, and also kind of going back to the

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Speaker 1: Barclays analysts who were talking about, we've never heard anything

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Speaker 1: called a reverse repo note, but there is this expectation

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Speaker 1: that if tether is out in the market with you know,

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Speaker 1: fifty or sixty billion dollars worth of assets that it's investing,

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Speaker 1: that someone in the traditional financial system would know them

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Speaker 1: and be familiar with them, and that people you know,

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Speaker 1: on repo dusks and things like that would be familiar

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Speaker 1: with them as a customer, and yet if you talk

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Speaker 1: to people in traditional finance, that doesn't really seemed to

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Speaker 1: be the case, Like no one is talking about how

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Speaker 1: they're transacting with Tether on a regular basis. What's going

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Speaker 1: on there. That's a really fantastic question, Tracy, and I

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Speaker 1: think it was last year that Financial Times went out

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Speaker 1: after Tether announced that they were one of the seven

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Speaker 1: largest holders of commercial paper in the world and asked

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Speaker 1: a whole bunch of commercial paper trading desks, hey, have

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Speaker 1: you noticed this new entrant into the commercial paper market?

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Speaker 1: And they all universally said who. So, yeah, that's a

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Speaker 1: fantastic question. Where is Tether in these markets? It's possible

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Speaker 1: that Tether is transacting using entities that aren't called Tether, like,

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Speaker 1: for example, blue Bit Capital, the cryptocurrency hedge fund that

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Speaker 1: one Carlo da Vissini and Silvannod Stephane were partners in.

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Speaker 1: Could be del Chain, the cryptocurrency focused offshoot of Dell

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Speaker 1: Tech Bank and Trust that Paulo Ardoino used to be

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Speaker 1: an executive director of. It. Could be full ger Alpha,

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Speaker 1: the cryptocurrency hedge fund spun off from del Chain that

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Speaker 1: was onboarded onto bitfin x well. Paulo was a director

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Speaker 1: it bell Chain. There's a possibility that just these deaths

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Speaker 1: don't recognize the name of Tether because Tether isn't transacting

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Speaker 1: in the name of Tether, or it could be a

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Speaker 1: lot of other things that we don't have visibility into yet.

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Speaker 1: But it is challenging to figure out just where is

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Speaker 1: all this money coming from, where is it going, and

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Speaker 1: why is no one noticing it coming or going? You know,

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Speaker 1: I wanna talk compare and contrast Tether a little bit

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Speaker 1: to other stable coins. The other like really big one

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Speaker 1: is u S d C, And in fact, just today

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Speaker 1: December five, we got the news that they're actually canceling.

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Speaker 1: Circle is no longer doing it's back, so that's kind

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Speaker 1: of interesting timing. But like, okay, with with something like

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Speaker 1: us d C, do we have very clear visibility into

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Speaker 1: where their money is and like compare like the sort

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Speaker 1: of level of transparency we have with Tether versus these

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Speaker 1: other stable coins, which my understanding is they seem to

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Speaker 1: be people are less suspicious of them. I'm generally less

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Speaker 1: suspicious of Circle than of Tether. Part of this is

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Speaker 1: because Circle has made fewer misrepresentations in public than tether has,

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Speaker 1: though to be clear, there was a period where coin

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00:23:12,160 --> 00:23:16,160
Speaker 1: based was advertising USDC is fully backed by cash after

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00:23:16,200 --> 00:23:19,600
Speaker 1: they had started using other assets, including treasuries and commercial

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Speaker 1: paper to back it. But broadly USDC and Circle have

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Speaker 1: been much better at their disclosures than tether has. They

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Speaker 1: are not being forced by the New York Attorney General

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Speaker 1: to do attestations, but are doing them monthly instead of quarterly.

401
00:23:31,960 --> 00:23:36,359
Speaker 1: They have a more expected mix of assets. You don't

402
00:23:36,400 --> 00:23:41,400
Speaker 1: see the lending encircles, books, you don't see the reverse

403
00:23:41,440 --> 00:23:46,360
Speaker 1: repos or produced produciary deposits. You don't see bitcoin backing Circle,

404
00:23:46,760 --> 00:23:50,960
Speaker 1: you don't see investments in Sampson Mao's gaming company Exordium

405
00:23:50,960 --> 00:23:54,359
Speaker 1: backing Circle and like Circle itself, and they were preparing

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00:23:54,400 --> 00:23:56,600
Speaker 1: for theirs back did go out and get audits for

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00:23:56,640 --> 00:23:59,000
Speaker 1: their firm as a whole, And so there is kind

408
00:23:59,000 --> 00:24:03,920
Speaker 1: of that structural difference. Over time, the claimed asset mixes

409
00:24:03,960 --> 00:24:08,520
Speaker 1: for the two have moved closer together. Tether has claim

410
00:24:08,640 --> 00:24:12,720
Speaker 1: to ditch commercial paper in favor of increasingly relying on treasuries,

411
00:24:13,040 --> 00:24:15,440
Speaker 1: and the mix of like treasuries to cash and stuff

412
00:24:15,440 --> 00:24:19,040
Speaker 1: for Tether is now much closer to Circle than it

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00:24:19,080 --> 00:24:21,560
Speaker 1: was like a year ago. So I think broadly the

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00:24:21,560 --> 00:24:24,080
Speaker 1: difference between the two is the level of disclosure, the

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00:24:24,160 --> 00:24:29,280
Speaker 1: level of openness, and the history of deceit. There's also

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Speaker 1: like both Circle and Paxos in the United States have

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00:24:33,040 --> 00:24:36,200
Speaker 1: started the process of trying to acquire banks or apply

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Speaker 1: for bank charters, likely anticipating that at some point some

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00:24:40,080 --> 00:24:42,440
Speaker 1: kind of legislation is going to pass that is going

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Speaker 1: to move stable coins into the broader banking regulatory framework.

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00:24:46,280 --> 00:24:49,760
Speaker 1: Tether has not started those moves, and I expect would

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Speaker 1: have a difficult time getting approval for a banking charter

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Speaker 1: or approval to buy a bank in the United States.

