Does Tether Cause Systemic Risk for the DeFi Ecosystem? | Sonya Kim | Luca Prosperi | Phil Fogel |

[Music] awesome huge thanks to Gordon uh for talking about the importance of stable coins uh with circle uh we're going to continue the conversation about stable coins with this next talk titled does tether cause systematic risk for defi ecosystems uh this talk is going to be hosted by Phil from Cork protocol please welcome our speakers [Applause] hello everyone um before we jump into the topic it'd be great to introduce our great panelists um Luca and Sonia if you guys want to quickly introduce yourselves um hi everyone I'm Luca I am the founder of a stable coin decentralized infrastructure project called mzero I've been researching writing and building stable coins for for quite a few years so thanks for having me hi everyone I'm Sonia chef at Steakhouse Financial uh we are bridging defi with trafi we're Crypton native Consultants to some of the largest Dows including maker da and lighter da we're also risk curators on a lending platform called Moro um and we've been uh delivering yield to stable coins including usdc and usdt depositors and I'm Phil I'm one of the co-founders of cork protocol we are tokenizing risk and building ways for people to price hedge and trade the risk of deegs on stable coins liquid staking and reaking tokens so as long as you're not a regulator you can think about it conceptually as a credit default swap like product for pegged assets so let's dive in tether is by far the largest aable coin with over 70% market share it's 2 and a half times larger than Circle its next competitor and everyone else is sort of you know know making up just a very little trunch of that and yet tether doesn't do public audits um there's been for years F there have been books written about it there's been you know lots of journalists have gone down the rabbit hole of trying to prove that tether was not fully backed yet it never really got there and so the ecosystem has sort of accepted that tether is safe and I guess the overarching question is is that true okay should I take this first you go first um I I have um um not obvious take on this um so I think the interesting like the panel the the title of the panel is is tther does tther constitute systemic risk for crypto yes we have 21 more minutes to spend on this but yes um but I don't think I don't think it's for the reasons everybody thinks about uh interestingly enough uh lack of transparency if you look in research lack of transparency is one of the key characteristics of money market instruments nobody knows what is the risk that Banks actually have on their balance sheets not even not even the board members of those Banks I sat on the board of ECB regulated Banks nobody knows uh nobody cares I think that so lack of transparency is not necessarily A Bad Thing interestingly enough and there are people in the audience who are remember this very well when svb went down Circle deaged exactly because everybody knew the risks this usdc had so excessive transparency is very bad for money market instruments um so I think tedar is big uh is it safe is it the question is is it um enough reserved or not I think this is not the right question I think the right question is is the equity buffer Ted has big enough to absorb the unknown unknowns that are in the balance sheets in my opinion no um but the best way to do it is actually grow other other ecosystems that are developing stable coins alongside tether instead of converging entirely in one issue I think tether's had an interesting Journey um if we're talking about tether in 2025 it paints a very different picture to tether in you know 2017 um even though they don't do full audits they do report these attestation reports if you look at the composition of the reserves right now um it's you know over 80% cash and cash equivalent the problematic High credit risk corporate bonds that were kind of you know talked about very widely um are now less than 0.01% of the reserves so I think the credit profile or some of the risks that um you know we were weary of back a few years have Di finished and uh you know now thanks to vibrant risk-free rate environment they are one of the most profitable financial institutions in the world they've uh you know made 13 billion a net profit last year drawing 10 billion in dividends so from a well capitalization perspective I think tether looks quite good today um of course risk exists where you don't think there is risk so um yeah tether's to to my mind uh been stress tested and has been the focus of um many people's nervousness so ironically perhaps there's less risk than uh what we've been you know uh worried about in the past at this point what would actually cause a tether deeg what what scenarios can you paint that would actually land us there so I so I I I agree on on the ability of tther the teder has demonstrated to churn their balance sheet and improve the quality whether there is enough capital I mean I used to be a financial institutions analyst so if I look at that balance sheet through a basil 3 framework I would probably put a couple of billion dollars on on top of it but for tedar it's like 40 days of operations so it's good position to be um in my opinion actually the highest risk interesting