We recently caught up with Bitfinex and Tether CTO, Paolo Ardoino at Paris Blockchain Week 2023. We spoke about the current crypto and financial markets and banking crisis, regulations, what’s new and on the horizon and what we can look forward to from Bitfinex in the future.
The full video interview can be watched here.
[00:01:03.230] — Stefania Barbaglio
Before we get into the show, if you’re not subscribed to our YouTube channel and podcast, click the subscribe button now and follow us on our social media to stay up to date with our news and interviews. Here is my conversation with Paolo.
[00:01:20.730] — Stefania Barbaglio
Paolo, really nice to meet you. It’s great to be here in Paris together with all your team.
[00:01:28.010] — Bitfinex CTO, Paolo Ardoino
Well, thank you very much, Stefania, for being here.
[00:01:30.930] — Stefania Barbaglio
Excited. Yeah. So perhaps maybe you could tell a little bit about yourself and your role at Bitfinex and also Tether. We try to not mix things up, but just to make sure that we clarify the different companies and the different project as well.
[00:01:48.430] — Bitfinex CTO, Paolo Ardoino
I’m a developer since basically this year would be 30 years, so I’m 38. I started coding at a really young age. That’s the only thing that I have basically been doing all my life since I studied Math, applied to computer science. Being Italian, I think that many Italians can relate that there is no job in Italy. So especially if you are a developer, you are paid a really low salary, even though, of course, the software developer role is growing in importance and has been growing in importance for the last 20 years. And so I like many started looking at other opportunities and started to learn about finance. I built a startup in London with a few other teammates that would deliver cloud-based financial services. We had hedge funds in the city as our customers. Then in 2014, I came to know John Carlo, the CFO of Bitfinex and Tether. Bitfinex at the time was a growing exchange and was becoming one of the most popular exchanges. Back in time, there were probably five exchanges that say today there are 500 exchanges for crypto exchanges. But Bitfinex was growing and the issues at that time were that the exchanges were e-commerce for Bitcoin rather than trading platforms.
[00:03:18.110] — Bitfinex CTO, Paolo Ardoino
My role, given my expertise in distributed application, spiral and computing, was actually to step up the technology of Bitcoin so that it could start providing resistance to more load, more users and scale up. I started doing that for a few years. in 2016, I became the CTO and so took over the entire development of the platform and all its services and brought Bitfinex to the technological excellence that it is today. In 2017, I also became the CTO of Tether. And there I started managing the security. So the blockchain deployments, the security and also the strategy when it comes to all the emerging markets.
[00:04:14.630] — Stefania Barbaglio
Okay, that’s very interesting stuff that’s interesting. So, if we go back to Bitfinex, obviously, as you said now, there are many, many exchanges. But what’s happened with the FTX? What’s happened also with the American banks? I think it impacted the crypto market a lot as well, as well as the financial market. And the role of banks is changing and the role of exchanges is becoming more challenging as well because there is the aspect of consumer protection that you have to keep in mind. So, my question would be, as we are coming out of these, I would say, collapses, these bear markets, who are going to be the survivors?
[00:04:58.550] — Bitfinex CTO, Paolo Ardoino
Well, I think the survivors are going to be the ones that, first of all, didn’t spend all their money into stadiums, sponsorships, and high-level marketing like F1 or football teams and so on. So really, we wondered a lot ourselves in the last year to see if we should do that. And the answer was always, we are a lean company and it’s impossible that this marketing approach where you spend hundreds of millions of dollars will continue because the financial world will change soon because as we are seeing that. So, the financial industry is in big trouble and the crypto exchanges are overspending. They are making the classic mistake of a booming industry like in the 2000 when there was the internet bubble. So, all the new companies were doing crazy marketing stunts and then the bubble popped, and equity run didn’t have any more… All these companies didn’t have any more cash flow and didn’t have enough funding to sustain all their employees. In fact, we are seeing cuts in terms of employees from 15 % to 45 % in all the major crypto companies. Neither Bitfinex, nor Tether fired or had to fire any employee or contractor for that reason.