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Speaker 1: You know, you mentioned the word to see, and I

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00:25:15,240 --> 00:25:18,520
Speaker 1: think certainly at a minimum you could say that Tether

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00:25:18,640 --> 00:25:23,000
Speaker 1: has pursued a rather weird strategy of disclosure and public

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00:25:23,040 --> 00:25:27,240
Speaker 1: relations where you know, sometimes it seems to intentionally be

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Speaker 1: kind of coy with information or maybe outright deceiving people,

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00:25:32,800 --> 00:25:37,119
Speaker 1: but it doesn't really seem to have mattered to the

430
00:25:37,200 --> 00:25:40,080
Speaker 1: people who are still using Tether to do a lot

431
00:25:40,119 --> 00:25:42,760
Speaker 1: of crypto transactions. And you know, at various times Tether

432
00:25:42,920 --> 00:25:46,679
Speaker 1: has been described as a sort of lynch pin in

433
00:25:46,960 --> 00:25:50,600
Speaker 1: the environment that is the crypto universe. You know, it

434
00:25:50,720 --> 00:25:53,720
Speaker 1: is the thing that allows a lot of transactions and

435
00:25:53,880 --> 00:25:59,040
Speaker 1: trading and betting to take place. Why why does it

436
00:25:59,160 --> 00:26:02,640
Speaker 1: not seem to matter that much to people who are

437
00:26:02,760 --> 00:26:07,760
Speaker 1: using crypto. Well, tether has existed since two thousand and

438
00:26:07,800 --> 00:26:10,920
Speaker 1: fourteen and has been mostly worth a dollar since two

439
00:26:10,960 --> 00:26:14,400
Speaker 1: thousand and fourteen. Like I, I can talk and list

440
00:26:14,520 --> 00:26:17,480
Speaker 1: many very specific lies in things that tether has done.

441
00:26:17,520 --> 00:26:19,639
Speaker 1: But the truth is that over most of that time,

442
00:26:19,920 --> 00:26:21,960
Speaker 1: for most of the people who used tether, it was

443
00:26:22,000 --> 00:26:24,320
Speaker 1: worth what they expected it to be worth, It was

444
00:26:24,359 --> 00:26:27,240
Speaker 1: able to be transferred from exchange to exchange, and it

445
00:26:27,359 --> 00:26:30,880
Speaker 1: broadly represented about a dollar's worth of value. There's also

446
00:26:30,920 --> 00:26:33,800
Speaker 1: the dynamic that many of the largest issuers and redeemers

447
00:26:33,800 --> 00:26:36,480
Speaker 1: of tether, like all me to research who was the

448
00:26:36,560 --> 00:26:40,720
Speaker 1: largest heads of November one, they did not hold on

449
00:26:40,760 --> 00:26:43,200
Speaker 1: to the tethers for very long. They were often selling

450
00:26:43,240 --> 00:26:45,359
Speaker 1: them directly into the market, using them for trades, and

451
00:26:45,359 --> 00:26:48,320
Speaker 1: so their overall exposure to tether was more of like

452
00:26:48,440 --> 00:26:51,480
Speaker 1: the systemic exposure of this thing existing, rather than like

453
00:26:51,560 --> 00:26:55,119
Speaker 1: the exposure to them specifically, if they're token suddenly becoming

454
00:26:55,200 --> 00:26:58,680
Speaker 1: valueless The other thing with Tether and bit for next

455
00:26:58,720 --> 00:27:01,439
Speaker 1: that becomes part of a channel is that after they

456
00:27:01,440 --> 00:27:04,040
Speaker 1: were hacked in two thousand and sixteen, they issued their

457
00:27:04,080 --> 00:27:07,760
Speaker 1: BFx token, and many of those tokens, rather than eventually

458
00:27:07,800 --> 00:27:10,919
Speaker 1: being redeemed for cash, were redeemed for equity in the

459
00:27:11,080 --> 00:27:15,280
Speaker 1: parent company for bitfn x, and so many people who

460
00:27:15,359 --> 00:27:17,800
Speaker 1: had been trading on bit for x in two thousand

461
00:27:17,840 --> 00:27:20,879
Speaker 1: and sixteen ended up becoming equity owners and having a

462
00:27:21,000 --> 00:27:24,720
Speaker 1: vested interest in these entities being successful and growing because

463
00:27:24,760 --> 00:27:27,600
Speaker 1: it directly benefited them. So there's a whole bunch of

464
00:27:27,680 --> 00:27:30,440
Speaker 1: kind of different competing dynamics. One, it's that Tether has

465
00:27:30,480 --> 00:27:32,840
Speaker 1: been largely good for what it was supposed to for

466
00:27:32,880 --> 00:27:36,360
Speaker 1: the time it's existed. Tether has been around and has

467
00:27:36,400 --> 00:27:39,760
Speaker 1: connections to many of these other entities in the cryptocurrency industry,

468
00:27:40,040 --> 00:27:42,399
Speaker 1: and then a decent portion of people in the industry,

469
00:27:42,440 --> 00:27:44,800
Speaker 1: especially those who have been around for several years, have

470
00:27:44,880 --> 00:27:48,280
Speaker 1: at least some vested interest in these entities being successful.

471
00:27:49,480 --> 00:27:52,280
Speaker 1: You know, I saw a tweet right before we started

472
00:27:52,280 --> 00:27:54,880
Speaker 1: recording this episode, and it was someone saying, my pet

473
00:27:54,920 --> 00:27:57,520
Speaker 1: theory is that an amazing amount of crypto is going

474
00:27:57,560 --> 00:27:59,600
Speaker 1: to turn out to be twenty dudes and an army

475
00:27:59,640 --> 00:28:03,040
Speaker 1: of shell companies. And when you when you describe this

476
00:28:03,160 --> 00:28:07,040
Speaker 1: sort of web of relationships, it does seem and this

477
00:28:07,119 --> 00:28:08,600
Speaker 1: is something that came up with f t X and

478
00:28:08,640 --> 00:28:14,280
Speaker 1: Alameda clearly, but it does seem so incestuous the entire industry.

479
00:28:14,640 --> 00:28:18,440
Speaker 1: I wanted to ask you specifically about Celsius as well,

480
00:28:18,560 --> 00:28:21,920
Speaker 1: what the relationship was between f t X and Celsius,

481
00:28:21,960 --> 00:28:25,199
Speaker 1: and also just generally how much of crypto is just

482
00:28:25,280 --> 00:28:29,760
Speaker 1: collateralized by more crypto because Tether is sort of the

483
00:28:29,840 --> 00:28:33,040
Speaker 1: ultimate collateral in the ecosystem, and you do get a

484
00:28:33,080 --> 00:28:35,960
Speaker 1: sense that there is a lot of leverage built on

485
00:28:36,080 --> 00:28:39,280
Speaker 1: that foundation. You asked about the relationship between f t

486
00:28:39,520 --> 00:28:42,040
Speaker 1: X and Celsius, I'm gonna start the relationship between Tether

487
00:28:42,160 --> 00:28:46,240
Speaker 1: and Celsius. So Tether was the lead investor in Celsius

488
00:28:46,280 --> 00:28:51,720
Speaker 1: Series A round. According to the lawsuit by Jason Stone,

489
00:28:51,760 --> 00:28:55,840
Speaker 1: one of the former traders at Celsius, Tether's loan to

490
00:28:56,080 --> 00:29:00,120
Speaker 1: Celsius in was effectively a bailout to allow celsie Is

491
00:29:00,200 --> 00:29:03,360
Speaker 1: to continue operating. And we know that Tether continued to

492
00:29:03,400 --> 00:29:07,560
Speaker 1: have these secured loans that they extended Celsius as they went.

