For years stablecoins have been one of the most controversial topics in crypto.
But with the recent collapse of TerraUSD, the algorithmic stablecoin linked to Luna, many are starting to lose faith in the $159 billion stablecoin market. Moreover, some investors are worried that the creation of a central bank digital currency, or CBDC, will obviate the need for stablecoins.
But despite the stablecoin market’s recent upheaval, Tether CTO Paolo Ardonio is optimistic about the future of stablecoins. In an exclusive interview with Insider, he noted that he remains confident in Tether’s financial health, wants fair regulation of crypto, and feels that CBDCs can coexist with stablecoins.
Tether is the world’s largest stablecoin — a type of cryptocurrency that is typically pegged to fiat currencies — and in fact was the world’s first stablecoin. While Tether supports the Mexican peso, Chinese yuan, European euro, and even gold, by far their most-used fiat currency is the United States dollar.
Stablecoins were created as a way to merge blockchain technology with traditionally less volatile fiat currencies, and in the last few years they have become an important part of the crypto ecosystem. Investors often use stablecoins as stores of value in-between trades. Stablecoins also make for a handy way of moving money between traditional financial networks and crypto markets.
But as crypto investors recently found out, stablecoins have their problems too.
Stablecoins have suffered a huge hit to their public image after TerraUSD’s $40 billion crash.
Following the collapse of Terra and its sister cryptocurrency Luna, panic spread to the rest of the stablecoin market, and Tether wasn’t immune. Investors cashed out $7 billion of Tether in under 48 hours — or about 9% of assets — and an additional $4 billion over the following days, causing it to lose its peg with the US dollar. This led to fears that Tether would suffer the same fate as TerraUSD and Luna’s, causing an industry-wide crash.
Ardonio, however, said that the recent problems in the stablecoin market only served to illustrate Tether’s resilience.
Ardonio cited the Washington Mutual bank run as an example of how traditional banks — when faced with a bank run like the one Tether just survived — have defaulted.
“In 2008 Washington Mutual suffered a 10% redemption of their assets,” Ardonio said. “10% of their assets were redeemed in less than 10 days, and the bank went bankrupt. No bigger redemption proportionally has happened in recent financial history. Now Tether, two weeks ago, was able to redeem 9% of assets in 48 hours. That is much more than any bank could do.”
Ardonio also addressed criticism that Tether does not have actual paper notes backing their stablecoin. In February 2021, the New York attorney general found that Tether had misled investors about its amount of cash reserves.
“Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. These companies obscured the true risk investors faced,” New York Attorney General Letiticia James said at the time.
Following the Attorney General’s statements, many focused on the attorney general’s findings on Tether’s commercial notes. Commercial paper is not liquid cash — rather they are a form of short-term unsecured corporate debt.
In theory, this means if investors were to cash out large amounts of their Tether, the company may be unable to pay out. Tether’s reliance on commercial notes is what prompted investor Jim Cramer to call Tether “an unstablecoin” and the “achilles heel of the whole crypto business.”
Ardonio believes that Tether has sufficiently responded to this criticism. Since 2021, he says they’ve reduced their holdings from $40 billion in commercial papers to $20 billion, a number that he points out is still steadily decreasing. Tether has also gone to great lengths to improve transparency regarding the assets backing their stablecoin, including providing the New York Attorney General’s office with a transparency report every quarter.
Ardonio is aware of the need for stronger oversight in the stablecoin market, and noted that he’s advocating for increased regulation to protect investors following the crash of TerraUSD.
“Fair regulation would see clear rules on the categorization of stablecoin, and also transparency requirements,” Ardonio said.
Ardonio’s desire for more regulation is rooted in a desire to prevent another debacle like what happened with Terra and Luna. Right now, there are hundreds of stablecoins, and there is no formal process or regulation for creating one.
“You cannot have a guy that wakes up in the morning and decides to create a cryptocurrency and defines it as a stable coin. People believe it is a stablecoin, but the first, the first wind, it crumbles,” Ardonio said.
Regulation that enforces transparency regarding currency reserves would also help secure the stablecoin market. Tether, or the other prominent stablecoin — Circle’s USDC — have cash reserves backing their assets, and could therefore cash out investors if needed.
However, stablecoins like Tron’s USDD or Frax use algorithms — the same theoretical backing that Luna provided TerraUSD — to maintain their pegs. And that, according to Ardonio, could pose a real threat to the stablecoin market.
“To be honest, with regards to algorithmic stablecoins, it’s all fun and games if you’re a $5 billion or $10 billion market cap stablecoin. If you have a liquidation with this market, you can still handle that,” Ardonio said. “But imagine if you have a $80 billion or $100 billion market cap stablecoin like Tether that’s backed by digital assets. It’s really hard to predict what will happen and know if there will be enough liquidity to backstop that immense cascade.”
Speaking of regulation, one of the biggest concerns that investors have regarding the future of stablecoins is the emergence of government-backed competitors in the form of central bank digital currencies, or CBDCs. If a central bank like the Federal Reserve were to create a stablecoin it would theoretically compete directly with stablecoins, and be free of the seemingly constant controversies that stablecoins face.
But Ardonio isn’t worried about the creation of a CBDC. He said that some American politicians — like Congressman Tom Emmer, who proposed a bill against CBDCs — are worried about how they could be used as instruments of mass surveillance. Mixed sentiment among politicians means that while CBDCs are under consideration, it’s likely that their development will proceed slowly.
He also said that if governments began to create CBDCs they would need to rely on the blockchain infrastructure that stablecoins have already built. “I really doubt that the US or European CBDCs will issue in Tron, Solana, or Ethereum or whatever, right? So, stablecoins are the ones that will take care of supporting the public projects.”
Looking towards the future, Tether has created partnerships with cities like Lugano in Switzerland to create demonstrable proof that when cities embrace cryptocurrencies they will see an increase of GDP.
Ardonio also highlighted Tether’s plan to build up infrastructure in developing nations where the population is in need of an inflation hedge and means to transact — which Tether can provide.
“Tether is one of the most used currencies in Turkey, in Argentina, Venezuela, Mexico, El Salvador, and Dubai. All the emerging markets, all the developing countries have embraced Tether,” Ardonio said.
In the end, Ardonio remains confident of Tether’s place in the ever-changing crypto world.
“There will always be a market for stablecoins as they present an opportunity for traders to interact with the larger crypto ecosystem. Tether in its own right is a resource for the unbanked, a tool for an evolving payment system, and a leader in driving the mainstream adoption of a new financial revolution.”
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