After the crash, crypto boosters are still HODLing

Last week, TerraUSD — the third-largest stablecoin, a token nominally pegged 1-to-1 to another currency — lost almost all of its value, while bitcoin continued to fall, falling below $27,000 on May 11. But the current crypto turmoil won’t endanger 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 US dollar and the world’s most traded cryptocurrency world, although experts are skeptical about its feasibility.

Much of the current crisis has stemmed from the collapse of what should be considered one of the most stable assets in the industry. Bitcoin was already worrying crypto-sceptical pundits as it became increasingly entangled with traditional speculative investors. “We still see Bitcoin being fairly closely correlated with traditional markets,” Bennett Tomlin, a fraud-focused data scientist and host of the Corner of crypto critics podcast, told rest of the world.

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

With bitcoin proving too volatile, stablecoins are often used as an inflation hedge 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 track, TerraUSD maintains its $1 peg through its own separate crypto token called Luna, as well as smaller bitcoin holdings.

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

Unlike algorithmic stablecoins like TerraUSD, Ardoino said Tether is a stablecoin because it is primarily backed by US Treasuries. Investors reeled as Tether briefly fell below $1 on multiple exchanges last week, but then rallied after holders realized that unlike TerraUSD — $7 billion as of last Wednesday — it was able to process all withdrawal requests .

However, Tether has come under criticism as to whether it is actually backed by fiat currency. In 2021, the company was fined $41 million by the US Commodity Futures Trading Commission for making “untrue or misleading statements” to customers. Ardoino attributed this to the fact that even the largest banks will not hold tens of billions of dollars in cash, prompting Tether to hold much of its reserves in short-term corporate bonds.

The company has converted commercial paper into safer US Treasuries following its legal woes, though many pundits still question the opacity of its underlying reserves. Tomlin said that unlike money market funds, Tether doesn’t disclose the counterparties holding its government bonds, but claims the details are part of the company’s “secret sauce.”

Ardoino instead put the blame on regulators, who he said did not provide clear guidelines on how stablecoins should be governed. “Otherwise, each individual stablecoin will use a different mechanism,” he said.

Ardoino remained confident that the slump will not hamper the sector’s long-term growth due to the cryptocurrency’s tribal nature, meaning that his followers will support the industry based on its underlying ideology rather than its profit margins.

As the first country to adopt bitcoin as legal tender, El Salvador’s compromised bitcoin bond represents a major test of its assertion. Ardoino’s Bitfinex will play a key role as an exchange for El Salvador’s proposed $1 billion capital raise game, which has been further compromised by the recent crash and ongoing 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 buy more bitcoin and half to fund infrastructure projects in El Salvador, including an ambitious plan to build a city that grows dedicated to cryptocurrency. Amid the May slump, Bukele doubled down on his bet, claiming he bought another 500 bitcoins 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 back to mid-March and then indefinitely postponed the project, citing the war in Ukraine and the price of Bitcoin. Meanwhile, Bloomberg cited a lack of investor interest as the reason for the delay.

The government approached Bitfinex shortly after the initial announcement to play a crucial role as an exchange for investors to buy the Volcano token. Ardoino denied a lack of investor interest as the reason for the delay, claiming he had leveraged “hundreds of millions of dollars in investment power” from retail investors and cryptowhales, as the largest holders are known, although he admitted that current Bitcoin market conditions are for the project not ideal.

Tomlin was skeptical of the claim. “If there had been this broad demand for the bitcoin bond, El Salvador would not have delayed it when they are so tight on cash,” he said rest of the world.

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

Meanwhile, economists have speculated that the bond issue was a ruse for Bukele to sidestep El Salvador’s debt crisis, as the country risks defaulting on its traditional $800 million Eurobond payment in January 2023 to guess.

Bukele’s unwavering commitment to the project is what Ardoino said to keep the crypto community interested in the token. “There is no doubt that you can make more money as a retail investor by investing in bitcoin than the Volcano token,” given that after five years, investors receive only 25% of bitcoin’s price appreciation and a 6.5% coupon. explained Ardoino.

“It’s not just about financial gains,” Ardoino added, citing the tribal nature of the crypto community, which will support El Salvador’s project to become the first country to adopt Bitcoin at all costs. “When I talk to people, they tell me they are interested in investing because the Volcano token cannot fail. El Salvador must not fail,” he said rest of the world.

“Remember Shiba Inu is valued at over $7 billion and that’s a canine symbol,” he added. “I can understand why the government in El Salvador is happy with its projection of raising $1 billion.”