The Wall Street Journal: Tether, a parallel economic system that transcends U.S. law enforcement

Original Title: The Shadow Dollar That's Fueling the Financial Underworld

Authors: Angus Berwick, Ben Foldy, The Wall Street Journal

Translated by: Luffy, Foresight News

An unregulated currency is undermining the U.S. fight against arms dealers, sanction violators, and fraudsters. Last year, the amount of money flowing through its network was nearly as much as that processed by Visa cards; more surprisingly, its recent profits have surpassed those of asset management giant BlackRock, despite having only a fraction of BlackRock's workforce.

It is Tether (USDT), a cryptocurrency that has become a significant part of the global financial system, with daily trading volumes reaching up to $190 billion.

Essentially, USDT is a digital dollar, but it is controlled by a private company based in the British Virgin Islands, whose activities are largely unknown to the government.

USDT is pegged to the dollar at a 1:1 ratio, which is why it is referred to as a stablecoin. Initially, USDT was popular only in the cryptocurrency space; today, however, it has penetrated the financial underworld, driving a parallel economy that U.S. law enforcement cannot touch.

In countries where the U.S. government restricts access to the dollar financial system (Iran, Venezuela, Russia), USDT thrives as an anonymous dollar for cross-border money transfers.

Russian oligarchs and arms dealers use USDT to purchase foreign assets and pay for sanctioned goods. Venezuela's sanctioned state oil company uses USDT to pay for goods. Drug cartels, fraud rings, and terrorist organizations like Hamas use USDT for money laundering.

In hyperinflationary economies like Argentina and Turkey, USDT is also a lifeline, allowing people to make daily payments and protect their savings.

USDT can be considered the first successful real-world product of the cryptocurrency revolution that began over a decade ago. It has made its parent company extremely wealthy. Tether holds $120 billion in assets, most of which are risk-free U.S. Treasury bonds, along with positions in Bitcoin and gold. Last year, Tether earned $6.2 billion in profits, $700 million more than the profits of the world's largest asset management firm, BlackRock.

Paolo Ardoino, CEO of Tether

Tether CEO Paolo Ardoino claimed earlier this year that, despite having fewer than 100 employees, its profit per employee is higher than any other company.

In a press release in May, Ardoino stated that Tether aims to "build a fairer, more interconnected, and more accessible global financial system." He claimed that over 300 million people are using USDT.

Washington can sever an adversary's ties to the dollar, cutting off much of its connection to the global trading system, as all dollar transactions involve banks regulated by the U.S. Tether has disrupted this power.

U.S. Deputy Treasury Secretary Wally Adeyemo told The Wall Street Journal, "We need a regulatory framework that does not allow offshore dollar-backed stablecoin providers to violate our rules." Adeyemo specifically mentioned Tether during his testimony before Congress in April.

The Wall Street Journal interviewed Tether users, researchers, and government officials, and reviewed transaction information between intermediaries, court and corporate records, and blockchain data.

Tether did not respond to requests for comment. The company stated in May that it is working with law enforcement to upgrade transaction monitoring to prevent illegal trading. The company said that Tether would freeze wallets used to transfer funds related to sanctioned entities. Ardoino stated that Tether is taking a "proactive approach to protect our ecosystem from illegal activities."

How USDT Works

The company behind USDT, Tether Holdings, issues virtual currency to a select group of direct clients (mainly trading firms) who deposit real-world dollars into exchanges. Tether uses these dollars to purchase assets (primarily U.S. Treasury bonds) to back the value of USDT.

Once in circulation, USDT can be traded on exchanges and with local brokers for other tokens or traditional currencies. For example, in Iran, a cryptocurrency exchange called TetherLand allows Iranians to exchange rials for USDT.

Tether reviews the identities of its direct clients, but the vast secondary market remains unregulated. These tokens can be transferred almost instantly between digital wallets. A report from the United Nations in January of this year stated that USDT is the "preferred" currency for money laundering in Southeast Asia.

A cryptocurrency ATM in Batumi, Georgia, supports Tether

Tether claims it can track every transaction on the public blockchain ledger and can freeze and destroy USDT in any wallet.

However, freezing wallets is like playing whack-a-mole. According to data from crypto data provider ChainArgos, from 2018 to June of this year, Tether blacklisted 2,713 wallets on the two most popular blockchains, which collectively received about $153 billion in funds. Of that massive sum, Tether was only able to freeze $1.4 billion, as the remaining funds had already been withdrawn.

Tether's founder, Giancarlo Devasini, created USDT in 2014. The initial acceptance of the stablecoin was low, and investor William Quigley stated that profiting from the accumulated billions was merely a "fantasy."

According to insiders, he and other co-founders soon sold their shares to Devasini. Since then, Devasini has been in charge of managing Tether. Company records show that this low-profile billionaire resides in a modernist villa in the French Riviera enclave of Roquebrune-Cap-Martin. Devasini's Italian compatriot Ardoino has become the spokesperson for Tether.

Tether's explosive growth occurred during the bull market of 2020-2021, when traders used USDT as a pricing asset for buying and selling. The market capitalization of USDT quickly soared from $4 billion to nearly $80 billion.

Anyone Can Use the Dollar

Venezuela, isolated financially due to U.S. sanctions and poor internal economic management, found a ready user base for USDT.

