Paolo Ardoino, the current head of the cryptocurrency enterprise Tether, faces a unique challenge: deciding how to allocate billions in newfound wealth. With substantial funds at his disposal, Tether is venturing into new territories such as AI, aiming to compete with giants like Microsoft, Google, and Amazon.
Tether, registered in the British Virgin Islands, ranks as one of the leading crypto companies globally. Its primary revenue source is its stablecoin, USDT, which is backed by a diverse mix of cash and other assets functioning as a reserve.
The operation model for Tether is straightforward: it issues USDT tokens in exchange for US dollars, which are then freely tradable within the cryptocurrency market. It holds a portion of these dollars as cash, converts a large fraction into interest-earning securities, and lends out a part. Whenever users wish to redeem their USDT for dollars, Tether covers this from its reserve pool, simultaneously earning from the held assets.
Much of Tether’s reserve is in short-term US government bonds, with its profitability increasingly linked to current interest rates. As interest rates have risen recently due to inflation, Tether has seen a significant rise in profits. It reported a substantial $5.2 billion profit in the first half of 2024, starting with a reserve of $118.5 billion.
Under Ardoino’s leadership, since becoming CEO in December after a six-year tenure as CTO, Tether has been channeling its resources meticulously. According to Ardoino, some funds are being allocated to fortify the USDT reserve, while the remainder is being invested in Tether’s newly established venture capital arm, Tether Evo. Significant investments include a majority acquisition in the neural implant technology startup, Blackrock Neurotech and a substantial stake in Northern Data Group, a company whose infrastructure supports AI model training.
Tether has experienced its share of controversy. In 2021, it settled for $41 million with US regulators who claimed the company made misleading statements about its reserve’s backing. In 2023, allegations surfaced regarding Tether’s use of fraudulent means to secure banking services. Furthermore, accusations from the UN and various blockchain analytics firms suggest that USDT is preferred for laundering money and financing illegal activities, though Tether has denied such claims.
Ardoino believes the company is often misunderstood, emphasizing that their main goal is to introduce the principle of decentralization from the crypto world into AI and other burgeoning tech sectors. He stresses the importance of an independent player distinct from traditional entities in the industry.
Ardoino, of Italian origin with a base in Switzerland, shared these insights in a recent phone interview with WIRED, which was subsequently edited for clarity and conciseness.
WIRED: This year, Tether has moved to diversify its business model with a push into venture capital. Tell me about the rationale.
Ardoino: Tether has become extremely profitable in the last two years thanks to the increase in interest rates. When Tether started, you could make 0.2 percent on the reserve, but today you can make 5.5 percent. Of course, that might be time-limited—we are hearing about potential rate cuts—but it’s very hard even with inflation at 3 or 4 percent to go back to the 0.2 percent scenario.
In the last 24 months, Tether has accrued around $11.9 billion profit. With this amount of money, we could have distributed it all to shareholders, to make everyone happy. Instead, part of it is being added to the reserve to further back the stablecoin, and the rest is basically being held in the investment arm.
What is your venture investment thesis? It seems like you are looking beyond the crypto industry.
We originated from the world of bitcoin—our roots are deeply embedded in the principles it stands for. Although we may not excel in every aspect of humanity, we strive to embed the principles of bitcoin, such as financial autonomy, freedom of speech, and unrestricted access to technology, into every investment we make.
The principle of decentralization transcends various domains, including artificial intelligence. Observations already show the politicization of AI. We advocate for the emergence of independent entities separate from established players like Amazon, Microsoft, and Google, which we deem crucial.
This principle equally applies to another significant technology: brain-computer interfaces (BCI). It’s imperative for the future to develop BCIs that prioritize user privacy, ensuring data remains private and isn’t exploited by major social media corporations.
Our approach deviates from traditional venture capitalism. We don’t simply invest to unearth a unicorn company for substantial returns. While lucrative outcomes are desirable, they must align with our core values of interdependence, resilience, and disintermediation.
How much capital will Tether commit to venture investments?
We will always prioritize the stablecoin business, because risk management is very important. Right now, we have a good buffer on top of the reserve, but if USDT keeps expanding, we will expand that proportionally.
But almost everything else—I would say more than 90 percent of the profit Tether makes—we will look to reinvest in things that matter to us and our community. We don’t need to give out big chunks of money as dividends.
Some VCs have done a poor job of making character assessments with respect to crypto founders, some of whom—like Sam Bankman-Fried—were later convicted of fraud. How do you plan to ensure Tether doesn’t make the same mistakes?
