Cryptofinance: Tether’s new take on the gold standard

Hello and welcome to the FT Cryptofinance newsletter. This week I’m taking a look at Tether’s new gold-backed stablecoin. 

Tether is arguably the world’s most important crypto company. Its USDT stablecoin is the biggest in the world with a market cap of nearly $113bn, making it bigger than the GDPs of Iceland and Luxembourg combined. In the first three months of this year the company made $4.52bn in profits, beating Wall Street giant Goldman Sachs’ $4.1bn.

This week Tether launched, in simple terms, a new stablecoin backed by gold, the latest step in the company’s expansion efforts and a new take on the gold standard.

The new token works like this: you deposit your fiat currency (worth a minimum of 50 troy ounces of gold, which is currently about $116,000) on the Tether Gold website. This is converted into tokens, which Tether says are backed 1:1 with a troy ounce of gold in the form of physical gold bars held in Switzerland.

You can trade this token, XAUT, on crypto exchanges, and it currently has a market cap of $576mn, according to CoinMarketCap.

XAUT has been around since 2020. The new bit is that now Tether will let you use your Tether Gold token as collateral for a new token, aUSDt. This token, the company says, can be used for “digital transactions, payments, and remittances with a currency that feels as familiar as the US dollar”, while staying exposed to gold.

The new token will be overcollateralised by the gold-backed coin.

“You would deposit your Tether Gold into a smart contract and say it’s $100 worth, you can mint up to $75 of aUSDT, and then you can use that as you see fit,” explains Andrew O’Neill, co-chair of the digital assets research lab at S&P Global Ratings.

In a short promotional video with a questionable voiceover, Tether says aUSDt “is the first Alloy by Tether product that aims to track the value of the US dollar using Tether Gold as collateral”.

O’Neill tells me that Tether’s risk disclosures make “interesting” reading. They state that a tokenholder “has no assurance” that a custodian will keep adequate “or any” insurance on the physical gold reserves, and there is a risk that the gold reserves “could be lost, damaged, stolen or destroyed”.

But the biggest risk for me is the idea of a gold-backed digital dollar created by a company with limited transparency. 

“My mind was genuinely blown,” one experienced crypto founder told me this week, after seeing Tether’s announcement. “Fundamentally what they have done is created a currency that is back on the gold standard.”

At least one of Tether’s employees agrees. One of them posted the announcement on LinkedIn with the caption “The (new) Gold Standard”.

“If the US inflation rates continue and so your actual US dollars are worth less and less, but you have this gold-pegged alternative . . . who cares what you call it, if it’s dollar-pegged and gold-backed, it is the best money you can create, and then it’s just a question of whether you do or whether you need to trust the person on the other side,” the founder said. The future may involve “a small number of semi-anonymous individual tech guys [who] are the controllers of the most powerful currency in the world”.

As we contemplate this dollar-pegged, gold-backed future, let’s take a brief trip down memory lane. Money launderers, Hamas and some Russian commodities firms are reportedly users of Tether. The company has never faced an independent audit of its business and, crucially, the reserves backing its stablecoin. Chief executive Paolo Ardoino blames the top auditors for not taking Tether on. 

For Tether, it marks the latest stage in its plan to expand beyond operating its synonymous stablecoin. In April, the company officially organised itself into four divisions, marking its expansion beyond USDT into areas such as bitcoin mining and market infrastructure; Ardoino said last week that the company’s venture capital arm plans to invest $1bn over the next year.

Tether’s promotional video ends by saying: “Let’s redefine the concept of stability together.” It remains to be seen how stable new digital assets used as collateral for even more digital assets will be.

Let me know what you think — email me at [email protected]

Weekly highlights

• The CFTC is investigating market maker Jump’s crypto activities, including its trading and investments, according to Fortune

• Standard Chartered bank is setting up a crypto trading desk for bitcoin and ether, Bloomberg reported

• Law professor Hilary Allen wrote about the dark side of tokenisation in the FT, warning of the risks of bringing traditional assets on to public blockchains

• The UK’s Financial Conduct Authority arrested two people in connection with a suspected illegal £1bn crypto exchange

Soundbite of the week:

Infamous “pharma bro” Martin Shkreli, who was released from prison two years ago, has been getting involved in crypto. He claims to have created the Donald Trump memecoin DJT, which soared in value this week, with Trump’s youngest son Barron.

Speaking on Twitter Spaces this week, he explained:

“It was the president’s son, [which] seems like a good idea.”

And finally:

Yesterday was the summer solstice, the longest day of the year, marking the real start of summer. So enjoy these photos of celebrations around the world, and I hope you enjoy the first summer weekend of the year.

Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click here.

Your comments are welcome.