Tether’s path to the spotlight

This is an audio transcript of the Behind the Money podcast episode: Tether’s path to the spotlight

Michela Tindera
Last year, two Financial Times reporters, Kadhim Shubber and Siddharth Venkataramakrishnan, started looking into this cryptocurrency company called Tether. As we discussed in our previous episode, Tether issues what’s called a stablecoin. Stablecoins are supposed to help investors move easily from traditional currency like US dollars into crypto. What’s significant about tether is that it’s the biggest stablecoin in circulation.

Kadhim Shubber
Stablecoins and tether in particular are the lubricant for the crypto economy.

Michela Tindera
That’s Kadhim speaking. And because Tether is so big, he and Sid wanted to learn more about who runs the company. One person they started looking at is Giancarlo Devasini. He’s the chief financial officer for Tether. He’s also the CFO of another company that’s a major crypto marketplace called Bitfinex. Of course, if you want to learn more about someone, why not look at the bio on their website? Giancarlo’s bio on the Bitfinex site is pretty detailed. Before reaching the heights of the crypto world, for example, he started this company called Solo in 1997. His bio says that Solo became the parent company to a collection of firms. They sold things like memory chips, DVDs and other tech hardware. His bio says his group of businesses grew to €113mn in revenue. And then it says shortly before the financial crisis hit in 2008, Giancarlo sold Solo and retired. But when Kadhim and Sid tracked down documents from 2007 about these businesses, they found a different story.

Kadhim Shubber
These companies were not sort of on the up and up, you know. The documents we had said that they’d been hit by falling memory chip prices, there had been a significant restructuring and the old banks, money in the banks wouldn’t extend the loans.

Michela Tindera
But there was an even bigger revelation that didn’t line up with his Bitfinex bio. The warehouse and some offices of Giancarlo’s faltering businesses burned down in 2008 and that fire doomed Solo.

[MUSIC PLAYING]

Kadhim Shubber
We don’t know, you know, the whole story, but it kind of puts it in a different light. The position he was in when he was coming to crypto in 2012, which was not sort of, you know, kind of, you know, during a retirement or what, but actually from someone whose, you know, previous businesses that he’d built up over years and years had had ended in sort of in a very, sort of, negative way.

Michela Tindera
But Giancarlo Devasini wouldn’t be down for long. A few years later, he would find his way to two of the top companies in the crypto world.

[MUSIC PLAYING]

Michela Tindera
Tether has been called the Federal Reserve of crypto. But it’s also faced questions around transparency and what kinds of assets are backing its tokens. In our previous episode, we explained exactly how much is riding on tether, in crypto and traditional markets. Without tether, the crypto economy could be seriously in trouble. In today’s episode, we’re going to dig into the professional histories of Giancarlo Devasini and his business partner, JL van der Velde. We want to see what their past can tell us about how they’re guiding Tether through these new challenges. I’m Michela Tindera, and this is Behind the Money, a podcast about business, money and power.

[MUSIC PLAYING]

Michela Tindera
Giancarlo Devasini doesn’t really do interviews. So what Kadhim and Sid have learnt came from a lot of Internet sleuthing and interviewing people who have known him. For example, he was born in Italy in the 1960s and eventually he decided to become a plastic surgeon. Sid says that Giancarlo eventually became disenchanted with being a plastic surgeon and moved on.

Siddharth Venkataramakrishnan
So one day he decided that he’d up sticks and move to, to East Asia essentially. And then he started importing or exporting electronic goods in the nineties.

Michela Tindera
But eventually Giancarlo came back to Italy and began the string of businesses that ended up under the parent company called Solo. Some of Solo’s subsidiaries are the ones that later went up in flames. That fire is the event that turned this story on its head for Kadhim and Sid.

Kadhim Shubber
You know, it’s slightly a kind of “aha” moment.

Michela Tindera
Learning about this fire, though, really changed how Kadhim and Sid thought about their reporting on Giancarlo going forward.

Kadhim Shubber
His previous business ventures had ended quite spectacularly, and for whatever reason, he was portraying the end of that time of his life differently in public. It puts in a different light the position he was in when he was coming to crypto in around 2012. This was someone whose businesses that he had built up over years and years had ended in quite a violent and dramatic way.

Michela Tindera
When Kadhim and Sid reached out to Tether for their article, the company insisted that Devasini, quote, “portrayed the facts entirely accurately”, unquote. So Giancarlo Devasini went from plastic surgeon to tech equipment entrepreneur and eventually found his way to crypto. Reporting on Giancarlo compelled Sid and Kadhim to also want to look into Giancarlo’s business partner, JL van der Velde, a person who also had a challenging past to trace.