enough for that is Bitcoin Bitcoin currently represents a very significant portion of Ted's balance sheets and um Bitcoin is a very volatile asset but at the same time I think that trust of the ecosystem on an isue is very important for digital money and I think the crypto system TR trust the tar is going to stick around for long enough to go through a bare Market in Bitcoins I think the fact that tedar hasn't been bending the knee to Regulators that were trying to protect the financial sector and the banking sector has put them in the great position Visa V competitors to be considered the one of the co core assets of crypto so my opinion is Bitcoin is the short-term major short-term risk for teder and we have seen the volatility in Bitcoin market now but trust is the most important thing that you have when you're a currency Builder and tther surprisingly has more trust in circle in crypto because we know that they are here to challenge the financial sector and probably circle is not so uh and I have a lot of respect for for Circle as well but that's the truth um yeah I agree that Bitcoin is a risk um perhaps it is a bit overplayed so last time I checked their balance sheet they had around 7 billion in equity so tether is actually on a Consolidated basis over collateralized they also have 7 billion around7 billion dollar in Bitcoin so there is some buffer there um which should um help I think beyond that I would have said regulatory risk um of course tether runs an extensive xus operation and is is one of the larger holders of us treasuries um it feels like under the Trump Administration and tether's relationship with counter Fitzgerald the fact that former CEO um Howard lutnick is now the um US Secretary of Commerce under Trump establishes an indirect uh link into uh Washington so that's positive but um I fear that maybe the US compet editors will do everything possible to try and um run a smear campaign against Heather or um play regulatory capture to their advantage at the expense of tethers yeah I mean the regulatory issue is actually I think probably the most prevalent right now tether has effectively been outlawed in Europe under MAA the two stable coin bills that are currently going through the US would follow a teller would follow a similar pattern there where it would be outlawed is that going to be core do you think that if that does happen in the US does tether market shares stay the same go up or go down I I I think it is it is structural that Ted's market share will go down significantly stable coins simply because the use cases of stable coins is changing uh so tther was the best player for the early days uh of crypto where main use cases were trading or lever trading So currently T represents I don't know like you know like 70% of the market share I think it is becoming clear that stable coins are becoming the best substitute for Bank deposits in the future in my opinion the stable coin Revolution is the most relevent Financial Revolution we will see in our lifetimes and tedar is not the best player to take the core um like to be the most relevant for the next stage so I think it's I think teder will continue to dominate its uh sector which is offshore dollar movements will grow will continue to be very profitable but if we expect stable coin Market to grow 10 to 50x in the next uh 20 years which I do tther probably will represent 5 to 10% of the market not 70 yeah I completely agree with Luca uh to my mind tether is a bet on uh uh the adoption of digital Dollar in Emerging Markets um of course with the recent announcement from the CEO of Bank of America saying that they might release a stable coin once regulation is sorted um this suggests that there'll be a lot more players uh regulative financial institutions looking to launch stable coins so um the relative growth between um you know em use of digital dollar IE tether and uh the growth of the stable ecos stable coin ecosystem in the US um that's kind of where the tethers market share tethers market share is set to diminish I think as we zoom out take sort of that endstate scenario where tether's market share is shrinking and there are lots of new entrance into this Market how do you guys think about the difference between centralized stable coins and decentralized stable coins as part of that market adoption so we live in a decentralized uh money world we have commercial Banks issuing M1 money they're all different we treat them the same but because there is a central bank at the center that is providing this type of like money uniqueness but we live in a decentralized money world and we will continue to live in a decentralized money world I don't believe that this future will be dominated by two three massive centralized issuer we will have networks that uh enforce similar standards and connect liquidity and use cases for many issuers to pledge collateral and issue digital money you know I come from the maker ecosystem I joined the maker ecosystem because for me it was a revolutionary view of the way we do money issuance I absolutely do not believe in a future with Bank of America issuing their stable coins and I hope we don't in that future I think Builders here in this room should build stable coins on decentralized stack and uh so that that's my view I think but