[00:06:42.490] — Bitfinex CTO, Paolo Ardoino
So, we have always been a lean company, always focusing on building technological solutions. And our idea is that winning is a marathon, it’s not a sprint. And because the conditions of the world, especially in regulatory volatility and so on, are changing so rapidly and are unpredictable at this moment in time. Also, the geopolitical situation is changing rapidly. Wasting money was not on the table for us and I think it is paying out really well.
[00:07:15.580] — Stefania Barbaglio
That’s really a good point. Another aspect, though, is decentralized exchange versus centralized exchange. As we are moving towards a more decentralized exchange, mass adoption of crypto is growing, so people are skilling up a little bit more, and are actually able to use a wallet. What is going to be the future of centralized exchange like Bit Fintech?
[00:07:43.250] — Bitfinex CTO, Paolo Ardoino
Well, three points in favour. So, the first one is non custodian. The second one is transparency. So, you can see everything on the chain. So you can make sure that the exchange is not cheating, for example. And the third one is the ability to do non-KYC. So basically they are on centralized exchanges like every centralized exchange nowadays has KYC information to trade. But the idea is that et all dexes, you would be on chain. You are in a situation where these dexes are hiding, in my opinion, behind the finger because their claim is there is no company, there is no one entitled to collect KWCs. But the reality of things is… And so, these are three great points. I think the most important one is the non-custodial. So, the ability to segregate the risk of the trading venue with the custody. And if custody remains in your hands, it’s great. So that should continue and that will continue. In my opinion, that is a great value proposition. But the second one, I would say, was transparency. Also for DEX’s it creates some problems because you can have front running. So, since everything is on chain, all the orders are on chain.
Bitfinex CTO, Paolo Ardoino — Bitfinex CTO, Paolo Ardoino
So it means that if someone is watching the manpool for Ethereum, for example, could actually Front Run you and that is actually happening. And actually, there are incentives for the thing called MEV. So there are on Ethereum so that beater traders can bribe with higher fees miners or validators now that we are in proof of stake in order to front run other users. So that is a classic. It’s an interesting incentive, but works and it exists and is worrisome for big trading firms. And the third one is non-POC. So if there is a thing that regulators hate more than all the money flow that is coming from the banking into crypto.
[00:10:00.000] — Bitfinex CTO, Paolo Ardoino
It’s the non KYC part of dexes and lending pools. In my opinion, and after talking to regulators and talking to people in the European Commission, as well as in the different commissions in the US, there is a huge interest in forcing KYC on the text platforms as well. So the reason is that the issue is money laundering. And as we have seen with turnaround cash, there is the push of… And there is a first example of how a privacy solution got the developer that developed it in trouble. That is the first time that happens and it’s scary. And I think that the aim of regulators is saying, “Look guys, that’s it.” You cannot keep going with non KYC lending pool from a user perspective, the claim will be that if you’re using a lending pool that is non KYC, you could actually lend money to a terrorist. I think, and also for most of these smart contracts, there are DAOs behind them and that in theory could be fine. But the reality of the matter is that these DAOs have 70% of the supply of these DAOs or these DAOs tokens in the hands of five guys.
[00:11:28.630] — Stefania Barbaglio
One person, one vote.
[00:11:30.370] — Bitfinex CTO, Paolo Ardoino
Yes, but one person has like 70 % of the vote. And so it’s really hard for them to claim that they are fully decentralized. I think this issue will bite them. My point is, I think in the future, what we are going to see, and I think Bitfinex was actually the precursor of all this, we’d add Fintech and a few different other products in the past, we started experimenting the ability of using a centralized machine engine and trading platform, but with external custody and non custodial custody. So in the past, we were offering Ethereum for Ethereum based tokens. Now we post it because the non KYC part was actually the thing that everyone was more excited about. And being a centralized exchange, we cannot afford it. So we post the project. But since 2017 we have been allowing trade through your MetaMask on Bitfinance with this product called Anthonyx. But also coming from traditional finance myself, there is an important point of segregating custody with the trading bank. So if you trade on the interactive brokers, interactive brokers will not custody your funds. They will use the street or other banks. So what we did in Bitfinance since 2019, before anyone else, we started integrating with the third party custody providers like Copper, and Fiber, and we are now integrating Zodia and a few others.