[MUSIC PLAYING]

Michela Tindera
Kadhim and Sid say it’s not clear when exactly, but Giancarlo Devasini and JL van der Velde have been longtime business partners well before Tether was a thing. Jean-Louis, or JL as he goes by, van der Velde, is Dutch, but he left the Netherlands when he was in his twenties to go to university in Taiwan. After that, he ended up spending a lot of his time in Hong Kong.

[MUSIC PLAYING]

Kadhim Shubber
So Van der Velde, you know, he’s worked kind of broadly in various tech sales positions and in Hong Kong for the best part of three decades. There are bits of his career that we couldn’t pin down exactly, but for example, he was the co-founder of as the next software business during the dotcom boom. And subsequently he spent a lot of time in the same sort of business as Devasini, importing and exporting tech hardware.

Michela Tindera
In 2006, JL took control of a company called Huashun Electronics. It’s based in China and produced technology equipment like amplifiers and TV receivers. At that time, the company was making about 3mn pieces of tech equipment per year from a factory outside Shenzhen. But then Kadhim, Sid, and another FT reporter, Ryan McMorrow, discovered something. They found that a few years after JL acquired the company, creditors started chasing it to pay its bills. The FT reported that by 2013, Huashun had been ordered to repay the equivalent of about $75,000 in more than a dozen judgments. On top of that, other records showed that Huashun frequently owed back taxes with fines for late payments. In 2021, the FT reported that Chinese regulators had added Huashun Electronics to its list of, quote, “seriously untrustworthy and law violating”, unquote, companies. That means that JL is banned from running any other companies in China. After the FT reported on this, Tether came out with a statement. They said that the FT story, quote, “highlights the challenges of doing business in China. And despite this, JL was able to build positive relationships with his business constituents”, unquote. So we have two guys, both with somewhat unique professional backgrounds, who, by the early 2010s, are both in their forties and both seem to be ready for something completely new.

[MUSIC PLAYING]

Michela Tindera
Cryptocurrency was in its infancy in the early 2010s. It was during these early days that Giancarlo and JL find their way to two crypto companies. These companies would become Tether and Bitfinex.

Kadhim Shubber
So Bitfinex, the exchange, gets off the ground in 2012. Tether launches in 2014. The founders of Tether, you know, included a former banker called Phil Potter who was involved until about 2018. There was a guy called Brock Pierce involved at the very start. He ran for president and he was previously a child movie star.

Michela Tindera
Brock didn’t stay with the company long, but the idea they came up with stuck: the stablecoin.

Kadhim Shubber
The basic proposition of Tether is that cryptocurrencies are, you know, interesting and exciting, but they’re very, they’re not super useful for transacting because they’re volatile. So if you hold bitcoin and you want to buy and sell sort of non-crypto assets or even other crypto assets with bitcoin, you know, the value of the thing that you’re buying with is fluctuating a lot and that’s not helpful.

Michela Tindera
That’s where a stablecoin comes in. It’s a one-to-one exchange with conventional currencies. So, for example, stablecoin’s value can be pegged to the dollar.

Kadhim Shubber
And therefore running Tether as well as running Bitfinex, it’s not known for quite some time that these two companies are, you know, have the same ownership and same people running it. That’s something that actually only emerges later. So it’s quite secretive.

Michela Tindera
Kadhim says it’s tough to know even today exactly how many employees work at Tether because Tether and Bitfinex are so interrelated. But Kadhim and Sid’s reporting shows that at least Giancarlo is quite involved in the day-to-day operations. Kadhim and Sid interviewed Sam Bankman-Fried, the founder of FTX, another major crypto exchange, and they asked him about JL and Giancarlo.

Kadhim Shubber
FTX is one of the small handful of players that does business directly with Tether.

Michela Tindera
Sam told them that he had only met JL van der Velde in person once, but that he’s worked with Giancarlo Devasini a lot.

Kadhim Shubber
One of the very interesting things he told us was that a significant amount of the way that Tether works is still manual. He was full of praise for how responsive Devasini is, 24/7. If you need to talk to him, if you need to do business with him, he’s there. There’s a side of tether, which is a stablecoin, a digital token that you can transact with in the crypto market. And then there’s a side which is sending and receiving money into bank accounts. So there’s tech there, but there’s also a manual hands-on side, which is interacting with a traditional financial system, you know, that involves quite a small number of people who run Tether.

Michela Tindera
Their role in the crypto economy has made both JL and Giancarlo very rich.

Kadhim Shubber
They are enormously wealthy now, in part because of their crypto exchange, Bitfinex. In 2019, Bitfinex disclosed that it had paid $260mn in dividends the previous year to its shareholders. Crypto exchanges have been the gateway through which money is poured into this new industry. So if you run one of the big ones like Bitfinex, you’ve done pretty well for yourself.

