Note: The original text comes from crypto.news, written by Selva Ozelli and published on May 18, 2024!

This is the second in a three-part series of interviews Selva Ozelli conducted for crypto.news with William Quigley, cryptocurrency and blockchain investor and co-founder of WAX and Tether. Part one was about Sam Bankman-Fried’s prison sentence. Part two was about cryptocurrencies and banks. Part three was about the future of NFTs.

1. In the first part of our interview, you said that you started your career at Andersen as a bank auditor. Coincub, a global cryptocurrency rating company, recently released a crypto bank report, ranking the world's most crypto-friendly banks. What do you think about the tokenization of the banking system?

I could write a book on this topic, but I will just briefly summarize my thoughts.

Money and payments have been evolving since their inception. The methods society uses to store and transfer value have changed since our inception, first to digitalization and now to tokenization. Over the past few decades, each major upgrade to the global monetary architecture has brought new benefits and new risks. In fact, as digitalization has evolved, the vast majority of what people usually think of as "money" are ledger balances in commercial bank databases. Generally speaking, the relational databases used by banks run primarily (but not exclusively) on Unix and Unix-like operating systems, which were first developed in the 1960s.

The tokenization of the global financial system is still in its early stages. However, it could have a transformative impact on how ownership of commercial bank deposits, payments, government and corporate bonds, money market fund shares, gold and other commodities, real estate, and other assets and liabilities are recorded on blockchains and other distributed ledgers, enabling profound new capabilities.

As detailed in Coincub's Crypto Banking Report, several financial institutions around the world have been actively exploring the possibility of tokenizing assets to improve the way we transfer value using blockchain technology. By using encrypted distributed ledgers, trusted real-time transaction verification can be provided, facilitating fast, secure, and low-cost international payment processing services (and other transactions) without the need for intermediaries such as agent banks and clearing houses. Although we have made great progress in digitalization, our bank payment and settlement systems are still slow and inefficient for many users, and settlement delays for large transactions and numerous intermediaries have increased transaction costs.

Tokenization and distributed ledgers can operate around the world 24/7, and with the introduction of real-time settlement, many of the above barriers have the potential to be overcome. This is because tokenization provides:

  • Programmability – making it easier for banks and bank customers to automatically access funds, respond to liquidity pressures instantly and automatically, and move liquidity when and where it is needed.

  • Instant Settlement – ​​This would provide the ability to hardwire future value transfers on the ledger, automatically executing based on the occurrence of future conditions, thereby increasing the speed and strength of bank settlements.

  • Atomic Settlement – ​​reduces the time lost between payment and delivery, or reduces the risk of loss when payment and delivery are exchanged and settled simultaneously (including between multiple parties).

  • The immutability of the shared ledger – serves as a record of transactions and a reliable audit trail. Blockchain-based IT infrastructure can significantly reduce payment errors and shorten account reconciliation time. The transparency and immutability of the ledger can help regulators and law enforcement agencies obtain accurate, verifiable token transaction data and seize assets from criminals.

As financial institutions, developers, regulators, and other stakeholders continue to develop the technology, tokenization of the global financial system will face various challenges and risks. Nonetheless, we are already seeing examples of how tokenization is beginning to bring tangible benefits in the global banking industry. For example, China's digital yuan, launched in 2020, could put China ahead of Europe and the United States in the global race to develop a state-backed digital currency, also known as a central bank digital currency. So far, the digital yuan has been used mainly for domestic retail and public sector payments, amounting to 100 billion yuan (about $14.5 billion), according to data released by the People's Bank of China.

First, there are still many unanswered questions about the tokenization of the global banking system from a technical and operational perspective. If tokenization plays a central role in the future financial system, where small banks are taken over by larger banks when they fail, many questions remain unanswered:

  • Will there be just a few unified, interoperable bank ledgers that handle all tokenized transactions globally?

  • Will many banks maintain their own blockchains?

