#289—The problem with Tether

Also, TradFi gets serious about tokenization

Apr 01, 2024

Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out our last report here.

This week:

The problem with Tether
BlackRock is all in
Banks working on tokenization
Reminder: BlockTalk 2024—featuring Greg Kidd
Stuff happens

1. The problem with Tether

The benefits of stablecoins are pretty clear: global access to digital dollars without the need for a bank account combined with instant settlement and minimal fees.

Moreover, that they live on blockchains allows them to seamlessly interact with the growing digital asset market.

It’s a phenomenal value proposition—why Bernstein analysts believe the total value of issued stablecoins to reach almost $3 trillion dollars within the next five years.

But that value prop, combined with the current manner in which stablecoins are implemented, is a double edged sword—no identity, no controls.

The most popular stablecoin, Tether, is centralized, which allows it to freeze accounts, but that’s pretty much it.

Here’s the WSJ, describing how Russian smugglers are able to circumvent sanctions via Tether:

A self-described Russian smuggler in China received a request from the manufacturer of the legendary AK-47 rifle. Russia’s largest maker of small arms, Kalashnikov Concern, needed electrical parts for drones that have been among the most effective weapons against Ukrainian armor.
The smuggler, Andrey Zverev, took the late 2022 order to a Hong Kong electronics distributor. The U.S. was trying to cut off such deals, and even sanctions-wary Chinese banks were blocking payments from Russia.
The solution: Zverev used tether, the cryptocurrency, to relay millions of dollars of funds from Kalashnikov to its supplier.

Also:

Tether has emerged as one of the world’s default black-market payment methods. The digital currency says it is backed one-to-one by the U.S. dollar. But unlike government-issued dollars inside the banking system, authorities have limited ability to trace its use around the world.
The “stablecoin” is the most-traded cryptocurrency, with as much as $120 billion in tether changing hands each day—often about twice as much as bitcoin. Transactions totaled over $10 trillion in 2023, not far off what payment giant Visa says it processed in its most recent financial year.
For Vladimir Putin’s war machine, tether has become indispensable. It helps Russian companies weave around Western sanctions and procure what is called dual-use goods that go into drones and other high-tech equipment. Importers working with such goods make transfers in rubles into Russian bank accounts operated by middlemen who convert the rubles into tether and pay out local currency to their foreign suppliers in places like China and the Middle East.

With Tether, it’s pretty easy:

Zverev preferred tether over traditional banks because it was anonymous, he told customers. The Tether Foundation rarely froze digital wallets due to users moving “dirty money” through them, he wrote.
His preferred tether-trading platform was a Moscow-based crypto exchange called Garantex. Launched in 2019, Garantex runs a network of cash exchangers inside Russia and abroad that allow customers to swap rubles for tether and then into foreign currency.

Relevant:

2. BlackRock is all in

After the launch of its ETF, BlackRock is now one of the largest holders of Bitcoin in the world, surpassing MicroStrategy last month.

Now, they’ve launched their first tokenized fund, the BlackRock USD Institutional Digital Liquidity Fund or BUIDL.

Here’s Axios:

BlackRock's tokenized money market fund is one more effort in bridging traditional finance with decentralized finance (DeFi), but it isn't stepping into that in-between in a "move fast, break things" way.

It's partnered with Securitize, a platform that aims to deliver private market alternative assets in a regulatorily compliant way.

How it works: The BlackRock USD Institutional Digital Liquidity Fund, or BUIDL, seeks to offer a stable value of $1 per token and pays accrued dividends in tokens.

"We're doing faster issuance and redemption. We allow peer-to-peer transfers across whitelisted wallets," Securitize CEO Carlos Domingo tells Axios.

If a holder loses access to those BUIDL tokens, for whatever reason, there are guardrails in place — they can call up the transfer agent, or in this case Securitize, and start a process for those tokens to be burned and reissued, Domingo said.

"Things happen, but for the most part, this is in control."

If this sounds like a stablecoin that offers yield—the fund will only hold cash, U.S. Treasury bills, and repurchase agreements—it’s not, as it’s only available to qualified purchasers.

BlackRock is working with a myriad of partners for its implementation (which lives on Ethereum)—Anchorage Digital Bank NA, BitGo, Fireblocks, and Coinbase.

Consider this a blueprint for the convergence of TradFi and tokenization in the future—where you get the benefits of blockchain, married with the centralized protections and guardrails of traditional finance.

Stablecoin issuers should take note.

3. Banks working on tokenization

BlackRock isn’t the only financial institution diving headfirst into tokenization. Consider some of the other initiatives from major financial institutions:

Citi

Citi Token Services has products for both trade and cash.
They recently settled their first stock trades on HKEX Synapse smart contract platform. They’re participants of Singapore’s Project Guardian project.
And most recently, they’ve been piloting the tokenization of funds on the Avalanche blockchain.

Societe Generale

Last December, SocGen issued its first bond on Ethereum.
The French bank has also experimented with equities settlement with Paxos on a permissioned chain.
It also became the first major bank to issue its own stablecoin late last year.

BNY Mellon

BNY Mellon has been working on interoperability solutions with Swift that leverage tokenized assets on blockchain.
America’s oldest bank has also been trialing FX swap and repo trading on Finteum, which leverages distributed ledger technology.
Back in October of 2022, they sponsored a study that showed 91 percent of institutional investors as interested in tokenized assets.
That same year, they launched their Blockchain Innovation Fund in Singapore.

Digital Asset’s Canton

Last month, Digital Asset announced the Canton Network, a pilot that included 45 financial institutions—including BNY Mellon, Broadridge, DRW, EquiLend, Goldman Sachs, Oliver Wyman, and Paxos.

And that’s just a smattering!

Relevant:

4. Reminder: BlockTalk 2024—featuring Greg Kidd

Hard Yaka co-founder Greg Kidd will be at BlockTalk 2024 this week on Wednesday, April 3rd.

Greg’s panel starts at 12pm PT: Blockchain and Washington DC

He’ll be sharing the stage with:

Moderator – Matthew Le Merle, CEO & Managing Partner, Blockchain Coinvestors, London
Bernie Moreno, Ohio Senatorial Candidate
Kristin Smith, President, Blockchain Association

Join us at the virtual conference—Registration is free!

Yaka Stuff