Michela Tindera
And Tether has ballooned in size recently. In fact, during 2021, the number of tokens it had in circulation grew from 20 billion to 80 billion. But reaching the top of crypto has not come without new challenges. Around the same time, JL and Giancarlo’s businesses would be accused by US regulators and authorities of presenting a business that is not quite what it seems.

[MUSIC PLAYING]

Michela Tindera
When Tether started out, its business model seemed pretty straightforward. Kadhim says Tether’s original proposition was that for every one tether stablecoin there is one US dollar sitting somewhere in a bank account to back that up if an investor wants to pull their money out.

Kadhim Shubber
It gets complicated in two ways. The first is that maybe banks don’t want to hold money for you. The crypto industry has faced that problem and certainly Tether specifically has had that problem. The second is, while it might be practical to hold, say, $1mn in a bank account, it gets more difficult as the stablecoin gets bigger and bigger. You can’t really go to a bank and say, here’s $70bn, please hold it in a deposit account. So as tether grows, inevitably there’s this incentive towards investing reserves in assets rather than holding it all in cash deposits.

Michela Tindera
Tether had said that since it launched in 2014, its tokens were fully backed by US dollars in bank accounts. But then, in February 2019, it pivoted and it then said that its reserves now included traditional currency, cash equivalents and other assets.

Kadhim Shubber
There’s a lot of controversy over whether it was transparent with, with you know, the market about when it made that switch. And then the question becomes, you know, are the assets safe and where are those assets and what are they?

Michela Tindera
In 2021, it became public that authorities and regulators had also been looking into this question. After conducting an investigation into Tether and Bitfinex, New York Attorney-General Letitia James put out a statement last year saying that her office had found that in years past, quote, “Tether’s claims that its virtual currency was fully backed by US dollars at all times was a lie”, unquote. The investigation found that Tether and Bitfinex lost access to banks that they had been using before 2017, including Wells Fargo. So instead, they turned to some payment processing firms, like one based in Panama called Crypto Capital. In 2018, Crypto Capital lost $850 million that it had been holding for Bitfinex. Messages that were revealed in the New York AG’s investigation show Giancarlo Devasini, operating under the screen name “Merlin”, pleading with someone named “Oz” from Crypto Capital. He was asking for the return of Bitfinex’s cash.

Kadhim Shubber
What happened is now you’ve got a massive hole in Bitfinex’s balance sheet. And so the folks at Bitfinex and Tether and these are the same people pretty much, remember? They decide that they’re going to fill that hole by lending Tether’s reserves to Bitfinex.

Michela Tindera
The amount that Tether lent was later repaid by Bitfinex. But this proved to be a pivotal moment in Tether and Bitfinex’s trajectory.

Kadhim Shubber
The significance of that is Tether’s always promised its users that there’s money in the bank to back up the tokens that are in circulation. Now that money is in Bitfinex’s bank. What they have is a, an asset in the form of a loan to a related party.

Michela Tindera
Last year, the New York AG Letitia James called Giancarlo Devasini and his colleagues, quote, “unlicensed and unregulated individuals”, unquote, who were, quote, “dealing in the darkest corners of the financial system”, unquote.

[MUSIC PLAYING]

Michela Tindera
Neither Tether nor Bitfinex admitted wrongdoing in their settlement with the attorney-general, but they were asked to pay 18 and a half-million dollars in penalties. Tether and Bitfinex have told the FT that those phrases from Attorney-General James saying that they had lied and the other about dealing in the darkest corners were not in the settlement they struck with her office last year. Just a few months later, a government regulator known as the Commodity Futures Trading Commission announced that it had settled charges against Tether. The group found that in years past, Tether had misrepresented to customers that it always had the government-backed currencies to match its tokens. Tether had to pay $41mn to settle that, and Bitfinex had to pay out another one and a half-million dollars to settle separate charges filed against Bitfinex. These were major instances of authorities and regulators inspecting Tether’s core business and claiming that they found problems. Tether would in turn agree to be more transparent. But would it be enough?

Tether pledged to be more transparent about its reserves after it settled with the New York attorney-general in February of last year. To meet that obligation, Tether has released what are called attestations. But as we mentioned when we spoke with FT reporter Ethan Wu in our last episode, those are basically snapshots of what they have at the moment. And Ethan says they’re not the full picture that an audit might provide.

Ethan Wu
And Tether has had a very, I think, vociferous back and forth with its critics saying, our stuff is safe, and people will say, no, it’s not. And they’ve gone back and forth. I do think over time, Tether’s reserves, as far as I can tell, which is perhaps not very much, have gotten safer. It looks like they’re holding more Treasury bills and bonds and fewer risky credit investments like commercial paper. But they don’t release a full audit. And without a full audit, you never really know.

