Tether's co-founder on how the USD peg really works

Transcript

GM good morning welcome to the milroad show The Daily crypto show where we break down crypto like kids playing hopscotch one step at a time I'm your host Jay Hamilton and today we're joined by the co-founder of tether and wax William Quigley we're going to discuss the past present and future of crypto's biggest use case stable coins before we jump into today's episode less than 50% of you listening to this subscribe to our Channel and we want you to subscribe so to celebrate that we're giving away some amazing prizes right now all you have to do is subscribe on whatever platform you're listening to by the end of August and before we jump into Today's Show we're just going to take a

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tokens into the smart Vault that's it the best part once you deposit your issued liquid token AG eth enabling you to participate in defi on pendo Spectra lra splice and others G is already live and you can go check it out for yourself today just head over to milro docomo show great to have you today yeah good morning I want to start off with we actually just wrote a newsletter about this about how tether is one of the most profitable companies in crypto it might be one of the most profitable companies in the world especially on a perhe head basis uh did you think this would happen

when you founded tether uh I co-founded it so I didn't found it but um I played around with the spreadsheet I can say that and you know if we have 10 million what can it do a 100 million a billion undermanaged I didn't go beyond a billion uh and now it's more than a 100 times that uh but also um you know when my partners and I started tether uh it it is I guess it's ironic that uh you know we did it as a charitable act we did not do tether to make money we we we did tether because

we needed it for for what we wanted wanted to do and it looked like the right answer uh so um yeah I guess that is irony the fact that it was kind of founded as a charitable contribution because we were all I don't know if the ethos is still there in crypto but we were all so appreciative of the uh whoever the people are who created bitcoin which allowed this whole industry to to to grow we were very appreciative and that had also been done as a charitable act and so um uh we didn't expect it to go where it went but

anyone with the spreadsheet could see well you know especially if rates went up remember rates were basically zero at that point as well so uh we didn't expect it really to make much money but it didn't take much money to run so you know there you have it and when you say that you were solving a problem that you saw what was it that you set out to do when you first wrote the plan for tether uh so I'll be I'll try to be very brief on this but it's it's uh it there was a series of things that seemed to uh be problematic when uh trying to exchange

cryptos back and forth with people uh the most obvious one to anybody who does any kind of Arbitrage uh is that the only way to Arbitrage profitably is for one side of of the trading pair to be stable otherwise you have two different things that you're holding and receiving and at the end of the day are you better off or worst off well the only way you can really do that is to artificially link those things to the base currency in which you operate and everyone has a different base currency I know some

people's base currency is is Bitcoin which is quite fascinating but uh ours was still USD and so you had to have that and then uh going back in time um a little bit uh for probably a lot of your listeners there was a day there was a time when there were only a few exchanges in the world which allowed you to deposit Fiat and for various reasons those exchanges had very few other tokens now there weren't nearly as many as there are today but they they only had a few three or four tokens and all of the fun and the action was in what we called alt exchanges an ALT exchange was

an exchange that didn't take Fiat so how did you get on the alt exchange you would send your Fiat to one of these very few exchanges that took Fiat you would acquire Bitcoin you would withdraw the Bitcoin and send it over to the alt exchange that listed all kinds of tokens you might be interested in but then every few weeks you might be feeling anxious and thinking a big bout of volatility was about to hit and what do you do well that was a problem another problem we were trying to solve and the way you solve that would be to be normally you would sell all of your alt tokens for Bitcoin transfer to bitcoin back to that exchange that allowed Fiat

and those exchanges didn't generally allow you to store the Fiat there so then they would wire it back to you that whole process took seven days by that time you wanted to be back into the market rinse repeat and so our thinking was what if there was a token that uh did not move relative to USD and there are various ways to skin that cat uh I believe tether did it the absolute best way we thought of all the other ways because this problem wasn't new many economists had written about how one might do something like this and um uh when you look at things like Luna and the disastrous consequences of the way they created the collateral backing to

stable coin that was both uh something we thought of and was obvious to us as a loser idea and uh uh the the beauty of tether is its Simplicity you know it is not pegged that's a very important fact there was no Peg to tether and that was critical let me stop you there because I I really want to lean into this William is I want because I think that there's a real misconception and I think a lot of our listeners probably do not understand how tether is pegged to the US dollar can you can you just I was going to say I'm letting you say

that yeah tether has never been it was never designed to be a peg is like a horrendous point of failure and uh I realize a lot of people in general probably your listeners are not U students of uh of central banks and Global Financial policies but um All Nations currencies are free floating uh there is no stable coin uh of the realm uh all currencies have no um have no intrinsic value their value is is based on a trading value with another