decentralized stable coins in the first iterations were considered crypto asset back Stables I think we will have real word or treasury asset backed Stables that are issued on software through networks where the builders who build use cases get most of the upside uh the banks will try to protect their Monopoly on deposits they will fail because they don't work well so that's that is my my opinion I think we will have a long list of mini issuers coming along coming out now but I think those issuers will kind of congregate within some sort of network um that c that Aggregates liquidity and use cases liquidity is the most under underappreciated aspect of stable coins you can have the best table in the world but if you don't have a liquidity Network it's useless and building a liquidity network is costly yeah I completely agree and I think there's two big things that we don't talk about new stable coins coming out even if Bank of America does launch a stable coin they have to build a liquidity Network next to it which obviously Bank of the America has the resources and the capital to do but other stable coin Builders who are trying to create novel designs or new systems it's very expensive and very difficult for them to do that how do you think about ways that they can actually build that and also how does that you think about the risk in the market of that different amounts of liquidity as as well as different designs I think you have to optimize your stable coin for certain usage um and be able to stand out um so in the case of decentralized stable coins I think one of the big advantages would be yield we know that onchain sources of yield tend to be higher and with our waas also coming on chain we're transporting real life you know uh say treasury yields onchain so um onchain yield environment looks way more diverse and potten uh of course higher because of the speculators um you know driving up yield at different moments of the cycle so if you construct a stable coin um that can draw from these sources of yield which for instance um Sky S usds is doing then you can really separ at yourself from the competition through this yield feature which stands out so um I'm excited for different experimentation and products that try to really optimize on a certain characteristic that tries to not just rely on liquidity but you know uh different features that stand out as you start seeing stable coins now competing on yields because that is the use case for some of these new stable coins do you not start seeing them moving up the risk spectrum and taking on more risk that they then are passing on un to a lot of users who don't necessarily understand how they're constructed or what the actual risk factors are yeah I also don't think these are I mean might I'm a nerd so the way they find stable coins are deep in the money fixed income instruments SDS is not SDS is a wrapped basic trade hedge fund tokenized strategy very different um I think heeld is one aspect I think in my opinion stable coins should have the best uh the closest to risk-free yield possible but real users do not care much about yield in my opinion you need to give them a lot of yield that's why we kept keep money in current accounts we don't have any money we don't get any yield from that little so I think that I agree with Sonia but I think we will go in the direction where hopefully crypto brings utility to people so Builders will build applications for people that need dollars and embed dollars into their application stack and they would connect in the back hand with rails on chain that allow them to move money around and invested in strategies or do different things uh so that that's that's where I think the future is going really fin really the mullet like finac with D5 in the back and Moro for example has been the guys at Mor have been great working with coinbase on this the reason why I think this is also called connected to the reason why I think the the Bank of America the JP Morgans of this world will not be successful because they will obsess with control and we don't want control we want to have like an open source Financial system where we are building better and better Primitives on chain that facilitate liquidity yield aggregation reduces cost and we don't want to buy into the JP Morgan stack um and I think this is antithetical to the way financial institutions have grown on the last 5050 years yeah I completely agree with that and I think that's sort of the real use Cas is about Builders building applications that solve real world problems and abstracting away all of the backend and The Primitives that are here right if I'm going to do something in an application I don't actually care or necessarily even want to know what stable coin is being used to process my payment or do it the challenge that I think exists now is that in most of the world if someone is building an application to do that and they're going to abstract it away tether is the First Choice use case they just use it it's easy it has liquidity and it has ubiquitousness across the ecosystem how does that change and how do you convince Builders to use something that's different and better and ultimately has the ability other than yield yeah I think I I just want to and then I'll let the others answer as well but