Tether Targets Tech Titans: Venturing Beyond Crypto to Challenge Microsoft, Google, and Amazon

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Tether, now swimming in funds, Targets Giants like Microsoft, Google, and Amazon

Under the leadership of its new chief, Paolo Ardoino, cryptocurrency firm Tether is tackling a unique challenge: devising strategies to allocate its newfound billions effectively. Venturing into new territories such as artificial intelligence, Ardoino is setting his sights on competing with industry titans Microsoft, Google, and Amazon.

Tether, established in the British Virgin Islands, ranks as one of the top global cryptocurrency enterprises. Its primary source of income is its stablecoin, USDT, whose value is linked to the dollar through a combination of cash and various assets kept as reserves.

The framework operates on a straightforward principle: In return for tokens, Tether collects US dollars from its users, which they can then utilize for transactions within the cryptocurrency space. A portion of these dollars is retained in liquid cash, while the majority is invested in securities that earn interest, and a certain amount is also extended as loans. Should a customer decide to redeem a USDT token for its equivalent dollar value, Tether fulfills this request using the reserve funds. Meanwhile, the company profits from the revenue generated by its financial holdings.

The financial reserves of Tether are primarily made up of short-term bonds issued by the US government. The revenue Tether earns from these bonds is directly influenced by current interest rates, which implies that the firm's profits have seen a notable increase as central banks have increased rates to combat inflation. Tether disclosed a profit of $5.2 billion for the initial six months of 2024, generated from a reserve totaling $118.5 billion.

Since assuming the position of CEO in December, following a six-year tenure as Chief Technology Officer, Ardoino is steering Tether towards leveraging its excess funds. According to Ardoino, a portion of these funds is being allocated to reinforce the reserve for USDT, while the remainder is being channeled into Tether's freshly established venture capital arm, Tether Evo. Under this new initiative, Tether has acquired a significant share in Blackrock Neurotech, a pioneering firm in neural implant technologies, and has made an investment in Northern Data Group, a data center provider pivotal for AI model training.

Tether has been embroiled in several contentious issues. In 2021, the firm agreed to a $41 million settlement with American regulatory bodies, following allegations that it had provided deceptive information regarding its reserve holdings. By 2023, accusations surfaced claiming Tether engaged in deceitful practices to secure banking services during its initial stages. Furthermore, both the United Nations and various blockchain analysis companies have accused USDT of being a preferred instrument for laundering money, financing terrorism, and facilitating other unlawful actions, a claim that Tether vehemently denies.

Ardoino believes the company is often not correctly perceived. According to him, their primary focus is on promoting the principle of decentralization within the crypto realm—a concept advocating for the distribution of authority among the masses rather than a select few—to the domain of artificial intelligence and other burgeoning technological fields. "It's going to be extremely crucial to have an entity that operates independently from the traditional powerhouses," he emphasizes.

Earlier this month, Ardoino, an individual with Italian roots and a residence in Switzerland, conversed with WIRED via a phone call. The interview below has been condensed and refined for succinctness and comprehension.

WIRED: In 2023, Tether has expanded its business strategy by venturing into the world of venture capital. Could you explain the reasoning behind this move?

Ardoino has noted that Tether has seen significant profits over the past two years, buoyed by rising interest rates. Initially, the returns on Tether's reserves were a mere 0.2 percent, but they have since surged to 5.5 percent. However, this boost may be short-lived as there are rumors of impending rate decreases. Despite this, Ardoino believes that returning to the minimal 0.2 percent return rate would be challenging, especially with inflation rates hovering around 3 or 4 percent.

Over the past two years, Tether has generated approximately $11.9 billion in earnings. While this substantial sum could have been allocated entirely to shareholders, bringing widespread satisfaction, a portion of it is instead being directed to bolster the reserve that supports the stablecoin. The remainder is effectively being retained within the investment division.

Could you share the principles guiding your investment choices? It appears you're exploring opportunities beyond the realm of cryptocurrency.

Our roots are deeply embedded in Bitcoin; it's where our loyalty lies. While we may not excel in every aspect of being human, we aspire to embody the core principles of Bitcoin – financial independence, the right to free speech, and unrestricted access to technology – in all our investments.

The idea of spreading control and authority across various sectors is also relevant in fields such as artificial intelligence. It's evident that AI has become a subject of political debate. We think it's crucial to introduce a new, independent entity into the scene, one that stands apart from traditional powerhouses such as Amazon, Microsoft, and Google.

Similarly, brain-computer interface (BCI) technology will play a crucial role in the years ahead. Developing BCIs that prioritize user privacy, guaranteeing that data stays private and isn't exploited by the corporations behind social media networks, will be of paramount importance.

Our firm diverges from the typical venture capital model. Rather than indiscriminately investing in the hope of discovering an exponentially profitable startup, we seek alignment with our core principles. The concepts of mutual support, robustness, and eliminating middlemen are central to our investment philosophy.

What amount of funding is Tether planning to allocate for venture capital investments?

The stablecoin sector will remain our top priority due to the critical nature of risk management. Currently, we maintain a solid surplus beyond the reserve. However, should USDT continue to grow, we will proportionately increase that surplus.

However, the vast majority of our earnings—I'd estimate over 90 percent of Tether's profits—will be allocated towards investments in areas that are significant to both us and our community. There's no necessity for us to distribute substantial amounts of money as dividends.