currency and those values are always moving right USD and Yen and R&B and Euro uh they all move every second and um uh central banks have a treasury which they will sometimes deploy to either drive down or drive up the value of their currency um relative to other currencies because your the value of your currency can affect the um competitiveness of your imports and exports and so uh we don't have a national currency or a national Treasury and um you know George Soros famously uh

broke uh the the British uh Central Bank when he started to attack the value of the pound in the 80s so uh we're certainly not you know set up like the UK uh and therefore for us there could be no pegging so there is no Peg guys uh we have no uh opinion as to what the value you want to trade your tether for trade it for a penny trade it for five dollar it's irrelevant um because tether has no Peg tether is redeemable for a dollar that's all your users have to understand tether is redeemable for a dollar there's no Peg what that means is if somebody wants to sell you tether at

90 cents buy it you're buying dollars for 90 cents if somebody wants to sell you tether for A110 maybe don't but maybe sell it right and as your your your viewers especially sh or Global we'll see the value of tether differs based on different exchanges coin market cap has a composite price which hovers very closely to a dollar it's really nice right maybe $1.01 cents and 99.8 cents uh and sometimes people will ask me well why doesn't it trade for exactly a dollar well why doesn't any currency hold its value relative to another currency uh it

may it may orbit very closely but it's never going to be exact and the simple reason is exchanges around the world are are are local monopolies effectively the people in Indonesia or used to be China um uh in Europe most of them are going to use one exchange that is familiar with them that will kyc them that will onboard them and therefore the supply of crypto on that exchange is really their Universe of what's available so if you're in let's say Korea and there is a uh a movement away from Bitcoin at the moment because

people are worried that bitcoin's going to drop they're gonna uh look for a safe harbor that Safe Harbor is going to be tether so there's going to be a huge spike in demand for tether but a fixed Supply at that second and therefore those people holding tether may be able to command a price above a dollar and the reverse would also be true if Bitcoin is in a a quick runup people want to liquidate tether and get into Bitcoin they may be willing to sell their tether for less than a dollar uh it doesn't change the fact that it's redeemable for a dollar but at any given moment if you see a profit making opportunity or you want to avoid but you perceive to be um a risk of a loss you

might be willing to trade your dollars for less than you know a dollar exactly and so um hopefully that explains the pegging and and the fact why we don't have one and why it moves relative to the dollar even though it is redeemable for a dollar that's great yeah thanks for explaining that William uh I want to sort of zoom out for a second stablecoin market cap currently all stable coins globally is about 170 billion ion dollar can we just talk about the impact that stable coins are having on defi crypto now but maybe more so where you see this

going in the future sure first I'd like to say uh I'll answer it in two ways the second way is about opportunity as a venture capitalist but but first uh stable coins are uh and I'm just gonna be like uh parochial and just say tether uh because uh I think tether's the best uh uh but tether is the circulatory system of crypto without tether crypto in its current form does not exist uh the if you look at trading volumes um uh essentially every traded crypto trades against tether but in

addition the only trading pair that matters is tether that's something a lot of people are surprised by the only trading pair that matters is tether nobody really trades even Bitcoin these days for ethereum or Bitcoin for salana that's just not a thing and it's not a thing because of the problem I talked about earlier which is you're trying to figure out what your profit is and if both things are moving you really don't know at the end of the day whether you're better or worse you do when you have a token index to the base currency that you use to calculate those profits so without tether um and okay I'll say all trading uh all all uh stable coins

at this point trading volume in crypto would drop a minimum of 75% I also believe the value of all crypto globally would drop 75% without tether crypto doesn't really exist in the way we think about it today that's how meaningful uh the invention of stable coin was I'll add one other point which is that uh defi defi really is U requires three ingredients to exist you need a ability to uh post something as collateral so a smart contract you need the ability uh to uh to calculate what

it is that you're trying to do which is which is the stable coin and then you need a yielding mechanism so with collateral and a stable coin and an ability to earn yield you mix those things together and you get what we call defi any of the that three-legged stool uh going away means defi goes away uh and so this giant category of crypto called defi would not exist without stable coins and so uh that is sort of one side of what I want to say now on the like the Venture Capital hat I'll put on uh and this is for those of your

listeners who uh are sick of being W2s and wage slaves and ultimately want to build a business one day which is a great thing to do um when we did tether not only did no one you know it had never been thought of before the very concept hadn't been thought of but once people learned about it and I'm not talking noobs who don't know crypto I'm talking about crypto ogs virtually all of them thought it was a dumb idea virtually all of them not only that it took us a good year to explain what it was and this was even for me I've been a venture capitalist