[00:13:03.360] — Bitfinex CTO, Paolo Ardoino
The reason is that in this way, hedge funds can keep their money on third party custody providers that are probably fully regulated in the UK and they can still use Bitfinex as a trading venue. They are not subject to one single point of failure and they can’t segregate the risk across multiple venues.
[00:13:21.310] — Stefania Barbaglio
Interesting. You mentioned, as a last point, just bring us to the aspect of regulation. You are based in Switzerland. Can you tell me, from a regulatory perspective, the challenges that you face, why Switzerland, and what you are doing to work with regulators to address those challenges?
[00:13:38.530] — Bitfinex CTO, Paolo Ardoino
Personally, I base part of my time in Switzerland. The companies are not based in Switzerland. We travel a lot. We are a company. Among the two companies, we have around 270 people from 59 different countries. We are a fully decentralized company. Our headquarters are both in the British Virgin Islands (BVI) and Bahamas. That is where the companies are incorporated, just because all the major hedge funds in the crypto world are either in BVI or in the Bahamas. And also all the banks, most prominent, non US banks that serve the crypto industry are mainly in the Bahamas. So owing to the regulatory challenges, both for Bitfinex and Tether, we decided to stop servicing US customers in early 2018. We feel like the US has an aggressive stance against crypto, and I think the recent events demonstrated that. So in 2018, with the crystal ball, we could see that it took time, but it definitely happened. As Bitfinex we are seeking to acquire licences and getting licences in key jurisdictions. So of course, we have a licensing department that is taking care of exploring Bahamas, Europe with the Mika license, possibly Switzerland, Japan, and other jurisdictions. So the issue is that only the smaller jurisdictions like Bahamas, or BVI or few others.
[00:15:30.010] — Bitfinex CTO, Paolo Ardoino
Now Hong Kong is out the impact in Singapore, but only the smaller jurisdictions or UAE have actually developed a regulatory framework. So the US, no regulatory framework. You can see the battles between this SEC and local exchanges because there is no clarity on what is a security, what is not. Mika licence in Europe. It should have happened early this year, but now people say that it will come either in winter this year or early next year. So all these regulatory frameworks can keep creating regulatory uncertainty for all the companies? So it’s really hard for a company like Bitfinex to step in and try to work with the regulator until there is certainty. Because if there is no certainty, we are just putting ourselves and our customer at risk.
[00:16:35.600] — Stefania Barbaglio
Before we go into Tether, we change the subject. Can you maybe give us an overview of the product that you have within Bitfinex?
[00:16:44.970] — Bitfinex CTO, Paolo Ardoino
Sure. So we have the main Bitfinex spot trading platform. We have the derivatives platform that soon will also add third party options. Right now, we have only futures. We have, I think, probably the most powerful product for the next 10 years. We started a conversation with you asking about El Salvador. And the great thing is that in Phoenix, different from other exchanges, is actually looking to expand to security tokens in an extremely serious way. So in 2019, we started working with a Kaisa curve later because in Kazakhstan, you have this area called Ashtana IFC, which is a new regulatory environment and financial area that has different conditions than the rest of Kazakhstan. And they have this incubation program that allows companies like us to obtain a licence to be able to trade securities but also offer the ability to companies to use our platform to raise capital for both their stocks or that, so bonds. So we obtain that licence and we start to list the first product in collaboration with Log Stream. And we are looking to and we are seeking to add more products this year to the platform now that all the regulatory complexity has been solved.