493
00:29:08,080 --> 00:29:11,200
Speaker 1: Celsius's exposure to ft X and Alameda has been a

494
00:29:11,200 --> 00:29:14,560
Speaker 1: little bit more challenging to figure out, especially with Massinsky's

495
00:29:14,560 --> 00:29:17,080
Speaker 1: tweets the last couple of days trying to muddy the water.

496
00:29:17,520 --> 00:29:20,000
Speaker 1: But it was clear that Alimated Research was lending from

497
00:29:20,000 --> 00:29:23,400
Speaker 1: Celsius and they were trading together, but the full extent

498
00:29:23,480 --> 00:29:27,560
Speaker 1: of the relationship is not entirely clear now as to

499
00:29:27,640 --> 00:29:30,880
Speaker 1: how much of the industry is like crypto collateralized loans,

500
00:29:31,000 --> 00:29:33,560
Speaker 1: loans to related party and things like that, I think

501
00:29:33,680 --> 00:29:36,800
Speaker 1: it is quite large. And that tweet you were talking about,

502
00:29:36,800 --> 00:29:39,200
Speaker 1: it was from a conversation from a couple of years ago,

503
00:29:39,440 --> 00:29:41,720
Speaker 1: and what we were talking about at that time was

504
00:29:41,800 --> 00:29:45,720
Speaker 1: Crypto Capital Core, the payments processor for bitfin x, Tether,

505
00:29:46,040 --> 00:29:49,160
Speaker 1: Quadriga c X, and then they also provided services for

506
00:29:49,200 --> 00:29:52,720
Speaker 1: several other exchanges crack in, bitmas, etcetera. And we were

507
00:29:52,720 --> 00:29:56,240
Speaker 1: talking about them because the directors for that, even Manuel Molina,

508
00:29:56,320 --> 00:29:59,280
Speaker 1: Lee As Josef and the rest, were directors for a

509
00:29:59,320 --> 00:30:02,600
Speaker 1: ton of other small companies around the world, including like

510
00:30:03,400 --> 00:30:07,320
Speaker 1: nominally mining companies, resource companies, these other things, but they

511
00:30:07,360 --> 00:30:11,360
Speaker 1: all primarily existed to provide banking to cryptocurrency companies, and

512
00:30:11,440 --> 00:30:14,800
Speaker 1: so we were talking about when in that conversation with

513
00:30:14,800 --> 00:30:17,560
Speaker 1: people who made the tweet about how all of these

514
00:30:17,600 --> 00:30:20,040
Speaker 1: different things that we're providing payment services to, all of

515
00:30:20,040 --> 00:30:23,880
Speaker 1: these different cryptocurrency exchanges, were these couple of individuals around

516
00:30:23,880 --> 00:30:25,960
Speaker 1: the world who were just starting up tons of different

517
00:30:25,960 --> 00:30:29,320
Speaker 1: companies and trying to get access to bank accounts for them.

518
00:30:29,360 --> 00:30:31,080
Speaker 1: And I think we've now seen, moving back to your

519
00:30:31,160 --> 00:30:35,520
Speaker 1: question about like cryptoclateralized stuff, we saw the FTT collateralized loans,

520
00:30:35,560 --> 00:30:38,800
Speaker 1: We've seen a variety of other cryptoclateralized loans, and we've

521
00:30:38,840 --> 00:30:42,480
Speaker 1: even seen a ton of large lending desks, including ones

522
00:30:42,560 --> 00:30:45,680
Speaker 1: like Black five, who were claiming not to do unsecured lending.

523
00:30:45,840 --> 00:30:48,640
Speaker 1: We're doing large amounts of unsecured lending as well, not

524
00:30:48,760 --> 00:30:52,840
Speaker 1: even cryptoclateralized, just giving out money, right, And so I

525
00:30:52,880 --> 00:30:54,880
Speaker 1: think that it is quite likely, and I think we're

526
00:30:54,880 --> 00:30:58,200
Speaker 1: going to continue to see as the FTX bankruptcy progresses,

527
00:30:58,520 --> 00:31:00,760
Speaker 1: that a lot of entities were doing this kind of

528
00:31:00,880 --> 00:31:04,640
Speaker 1: lending and had various exposures that would seem atypical or

529
00:31:04,640 --> 00:31:08,400
Speaker 1: surprising to people in the traditional finance industry. Speaking of

530
00:31:08,440 --> 00:31:12,360
Speaker 1: the web of the web, everyone connected. What's the deal

531
00:31:12,440 --> 00:31:16,040
Speaker 1: with this tiny bank that like FTX I bought a

532
00:31:16,080 --> 00:31:19,440
Speaker 1: steak in and like I think Washington State that had

533
00:31:19,480 --> 00:31:21,800
Speaker 1: like three employees. The New York Times reported on it.

534
00:31:21,800 --> 00:31:23,640
Speaker 1: What's that all about? And I think there's a tether

535
00:31:23,720 --> 00:31:29,800
Speaker 1: connection there. Yeah, So that is Farmington State Bank in Washington.

536
00:31:30,120 --> 00:31:32,520
Speaker 1: And Protest was actually able to get an interview with

537
00:31:32,760 --> 00:31:35,720
Speaker 1: Hanvir Schalapin, the chief digital officer of that bank, where

538
00:31:35,720 --> 00:31:38,640
Speaker 1: we got some additional context on this. So as of

539
00:31:38,680 --> 00:31:41,400
Speaker 1: a couple of years ago, it was an incredibly small bank,

540
00:31:41,480 --> 00:31:44,560
Speaker 1: like ten million total in deposit deposits, putting off a

541
00:31:44,560 --> 00:31:47,320
Speaker 1: total of like six d K and revenue per year,

542
00:31:47,920 --> 00:31:51,800
Speaker 1: had a few dozen accounts, three employees, tiny little branch,

543
00:31:52,120 --> 00:31:55,960
Speaker 1: like one of the thirty smallest banks in America. And

544
00:31:56,040 --> 00:31:59,200
Speaker 1: that was true until the head of Deltech Bank can

545
00:31:59,200 --> 00:32:01,680
Speaker 1: Trust in the Bahama US, the bank I already mentioned

546
00:32:01,760 --> 00:32:06,840
Speaker 1: was banking Teller and elm to Research went out and decided, sorry,

547
00:32:07,000 --> 00:32:08,800
Speaker 1: they didn't go out. They've been very careful to say

548
00:32:08,800 --> 00:32:10,640
Speaker 1: they didn't go out, so I should be careful as well.

