Dialogue Tether CEO: Tether attempts to enter the AI field, auditing remains a high priority

Original Title: 《Flush With Cash, Tether Has Got Microsoft, Google, and Amazon in Its Crosshairs》

Author: JOEL KHALILI

Translation: Shenchao TechFlow

Under the leadership of new CEO Paolo Ardoino, the crypto company is making significant investments in an attempt to enter the artificial intelligence market dominated by the world's largest tech companies.

Paolo Ardoino, CEO of Tether Holdings, at the Paris Blockchain Week Summit in April 2024. Photo credit: NATHAN LAINE/BLOOMBERG; GETTY IMAGES

Paolo Ardoino, the new CEO, is facing a challenging yet enviable question: how best to allocate billions of dollars. Recently, Tether has been flush with cash and is venturing into unfamiliar territories, such as advancing AI. Ardoino's ambitious plan is to compete against Microsoft, Google, and Amazon.

Tether, registered in the British Virgin Islands, is one of the largest crypto companies in the world. Most of its revenue comes from its stablecoin USDT, which is pegged to the US dollar through a reserve of cash and other assets.

The model is relatively simple: Tether takes dollars in exchange for tokens that customers can trade freely in the crypto market. It keeps a portion of the dollars as cash, uses most to purchase interest-bearing securities, and lends out some. If customers wish to redeem USDT tokens for corresponding dollars, Tether will withdraw from its reserves, while at the same time earning income from the assets it holds.

Tether's reserves are primarily composed of short-term US Treasury bills, with income tied to current interest rates, meaning that as central banks raise rates due to inflation, the company's profitability continues to improve. Tether recently reported a profit of $5.2 billion for the first half of 2024, with total reserves of $118.5 billion.

Under Ardoino's leadership, who took over as CEO last December after serving as CTO for six years, Tether is looking for ways to deploy this idle capital. Ardoino stated that part of the funds is used to build a buffer for USDT reserves, while the remainder is invested in the company's new venture capital arm, Tether Evo. The company has already taken a stake in brain implant technology startup Blackrock Neurotech and invested in data center operator Northern Data Group, whose infrastructure is used to train AI models.

Tether has also sparked controversy. In 2021, the company reached a $41 million settlement with US regulators, who accused it of misleading statements regarding the composition of its reserves. In 2023, Tether was accused of using fraudulent means to obtain banking services in its early history. Additionally, the United Nations and blockchain analytics firms claimed that USDT has become a tool for money laundering, terrorist financing, and other illegal activities, although Tether disputed this characterization.

Ardoino stated that the company is often misunderstood. He said that Tether's most pressing concern is to promote the decentralized crypto ethos—that power should be held by the majority, not the few—into the AI industry and other emerging technology sectors. "Having a company independent of traditional players will be very important," he said.

Ardoino spoke with WIRED over the phone earlier this month. The following interview has been edited for brevity and clarity.

WIRED: This year, Tether is diversifying its business model and entering venture capital. What’s the reasoning behind this?

Ardoino: Thanks to rising interest rates, Tether has become extremely profitable over the past two years. When Tether launched, reserve yields were at 0.2%, and now they can reach 5.5%. Of course, this situation may be time-limited—we've heard that interest rates may go down—but even if inflation is at 3% or 4%, it's hard to go back to a 0.2% scenario.

In the past 24 months, Tether has accumulated about $11.9 billion in profits. We could have distributed all that money to shareholders to make everyone happy. Instead, part of it has been added to reserves to further support the stablecoin, while the rest is essentially retained in the investment department.

What is your venture capital philosophy? It seems you are moving beyond the crypto industry.

Ardoino: We come from Bitcoin—we are Bitcoin supporters at heart. Maybe we are not perfect in our dealings, but we strive to carry the ideals of Bitcoin in every investment, namely financial freedom, freedom of speech, and access to technology.

The concept of decentralization can be applied to different fields, such as AI. We have already seen AI being heavily politicized. We believe that having a role independent of traditional players like Amazon, Microsoft, and Google will be very important.

The same goes for another important technology: brain-computer interfaces (BCI). This will become very important in the future. Building brain-computer interfaces that respect individual privacy—ensuring that data remains local and is not collected by the same company that operates social media platforms—will be crucial.

We are not a traditional venture capital firm. We won’t just throw money at companies looking for unicorns that can give us 100x returns. Of course, that would be great, but it must align with our vision. Interdependence, resilience, and disintermediation—these terms are very important to us.

How much capital will Tether invest in venture capital?

Ardoino: We will always prioritize the stablecoin business because risk management is very important. Right now, we have a good buffer on reserves, but if USDT continues to expand, we will scale up proportionately.

