This Is What We Know About How Tether Works

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

Tracy, you know, one of the funny things, I guess, I don't know if funny is the right word, but one of the funny things with crypto is that, you know, it's shocking when a big entity like FTX collapses, and there have been other collapses as well, but on some level, I don't think anyone really thinks anyone in this space is like blue chip or like completely legit, right? Like there's no one in crypto that you would like trust the way, like say you'd trust like putting your money at like JP Morgan or something.

Tracy Alloway (0:47)

I think that's true, but everything in crypto is kind of relative. So I have previously described FTX as like the Microsoft of crypto exchanges, because it was the one that people thought was kind of best practice, and it had all these connections with traditional finance and Sam Bankman Fried was lobbying for stronger crypto regulation and everything seemed kind of like up and up and it had this wonderful liquidation engine that everyone talked about. And clearly, clearly that wasn't the case, but you're right. There are actors in the crypto space of varying quality, let's say.

Joe Weisenthal (1:24)

Right. And you said the key word which you nailed is relative, because sure, there are some that seem to be kind of well-run and decently well-regulated. And then there are others that people have been saying, oh, this is going to collapse. This is a fraud. This is whatever for years and years.

And you don't really know which one is going to go. And it turns out that a lot of the critics of crypto may get things right. But on the other hand, don't really know which domino is going to tumble next. It's been surprisingly hard to figure that out.

Tracy Alloway (1:57)

Yeah. And again, I hesitate to use the word fun, but I guess that's one of the unusual things about crypto is the guys you think aren't going to make it can persist for a lot longer that those that you think have a better chance. So, you know, things like Dogecoin, how long has that lasted?

Joe Weisenthal (2:16)

It's still here, yeah.

Tracy Alloway (2:17)

I know.

Like something that is clearly a joke still has a nominal monetary value. And then of course, there is Tether.

Joe Weisenthal (2:25)

Yes. And so I think when FTX collapsed, both of us sort of had the same thought at the same time, which is like, man, you know, it's funny. Again, I don't know if funny is the right word, but Tether is still here. And people have been betting against Tether or predicting its demise or claiming that it's a fraud or claiming that it's going to get shut down by regulators or claiming that it's going to lose its peg forever.

Meanwhile, all of these things implode that aren't Tether. And Tether as of right now, which is we're recording this on December 5th, is trading about one to the dollar.

Tracy Alloway (2:58)

Right, so Tether is a stable coin. One Tether is supposed to be worth $1 at all times. It has previously dipped below that level, particularly after the big crypto blowups in the spring of this year when TeraLuna collapsed. And then when FTX collapsed, it slipped slightly below its $1 peg, but it's come back. And I think it has been remarkably resilient when you consider that literally for years, people have been asking about this company, how it's run, the sort of web of relationships around it.

And perhaps most crucially, are there actually things backing Tether? Because as I mentioned, it's a collateralized stablecoin.

It is supposed to be backed by dollar assets, but there's always been a lot of doubt and questioning over whether or not those exist. In fact, last year, Tether and Bitfinex were ordered by the CFTC and also the New York Attorney General to pay millions of dollars in fines for misleading customers. And Tether's own PR strategy when it comes to this, I think it's fair to say it's been a little bit weird. And I'm just thinking, you know, one of the ultimate ironies is, I remember we had Sam Beckman Fried on, the FTX founder with Matt Levine, I think our first conversation with those two, and we asked SPF about Tether, and he basically said something along the lines of like, oh, it's just a, you know, it's a complete mess. Like, you know, it's kind of a mess of a process maintaining this thing. And so if SPF is telling you that this thing is messy, I think it deserves its own episode, right?