[00:18:18.150] — Bitfinex CTO, Paolo Ardoino
And also we are seeking the same licence and we should obtain this licence within one month, also in El Salvador. So with these licenses we developed a platform called Bitfinex Securities. Bitfinex Securities allows companies to register, create a prospectus, give us the prospectus like a normal public offering. Also the prospectus has to be approved by the regulator of the jurisdiction, this could be El Salvador or Kazakhstan. Once that is approved, the company can raise capital through Bitfinex Securities in dollars, Tether USDT or Bitcoin. And the interesting part there is that with our securities platform, we can serve much smaller companies. And especially in emerging markets. We are now in a situation where if you are a company in high net worth Turkiye or like Algeria or Georgia, if you want to raise one million dollars, it’s extremely difficult. If you are in Silicon Valley now, probably after a week ago it is much harder because Silicon Valley bank blew up. But before that, it was extremely easy to raise one million dollars for any company. They will give you one million dollars as change in Silicon Valley. You wouldn’t be even serious to ask for that money.
[00:19:52.870] — Bitfinex CTO, Paolo Ardoino
You should at least raise 50 million dollars. But for the rest of the world, it’s extremely challenging. We think our platform is a perfect position to be the platform for security offerings for all the emerging markets where the beauty of our industry is that around a $1 trillion industry at peak was a $3 trillion industry. Imagine just 10 billion, that is a tiny portion of it, of liquidity can be devoted to actual equity or debt investments in promising companies from emerging markets or markets that don’t have the same access to liquidity that American companies have.
[00:20:37.430] — Stefania Barbaglio
What are the investors going to get?
[00:20:39.710] — Bitfinex CTO, Paolo Ardoino
You are getting, first of all, tokenized shares. We offer three products, so you can tokenize the shares of your company, existing company or new company. As an investor, you are entitled, of course, to these shares and we will have a secondary market on the fintech securities. Also, these are public offerings because they are regulated as public offerings, so you are entitled to dividends and so on. They are in all effects shares. Or we have the ability of doing capital rates for bonds and the secondary market for bonds. So also as a bond holder, a tokenized bond holder, you can access dividends through Bitcoin and securities. The third one is the ability to create funds and tokenize the shares of funds on Bitcoin and securities. So the idea is without basically intermediaries, we allow you to get in touch with the biggest whales in the Bitcoin market. Bitcoin has the biggest whales in the Bitcoin market. We are the second biggest public Bitcoin wallet in the industry. Our users are only whales. We are not super strong in the retail market. And so that’s why we think that we have a huge opportunity there to bring together companies that have great products, but they have a hard time to raise capital.
[00:22:09.880] — Bitfinex CTO, Paolo Ardoino
Because if you go through the standard route, you have to go to the different banks and do road shows and so on. And every single step, we eat a portion of the fee or all of the money that we are raising. So with these financial securities, the idea is that the fees will be ridiculous compared to the actual traditional financial fees.
[00:22:35.410] — Stefania Barbaglio
What will be the time frame to list a product of infinite securities?
[00:22:40.020] — Bitfinex CTO, Paolo Ardoino
So it all is open now, so it also depends on the regulator. So of course, the regulator has to approve because you have to provide a key information document to the regulator that explains the company and explains the business model is exactly as you would do to apply to the nonstop exchange. So it’s dependent on the regulator, but I would say between 30 and six months. So as a technological exchange for securities, we are not allowed to do marketing for the products that we list.
[00:23:15.580] — Stefania Barbaglio
Is another company going to do the marketing?
[00:23:16.970] — Bitfinex CTO, Paolo Ardoino
Be doing the marketing? It’s all on their side because that is a really risky regulatory issue if you start the marketing. Because this is like the series industry, it’s not like talking like creating new tokens, pump and dumps, and so on. If someone gets hurt. Someone goes to jail. It’s the same applied, the same rules that they are in financial. It’s a very interesting product. And I think for the Emerging Market, but also as an alternative for other companies, could be very interesting. That also brings me… So I want to move to Tether now. And that is actually a great point because I’ve got a different relationship with the company in the mining industry, and on the stock exchange. And one of the questions is, we have got a mine that we need to fund, and what about thinking of a different way to raise capital? Perhaps if it’s a gold mine, I know there is Tether Gold that has an opportunity to raise funds. So then the investor will get exposure directly to the gold in the mine rather than do a normal equity fund raise.
