Crypto should get back to its roots

As part of “Crypto Opinion with Mike Ermolaev”, an ongoing series that interviews prominent figures in the crypto scene, Mike sat down with CTO of Tether Paolo Ardoino to discuss the world’s largest stablecoin's resilience throughout 2022, Tether's charity work, and its plans for the year ahead.

A computer enthusiast since childhood, Paolo Ardoino has devoted his life to computers. He began coding when he was eight years old. He has built a successful career in the technology industry, working as a software engineer, a software architect, and a computer security specialist.

After reading the Bitcoin whitepaper in 2012, he became inspired by how people can manage their own wealth without banks or other intermediaries. Paolo had no idea his fascination with Bitcoin would lead him to an extremely successful career in the crypto space where he holds the position of CTO at Tether, the largest stablecoin by market cap.

It was a pleasure to speak with him and discuss topics ranging from the Türkiye earthquake to the war in Ukraine to Tether's plans for this year. 

Tether withstands the greatest trial by fire in finance history

The first thing we talked about was the most challenging year the crypto industry had faced, and Paolo told me how Tether successfully weathered the storms.

“The past year has definitely been challenging for many crypto companies, but also for many people who believe in crypto. In a way, it feels like the crypto space betrayed the trust that many people put into it because of some projects’ greed and lack of vision. And many projects really blew up, creating a cascading effect,” Paolo said. 

In his explanation, the Terra Luna crash triggered the domino effect with Celsius, Three Arrows Capital, then the FTX scandal, BlockFi, Genesis, and Voyager. According to him, this was due to the distance these projects had from Bitcoin's original vision, which was to create a new tool for financial inclusion and financial freedom.

“When the first block of Bitcoin was announced on January 3, 2009, the concept was that the entire world economy was on the brink of failure so “Let's create something completely more resilient – not guided by humans. Because if humans guide it, then we end up being greedy again.” I feel like crypto in 2022 demonstrated the fast-paced issues of traditional finance, proving there isn't much difference between crypto and traditional finance,” he said.  

It can be different, but in order for crypto to be different, Paolo believes it must focus more on technology, objectivity, and financial inclusion – going back to its ethos.

As he explained, following the Terra Luna chaos, Tether was shorted by large funds seeking profits as they saw how well it worked with the Terra stablecoin. When investors short Bitcoin, for example, at 20k, and it goes to 10k, they make money. However, if it goes to 60k, they lose a lot of money. With stablecoins, there’s a concept called an asymmetric bet where shorters never take a risk because the worst case scenario remains 1:1.

“After Terra Luna, many big funds thought, “Wait a minute, Terra Luna blew up, so we can try to blow up Tether as well.” They believed in FUD. And then they started putting pressure on Tether by borrowing a lot of USDT from Genesis, FTX, Voyager, Celsius, BlockFi – from many of the classic lenders that were lending out Tether. First of all, they were lending out Tether without any sort of collateral. That is crazy!

Anyway, these hedge funds were borrowing a lot of Tethers from these lenders, and there were sellings at par – sub one dollar. This was pushing market makers to buy cheap Tethers from the market, go to Tether to redeem them for one dollar. Then they moved these dollars back to exchanges to buy cheap Tethers, and so on. Therefore, there were huge redemptions, both in terms of number and size,” Paolo said. 

Yet, he added, Tether knew these redemptions were not going to be a problem because its portfolio was extremely liquid, despite some people's doubts.

“In a way, what happened is that we had the biggest trial by fire in the history of finance. In two days Tether was subject to 10% of redemptions, amounting to $7 billion paid out to Tether customers within 48 hours and $20 billion between mid-May and mid-June 2022,” he said.  

As we look back on the history of traditional finance, Washington Mutual went bankrupt in 2008 after making only 10% of redemptions within ten days, while Tether stayed afloat after doing the same within 48 hours. In its attestation, which saw the light of day shortly after our interview, Tether provided some very telling statistics on its performance. 