  • To what extent will these banking blockchain platforms be interoperable so that customers using different blockchains can transact seamlessly and securely across the globe?

  • How will banks respond to cybersecurity and other financial risks? For example, the stablecoin USDC broke its peg to the dollar after the collapse of Silicon Valley Bank last year, as Circle, the US company behind the coin, revealed that $3.3 billion of its $40 billion reserves backing USDC were stored at Silicon Valley Bank. In contrast, Tether (USDT) - the world's first and most traded stablecoin ever, and the stablecoin I co-founded - has better managed reserve deposits that are transparently reported to the public every day, effectively responding to the risks posed by bank failures.

Secondly, from a legal, regulatory and taxation perspective, different countries have introduced different legal, regulatory and taxation systems for digital assets and blockchain. Of course, there is still more work to be done to clarify the extent to which ownership and other rights associated with specific assets are attached to tokens and transferred across borders through tokens.

These and many other key questions will be answered as financial institutions, developers, regulators and other stakeholders continue to develop blockchain technology around the world. Meanwhile, global standards on money laundering and tax laws are being developed under the leadership of the Financial Action Task Force (FAFT) and the Organization for Economic Cooperation and Development (OECD).

3. In the first part of our interview, you said that Tether, the first dollar-backed stablecoin co-founded by you, is also the world's most traded digital asset and is leading the industry amid fierce competition from Meta, BRICS and other countries. Please introduce Tether stablecoin.

Tether is a stablecoin backed by the U.S. dollar that was launched in 2014 by Tether Ltd. Tether is owned by iFinex Inc., a British Virgin Islands-based company that also owns Bitfinex, a Hong Kong-based cryptocurrency exchange that provides digital asset investment and trading services to users outside the United States.

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As of May 2024, Tether has been minted on 14 protocols and blockchains. Tether stablecoins avoid the wild volatility of digital assets, most commonly by pegging their value to the price of traditional currencies such as the US dollar, euro, or renminbi. Meta tried to issue a stablecoin called Libra, which was later renamed Diem and finally closed in 2022. Since 2017, the BRICS countries have been studying the issuance of stablecoins based on a basket of fiat currencies. To meet this demand, Tether launched#BRICSTat the BRICS summit last year, a BRICS stablecoin, an alternative to the US dollar and USDT, pegged to the Chinese yuan, and offering a 10% annual return.

Tether holds 64% of the stablecoin market share and is the most traded cryptocurrency. After surpassing Bitcoin in 2019, USDT has become the world's most traded digital asset. As of May 4, 2024, Tether's circulation has exceeded US$110 billion, 36 million euros, 20 million yen, 19 million pesos and 246,000 Australian dollars, leading to concerns that it will become a systemic risk in the digital asset market and threaten the stability of the broader financial market.

Generally speaking, Tether is a safe investment, primarily as a means of hedging against the volatility of other digital assets. However, like any investment, it also has risks, and investors must take into account Tether's efforts to maintain full transparency at the company, including publishing records of current reserve assets on a daily basis and working with international regulators to strengthen regulatory compliance.

4. As the digital asset with the largest trading volume, Tether is inevitably used for illegal transactions. According to TRM Labs, USDT was involved in $19.3 billion in illegal transactions in 2023, making it the most used stablecoin in cryptocurrency crimes last year. What do you think of the illegal use of Tether?

Since December 1, 2023, Tether has been working with law enforcement and regulators to launch a voluntary wallet freeze policy. Tether provides secondary market controls to freeze transactions related to individuals listed on the U.S. Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) List. The list includes companies and individuals controlled or owned by sanctioned countries.

Recently, Tether also announced a partnership with blockchain monitoring company Chainalysis to monitor transactions of its tokens in the secondary market. The monitoring system will help Tether identify risky crypto addresses/wallets that may be used to circumvent sanctions or engage in illegal activities such as terrorist financing and illegal transfers.

*Friendly reminder: This article is for popular science purposes only and does not constitute any investment advice!