since the mid 90s uh uh and I've done a lot of stuff that people couldn't understand why you would need that even for me I was surprised it seemed quite straightforward but I realized um you really had to take a deep dive into crypto and understand I had been building blockchains for three years before I really knew what a blockchain was but I was going through that exercise being very curious what is this really I do think if you cannot explain to anybody the topic in which you're focused on then you're probably not an expert uh because you should be able to explain it God forbid when you try to get people to explain what a blockchain

is uh most of the times I can't even understand what they're saying so but I thought we did a good job of explaining tether but it turned out a lot of people weren't really actively trading crypto at the time so they didn't really see a need they also were stumped by this idea that it had it had an offchain element and of course they were pre occupied with this with this question of but how do I know the money is there I actually never thought that would be a problem and I was proved to be right I didn't think that would be a problem if people had trust in the people who were launching it and so I would say to people even tether even stable coins

which most people now say well duh how could nobody know the value of a stable coin well prior to it existing people didn't and so um that should say if you have an idea and a lot of people are either scratching their head or saying it's lame don't consider that to be an indictment of the idea and something you shouldn't go forward on if you really have what I consider as a VC the most precious element in the universe and that's deep Insight if you have deep insight about why something should be used or created then don't worry about the fact that other people don't because most people are not curious and most people never go to that extra step to figure out what's missing in this puzzle people are very

good at telling you um you know what color they would like in a new product category or make it cheaper make it smaller but if you ask people what's missing from what you do that would enhance your trading ability your your living uh very few people are going to be able to do that exercise and uh and I think stable coins are such a perfect example of that something that is in retrospect incredibly obvious but at the time people couldn't comprehend why it was needed and I like this perspective of stable coins being incredibly obvious because I'd like to shift gears slightly

to a conversation of where this is going in relation to governments and monetary policy because where we are right now is we're in this monetary policy cycle that we've been in for since about 2008 constantly printing money debasing our Curren sees and that has led to this situation that the whole world is in where we have inflation and recessions or the government's not allowing recessions and it's not typical business cycle and we don't need to get into that conversation we talk about that Lots we talked Lots about on the show about macro but what I'm curious about is where what is the relationship between and governments is there

conversations happening is there a relationship and where do you think this goes long term there's been talk about CBT cbdcs for a long time but we haven't necessarily seen that yet do you think that governments are going to try to control stable coins eventually curious to get sort of your your larger zoom out government perspective on the future of stable coins yeah and uh briefly right yeah sorry I packed a lot into that question so I will go I'll try to be brief uh of of course all of the developed world uh central banks are

aware of tether and they're aware of stable coins uh the uh I made a prediction in 2015 and uh I I guess I still think it can happen maybe it'll take a little longer but I thought by 2030 the uh all of the world's major economies would have tokenized their Fiat and the reason is because there are very few Innovations in in life that only have upsides they have no tradeoffs they're only better right um uh stable coins are one of those few things there it's only better it only enhances Fiat

for it to be tokenized and I figured it would take 15 years for slow moving governments to figure it out but many of the things they want to do can be done if they tokenized their currency now um uh many governments are on the process of developing a what now is called a central bank digital currency uh even though it's not it's digital but it's uh um uh tokenization and digitalization are radically different so I I don't think it should be called digital it should be called called the tokenized Fiat many many governments are doing it the US was rapidly moving towards that until poell noticed something in um probably on Tik Tok um which caused him

to pause and I remember his quote was something to the effect of um we're going to be evaluating this over some period of time in order to see how we might do this and the reason was because in on the internet like a couple years ago a bunch of conspiracy people started saying that oh my gosh with the Central Bank digital currency the government's going to be able to know uh about your purchases and money movement now for your audience just let me say something that was laughable to me I've been in the payment space for like 20 years that was laughable to me because the US

government has been able to track every damn dollar of what you do for decades people it's Insanity all all of your wires if it's in USD have to be tracked using something called a suspicious activity report which is just if someone in the bank thinks you're suspicious um the the US Government Can can subpoena any credit card company and see every dollar you've spent it's Madness that you would not want to tokenize your currency because you think the government's going to do something with that when the government's been doing that for 20 years so that shouldn't be the reason to be afraid now kind of in that question

you asked me about is is a question I've pondered for many years which is um if central banks around the world begin to issue uh digital currencies or tokenized fi what happens to the private issuers of Fiat what happens to those of of of the tethers of the world and I've uh I've done work with different uh groups who have been pondering the same thing and um uh there's not time here to go through it but think of it as almost like a decision tree the central banks