“The work Tether has done in terms of resilience is remarkable. Many competitors among which many blew up in 2022 pointed the finger at Tether as the risk to the crypto industry and yet Tether remained solid throughout the entire 2022, actually the worst year for the crypto industry. 

I cannot feel more proud than of the work the team has done. And we are set to start a great 2023. We see signs of willingness to rebuild the industry, hopefully with better actors overall,” Paolo said.  

In addition, he said Tether is growing in different financial inclusion use cases, focusing on Africa, South America, and Asia.

Tether's charity work

Following the earthquake in Türkiye, Tether, along with several other crypto companies, pledged a collective 5 million Turkish Lira in support of the earthquake-ravaged nation. Specifically, I was curious as to how this money will be transferred and how it will be spent. I asked Paolo to clarify this.

“In these situations, one of the biggest fears that you have when you want to donate money is to make sure that the money is well-spent. Because otherwise it's like throwing money into the wind when it should really go to help people. Tether has never been the company that puts its name on stadiums nor have we created these huge acquisitions and sponsorships. 

However, when it comes to helping people and investing in things that really matter, such as people's health, we want to be more present in areas affected by these types of issues,” he said. 

Paolo said Tether plans to increase its commitment in the future, but it wanted to start with something significant. The team did due diligence asking many people inside Türkiye to make sure the NGO they were planning to give money to would actually be helpful. According to him, one million TRY will be used for aid, medical supplies, and other purchases of this type, and the second batch of two million TRY will be used for tents and short-term necessities, while the remaining funds and any additional funds that may be forthcoming will go towards reconstructing the country and possibly building new hospitals.

“I'm Italian and we had a few earthquakes in the past. One thing that struck me is that it always ended up being a political thing. There’s always a political group in charge saying, “Yeah, we are going to reconstruct everything in two to five years, and we will never let these people down.” 

In Italy, there was a devastating earthquake that affected the Church of San Francesco in Assisi as well as a nearby city of L'Aquila. And no one did anything there. It was just a marketing stunt for politicians. If you wait for politicians, usually nothing happens. People can be left without houses or whatever else they need. 

Obviously, we cannot do everything, but I think that our industry is coming together to be helpful, probably more helpful than what I have experienced in my country,” he said. 

Additionally, Tether contributed quite a bit to the restoration fund in El Salvador following the flooding caused by a huge storm in the past. It also set up another fund to assist victims of the pandilla (street gangs) war in El Salvador, where approximately 80 people were killed, mostly family heads.

“We thought that without them, these families could go into total poverty, so we wanted to help them. So, it's not just about Türkiye, we try to help wherever we can. Of course, we cannot be helpful everywhere, but we plan to continue that type of activity in 2023,” Paolo said. 

Giving people tools and knowledge to become self-sufficient

Paolo spoke about other charity projects Tether is involved in, and he said the company promotes Bitcoin education through initiatives in South America and Africa, where it wants to keep technological tools and education around so people can build with them instead of being fed constantly from outside.

“It's not a Bitcoin education in the sense that you should buy Bitcoin, but rather a Bitcoin education in the sense that you should learn about Bitcoin since that is what will help you improve the stability of your family, and your community, providing basic financial services to your community that would otherwise be unavailable. In a way, we're just saying that we'll provide you with the tools to help yourself. Rather than us giving you money, we are giving you education and the tools and technology,” he said.  

One of the programs supported by Tether is Penguin Academy in Paraguay. “That's an amazing group. It was around the 10th of January when I was asked to teach at the academy in Asuncion. I spoke about Holepunch and peer-to-peer communication. The guys and girls were excited. I love this because they take young guys who don't know how to code. They cover the costs and teach them to code, and then after two weeks they learn the mindset to code. Rather than giving them like a prefix of a book, they teach them the mindset of coding. Of course, after two weeks, you are not the best coder ever, but still, it's something,” Paolo said.  

Graduates of this course have a high chance of getting hired as junior developers, and they can earn up to a thousand dollars from their first month of employment, which is more than three times the average salary in Paraguay, he added. 

