Tether earned billions in interest, so naturally it’s launching a venture arm

Tether plays an interesting role in the cryptocurrency ecosystem as one of crypto’s largest liquidity providers. Tether issues a stablecoin called “USDT,” which is pegged to the US dollar. You can purchase 100 USDT for $100, and, later, that USDT can be redeemed for $100, destroying the tokens in the process.

Crypto traders prefer USDT to dollars due to its ease of transaction: traders can swap USDT for other cryptocurrencies more quickly than it can move from crypto to dollars, making it the preferred “cash” asset in volatile markets.

There are currently $115 billion worth of USDT in circulation, which are, according to Tether, “backed 100% by Tether’s reserves.” 84% of those reserves are in cash and short-term deposits (Tether owned $91 billion in US Treasuries in June), 3% precious metals, 4% bitcoin, 3% “other investments,” and 6% secured loans. Basically, Tether takes your money, stores it in its reserves, and gives you USDT, and then it reverses the process when you convert back to fiat (US dollars).

A couple of years ago, when interest rates were still deflated, Tether was earning basically zero yield on its deposits, but now, with the Federal Funds Rate above 5%, Tether is earning a lot on its deposits: specifically, the company reported a $5.2 billion profit from its reserves in the first half of 2024 alone, and $11.9 billion in the last 24 months. So, what is Tether doing with its billions in profits? Reinvesting in Treasuries? Distributing dividends to its private shareholders? Buying more bitcoin?

Nope, it’s launching a venture capital arm. From a recent WIRED interview with Tether’s CEO Paolo Ardoino:

WIRED: This year, Tether has moved to diversify its business model with a push into venture capital. Tell me about the rationale.

Ardoino: In the last 24 months, Tether has accrued around $11.9 billion profit. With this amount of money, we could have distributed it all to shareholders, to make everyone happy. Instead, part of it is being added to the reserve to further back the stablecoin, and the rest is basically being held in the investment arm.

How much capital will Tether commit to venture investments?

We will always prioritize the stablecoin business, because risk management is very important. Right now, we have a good buffer on top of the reserve, but if USDT keeps expanding, we will expand that proportionally.

But almost everything else—I would say more than 90 percent of the profit Tether makes—we will look to reinvest in things that matter to us and our community. We don’t need to give out big chunks of money as dividends.

Some VCs have done a poor job of making character assessments with respect to crypto founders, some of whom—like Sam Bankman-Fried—were later convicted of fraud. How do you plan to ensure Tether doesn’t make the same mistakes?

Looking under every rock and doing the deepest level of due diligence is the only way to save the capital you invest. Not every single investment will be perfect, but we will come into every company with our heart and brain to ensure the maximal result.

I have long found the “big company launches a venture arm to fund small companies” play interesting (I used to work for UPS, the shipping company, and even it had a venture arm), but Tether took this to another level. Given that businesses typically have a fiduciary duty to their shareholders, the decision to invest more than 90% of one’s profits in outside investments instead of either reinvesting in reserve assets or paying shareholders is surprising.

Ardoino noting the importance of “looking under every rock and doing the deepest level of due diligence” is also ironic, considering that despite managing more than $100 billion, Tether has never been audited (Ardoino has stated that none of the Big Four accounting firms would audit them out of fear of damaging their reputations, perhaps due to their prior relationships with traditional banks).

One would hope that, before deploying more than $10 billion in venture bets, Tether seeks more transparency than it has provided its own critics.