After the crash, crypto boosters are still HODLing

Last week saw TerraUSD — the third-largest stablecoin, a token nominally pegged 1-to-1 to another currency — lose nearly all of its value, while bitcoin continued to fall, plunging below $27,000 on May 11. But crypto’s current tumult will not jeopardize two of the industry’s flagship projects — El Salvador’s Bitcoin bond and Tether — according to Paolo Ardoino, the CTO of Bitfinex and Tether, a stablecoin pegged to the U.S. dollar and the world’s most traded cryptocurrency, although experts remain skeptical of their viability. 

Much of the current crisis stems from the collapse of what was meant to be one of the most stable assets in the industry. Bitcoin already worried crypto-skeptical experts as it became increasingly entangled with traditional speculative investors. “We still see bitcoin being pretty tightly correlated to traditional markets,” Bennett Tomlin, a data scientist focused on fraud and host of the Crypto Critics’ Corner podcast, told Rest of World.

Ardoino also attributed the current crypto slump to the fact that most of the crypto industry is now driven by traditional traders, who sold their holdings as the S&P 500 Index suffered six consecutive weeks of losses, he said. “There is no separation between crypto finance and finance anymore — it’s all finance.” 

With bitcoin proving too volatile, stablecoins are often used as a hedge against inflation in markets like Lebanon, Venezuela, and Nigeria. But, last week’s bitcoin collapse was due in part to the crash of TerraUSD, an algorithmic stablecoin. Unlike traditional stablecoins, which ostensibly manage their peg through reserves of the currency they are tracking, TerraUSD maintains its $1 peg through its own separate crypto token called Luna, as well as smaller holdings of bitcoin. 

“The main mistake was that [TerraUSD’s] creators called it a stablecoin,” said Ardoino, distinguishing algorithmic stablecoins as a separate category. “A stablecoin needs to track the price of its underlying currency, no matter what.”

As opposed to algorithmic stablecoins like TerraUSD, Ardoino said that Tether is a stablecoin because it is backed mainly by U.S. treasuries. Investors wavered when Tether briefly dropped below $1 on several exchanges last week, but then rallied after holders realized that it was able to process all withdrawal requests, unlike TerraUSD — $7 billion since last Wednesday.

Tether has come under fire over whether it is actually backed by fiat currency, though. In 2021, it was fined $41 million by the U.S. Commodity Futures Trading Commission for “making untrue or misleading statements” to customers. Ardoino blamed this on the fact that even the largest banks will not hold tens of billions of dollars in cash, leading Tether to hold much of its reserves in short-term corporate-issued debt.

The company has been converting commercial papers into more secure U.S. treasuries after its legal issues, although many experts still question the opaque nature of its underlying reserves. Tomlin said that unlike money market funds, Tether does not reveal the counterparties holding its treasuries, instead claiming that the details are part of the company’s “secret sauce.”

Ardoino instead put the onus on regulators, who he said are not providing clear guidelines on how stablecoins should be managed. “Otherwise, every single stablecoin will be using a different mechanism,” he said. 

Ardoino remained confident the slump will not impede the sector’s long-term growth because of the tribal nature of cryptocurrency, meaning its acolytes will support the industry due to its underlying ideology rather than profit-margins. 

As the first country to adopt bitcoin as legal tender, El Salvador’s imperiled Bitcoin bond represents a major test for his assertion. Ardoino’s Bitfinex will serve an important role as the exchange for El Salvador’s planned $1 billion raise, which has been put into further jeopardy thanks to the recent crash and continuous delays. 

Salvadoran president Nayib Bukele announced the Bitcoin bond — or Volcano Token — in November. The idea was to raise $1 billion from investors, with half of the proceeds going to purchase more bitcoin, and half financing infrastructure projects in El Salvador, including an ambitious plan to build a city dedicated to the cryptocurrency. Amid May’s slump, Bukele doubled down on his bet, claiming to have bought an additional 500 bitcoin — worth $15.5 million — using government funds. 

After originally stating that the token would be available in early 2022, El Salvador’s finance minister later pushed the date to mid-March, and then delayed the project indefinitely, citing the war in Ukraine and the price of bitcoin. Meanwhile, Bloomberg reported a lack of investor interest as a reason for the delay. 

The government approached Bitfinex soon after the initial announcement to serve a crucial role, as the exchange for investors to purchase the Volcano Token. Ardoino denied a lack of investor interest as a reason for the delay, claiming that he has fielded “hundreds of millions of dollars of investment power” from retail investors and crypto whales, as the largest holders are known, although he admitted that the current bitcoin market conditions are not ideal for the project.

Tomlin was skeptical of the claim. “If there was this broad demand for the Bitcoin bond, then El Salvador would not have delayed it when they’re so cash-poor,” he told Rest of World. 

Ardoino pointed to El Salvador’s ongoing crackdown on gang violence as another reason for the Volcano Token’s delay. The Bukele-controlled Congress needs to pass a digital securities bill to start the process, which Bitfinex helped advise, but the recent “war on gangs” seems to have taken up most of the government’s bandwidth, Ardoino said. He expected the law to be passed in the first half of June, with the token launched in mid-September.

Meanwhile, economists have speculated that the bond was a ploy for Bukele to circumvent El Salvador’s debt crisis, with the country at risk of defaulting on its $800 million traditional Eurobond payment in January 2023.  

Bukele’s steadfast commitment to the project is what Ardoino said is keeping the crypto community interested in the token. “There is no doubt that as a private investor you can make more money investing in bitcoin rather than the Volcano Token,” since investors will only get 25% of the price appreciation of bitcoin after five years, as well as a 6.5% coupon, Ardoino explained. 

“It’s not all about financial gains,” Ardoino added, citing the tribal nature of the crypto community that will support El Salvador’s project as the first country to adopt bitcoin, at any cost. “When I talk to people, they tell me they are interested in investing because the Volcano Token cannot fail. El Salvador cannot fail,” he told Rest of World. 

“Keep in mind that Shiba Inu has a valuation of over $7 billion, and that’s a dog token,” he added. “I can see why the government in El Salvador is comfortable in its projection of raising $1 billion.”