549
00:32:10,840 --> 00:32:13,320
Speaker 1: The chairman of their bank went out with no connection

550
00:32:13,320 --> 00:32:15,200
Speaker 1: to the bank. He's a chairman of and decided he

551
00:32:15,240 --> 00:32:17,240
Speaker 1: wanted to purchase a U S bank for no reason

552
00:32:17,280 --> 00:32:19,400
Speaker 1: that had anything to do with his bank in the Bahamas.

553
00:32:19,760 --> 00:32:21,960
Speaker 1: And he found this bank in Washington, again with nothing

554
00:32:22,000 --> 00:32:23,840
Speaker 1: to do with his bank in the Bahamas, and was

555
00:32:23,880 --> 00:32:26,400
Speaker 1: able to get eleven point five million dollars from ELM

556
00:32:26,520 --> 00:32:29,440
Speaker 1: to research to go out and buy this bank. They

557
00:32:29,720 --> 00:32:32,120
Speaker 1: were giving it like a post money valuation of like

558
00:32:32,120 --> 00:32:35,280
Speaker 1: a hundred and twenty million dollars and ten million in deposits,

559
00:32:35,960 --> 00:32:39,280
Speaker 1: which is an absurd bank valuation. But continuing, they rename

560
00:32:39,320 --> 00:32:42,719
Speaker 1: it Moonstone Bank and Trust, according to han Vir, because

561
00:32:42,760 --> 00:32:45,360
Speaker 1: they wanted to bank cryptocurrency assets which were going to

562
00:32:45,400 --> 00:32:48,240
Speaker 1: the Moon, and cannabis assets, which as we all know,

563
00:32:48,280 --> 00:32:51,600
Speaker 1: are great for getting you stone their entry into the

564
00:32:52,560 --> 00:32:55,440
Speaker 1: I didn't know that about the stone part. Oh yes,

565
00:32:55,520 --> 00:32:57,800
Speaker 1: that really why the second half. So the Moon is

566
00:32:57,880 --> 00:33:02,280
Speaker 1: crypto and the stone is cannabis. Yes, Oh my gosh,

567
00:33:02,280 --> 00:33:04,520
Speaker 1: Oh my gosh, that's so good. I just got that.

568
00:33:05,240 --> 00:33:07,840
Speaker 1: I'm glad I didn't. I'm glad I stopped and plauses

569
00:33:07,840 --> 00:33:10,120
Speaker 1: there because that is a great detail that I wouldn't

570
00:33:10,120 --> 00:33:12,880
Speaker 1: have wanted anyone to miss. Okay, the Moon's don't Okay, sorry,

571
00:33:13,000 --> 00:33:16,680
Speaker 1: that's good. And so then they get four new accounts.

572
00:33:16,760 --> 00:33:19,640
Speaker 1: Their deposits go from like ten million to thirty million

573
00:33:20,000 --> 00:33:23,520
Speaker 1: with these four new accounts, and they were able to

574
00:33:23,560 --> 00:33:26,800
Speaker 1: get Federal Reserve approvals, start using fed wire and things

575
00:33:26,840 --> 00:33:31,120
Speaker 1: like that, and this tiny little bank in Washington got

576
00:33:31,160 --> 00:33:35,320
Speaker 1: this investment from Alemida Research and suddenly became much much larger.

577
00:33:36,320 --> 00:33:39,000
Speaker 1: First of all, can I just say it's incredibly impressive

578
00:33:39,080 --> 00:33:42,000
Speaker 1: the way you are able to keep this very very

579
00:33:42,040 --> 00:33:46,800
Speaker 1: complicated web of relationships and names in your head, because

580
00:33:46,960 --> 00:33:49,440
Speaker 1: I certainly wouldn't be able to do it. But but

581
00:33:49,720 --> 00:33:53,360
Speaker 1: I just wanted to ask a really obvious question, and

582
00:33:53,400 --> 00:33:55,200
Speaker 1: I suspect I know the answer, but I think it's

583
00:33:55,280 --> 00:33:59,040
Speaker 1: kind of important to touch upon. But who regulates Tether

584
00:33:59,520 --> 00:34:04,760
Speaker 1: if any one? Well, I mean they have one money

585
00:34:04,800 --> 00:34:08,719
Speaker 1: transmitter license in the United States to an old Taiwanese

586
00:34:08,880 --> 00:34:12,520
Speaker 1: entity that they don't really use anymore, so finn sent right.

587
00:34:13,239 --> 00:34:17,759
Speaker 1: But more seriously, there is no like single regulator overseeing

588
00:34:17,760 --> 00:34:21,600
Speaker 1: Tether's operations. There's I think a variety that could try

589
00:34:21,640 --> 00:34:24,480
Speaker 1: to make a claim that they have jurisdiction over Tether,

590
00:34:24,600 --> 00:34:27,000
Speaker 1: but they're going to have to probably do that via

591
00:34:27,120 --> 00:34:30,200
Speaker 1: enforcement actions. It's a British Virgin Islands and a Hong

592
00:34:30,280 --> 00:34:36,040
Speaker 1: Kong domiciled company, so nominally the British Virgin Islands regulators

593
00:34:36,320 --> 00:34:38,920
Speaker 1: and the Hong Kong regulators might have a claim over it.

594
00:34:39,760 --> 00:34:42,320
Speaker 1: Part of the challenge with any of these cryptocurrency companies

595
00:34:42,400 --> 00:34:44,719
Speaker 1: is that they are very deliberately set up with the

596
00:34:44,760 --> 00:34:49,040
Speaker 1: goal of avoiding regulators and most regulatory tactics. They pick

597
00:34:49,360 --> 00:34:53,440
Speaker 1: locations where they think they can gain regulator approval or

598
00:34:53,480 --> 00:34:56,279
Speaker 1: avoid regulator ire and then they try to structure their

599
00:34:56,280 --> 00:34:58,680
Speaker 1: operations and even their executives in a way where it's

600
00:34:58,680 --> 00:35:02,239
Speaker 1: going to be challenging for countries with more active regulators

601
00:35:02,280 --> 00:35:04,319
Speaker 1: to pursue them or to stop them from doing what

602
00:35:04,360 --> 00:35:07,799
Speaker 1: they want. I want to just go back to the

603
00:35:07,920 --> 00:35:11,600
Speaker 1: question that Tracy asked, because I still feel like I

604
00:35:11,600 --> 00:35:13,759
Speaker 1: I think there's a lot of hair on tether, so

605
00:35:13,800 --> 00:35:17,600
Speaker 1: to speak, all these questions, etcetera. I get why. In

606
00:35:17,680 --> 00:35:21,479
Speaker 1: the beginning, maybe you know, various entities used te tether

607
00:35:21,680 --> 00:35:24,000
Speaker 1: to trade and it did the job, and maybe they

608
00:35:24,000 --> 00:35:28,480
Speaker 1: had an interest in seeing tether success due to other