Numerous venture capitalists have faltered in accurately evaluating the integrity of cryptocurrency founders, among them individuals such as Sam Bankman-Fried who ended up being found guilty of fraudulent activities. What strategies will Tether implement to avoid falling into similar pitfalls?

Examining every detail and performing thorough research is essential to safeguard your investment. While not every investment will be flawless, we pledge to approach each company with dedication and intelligence to achieve the best possible outcome.

Our collaboration extends to working closely with the leadership teams; we assist in making enhancements where necessary. Should the need arise, we're prepared to alter the management structure. The issue rarely lies with technology; more often, it's ineffective management that leads to a company's underperformance. Our investment strategy is marked by a profound level of commitment and seriousness, stemming from our deep concern.

How do you interpret the recent accusations leveled at Northern Data, a company within your investment portfolio, which is being charged with engaging in securities fraud?

The matter in question is set to be reviewed by the legal system. We've collaborated with Northern Data for a considerable period. This company holds great promise as it offers a unique perspective distinct from the three major players in the data center industry. It's not my place to remark on claims made by a few unhappy former staff members. Northern Data has robustly countered these accusations, and we continue to support our investment in them.

Let's delve into the present regulatory landscape. It appears that Tether operates similarly to a traditional bank, accepting deposits that it then keeps in the form of cash, securities, or extends as loans. Given this, why wouldn't Tether fall under the same regulatory framework that governs banks?

Currently, financial institutions are extending credit up to 90 percent of what they have on their books, leaving just 10 percent as security. In contrast, Tether boasts a collateralization rate of 105 percent. Drawing a parallel between Tether and a traditional bank seems unjust. It's akin to arguing that since both cars and airplanes have engines, they should be subjected to identical regulatory standards.

Reports indicate that Tether has not pursued obtaining a license to function within the European Union according to the Markets in Crypto-Assets (MiCA) framework. Is Tether considering withdrawing from the EU market?

We're solidifying our approach for the European sector. The MiCA regulation sets a cap on the [daily] creation and trade volume of stablecoins not pegged to the euro, such as USDT. [This measure aims to stop stablecoins valued in US dollars from overtaking the euro as the main currency for transactions in the EU.] Personally, I'm in favor of this as it's unlikely to cause harm to anyone.

Another constraint pertains to the reserves required for stablecoins, such as USDT. Under the MiCA regulations, a stablecoin must maintain up to 60 percent of its reserves in cash deposits. This means that for a stablecoin holding reserves of €10 billion, it would be mandatory to deposit €6 billion in a financial institution. These institutions, in turn, are permitted to loan out as much as 90 percent of these deposits, leaving only €600 million on hand. In a scenario where a client wishes to redeem €2 billion in stablecoin, but the bank's available cash is merely €600 million, this could lead to both the bank and the stablecoin provider facing bankruptcy. This approach, rather than mitigating risks, could potentially introduce new systemic vulnerabilities within Europe's financial ecosystem.

The ongoing lack of a complete examination of Tether's reserve has sparked rumors that USDT might not be, or at least might not have been previously, fully supported by its reserve on a one-to-one basis. What is the reason behind Tether's failure to fulfill its pledge of presenting an in-depth audit?

The examination remains a top concern. Regarding stablecoins, Senator Warren from the United States has cautioned the Big Four audit companies about taking on new cryptocurrency clients, particularly in the aftermath of the FTX debacle. [Senator Elizabeth Warren, in March 2023, urged an accounting oversight body to clamp down on fraudulent audits within the cryptocurrency sector.] FTX's actions were detrimental. Initially celebrated by major news outlets, their mistakes have had negative repercussions for the entire industry.

Have the Big Four accounting firms outright refused Tether? Did Tether seek approval and get declined?

We've engaged in conversations with a few of them.

What justifications did they offer?

Essentially, the timing wasn't ideal. When you're one of the Big Four audit companies, a significant portion of your clientele consists of banks. Having a stablecoin on your client list might not sit well with them. This is just my guess, but with Tether introducing a digital dollar enabling individuals to maintain checking and savings accounts, stablecoins might pose a challenge to traditional banking sectors.

The issue of lacking formal audits isn't exclusive to Tether; Circle, the issuer of USDC, which ranks as the second biggest stablecoin after USDT, faces a similar situation. Instead of an audit, they provide an attestation, a fact that has been frequently misconceived and inaccurately reported by major news outlets. This raises the question: If other stablecoins are considered so reliable, why haven't they undergone audits? Notably, USDC, often touted as the world's most regulated stablecoin, hasn't been audited either. This suggests a broader issue within the industry.

Circle, a client of Deloitte, one of the top four audit firms, undergoes a monthly verification process by Deloitte to confirm the validity of its claims regarding the magnitude and makeup of the USDC reserve. While Circle asserts that it carries out a comprehensive audit every year, it hasn't disclosed any findings from such audits since 2021.

To be perfectly clear: Has Tether at any point released USDT tokens without having equivalent dollar reserves?

Tether has consistently maintained its support. In 2022, there was an attempt through a short attack to incite a bank run against Tether, during which we facilitated the processing of over $20 billion in redemptions within a span of 20 days. It's my belief that Tether deserves some recognition for this.

By 2024, it's fair to acknowledge that initial judgments regarding Tether's reliability might not have been completely accurate. A pat on the back isn't necessary, but avoiding criticism as we strive to innovate in the financial sector would be appreciated.

As of August 13, 2024, 10:50 am ET, information regarding how often Circle conducts audits on the USDC reserve has been included.

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