Looking under every rock and conducting the deepest level of due diligence is essential to safeguard your investment. Not all investments will turn out perfectly, but we approach each company with dedication and intellect to achieve the best possible outcomes.
We collaborate closely with company management to facilitate improvements; if required, we are prepared to replace them. The fault does not usually lie with technology but with inadequate management. We are extremely serious about our investment strategies because we deeply care.
What did you make of the recent allegations made against Northern Data, one of your portfolio companies, accused of committing securities fraud?
This matter is set for judicial assessment. We have been associated with Northern Data for a considerable time, which holds significant potential to emerge as a distinct voice among the leading companies in the data center industry. Regarding the allegations by a few former employees, it is not my place to comment. Northern Data has issued a strong response to these accusations, and we continue to support our investment.
Let’s talk a little about the current regulatory environment. It could be said that Tether acts a lot like a bank: It receives deposits, which it holds in cash and securities or loans out. Why shouldn’t Tether be subject to the same regulations as the banks?
The banks are lending out 90 percent of their balance sheet, meaning they are only 10 percent collateralized. Tether has 105 percent collateralization at the moment. I think it would be very unfair to compare Tether to a bank. It’s like saying, “A car has an engine like a plane, so we will try to regulate cars and planes in the same way.”
It’s been reported that Tether has not sought a license to operate in the EU under the Markets in Crypto-Assets (MiCA) regime. Does Tether plan to exit the European market?
We are formalizing our strategy for the European market. MiCA imposes a limit on the [daily] issuance and transaction volume of non-Euro-based stablecoins, like USDT. [The idea is to prevent US dollar-denominated stablecoins from displacing the Euro as the primary medium of exchange within the EU. ] I actually like that, because it will not hurt anyone.
But another limitation is on reserves. For a stablecoin like USDT, up to 60 percent of the reserve would have to be in cash deposits under MiCA. If you have a stablecoin with, say, €10 billion in reserve, you would need to put €6 billion in the bank. The bank can lend out up to 90 percent of that, keeping only €600 million. Imagine a customer asks to redeem €2 billion [worth of stablecoin], but the bank has only €600 million. Then you are in a situation in which both the bank and stablecoin go bankrupt. I don’t think it’s safe. Actually, it’s a way for stablecoins to create additional systemic risks in Europe, rather than reducing them.
The continued absence of a full audit of Tether’s reserve has given rise to speculation that USDT is not—or at least has not been in the past—backed one-to-one by its reserve. Why has Tether not been able to deliver on its promise to provide a comprehensive audit?
The audit is still a high priority. When it comes to stablecoins, you have Senator Warren in the US telling the Big Four auditing firms that they should be aware of onboarding new crypto customers, especially after FTX. [In March 2023, Senator Elizabeth Warren called for an accounting regulator to “rein in sham audits of crypto firms.”] FTX didn’t help at all; they were the heroes of mainstream media and messed it up for everyone.
Has Tether been explicitly rejected by the Big Four auditing firms? Has Tether applied and been turned away?
We’ve had discussions with some of them.
What reasons did they provide?
That it was not the right moment, basically. If you are a Big Four auditing firm, tens of thousands of your customers will be banks. They might not be happy if you have a stablecoin as a customer. That’s my speculation, but Tether has created a digital dollar that allows people to have checking and savings accounts, so stablecoins could be considered a threat to the banking industry.
It’s not only Tether; Circle, the company that issues USDC, the second-largest stablecoin behind USDT, does not have an audit—it has an attestation as well. This has been misunderstood for a long time and misreported by mainstream media. If the other stablecoins are so holy, why do they not have an audit? Even the stablecoin portrayed as the most regulated in the world, USDC, doesn’t have an audit. It’s an industry problem.
[Circle, a client of Deloitte, a prominent member of the Big Four auditing firms, routinely undergoes monthly verifications on the exactness of reports regarding the USDC reserve’s size and makeup, though a comprehensive audit has not been published since 2021.]
To ensure complete transparency: Has Tether ever released USDT tokens without backing by dollar reserves?
Tether has consistently maintained backing. In 2022, a concentrated attack attempted to incite a run on Tether, during which we handled over $20 billion in redemptions within 20 days. It seems fair that Tether receives some recognition for its resilience.
By 2024, it might be acknowledged that early doubts about Tether’s reliability were perhaps unfounded. We may not seek accolades, but at least avoiding undue criticism as we strive to revolutionize the future of finance would be appreciated.