609
00:35:28,520 --> 00:35:32,200
Speaker 1: equity exposures that they may have had. But today, in

610
00:35:33,320 --> 00:35:36,040
Speaker 1: given the sort of relative level of transparency. Given the

611
00:35:36,040 --> 00:35:39,920
Speaker 1: perceived level of scrutiny that faces tether, why do you

612
00:35:39,960 --> 00:35:43,439
Speaker 1: think there's still so much demand for using it both

613
00:35:43,480 --> 00:35:47,400
Speaker 1: as a money transfer device between exchanges as a base

614
00:35:47,560 --> 00:35:51,040
Speaker 1: pair for trading, Like, where where is the demand coming

615
00:35:51,040 --> 00:35:54,760
Speaker 1: from today? Well, I mean, I think first we should

616
00:35:54,800 --> 00:35:56,719
Speaker 1: be very clear that it seems like the demand for

617
00:35:56,800 --> 00:35:59,839
Speaker 1: Tether has plummeted over the last several years. Like if

618
00:35:59,840 --> 00:36:02,560
Speaker 1: you look at the relative stable coin dominance from like

619
00:36:02,719 --> 00:36:05,480
Speaker 1: April nineteen when the New York Attorney General filed their

620
00:36:05,520 --> 00:36:12,319
Speaker 1: injunction and two now, Tether's dominance has vastly decreased among

621
00:36:12,360 --> 00:36:15,279
Speaker 1: stable coins, right. And if we look at the like

622
00:36:15,640 --> 00:36:19,960
Speaker 1: broader defy area, we often see Tether being priced at

623
00:36:20,000 --> 00:36:22,800
Speaker 1: a discount, valued at a discount to other stable coins.

624
00:36:23,120 --> 00:36:25,640
Speaker 1: Maker Dow won't even use Tether as collateral for a

625
00:36:25,640 --> 00:36:28,240
Speaker 1: lot of their things, right, And you see that across

626
00:36:28,239 --> 00:36:30,399
Speaker 1: some other lending protocols and things like that, where Tether

627
00:36:30,520 --> 00:36:34,520
Speaker 1: will be priced materially different than USDC. There has been

628
00:36:34,560 --> 00:36:37,880
Speaker 1: a certain repricing of tether risk over the last several years.

629
00:36:38,440 --> 00:36:43,680
Speaker 1: I think, just broadly, it is an old instrument that's

630
00:36:43,680 --> 00:36:46,600
Speaker 1: existed for a long time, and that one of the

631
00:36:46,640 --> 00:36:49,880
Speaker 1: more recent things that really drove tether's growth before b

632
00:36:50,040 --> 00:36:53,719
Speaker 1: U s D and before finance across collateral was that

633
00:36:53,800 --> 00:36:57,400
Speaker 1: like when finance launched their collateralized futures products, the easiest

634
00:36:57,400 --> 00:37:00,799
Speaker 1: way to collateralize those was with tether's and so there

635
00:37:00,880 --> 00:37:03,359
Speaker 1: was this massive increase in the issuance of tethers from

636
00:37:03,400 --> 00:37:06,719
Speaker 1: these firms like Alimated Research in Cumberland Global and these

637
00:37:06,719 --> 00:37:09,080
Speaker 1: that wanted to trade futures on finance and needed to

638
00:37:09,120 --> 00:37:12,719
Speaker 1: collateralize those positions. And so because Binance chose tether for that,

639
00:37:12,760 --> 00:37:15,080
Speaker 1: you saw this massive increase in the number of tethers

640
00:37:15,120 --> 00:37:17,560
Speaker 1: issued during that period, so these firms would be able

641
00:37:17,600 --> 00:37:21,280
Speaker 1: to trade that product. Once finance switched to cross asset

642
00:37:21,320 --> 00:37:25,000
Speaker 1: collateralization and started favoring b USD and stuff for those assets,

643
00:37:25,200 --> 00:37:27,080
Speaker 1: we started to see a lot of the dominance and

644
00:37:27,120 --> 00:37:30,000
Speaker 1: position for tether and those markets start to decrease. So

645
00:37:30,040 --> 00:37:32,160
Speaker 1: why is tether still used Because it's been used for

646
00:37:32,200 --> 00:37:34,160
Speaker 1: a long time. There's a lot of them out there,

647
00:37:34,360 --> 00:37:37,840
Speaker 1: and tether is perceived position in the industry, especially outside

648
00:37:37,840 --> 00:37:39,359
Speaker 1: of the United States, is that that they have been

649
00:37:39,400 --> 00:37:42,359
Speaker 1: around for a long time, and some even see their

650
00:37:42,360 --> 00:37:45,600
Speaker 1: ability to survive a New York Attorney General investigation and

651
00:37:45,640 --> 00:37:49,719
Speaker 1: a CFTC investigation and continue operating as proof that there

652
00:37:49,800 --> 00:37:53,120
Speaker 1: must not have been anything so abjectively criminal that those

653
00:37:53,800 --> 00:37:56,919
Speaker 1: organizations wouldn't choose to try to get them shut down.

654
00:37:58,320 --> 00:38:01,560
Speaker 1: You know, you mentioned the fact that for most of

655
00:38:01,600 --> 00:38:03,920
Speaker 1: its history it's been able to maintain the one to

656
00:38:04,000 --> 00:38:07,160
Speaker 1: one peg with the dollar as another you know, sort

657
00:38:07,200 --> 00:38:11,319
Speaker 1: of selling point for people in the crypto ecosystem. I

658
00:38:11,360 --> 00:38:15,080
Speaker 1: guess my question is, like, what would be the thing

659
00:38:15,520 --> 00:38:19,480
Speaker 1: that would prompt the peg to start to fall apart? Because,

660
00:38:19,600 --> 00:38:22,840
Speaker 1: as we mentioned in the intro, we have seen it

661
00:38:22,960 --> 00:38:26,800
Speaker 1: dip below one at various times in history, notably during

662
00:38:26,840 --> 00:38:30,560
Speaker 1: the Spring crypto blow up when Tara Luna collapsed, and

663
00:38:31,040 --> 00:38:34,320
Speaker 1: recently in November with f TX, but it hasn't really

664
00:38:35,080 --> 00:38:37,279
Speaker 1: dropped to the extent that I think a lot of

665
00:38:37,719 --> 00:38:41,840
Speaker 1: critics of tether might have expected it to. Yeah, so

666
00:38:42,719 --> 00:38:46,080
Speaker 1: when tether is below a dollar, those who are able

667
00:38:46,080 --> 00:38:50,640
Speaker 1: to redeem tethers should be redeeming tethers. It's free money

668
00:38:50,680 --> 00:38:52,200
Speaker 1: that's sitting out there right if you can buy it

669
00:38:52,320 --> 00:38:55,640
Speaker 1: up for less than point nine cents and give it

670
00:38:55,640 --> 00:38:58,360
Speaker 1: back to tether for nine point nine cents. You're making

671
00:38:58,480 --> 00:39:01,040
Speaker 1: easy money in that trade. And that's what we've seen

672
00:39:01,080 --> 00:39:04,120
Speaker 1: a lot of firms do. During the tera to pegging.