In 2020, the government under President Nicolás Maduro was besieged by U.S. measures targeting the state oil company, Petróleos de Venezuela (PdVSA). In October of that year, Maduro's parliament passed an "anti-blockade law" authorizing the government to use cryptocurrencies to protect its transactions.

According to sources familiar with PdVSA, the company began requiring payment for oil transportation in USDT. Authorized purchase orders from PdVSA typically instruct buyers to send USDT to a specific wallet address. Another method involves intermediaries exchanging cash for USDT and depositing the tokens into prepaid travel cards, allowing cardholders to make purchases using cryptocurrency.

Venezuelan President Nicolás Maduro passed a law allowing the government to use cryptocurrencies for transactions

The widespread adoption of USDT by PdVSA had another effect: intermediaries selling oil did not return the revenue to the government but instead pocketed the funds, leading to a scandal that resulted in the oil minister's resignation.

Former Venezuelan oil minister Rafael Ramírez stated in an interview, "The use of this cryptocurrency only fuels massive corruption."

The Venezuelan government did not respond to requests for comment. The country's justice minister stated in April that intermediaries using cryptocurrency made it so that funds "stolen could not be detected by authorities."

For ordinary Venezuelans, USDT has also become a lifeline. Inflation rates as high as 2 million percent have rendered people's bolívar savings worthless. Currency controls have made bank transfers abroad impractical.

30-year-old Caracas graduate Guillermo Goncalvez operates a platform called El Dorado, providing peer-to-peer USDT trading for Venezuelans, directly connecting buyers and sellers.

El Dorado has over 150,000 users, and the fees they pay are just a fraction of what traditional remittance agencies charge: local shops convert daily earnings into USDT, Venezuelan immigrants send USDT back to their families, and freelancers receive their salaries in USDT.

Goncalvez stated, "USDT is the digital dollar for all Venezuelans."

Enough Money to Fill a Plane

The Wall Street Journal previously reported that USDT is an important payment channel in Russia.

This year, a research center supported by the Russian government drafted a confidential report stating that USDT is one of the most popular ways for importers to exchange rubles for foreign currency. Some large institutions are also involved: according to a company introduction released in June, Russian bank Rosbank offers USDT transfers for clients to pay overseas suppliers. A spokesperson for Rosbank did not respond to requests for comment.

USDT is also the preferred currency of the Russian elite.

A broker named Ekaterina Zhdanova told colleagues in Telegram messages in 2022 and 2023 that she was arranging large transactions for clients to exchange rubles for USDT. According to blockchain data, the digital wallets of the clients Zhdanova mentioned have transferred over $350 million in USDT.

38-year-old Zhdanova, who was born in a village in Siberia, runs a concierge service that helps wealthy Russians obtain foreign visas; she also operates a travel agency that organizes luxury cruises. Her ex-husband is a senior aide to a billionaire Russian real estate developer.

The Russian invasion of Ukraine and the subsequent sanctions have led to a surge in demand for her services.

According to chat records on Telegram, two months after the war broke out, Zhdanova relayed a client's request to a group of large Russian cryptocurrency traders. She said the client wanted to purchase about $10 million in USDT each month, totaling $300 million, in exchange for cash delivered in the United Arab Emirates or Turkey.

After finding traders willing to accept the deal, Zhdanova told them she could coordinate the collection of cash.

She said, "They will use a plane to pick up the cash."

At the end of last year, the Treasury Department sanctioned Zhdanova, accusing her of transferring assets for unnamed oligarchs. Insiders stated that she was detained by French police at an airport in France as part of another money laundering investigation. She remains in custody. Zhdanova's lawyer declined to comment.

"Everything. Everywhere."

Tether is currently investing in startups that use USDT for everyday payments. The more users Tether attracts, the more USDT it needs to issue.

In Tbilisi, Georgia (a popular destination for Russian immigrants), a green "T" token symbol with a circle shines outside a currency exchange shop with blacked-out windows. The ATM's promotional slogan states that users can deposit stablecoins.

Tether's logo appears outside a store in Tbilisi, Georgia

Tether CEO Ardoino visited Georgia last year and proposed to government officials to help develop the local crypto economy. They signed a cooperation agreement, and Ardoino stated that this would make the former Soviet republic a thriving payment hub. According to Georgia's innovation agency, Tether has invested $25 million in local startups.

Tether's key investment company, CityPay.io, has launched a USDT payment system for thousands of Georgian companies. Hotels, including the Radisson Blu Iveria in downtown Tbilisi, have CityPay terminals, and the company has partnered with a local real estate firm to support USDT purchases of luxury apartments.

CityPay also offers USDT international payment services, with total monthly payments reaching up to $50 million, according to CityPay's Turkish CEO Eralp Hatipoglu. He stated that the pressure the U.S. exerts on the global banking system has created these new opportunities. He mentioned that businesses exporting from Turkey to Georgia face scrutiny from intermediary banks, and wire transfers take several days.

A crypto conference sponsored by Tether is held in Tbilisi, Georgia

CityPay's website claims "100% anonymous transactions," but Hatipoglu stated that they verify customer identities against sanction lists and do not accept Russian businesses.

Tether stated that its goal is to expand CityPay into other emerging markets. In June of this year, at a cryptocurrency conference held in a skyscraper in Tbilisi (which Tether sponsored), Tether's expansion head attended the event, and banners promoted the use of USDT for everyday payments on CityPay. Guests lined up to use USDT to buy coffee.