Bloomberg Interview Part 2 | FTX Founder Talks About USDT: Lack of Transparency Could Also Be a PR Strategy

FTX exchange founder Sam Bankman-Fried recently interviewed with Bloomberg's "Odd Lot," along with Bloomberg columnist and author of "Money Stuff" with 150,000 subscribers, Matt Levine. The previous part of the interview focused on the structure of the cryptocurrency industry and the future of FTX, while this part discussed the controversy surrounding USDT.

What If Tether Collapses? Will the Cryptocurrency Market Crash?

Next, Matt Levine asked a question that interests the entire cryptocurrency community and traditional investors:

"This question may be a bit unfair to you, but I really want to hear how you would answer it. What if Tether turns out to be as bad as rumored, such as investing in Chinese commercial paper, and if the price drops, Tether collapses, what will happen to the cryptocurrency market?"

SBF answered this question in two versions. The first is what he thinks is the more likely scenario, and the second is what Matt Levine called the "worst-case scenario."

Assuming that one-third of Tether's reserve assets are Chinese B-rated commercial paper with a default rate of 40%, the reserve assets of Tether would lose about 12%. So, in a sense, 1 USDT would be equivalent to about 0.88 US dollars, and Tether would lose approximately 10 billion US dollars.

SBF believes that the more likely scenario is that there will not be a complete run on the bank, and those investors who want to redeem will be forced to redeem at a rate of 0.88 US dollars for 1 USDT. At the same time, if someone predicts that USDT will eventually return to 1 US dollar, it may attract market buying for arbitrage opportunities.

Tether may inject liquidity through fundraising. Once liquidity is restored, the crisis will be averted. Of course, public confidence in Tether will also decrease.

If a complete run on the bank occurs, the market will be in a very bad state because it means that a large number of futures and options contracts will be liquidated, price drops will cause a stampede effect, and combined with the previously mentioned fragile structure, the situation will become very bad.

In fact, SBF believes that in the future, investors in the cryptocurrency market may need to treat USDT as a "futures contract" and hedge while holding it, for example, by simultaneously buying a leveraged contract that shorts USDT. If this can be done, then in the event of a liquidity crisis, the situation may be slightly better.