In El Salvador, Tether supports Mi Primer Bitcoin, which provides free Bitcoin education. Additionally, it partners with a few education-focused companies in Africa.

“Again, for us it is important that the messaging is not about crypto as speculation, but about Bitcoin and stablecoins as a way to combat devaluation of national currencies that is pretty aggressive in Africa, as well as about financial inclusion and freedom. So be your own bank and protect your family – that is the concept. We really want to detach ourselves from the concept of Bitcoin as a way to gamble money to try to get rich quickly. It is important to give another perspective, especially to people that don't have wealth to waste. They need to make sure that they can protect their wealth as much as they can,” Paolo said. 

Technology as a lifeline for war-torn nations

In response to my question about Tether's role in helping Ukraine, Paolo said that Tether helps its collaborators in the country relocate to Switzerland and to the EU.

“We help them relocate, as well as their families and friends, and we are also working with international organizations. For example, we help them to study in Switzerland or elsewhere in Europe. So we are involved both personally and as a company in trying to lend our hand. 

You can see how a good percentage of the world was living almost in peace for so many years. And then things after the pandemic started and went down so quickly. That makes you think that you never know what will happen in the future, how this entire situation can unfold, and how it can worsen. History never repeats itself, but it rhymes. So you can never exclude anything. At this point, humanity should be smart enough to understand that new technologies are the only thing that can help a little bit in these really crazy situations,” he said. 

“Bitcoin, Tether, and crypto in general offer people affected by the war an additional lifeline. In this situation, it is usually quite difficult to distribute money. People cannot wait for banks to wake up in the morning or be closed over a weekend. These people are suffering and need instant help. I cannot be more humble to be just a really small part of this huge technology, but I see this happening from the inside,” Paolo added. 

Additionally, I asked Paolo what he thinks of Russian citizens using USDT to circumvent bank closures, Visa and Mastercard bans, and other sanctions, and whether he thinks this is decentralization in action or an evasion attempt.

“Keep in mind that Tether is on public blockchains. The result is that there is much more transparency aimed at Tether, stablecoins, Bitcoin, and crypto in general, than in the banking system. So if you think about the fact that every single transaction that you do remains traced on-chain and there are many cases in which law enforcement can follow these traces, then using stablecoins is probably the worst thing you can do to avoid sanctions,” he said. 

Neither central banks nor people are ready for CBDCs

Following that, I moved on to the topic of central bank digital currencies and Paolo's thoughts on them. He said it is still a long way off before CBDCs are actually implemented, and it is not only about the public not being ready, but banks as well.

“Based on what we're seeing, as well as the meetings and panels we've participated in, central banks are taking an interest in CBDCs. But also they are kind of scared about CBDCs themselves because if you launch a CBDC that is like a pilot project - that's okay. But imagine that the entire European Union will start using a CBDC instead of cash. There are many unknowns on how this can affect the economy. 

Cash, for example, never bears a positive or negative interest rate. In theory, could a CBDC bear a positive interest since it's digital? And what if the interest rate goes negative? If people have cash that has no negative interest rate, would they be willing to be subject to negative interest with CBDCs? There are so many issues,” Paolo said.  

“Humanity has been using pocket money for peer-to-peer transactions for 5,000 years and now we are forcing them to hold something digital for the first time in history without any paper money or coins. Leaving aside all the potential fears where central banks can have access to every single transaction that any person in that jurisdiction made, there are so many other concerns. 

The interesting thing is that it's not just the consumer who worries about being tracked by the central bank. There are also central banks that worry about what will happen to their economies. Once you launch it, it's not that you can just say, “Well guys, I made a mistake and now here’s the cash again.” It's impossible to go back. Perhaps in 20 years or eventually it might happen, but I don't see it as imminent as people believe it could be,” he continued. 

Furthermore, he noted that major central banks would never launch CBDCs on public blockchains.