673
00:39:04,120 --> 00:39:08,000
Speaker 1: Almeda Research was very actively arbitraging the tether peg, buying

674
00:39:08,040 --> 00:39:10,560
Speaker 1: up tethers and sending them back to the treasury, presumably

675
00:39:10,680 --> 00:39:15,040
Speaker 1: to redeem and make those that easy money. If one

676
00:39:15,080 --> 00:39:18,640
Speaker 1: of those firms that does the arbitrage sends it back

677
00:39:18,640 --> 00:39:23,360
Speaker 1: to tether and the process is even more abnormally messy

678
00:39:23,560 --> 00:39:27,720
Speaker 1: than Sam Bankman Freed would normally claim it is, then

679
00:39:27,760 --> 00:39:30,920
Speaker 1: they may decide that whatever money they're making from that

680
00:39:31,120 --> 00:39:34,839
Speaker 1: arbitrage is no longer worth trying to make. And when

681
00:39:34,840 --> 00:39:37,840
Speaker 1: those firms decide that and they stopped trying to arbitrage

682
00:39:37,880 --> 00:39:40,440
Speaker 1: the peg, then whatever is causing it to deviate continues

683
00:39:40,480 --> 00:39:44,719
Speaker 1: to deviate. The fact that we've seen it return suggests

684
00:39:44,800 --> 00:39:46,879
Speaker 1: that there are entities that have been able to buy

685
00:39:46,960 --> 00:39:50,680
Speaker 1: up and redeem tethers and make that trade. What would

686
00:39:50,719 --> 00:39:53,360
Speaker 1: cause it to break would be something that makes that

687
00:39:53,480 --> 00:39:56,520
Speaker 1: no longer true, where people are trying to extract that

688
00:39:56,600 --> 00:39:59,920
Speaker 1: value and are not receiving it. In turn, part of

689
00:40:00,000 --> 00:40:02,239
Speaker 1: a strange dynamic for me with tether. That makes this

690
00:40:02,280 --> 00:40:07,240
Speaker 1: a more complicated question is that it's supply dynamics don't

691
00:40:07,280 --> 00:40:10,720
Speaker 1: necessarily match what we would expect, like it doesn't seem

692
00:40:10,760 --> 00:40:13,440
Speaker 1: to expand and contract in time with the rest of

693
00:40:13,480 --> 00:40:16,279
Speaker 1: the cryptocurrency industry. And yeah, this is why I was

694
00:40:16,320 --> 00:40:19,480
Speaker 1: asking you about the sort of outstanding number of tethers before,

695
00:40:19,520 --> 00:40:22,759
Speaker 1: but go ahead, yeah, and this is this. Yeah, And

696
00:40:22,800 --> 00:40:25,840
Speaker 1: so like we see tether for a long time, it

697
00:40:25,960 --> 00:40:30,520
Speaker 1: basically just monotonically increased with like one brief decrease. And

698
00:40:30,560 --> 00:40:34,080
Speaker 1: we've seen more redemptions now than we have historically, but

699
00:40:34,200 --> 00:40:37,799
Speaker 1: still generally tether tends to be slower to start decreasing

700
00:40:37,800 --> 00:40:40,239
Speaker 1: in market capped than the other stable coins. And the

701
00:40:40,280 --> 00:40:44,360
Speaker 1: reason for this has not been entirely clear. For a while,

702
00:40:44,560 --> 00:40:48,160
Speaker 1: it looked like the explanation was that many tethers were

703
00:40:48,200 --> 00:40:54,000
Speaker 1: destined for purchasers and entities who were not likely to redeem.

704
00:40:54,120 --> 00:40:55,880
Speaker 1: So for a long time there was an active demand

705
00:40:55,920 --> 00:40:59,000
Speaker 1: for tethers in like the Chinese over the counter trading

706
00:40:59,000 --> 00:41:02,960
Speaker 1: market or are for Chinese bitcoin miners and things like that,

707
00:41:03,160 --> 00:41:07,200
Speaker 1: and many of these entities preferred having the tethers because

708
00:41:07,200 --> 00:41:10,760
Speaker 1: of the ease of transacting them, then the corresponding dollars

709
00:41:10,920 --> 00:41:15,360
Speaker 1: and the relative risk of tethers was like acceptable for

710
00:41:15,480 --> 00:41:18,880
Speaker 1: their purposes, and this seems to have been a pretty

711
00:41:18,960 --> 00:41:21,840
Speaker 1: important like sink for tethers. We see this in like

712
00:41:22,000 --> 00:41:25,319
Speaker 1: the decrypt reporting on the Babbel finance blew up. We're

713
00:41:25,400 --> 00:41:28,800
Speaker 1: supposedly in a manner very similar to the Celsius bailout.

714
00:41:29,000 --> 00:41:32,080
Speaker 1: Tether stepped in and bailed out the bailed out Babbel finance.

715
00:41:32,280 --> 00:41:35,960
Speaker 1: Right now, it's a little bit less clear to me

716
00:41:36,120 --> 00:41:39,000
Speaker 1: why we don't see tether expand and contracting quite the

717
00:41:39,000 --> 00:41:41,200
Speaker 1: way we expect, And I think that's part of the

718
00:41:41,280 --> 00:41:44,839
Speaker 1: challenge in figuring out why tether doesn't lose its peg

719
00:41:44,880 --> 00:41:47,800
Speaker 1: in the way people expect. I think there are people

720
00:41:47,920 --> 00:41:51,840
Speaker 1: for whom tethers are worth more than the dollar backing

721
00:41:51,880 --> 00:41:55,600
Speaker 1: them because of some additional convenience they provide, and that

722
00:41:55,760 --> 00:41:58,040
Speaker 1: some of these people who are interested in these tethers

723
00:41:58,040 --> 00:42:01,200
Speaker 1: are people who are unlikely to redeem them. So because

724
00:42:01,239 --> 00:42:04,080
Speaker 1: there's this kind of demand sinc for tethers, these tethers

725
00:42:04,080 --> 00:42:06,120
Speaker 1: that go out but that are unlikely to ever come

726
00:42:06,120 --> 00:42:09,200
Speaker 1: back in, there's a little bit of a cushion and

727
00:42:09,280 --> 00:42:12,080
Speaker 1: Tether's operations that make it easier for them to handle

728
00:42:12,480 --> 00:42:16,399
Speaker 1: the remaining entities, who are the larger cryptocurrency market making

729
00:42:16,400 --> 00:42:20,280
Speaker 1: funds and quantitative trading funds who are actively redeeming, issuing,

730
00:42:20,320 --> 00:42:24,319
Speaker 1: and transacting in these instruments. So I just want to

731
00:42:24,360 --> 00:42:27,480
Speaker 1: sort of reiterate this point because I think it's really important.