say um we are going to issue a tokenized Fiat and no private issuer will be allowed to so tether and all the stable coins uh private issued stable coins disappear that would be the worst case scenario because the very reason the central banks are issuing a tokenized Fiat is because the private markets invented it and once government does anything all Innovation dies government does not innovate so is it likely that uh private markets are going to continue to evolve and innovate around around um stable coins of course of course but not if you outlaw the

private Market from issuing them so that would be the worst case scenario a mid-case scenario might be uh they central banks uh issue their their uh tokenized Fiat and say that uh um stable coins issued by private issuers have to be subjected to a lot of the rules that um crossb payment processors do now and that may cause things like defi to be harder to do because defi operators would have to be trying to do that kyc and AML function that really is hard to do in a blockchainbased environment so

um stable coins could still exist you could own them on an exchange whatever but you would maybe not be able to use them in the way we like to use them and then um the best way would be that central banks issue their their um uh tokenized Fiat and they have no opinion and do not interfere with the how the private markets um treat their privately issued stable coins and and that in that scenario you would have the greatest amount of innovation and use of stable coins because the private issuers would

always be pushing the envelope of what could be done next so I don't really know which way it's going to go you know there's a chance of any of those things happening certainly the fact that uh the the US Federal Reserve has really paused based on Pal's remarks the speed at which it's going to issue uh a central bank digital currency I think we have probably five years or so in the US to figure this out and uh that's probably good and maybe at that point it tether and its like will be so prolific that the they'll be hesitant The Regulators will be hesitant to to kill off the

private Market yeah I think it's it it's we're certainly in a scenario right now where as you said we need the Innovation we need the private market and it is allowing us to move at this rapid speed that the governments could never move at I hope that the governments don't slow us down and most likely this is a government by government Nation by Nation situation where different governments are going to respond differently and they're going to have different approaches true true but just like banking law banking law is supposed to be uh linked to the jurisdiction in which those Banks exist so why is it that US banking law is global law and it is global law which is annoying even in

China China abides by US banking law why because Banks only have value if they're connected to other Banks and the us through the Patriot Act and then Dodd Frank to abysmal pieces of legislation have created horrible tortures that they will inflict upon banks that don't comply with us banking law and so uh the US is probably the one country that could um severely restrict privately issued stable coins even issued in countries with with deposits in banks that aren't US Banks whether they will or not I don't know you know when Powell

said last year uh I think the way he phrased it was uh in the coming years is what I remember saying in the coming years we will be looking to research when I hear a Fed chairman say in the coming years that sounds like never that's decades that's like a century yeah in the coming years like what I mean if a corporation said that I would say that's five years out coming years who knows he's probably just kicking the can down the road to the next you know to the next uh head to to for that person to make the decision um maybe with Gary gendler more than likely uh stepping down whoever wins in the usid presidential election there will be a um

a more crypto friendly SEC which probably since that's part of the Treasury Department would have um some kind of uh positive effect on on stable coin issuers um so yeah I think I think stable coins you said at the beginning you know if if if crypto if nothing else had happened with crypto but stable coins that would be good I would I would agree I would say um uh stable coins are such an innovation in the history of money they second only to the invention of Fiat uh that uh stable coins uh if nothing else happened in

crypto uh crypto's market cap of 10 trillion I think would be justified just by the existence of stable coins and probably a lot of people not in crypto don't understand how important they really are and let's face it when a government says like sing uh El Salvador last year we're going to own Bitcoin or whatever because people are going to use it Bitcoin is a failure and that shouldn't be controversial as a payment system as a payment system as a payment yes and and and you know read the Bitcoin white paper it was designed as it was designed yeah which is fine things lots of things were designed for our use that never happened and they're

still useful right uh but stable coins tether wasn't designed for D5 but D5 came along and that's great but if you were going to get the advantages of a tokenized uh uh item for for especially for cross B it would look like tether so what what uh what should have happened already is many many companies around the world um should be using tether as a form of payment and particularly crossb settlement where most people just want they want you know a fixed amount of something they want to invoice you for

something that costs 1,000 USD and they want the equivalent of that in Euros or whatever it is they're taking they don't want to be subjected to the FX volatility because that's that's not their business and so um it is a puzzle to me why more businesses haven't started using things like tether but maybe maybe this cycle you know this bull market run in 2025 they will it's when you break it down like that it seems so obvious uh and I think when you explain when you explain stable coins to a non- crypto person it is very difficult to get but when you ask them how they send money across borders they

get it instantly because and I would even go I would even go further I've been in the payments space for a long long time I was the First Institutional Investor in um in PayPal you know back in the 90s uh I also uh I began my career as a uh as a bank auditor uh the movement of money the uh Payment Systems payment rails even excluding cross border but ad cross border um very very few people working in finance working in treasury groups in finance understand this very few and so your CEO or whatever is Never Gonna understand this