“Imagine the European Central Bank scratching its head and saying, "Okay, which fork should I support?" And then entering into blockchain politics. There is an insane amount of risk. The only solution for central banks would be using a private blockchain.” 

As for public blockchains, Paolo said he believes privately-issued stablecoins like Tether will live on. 

“Central banks also have to make sure not to destroy the banking industry by creating CBDCs. I think there is this huge clear balance between central banks and the banking industry on one side and citizens that don't want an Orwellian future on the other side. We believe at Tether that privately-issued stablecoins like us will operate on public blockchains because that will be our niche, if you will,” he said. 

Furthermore, we discussed how emerging markets are more open to experimenting with digital currencies than major central banks.

“That's true. I cannot share the details yet, but we are collaborating with some small countries interested to create their own Tether version as definitely an experiment to start with,” he said. 

Speaking of El Salvador, he pointed out that it is a unique case, since it had a national currency before the dollar was adopted 30 years ago, and now Bitcoin is available there as well.

“What El Salvador did was actually a case of relinquishing control. They issued a law saying that Bitcoin is legal tender in a way that removes power from the government rather than adding it. As a result, people have more freedom and power,” he said.  

“Note that no country in this world has a healthy economy so far. All economies are severely affected by pandemics, inflation, wars, etc. 

This is also why I don't believe anyone would want changes to cause more problems. It is definitely the smaller countries that will be kind of the canary in the cave or those experimenting with these types of topics, not the larger ones,” Paolo added.  

Also, he said that Tether does not interfere with the plans of governments. It essentially supports small economies that lack the resources to look into or develop these technologies on their own.

“It’s about advising them on how to do it in a way that doesn't end up in being a rebellion. We are trying to do our part to steer this concept of CBDCs in that direction so they can eventually happen,” he said, adding that some countries may launch their CBDCs as early as this year.

I then asked him what other projects we can expect from Tether this year. As a counterweight to what is happening in technology, Paolo said Tether intends to explore and expand the concept of freedom of communication through projects like Keet, a free peer-to-peer video calling app, and Holepunch, a platform for building fully encrypted peer-to-peer applications.

“Sometimes people wonder why a company like Tether is involved in co-founding and funding these projects that are about creating peer-to-peer communication systems without any central server. Going back to injured zones like Türkiye, or Africa as an emerging market, or war zones, we believe that having all people's data in the hands of a few big tech companies is extremely problematic. Thus, we believe that privacy and stability are both important,” he said. 

“Imagine that you send a message on Whatsapp or Telegram to your friend who lives in the same city. This message will travel thousands of miles to Google or Amazon data centers and will travel back to your friend that is sitting 100 meters from you. 

If you're in Africa or in South America where the Internet grid is not as good as in North America or Europe, just think about how much waste, not in terms of pollution, but in terms of clogging the Internet grade - consuming bandwidth - all these communications do,” he added. 

He explained that this is happening because there is a huge centralization need in big tech companies because that's the only way they can survive and keep paying for these huge data centers. 

“Imagine if you could save 98% of the global countrywide bandwidth because the messages remain local. If I need to send a message to my family that lives 10 kilometers from me, this message can only travel through hardware that is within my range rather than traveling thousands of miles. This could put a huge relief onto Internet grids and can help countries to invest in things that are more important since they would be saving a lot of bandwidth and capacity in the Internet grid. This is one example of things we are working on,” Paolo said.  

“Thankfully, Tether has the resources to help and build these technologies even compared to a big tech company. And these are not resources coming just from the reserves but coming from our own profits. We believe that investing our profits in things that can be helpful for emerging markets is going to be extremely important in the next few years,” he added. 

As we came to the end of the interview, I asked if he had any final words he wanted to share specifically with FXStreet readers.

“Well, do your own research – it’s too obvious, but focus on adoption. Don’t focus on speculation, focus on just a few projects that you deem are actually changing the world rather than focusing on what is new, then you will have a safer life. 2022 has been extremely telling and extremely aggressive and we should all learn from that example,” Paolo said. 

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