732
00:42:27,920 --> 00:42:33,400
Speaker 1: If you have tether or usd T, you can redeem

733
00:42:33,400 --> 00:42:37,200
Speaker 1: it directly with tether itself, but I believe you have

734
00:42:37,280 --> 00:42:40,960
Speaker 1: to set up an account and there's like a minimum

735
00:42:41,040 --> 00:42:44,680
Speaker 1: of a hundred thousand worth of tokens or something like

736
00:42:44,719 --> 00:42:48,680
Speaker 1: that um in order to transact directly. So what most

737
00:42:48,680 --> 00:42:51,080
Speaker 1: people would do is you would go into the secondary

738
00:42:51,160 --> 00:42:55,120
Speaker 1: market and just sell there. And in the secondary market,

739
00:42:55,200 --> 00:43:00,400
Speaker 1: the peg is maintained through you know, basically market mayers

740
00:43:00,480 --> 00:43:03,959
Speaker 1: who kind of operate like exchange traded funds, would where

741
00:43:04,040 --> 00:43:07,200
Speaker 1: if there is an arbitrage opportunity, if Tether is trading

742
00:43:07,239 --> 00:43:10,000
Speaker 1: below the one dollar peg, they would go in and

743
00:43:10,040 --> 00:43:12,520
Speaker 1: sort of arbitrage that and make money in order to

744
00:43:12,920 --> 00:43:16,960
Speaker 1: keep it close to that peg. So what you're saying

745
00:43:17,200 --> 00:43:20,759
Speaker 1: is if the market makers are no longer able to

746
00:43:20,840 --> 00:43:24,600
Speaker 1: fulfill that capacity, if they're having balance sheet issues, if

747
00:43:24,640 --> 00:43:28,360
Speaker 1: they're risk averse that kind of thing, then that could

748
00:43:28,360 --> 00:43:34,960
Speaker 1: be what would trigger a substantial deep pegging event for tether. Yeah, basically,

749
00:43:35,000 --> 00:43:37,960
Speaker 1: And I think part of that is like when Sambankment

750
00:43:38,000 --> 00:43:40,040
Speaker 1: Freed came on here, he talked about how the process

751
00:43:40,200 --> 00:43:43,560
Speaker 1: of redeeming tethers was sometimes messy, and like, that's not

752
00:43:44,120 --> 00:43:46,880
Speaker 1: generally or necessarily what you would expect for this. You

753
00:43:46,920 --> 00:43:50,399
Speaker 1: would expect that element to research sends the tethers back

754
00:43:50,400 --> 00:43:53,600
Speaker 1: to the tether treasury and tether from their bank account wires,

755
00:43:53,640 --> 00:43:56,880
Speaker 1: element to research the corresponding number of dollars. Right. That

756
00:43:57,000 --> 00:43:59,480
Speaker 1: doesn't seem like it should ever be a messy process,

757
00:43:59,520 --> 00:44:02,560
Speaker 1: But we know from one of the largest tether issuers

758
00:44:02,560 --> 00:44:05,720
Speaker 1: and redeemers that it was, And so whatever is causing

759
00:44:05,760 --> 00:44:08,200
Speaker 1: that messiness in the process is the thing that I

760
00:44:08,239 --> 00:44:11,680
Speaker 1: would expect Mike someday, cause it so that one of

761
00:44:11,680 --> 00:44:15,280
Speaker 1: the firms that does the arbitrage will blink and choose

762
00:44:15,320 --> 00:44:19,319
Speaker 1: to stop doing it. Bennett, I think we could go

763
00:44:19,400 --> 00:44:22,120
Speaker 1: on for a pretty long time, because this is like

764
00:44:22,120 --> 00:44:25,520
Speaker 1: a fascinating conversation and your knowledge of the detail is great.

765
00:44:25,560 --> 00:44:27,560
Speaker 1: But I think that is also a great place to

766
00:44:27,600 --> 00:44:29,359
Speaker 1: stop it. So thank you so much for coming out

767
00:44:29,440 --> 00:44:33,440
Speaker 1: offl thanks for having me. That was really great, Unet,

768
00:44:33,560 --> 00:44:51,440
Speaker 1: that was amazing, Tracy. I thought that was really fantastic.

769
00:44:51,480 --> 00:44:53,960
Speaker 1: And again, you know, this sort of the web and

770
00:44:54,000 --> 00:44:57,480
Speaker 1: the degree of like interconnectedness among and we only we

771
00:44:57,520 --> 00:44:59,800
Speaker 1: only looked at a slice, but it really is striking

772
00:44:59,840 --> 00:45:03,480
Speaker 1: the agree to which every entity seems to have some

773
00:45:03,520 --> 00:45:07,560
Speaker 1: sort of relationship with every other entity and crypto totally.

774
00:45:07,600 --> 00:45:10,200
Speaker 1: I kept getting, um, what's that meme of the guy

775
00:45:10,440 --> 00:45:12,680
Speaker 1: and he's like standing in front of like a board

776
00:45:13,680 --> 00:45:17,360
Speaker 1: it's always sunny. Yes, it's always sunny in Philadelphia. I

777
00:45:17,400 --> 00:45:20,080
Speaker 1: think that's it. And he looks kind of crazy but

778
00:45:20,120 --> 00:45:24,400
Speaker 1: he's onto something like that's yeah. I kept getting images

779
00:45:24,400 --> 00:45:26,279
Speaker 1: of that in my head. You know. One of the

780
00:45:26,520 --> 00:45:30,800
Speaker 1: I guess again fun. One of the interesting things about

781
00:45:30,920 --> 00:45:34,920
Speaker 1: crypto it because so much of it happens on chain,

782
00:45:35,520 --> 00:45:38,400
Speaker 1: it does seem like there is this role for like

783
00:45:38,440 --> 00:45:41,960
Speaker 1: the sort of like crazy Internet detective to sort of

784
00:45:41,960 --> 00:45:44,040
Speaker 1: like this is so, this is Tether's wallet and this

785
00:45:44,080 --> 00:45:46,920
Speaker 1: is el amede as wallet, and you can sort of

786
00:45:46,960 --> 00:45:49,080
Speaker 1: do it for real because like people have always been

787
00:45:49,080 --> 00:45:51,880
Speaker 1: trying to do that, but in crypto you actually can

788
00:45:52,480 --> 00:45:56,000
Speaker 1: legitimately do that to some extent totally. Or you can

789
00:45:56,040 --> 00:46:00,399
Speaker 1: also just point out the obviously insane things like naming

790
00:46:00,440 --> 00:46:03,279
Speaker 1: your bank moon stone that cryptos going to the moon,

791
00:46:03,760 --> 00:46:06,879
Speaker 1: and you can use it to get stoned. That's nuts, um.