Michela Tindera
In our previous episode, we explained what happened when another popular but smaller and different kind of stablecoin called terra collapsed last month. In short order, tether also briefly unpegged from the dollar. Tether bounced back quickly then. But Ethan told us about how, if a real bank-run scenario took place, it could destabilise not only the crypto markets, but also the traditional markets.

Ethan Wu
If tether isn’t worth a dollar, people could lose faith in the project. They could start going to Tether and demanding their money back. Hey, you guys are worth $0.95. This, this is bizarre. I want my money back. Give me my dollar. I don’t want $0.95. I want a dollar. And that’s where you get into this bank-run-style scenario where Tether has to start selling their assets to meet a wave of redemptions, a wave of people demanding their money back. And that could cause big ripple effects in traditional markets as they’re doing a fire sale. You know, they’re trying to get rid of their assets as quickly as possible. That could be very destabilising. And I think once you’re in that territory, you don’t really know what happens. It could be a small crisis. It could be a huge crisis. It’s really hard to say. And that possibility, I think, is really quite scary.

Michela Tindera
Tether’s company blog had a post published in May that said that Tether, quote, “engages in constant risk management and stress-test scenarios, ensuring it always has at hand a liquid portfolio of assets to manage redemptions, even in a bank-run scenario”, unquote. We asked to speak with Giancarlo and JL and Tether declined. But in response to some of our questions, Tether also said the company, quote, “has never refused redemption in its history”, end quote. Events like terra’s collapse and tether’s unpegging have led to more calls for more regulation of stablecoins. Last month, Treasury Secretary Janet Yellen testified before the House Financial Services Committee about this.

Janet Yellen
Look, I just think there needs to be a comprehensive and consistent regulatory approach for stablecoins because of the risks they can pose to the financial system.

Michela Tindera
Ethan thinks that the way Tether operates and how transparent it is will have to change if regulation comes for it.

Ethan Wu
The big question about Tether is: does Tether survive tighter regulation? And it’s going to have to become a totally different company if it’s going to. This company is very secretive. They’re very tight-lipped about what they do and and who works for them and you know what they hold. That’s not going to cut it with regulators. At once, there are some kind of significant lawmaking efforts you know well underway to becoming the law of the land. You know, Tether’s going to have to change the way it runs the company or it’s going have to close up shop.

Michela Tindera
Tether says that it remains committed to leading in, quote, “transparency and accountability to its customers”, unquote. It also says it is, quote, “the first among its peers to disclose the composition of its reserves and deliver public attestations without misleading the public to think that they were official audits”, unquote. But Tether has yet another challenge on the horizon. In July 2021, almost a year ago, Bloomberg broke a story that said that the Department of Justice was investigating whether Tether and its executives committed bank fraud. The investigation is reportedly centred on whether years ago Tether hid from banks that their transactions were linked to crypto.

Kadhim Shubber
You can imagine three plausible scenarios.

Michela Tindera
That’s Kadhim again.

Kadhim Shubber
First, we may never hear anything of it, which means they investigated and there were no charges to bring. I think it’s only fair to assume this as the base case. The folks at Tether, like everyone else, deserve a presumption that they’re completely innocent.

Michela Tindera
Kadhim says that the second thing that might happen is that the DOJ may investigate and find that Tether as an entity has some sort of liability. That sort of thing could lead to a settlement, which Kadhim says is something that the DOJ does regularly.

Kadhim Shubber
And third, and finally, which would be the most significant, you could see individuals charged and possibly a trial, which, to be clear, could still end in an acquittal. But thinking back to what Sam Bankman-Fried talked about in terms of the manual element of the company, the personal element of the company. Then you have a new question: what would a process like that mean for the price and the stability of the tether token?

Michela Tindera
Tether responded to Bloomberg’s reporting last year in a blog post. They said that the article was based on, quote, “unnamed sources and years-old allegations patently designed to generate clicks”, unquote. They added that the business, quote, “routinely has open dialogue with law enforcement agencies, including the US Department of Justice, as part of our commitment to co-operation, transparency and accountability”, unquote. Before there was Tether, there was a fire that ended a troubled company in Milan. There was a business owner who would eventually be barred from operating in China. But these events didn’t stop Giancarlo Devasini and JL van der Velde from reaching the top of the crypto world. Since then, the New York attorney-general has accused them of deceiving the market. And the DOJ is reportedly investigating whether Tether’s executives committed bank fraud. Still, Tether is the number one stablecoin in the world, but crypto is becoming more mainstream and getting more attention. As regulators demand transparency, that could likely mean a new era for JL and Giancarlo’s business.

[MUSIC PLAYING]

Michela Tindera
Behind the Money is hosted and produced by me, Michela Tindera. Stephanie Horton is our contributing producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.