I mean when somebody um someone in Germany uh sells uh you know sneakers on ebay to someone in the US and they they get Euros uh you know there there was no Euro going back and forth to complete transaction um PayPal was never exposed to uh that volatility and the the um dollar to Euro outrageous 4% or whatever it is uh exchange fee never they never incurred that that is pure profit one of the things I would like your audience to

know is that um um when we think about how uh something like a stable coin could lower the cost of doing uh payments and remittance and all that people always tend to focus on the stipulated fees charged by credit card companies or um financial institutions that actually do the currency conversion and all that um but but the reality is the stipulated fees one% 2% The Interchange and all that is irrelevant compared to the cost of converting that currency I think I've done back of the envelopes over the

years I think the annual cost in a roughly 80 trillion global economy uh I think the cost of currency conversion is somewhere between 750 billion and one trillion annually that is captured by about 5,000 proxy of the government remember you're not allowed to touch uh currency uh going back to Biblical times unless the king or the government grants you special uh dispensation to do that uh money exchangers are pure profit makers they're always uh aligned with

governments you have to have a government permission to do it and that that um those 5,000 institutions which collectively get somewhere between 750 billion and one trillion think about that's every year and remember this this is not revenue revenue has a cost of goods and you get a gross margin this is pure profit right one trillion pure profit so if you never needed to engage in that in that currency conversion because you held the currency you received natively um then you all the businesses and the consumers of the world would keep that trillion dollars

annually and so so the reason why tether and these other stable coins is so incredibly disruptive is because it is a way to offset a trillion dollars of value extraction annually that has been going on since like crossborder trading began and letting people keep that and do something more productive with it um and it's also why I think many financial institutions are so wary of it and it's also why I think if we get a cbdc how I see it going and people in crypto will will find this disgusting

but I see it going like this the financial institutions themselves are going to use this tokenized Fiat but they're still going to charge you currency conversion costs even though they're never doing any effects I'm sure that's going to to happen oh yeah I mean you're right why why wouldn't they they don't want to give that they don't want to give that profit up no way no chance right they're they're too entrenched they they rely on that profit for their business at this point they're too heavy try to get PayPal to tell you in their financials what percent of their transaction uh revenue is from FX you know uh it's it's even when

you're a big customer of theirs and I have been uh that's not something they want to share with you what they do is they try to keep you focused on the stipulated fees you know William uh you're paying you 1.8% for the interchange for the credit card we're going to lower that to 80 basis points and you're like tell you what you can keep it all how about you let me in on what it is your assessing me when I convert from euros to dollars you know and that's when even the salespeople don't know and and if they won't tell you and if they don't know you know there's reason when I first to posed this question to my account managers

they were confused because they had never understood this these were people working for PayPal for years they're like what are you talking about and I said when you get me the name of someone and their title has something like treasury or crossborder FX and yeah eventually that happen happen and uh uh I I understood how how profitable this was for them so um this is why it's so disruptive for for something like a stable coin and and when something is so disruptive there is going to be a a lot of challenge in pushing it through we all know that disruption is always gradual it is always gradual and then

all of a sudden the term that we always use in crypto and I think we will see that moment when that happens with stable coins tough to say uh William I think we're gonna have to end here because we're already uh overtime but we're gonna have to get you back on for a part two at some point in the future because this has been such a great conversation I just want to give you a chance uh to tell people where they can follow you and if you have any final thoughts that you want to share I'm not easy to follow because I'm usually working I have a Twitter account William E Quigley William E Quigley but and I post uh you know shows like this things that I do uh and educational stuff I do um and uh I probably should comment more

on things that I see because I have a perspective that goes back many decades in banking and Venture and now crypto but uh I haven't much so far but you can certainly see when I'm doing shows like this I'll post them there and yeah maybe in December or something uh when uh Market is supposed to be going we can talk about what that means wherever Bitcoin is and I'll leave your audience with uh if Bitcoin isn't close to 100,000 90 to 100,000 that should be of concern in terms of uh using past patterns following uh uh happenings as an indicator of what's going to happen in

2025 so uh uh I don't tell people I think it's going to go between 90 and 100,000 by December I just say if it doesn't what that will mean is we are no longer on the patterns that we've been historically which means it's much more difficult to know what to do going into 2025 I like the uh the subtle price prediction William thank you so much for joining us today for everybody listening in remember none of this is financial advice investing in crypto investing in any asset is risky and you should only invest what you can afford to lose thanks so much again for listening in we'll see you next time have a wicked awesome day [Music]