792
00:46:06,920 --> 00:46:10,759
Speaker 1: But the other thing I mean, I thought Bennett's explanation

793
00:46:11,000 --> 00:46:16,200
Speaker 1: of the whole thing was fantastically impressive, in particular the

794
00:46:16,239 --> 00:46:19,799
Speaker 1: way he laid out the sort of relationship between the

795
00:46:19,840 --> 00:46:23,719
Speaker 1: market makers slash arbitrage ers and the messy process and

796
00:46:23,800 --> 00:46:26,680
Speaker 1: this idea that well, in theory it really shouldn't be

797
00:46:26,719 --> 00:46:28,880
Speaker 1: this messy, but it is in practice, which kind of

798
00:46:28,920 --> 00:46:33,080
Speaker 1: suggests are points to future vulnerabilities, you would think. But

799
00:46:33,200 --> 00:46:36,319
Speaker 1: that said, I also think, you know, just going back

800
00:46:36,360 --> 00:46:40,160
Speaker 1: to this idea of why tether has so far proven

801
00:46:40,280 --> 00:46:46,120
Speaker 1: relatively resilient, Like, I also think there is this overarching

802
00:46:46,239 --> 00:46:50,640
Speaker 1: theme of I liquidity, right, and if people just like

803
00:46:50,760 --> 00:46:54,280
Speaker 1: aren't transacting with it as much, then it can stay

804
00:46:54,320 --> 00:46:58,160
Speaker 1: at one for far longer than you might expect. And

805
00:46:58,200 --> 00:47:00,720
Speaker 1: this idea that you know, the a lot of interesting

806
00:47:00,760 --> 00:47:02,920
Speaker 1: stuff on that question too, because like, even if you

807
00:47:02,960 --> 00:47:06,520
Speaker 1: were to take the attestation at face vailue. You know,

808
00:47:06,600 --> 00:47:09,080
Speaker 1: like a lot of assets have declined a lot in failure,

809
00:47:09,120 --> 00:47:12,560
Speaker 1: including treasuries and including like anything that has any sort

810
00:47:12,560 --> 00:47:15,960
Speaker 1: of credit element over the Chinese commercial paper. I mean,

811
00:47:16,560 --> 00:47:19,719
Speaker 1: like everything is sort of we're there, But then ben

812
00:47:19,719 --> 00:47:22,359
Speaker 1: Atts point maybe there's some Tether's out there that will

813
00:47:22,400 --> 00:47:25,040
Speaker 1: never be redeemed and that creates some sort of buffer.

814
00:47:25,239 --> 00:47:27,600
Speaker 1: I don't know, it is very interesting. You know. Another

815
00:47:27,640 --> 00:47:30,879
Speaker 1: thing is that like and that sort of makes the

816
00:47:31,040 --> 00:47:34,960
Speaker 1: persistence of tether as this important vehicle. I mean he

817
00:47:35,000 --> 00:47:38,239
Speaker 1: mentioned that Tether's dominance within crypto, within de fire within

818
00:47:38,280 --> 00:47:41,920
Speaker 1: crypto has gone down, it's still bigger than USDC by

819
00:47:41,920 --> 00:47:46,080
Speaker 1: a substantial margin according to corner Coin market cap sion

820
00:47:46,280 --> 00:47:48,399
Speaker 1: verse forty three billion, So it's still I mean, it's

821
00:47:48,440 --> 00:47:51,200
Speaker 1: still really big. Um. But you know, there's also all

822
00:47:51,239 --> 00:47:53,640
Speaker 1: this everyone knows, like there's all this scrutiny over it,

823
00:47:53,680 --> 00:47:56,960
Speaker 1: and they have been sued, etcetera. So the persistence of

824
00:47:57,040 --> 00:48:02,160
Speaker 1: tether is still just like in itself, like a fascinating story. Absolutely. Um.

825
00:48:02,200 --> 00:48:06,040
Speaker 1: So I guess we will. We'll see how how long

826
00:48:06,080 --> 00:48:08,160
Speaker 1: it goes on for U see how long it's share?

827
00:48:09,360 --> 00:48:11,920
Speaker 1: Shall we leave it there? Let's leave it there all right.

828
00:48:12,080 --> 00:48:14,880
Speaker 1: This has been another episode of the All Thoughts podcast.

829
00:48:14,920 --> 00:48:17,440
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at

830
00:48:17,440 --> 00:48:19,759
Speaker 1: Tracy Alloway and I'm Joe Why Isn't Thal? You can

831
00:48:19,840 --> 00:48:22,839
Speaker 1: follow me on Twitter at the Stalwart. Follow our guest

832
00:48:22,880 --> 00:48:27,040
Speaker 1: Bennett Tomlin. He's at Bennett Tomlin. Follow our producer Carmen

833
00:48:27,160 --> 00:48:31,440
Speaker 1: Rodriguez at Carmen armand, as well as Dash Bennett at dashbot.

834
00:48:31,680 --> 00:48:34,279
Speaker 1: And check out all of the podcasts at Bloomberg under

835
00:48:34,280 --> 00:48:38,680
Speaker 1: the handle at podcasts and some other housekeeping. We're gonna

836
00:48:38,680 --> 00:48:41,400
Speaker 1: be doing an a M A episode where you, the listener,

837
00:48:41,440 --> 00:48:44,000
Speaker 1: can ask me and Tracy questions. So if you want

838
00:48:44,080 --> 00:48:45,759
Speaker 1: to be included in the episode, if you want to

839
00:48:45,800 --> 00:48:48,520
Speaker 1: hear your voice on the odd Lots podcast, record a

840
00:48:48,600 --> 00:48:51,759
Speaker 1: voice memo, ask us a question about literally anything and

841
00:48:51,800 --> 00:48:54,400
Speaker 1: send it to odd Lots at Bloomberg dot net. Please

842
00:48:54,440 --> 00:48:57,800
Speaker 1: include your name and location and we'll try to answer

843
00:48:57,840 --> 00:49:00,960
Speaker 1: your question. And for more lots of content, go to

844
00:49:00,960 --> 00:49:04,680
Speaker 1: Bloomberg dot com slash odd Lots, where you can find transcripts.

845
00:49:04,680 --> 00:49:07,200
Speaker 1: Tracy and I blog and we have a newsletter that

846
00:49:07,239 --> 00:49:09,600
Speaker 1: you could subscribe to where we talk about these topics

847
00:49:09,880 --> 00:49:11,720
Speaker 1: each week. Thanks for listening