I think I just want to um double down what I said before on the yield I think the ultimate user doesn't care about the yield but the intermediary does care about the yeld so if you are a user we have seen like the lack of traction of yield bearing stable coins but so imagine you you you have an application where you have you have 1 million clients and each client has $1,000 the ,000 client doesn't care about the yield but you care about like the billion dollars that is sitting on your on your on your app so imagine if you are an app developer and you can actually provide a dollar use case for your clients they don't know what's stable coin they just see a dollar balance on the app and and you can have the same liquidity as tether the same off on off and on ramps but you make $50 million of uh treasury yield for your company and you run the operations with this so I think the yield is a great you is is a great source of uh Mark like Market capture for developers and applications and we are trying to build liquidity networks and tools to allow this uh so that the complexity of on and off ramping liquidity the need of uh network is abstracted away from the application Builders so the question was other than Neil how do you differentiate yourself or how do you over yeah how do you get the builders to you know yes the builders will want yield right and that that's one way to get them to into that ecosystem but right now it's so much easier to build and bootstrap how do you get them to pick one stable coin over another how do you get them because the yield use case right now anyone could be doing this with any of the yield bearing stable coins today most people that you see out there building real world use cases outside of Europe and the United States right where they're building this for the developing world where they're onboarding tens of millions of people into crypto they're using tether that's the primary use case how do you get them away from that how do you get them off this like addiction to tether I don't have a good answer for you um the fact that you know it's the most liquid means there's uh least amount of drag when you're going from uh a token to usdt so you know liquidity begets liquidity it gets more and more difficult and I guess all this is to say I'm quite bullish tether after this discussion yeah I mean you need a lot of work and a lot of money now there is a lot of money out there who can do that um the way we see it at m0o is we are and we we are horrible marketers this will change but we want to develop we want to provide application Builders with Absolute Total Control about their tax stack the way they distribute the yield the the the liquidity they have the smart contracts only with code no paper no compliance super easy and we will bring a lot of money who can help them doing this so it's also like the experience and the simplicity of embedding your stable infrastructure in your app so you can focus on the app layer it's not easy but I'm absolutely not here to say okay teder is too big so we're going to give we're going to leave the Global Financial systems to 25 guys what do you think Phil I think it is I think a lot of what Lucas said is is right you know it's making the the builders have an easier experience and a better experience that's got to be the answer but I also actually think it's marketing right tether has had such a Head Start that their brand is ubiquitous you go anywhere around the world and most people know Bitcoin and tether right and that's you know and you can do things with tether that you can't do with anything else right on and off ramps not even Bitcoin has that level of on and off ramps around the world where you can just walk into some place send someone 100 hether and they give you $100 in local currency so I think it's about how do you get those on and off ramps to get that level and maybe it is integrating with some of the existing use cases in the financial The Current financial system that allow for those rail to be used and I think that's a little bit what circles play is um but I think it'll be interesting to see how this all plays out I think it'll be interesting once we have risk pricing tools to let actually the market dictate the price of risk across all the different basket of stablecoins and pointing to ones that are much safer than others I think that'll be really cool and I also think it'll be really interesting to see if tether ever actually doesn't audit or passes on the interest margin to any of the integrators or used yeah any last thoughts no I think I think you should spend 30 seconds telling the audience what you are doing guys at cork to do this uh sure so at cork we're building these risk pricing tools for the market where you can actually go and create um what we call a dpeg swap and the dpeg swap allows you to on a fully collateralized basis trade one stable coin or one LRT for another one and so if your stable coin deegs you actually have insurance against said and because that's a liquid trading instrument the market can price and trade both sides of that trade to allow you to for the market to give you a price signal as well as for people to be able to buy a hedge everyone should check it out ck. Tech thanks thanks Luka thanks thanks thanks everyone [Applause]