Tether Gold is a product that is 100 % backed by pure gold bars. So it’s a stablecoin. I think it’s probably the best stablecoin, especially for the next 10 years. I think, and being part of the same family, I can easily say that. And I think that tethered gold is superior to Tether USDP. Just because gold, to me, is not competing with Bitcoin. Bitcoin is far superior because it’s more transportable and can be used for e-commerce. But gold is actually competing with the dollar. Before 1950, all the biggest national currencies were packed to the gold. You could not print out of the air unless you would keep buying gold and stash gold in your own central bank. After the ’50s, the US and all the others decided to peg from the gold. And that led to situations like during the pandemic when 30 % of the total dollar supply was created in two years. And also leading to now we are seeing huge interest rates because there is too much inflation because they printed too much and so on. With gold, you couldn’t do that. So to me, gold is what the US dollar should have been.
[00:25:56.320] — Bitfinex CTO, Paolo Ardoino
This reserved currency is natural because it comes from the soil and has been used by humanity for the last five to six thousand years. So with Tether Gold, the process is simple. So someone wants to acquire Tether Gold tokens as they would acquire Tether USDT, for example. So they send the dollars, we buy gold bars that are 99.9 in quality. They are London quality insured bars with a fixed price and so on and quality standards. All these bars are stored in a vault in Switzerland and there is 100 % matching between how many Tether Gold tokens have been issued with the number of ounces that we have in the vaults. So we believe that now Tether Gold is half a billion dollars in size, so quite small compared to Tether USDT. But if the geopolitical issues that we are seeing keep going, I’m pretty sure that Tether Gold is going to be probably the biggest stablecoin within 10 years.
Just one thing, I was reading this morning about China and Russia starting to look at an alternative currency that would be the yuan for their trade. But in the end, the only… So the problem is that eventually the bricks group will not necessarily have cannot trust necessarily one single currency that would be the yu an. So the gold would be the most intelligent stablecoin or currency to be used among them because no one can fake the gold. And so we think that in general, gold based stablecoins will keep growing as a way in a world that is all about distrusting each other and nations distrusting each other.
[00:28:04.090] — Stefania Barbaglio
I’m a strong believer in gold myself, so I completely agree. And it’s a very interesting product. Now, we are here at the Paris Blockchain Conference and yesterday there was this big side event from Circle. So obviously Circle is like a competitor. If we want to say this word with USDT, what’s your take on Circle? And how do you see yourself being a different product than Circle?
[00:28:34.900] — Bitfinex CTO, Paolo Ardoino
Tether was born from the necessity of Bitfinex, actually. So in 2014, there were five exchanges, Bitfinex, Bitstamp, Coinbase, Kraken, and Binance. Binance was born in 2017. So in 2014, basically, there were five exchanges and no one had banking. And so even the ones that had banked with banking, in order to send a wire from an exchange to another, in order to do arbitrage, right? You want to buy Bitcoin when the price is lower and sell it when the price is higher, take the dollars from where you sold the Bitcoin and move back the dollars on the exchange for the price is lower. To move the dollars across exchanges would take from seven days to two weeks, basically. And so there was a huge price in this location across all these exchanges. And so the simple idea of Tether was why we don’t use this beautiful technological blockchain and we don’t put a dollar on top of it. Really simple like that. So we are big Bitcoin believers in Tether and so we believe that Tether is a great tool for onboarding, and is a great tool for financial freedom for emerging markets that need access to the dollar.
But it was a tool created by technologists, by people that are excited by the industry. You can see the difference. Circle in 2016 said that within five years, no one would even remember Bitcoin. For us, Bitcoin is our life. We would die on this field.
[00:30:18.830] — Stefania Barbaglio
It’s so interesting because sometimes the press describes projects in a distorted way. And I think one of the arguments about Tether was always about how they don’t back their stablecoin properly. It’s all like papers. And there was an image of the company and behind the stablecoin there wasn’t what I’m actually seeing right now, simple people trying to make changes. So what would you say about the backing of the stable token in your defence to what the media sometimes put out?