But almost all other aspects—I would say over 90% of Tether's earned profits—we will seek to reinvest in things that matter to us and our community. We don’t need to give out large sums as dividends.

Some venture capital firms have done poorly in assessing the character of crypto founders, with some (like Sam Bankman-Fried) later determined to be fraudulent. How do you plan to ensure Tether doesn’t make the same mistakes?

Ardoino: Carefully checking every detail and conducting the most thorough due diligence is the only way to protect your investment capital. Not every investment is perfect, but we will use our heart and brain to ensure the best outcomes.

We work directly with management; if improvements are needed, we offer assistance. Otherwise, we are prepared to replace management. The technology itself is not flawed; if a company is not performing well, it is usually due to management issues. We take investing very seriously because we care deeply.

What are your thoughts on the recent allegations against Northern Data? This is one of our portfolio companies, accused of securities fraud.

That will be assessed by the courts. We have been working with Northern Data for quite some time. The company has enormous potential; it can provide an independent perspective for the three major players in the data center business. I cannot comment on the allegations from a few disgruntled former employees. Northern Data has strongly responded to these allegations, and we support our investment.

Let’s talk about the current regulatory environment. It could be said that Tether operates similarly to a bank: it accepts deposits, retains them as cash and securities, or makes loans. Why shouldn’t Tether be subject to the same regulations as banks?

Banks have loans that account for 90% of their balance sheets, meaning they have only 10% collateral. Tether currently has a collateralization rate of 105%. I think it is unfair to compare Tether to banks. It’s like saying, "The engine of a car and the engine of an airplane are the same, so we should regulate cars and airplanes in the same way."

It has been reported that Tether has not sought a license to operate in the EU under the Markets in Crypto-Assets (MiCA) framework. Does Tether plan to exit the European market?

We are formally developing a strategy for the European market. MiCA imposes daily issuance and trading volume limits on non-euro stablecoins like USDT. [Its aim is to prevent dollar-denominated stablecoins from replacing the euro as the primary medium of exchange within the EU.] I agree with this, as it does not harm anyone.

But another limitation is the reserve requirements. For stablecoins like USDT, under MiCA, up to 60% of reserves must exist in the form of cash deposits. If you have a stablecoin with reserves of €10 billion, you need to deposit €6 billion in a bank. The bank can lend out up to 90% of that amount, keeping only €600 million. Imagine if customers demand to redeem €2 billion (worth of stablecoins), but the bank only has €600 million. Then you would face a situation where both the bank and the stablecoin go bankrupt. I don’t think that’s safe. In fact, it’s a way to create additional systemic risk for stablecoins in Europe rather than reduce it.

The ongoing lack of comprehensive audits of Tether's reserves has raised speculation that USDT is not or has not been fully backed by its reserves. Why has Tether been unable to fulfill its commitment to provide comprehensive audits?

Audits remain a high priority for us. When it comes to stablecoins, US Senator Warren has told the Big Four accounting firms that they should be cautious when accepting new crypto clients, especially after the FTX incident. [In March 2023, Senator Warren called for the establishment of an accounting regulator to "stop the sham audits of crypto firms."] FTX did not help at all. They were the heroes of mainstream media and messed everything up.

Did the Big Four accounting firms explicitly refuse Tether? Has Tether applied and been rejected?

We have had discussions with some of those firms.

What reasons did they provide?

Basically, they said now is not the right time. If you are a Big Four accounting firm, your thousands of clients are banks. If you have a stablecoin as a client, they may not be happy. This is my speculation, but Tether has created a digital dollar that allows people to have checking and savings accounts, so stablecoins may be seen as a threat to the banking industry.

Not just Tether, Circle (the company that issues USDC) also lacks an audit—it has a certification. This has long been misunderstood and misreported by mainstream media. If other stablecoins are so sacred, why don’t they have audits? Even the stablecoin considered to be the most regulated in the world [USDC] does not have an audit. This is an industry issue.

[Circle is a client of Deloitte, one of the Big Four accounting firms, which checks the accuracy of statements regarding the size and composition of USDC reserves monthly, but has not released a comprehensive audit report since 2021.]

To clarify: Has Tether ever issued USDT tokens that were not backed by dollar reserves?

Tether has always been backed. In 2022, during a short attack against Tether that attempted to trigger a bank run, we processed over $20 billion in redemptions within 20 days. I think Tether deserves some recognition.

At least until 2024, it should be acknowledged that the initial assessment of Tether's credibility may not have been entirely correct. We don’t need medals, but as we strive to create the future of finance, we hope for less criticism.