[00:30:53.110] — Bitfinex CTO, Paolo Ardoino
So we started publishing our attestations in 2021. We were the first stablecoin to provide the breakdown of our service. So we had different assets among which also commercial papers. That was the thing that scared everyone. Just to be clear, our commercial papers were extremely safe. They rated A1 or A2 at their minimum. Also at that time, we forced everyone else, all the other competitors, to publish their breakdown of their service. Our second competitor had the commercial papers as well. They removed it. But also we, as Tether, had 30 billion in commercial papers. There was speculation that was a Ver Grande. We never, never held their Ver Grande. We only had the highest quality commercial papers. And we are seeing now Silicon Valley Bank that was discovered in having sold 18 billion of 10 years long maturity municipal bond. So it’s like you buy a municipality bond of Santa Marta, Italy or some other small towns. In the end, we instead had commercial papers with a really short maturity, 30 and six months. So in fact, we announced in mid 2021 that we would sell all these commercial papers and move everything to US Treasuries.
And so indeed, we did that. We did sell, so no commercial paper that we had ever failed or defaulted on. We never lost money on these commercial papers. They just expired and we moved everything to US Treasuries. So now we are the biggest one in the crypto industry. We are the biggest US Treasury holder and globally, we are the fourth year, I think, US treasury holder in the world as Tether. Right now, Tether is not only 100 % back. Tether has its own equity, capital, its own money that has been generated through holding US treasuries and do short term investments with real proper risk management, not like these US banks. And that process generated in one quarter, that is the last quarter of 2022, $700 million in profit. So tether has its own capital, own equity that is 1 billion. That was 1 billion on the 31st of December 2022. I don’t have the finalized numbers, but if things keep going like this, at the end of this quarter, so 31st of March, 2023, we will have 700 million more that will be 1.7 billion in our own equity that will be kept in the company to be at that point, you are not only 100 %…
You are 102 % back. So we are comparing ourselves with banks that invested in basically bonds made by tick tacks. So it’s like they have holes of several tens of billions of dollars. And we are the company most scrutinised in the world. So everyone is obsessed with Tether. And yet Tether stood the test with all the Black Swan events. So even now, we could see from years before that US banking was going to have big troubles because it was over leveraged. So history repeats. So what happened in 2007 and 2008 would repeat itself. And so we did two things. We didn’t want to rely on US banking. And second, we never wanted to keep large cash positions in the bank because the issue with large cash positions is that they are not insured. So the FDISC insures up to $250,000, but for the stablecoin, it’s nothing. So what we did, in fact, is keep everything in US treasuries and also use repos and reverse repos market. And also all our US treasuries are in short term maturities, 3, 6 months. So even if we are also hedging this way ourselves against the yield curve and the potential issue of the yield of the Fed changing the yields pretty quickly because you can sell them daily, these US treasuries, being short maturity and you don’t lose a basis point on the sale.
So the quality of risk management that Tether does is incomparable to our competitors and also to the banking industry. So our second competitor, Circle, had 7 % of their assets as cash in Silicon Valley Bank. So thankfully, they got it back, but they didn’t get it back.
[00:36:25.400] — Stefania Barbaglio
Thank you for the explanation. The last question is about stablecoin interest. I’ve been in some conversations saying the dollar pays interest. Is a stablecoin able to pay interest?
[00:36:43.340] — Bitfinex CTO, Paolo Ardoino
No and never. There’s a good reason for that. From the first moment you start paying interest, you are considered a security because someone could buy your stablecoin with the expectation of making money and that makes a security. But think about this, right- 99 % of the market share of Tether is emerging markets i.e. developing countries. So you are a Turkish person which has the Turkish Lira default rating 80 % year on year compared to the dollar. You surely will not complain to us that because we are not sharing 4 % when you are actually saving 76 % of value for you.