What Bitcoin Did

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Phil Potter on Bitfinex and Tether

Peter McCormack
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Phil Potter on Bitfinex and Tether - WBD112 Peter McCormack

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Interview location: New York
Interview date: Saturday 11th May, 2019
Company: Bitfinex & Tether
Role: Chief Strategy Officer at Bitfinex | Co-Founder at Tether

Creating a Bitcoin business is hard, especially one processing hundreds of millions or even billions of dollars in value. For exchanges, these challenges are especially difficult, from defending against relentless hack attempts to securing banking services.

Starting a Bitcoin business today is undoubtedly easier; companies have become more open to working with Bitcoin businesses and specialist providers now exist. Still, the regulatory challenges exist as companies serve international customers with a broad set of unclear, jurisdiction-specific laws.

Bitfinex has a long history in Bitcoin, surviving many of its own challenges. It too suffered a major hack which nearly destroyed the business and faced the challenges of navigating the regulatory framework while struggling for banking services. Further, many of the team at Bitfinex were responsible for the creation of Tether, itself facing many difficulties.

In this interview, I talk with Phil Potter, who was Chief Strategy Office at Bitfinex and co-founder of Tether. We discuss the Bitfinex hack, challenges of getting banking services, the history of Tether and the difficulty of auditing reserves.

TIMESTAMPS

00:04:59: Introductions
00:05:15: Phil’s background before working in the crypto industry
00:09:53: Exploring how Phil came to work at Bitfinex
00:16:13: Discussing some of the biggest challenges that occurred at Bitfinex
00:22:23: Delving into the £72 million hack at Bitfinex in 2016
00:27:40: Exploring the solution that Bitfinex came up with to move forward past the hack
00:34:27: Touching on other motivations for creating the BFX token
00:42:05: Delving into why there is so much goodwill towards Bitfinex in the crypto ecosystem
00:51:49: Discussing the problems experienced with banking partners and on/off fiat ramps
00:58:08: Exploring the history of Tether and the reasons for its creation
01:05:20: Touching on the tipping point that helped Tether take off and what made it so popular
01:09:40: Discussing some of the myths surrounding Tether, including auditing
01:15:23: Touching on the operational procedures of fractional and reserve banking
01:20:01: Continuing to talk about other myths surrounding Tether, including incorrect reporting
01:28:51: Discussing the cypherpunk nature of Tether and how it compliments Bitcoin
01:34:53: Touching on the current situation with the Attorney General
01:37:39: What is Phil up to now he has left Bitfinex
01:39:19: Final comments

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TRANSCRIPTION

Peter McCormack: Hi Phil, how are you doing?

Phil Potter: I'm well thank you.

Peter McCormack: Thank you for coming on the show and thank you for last night.

Phil Potter: Thank you! Thanks for having me.

Peter McCormack: That was some very good wine you bought us!

Phil Potter: That was an excellent meal!

Peter McCormack: So it's great to get you on. Obviously you have quite a rich history in the world of Bitcoin and crypto. You've been involved in some very important companies and I think it would be great to hear some of the stories and the history and the background. So a great point for me to start is, I don't actually know your full background too well. Could you cover me the journey from kind of education to Wall Street to working at Bitfinex?

Phil Potter: Okay, so I have a degree from Yale. I studied physics and also studied a lot of ancient languages. That was a passion of mine. I went to Wall Street after graduated and I worked for Morgan Stanley for a few years on, then I went on to Bear Stearns for a few years.

Then I left in 2000 to basically start my career as a FinTech entrepreneur and got involved with developing trade execution software, for what was really in the early days, day trading, people trading on ECNs or rather I should say, the birth of the ECN market in the sort of democratizing of market access. I did that in various sort of iterations and various groups and partnerships for many years.

I had merged my company with a larger offshore consortium around 2012. The market that we were in, was a tough market. We did a lot of technology driven trading. So high frequency trading, but also really about developing software to give trader's edge. We had good years, but then the business got very, very competitive and very tough.

We were really competing against people who were investing tens of millions of dollars in super fast infrastructure, that we just weren't doing. So I was already kind of looking for something else to sink my teeth into and I was introduced to Bitcoin actually through one of my employees at my old trading firm, who's a gentleman named Josh Rossi, who went on to start the Satoshi Square phenomenon of people, gathering in Union Square in New York, which our office is right down the block from. People were just trading Bitcoin in person in the park!

Peter McCormack: That's amazing!

Phil Potter: It was really cool and that's when I met a lot of people. It was a lot of the sort of crypto OGs that I'm still friends with today. It was quite a time! Once I discovered Bitcoin and I guess everybody that gets into Bitcoin, always has that story about the time that they downloaded the white paper and read it over a weekend and had that kind of epiphany moment! I had one of those experiences too. I feel like it's very cliché, but it's true and I immediately recognized that there was really no one with a FinTech Wall Street background involved in the industry at all.

In fact, I think it was Erik Voorhees, I was having lunch with him one day back in 2013 and he made a comment to me that always stuck with me. I guess we were talking about different opportunities and what have you and at the end he said to me, "Phil, Bitcoin needs people like you. You need to get involved." I'm not sure if Erik even knows that that conversation resonated with me, but it did and that was one of those moments where I'm like, "yeah, you know what, I can be an additive force in this industry." That was that sort of genesis moment for me.

Peter McCormack: Okay. So what was the step then to be in Bitfinex?

Phil Potter: So I left my old partnership and I was looking to see different ways I could get involved. But at the time it seemed like the most obvious thing to do is to start trading Bitcoin. So I went through the rather elaborate process of getting registered everywhere and I was pretty adept at doing KYC and stuff like that because I've operated multiple broker dealers over many years.

So I knew how to deal with banks and you how to deal regulators. I know how to get on a plane and go somewhere and deal with it and that's basically what I did. I was doing that through 2013 and that was a remarkable year in Bitcoin. So when I first bought my first Bitcoins, I don't know late 2012, it was $15 or something like that, and which I promptly sold at $23! Then I bought them back!

Peter McCormack: We've all got a story like that!

Phil Potter: That's the one thing that kills me is people say, "well, you've been at it since the beginning you must be really rich?" I know lots of people who have been in it from the beginning. No one buys Bitcoin and just holds onto it. You're like, "oh my God, I'm up 5x, I've got to sell!" And that's what we all did! Unless you had your stuff locked up in cold storage somehow or you forgot about it or something like that, those are the windfall stories.

Peter McCormack: Nobody ever in their right mind when Bitcoin is at $20, thinks it's going to go to $20,000.

Phil Potter: No, and when it goes to $50, you're like, "oh God, I got to sell!" But 2013 was a crazy year and so the trading stuff became very, very successful. I was one of those guys that figured out how to get money out of Mt. Gox, pay a pretty big [Inaudible] and what have you. But I was just doing it and there was enough arb spread from the other exchanges to make it work. I was trading some altcoins too and so I became a pretty big customer of a bunch of these exchanges.

But in particular it was Bitfinex, that I actually ended up sort of developing a relationship with with Giancarlo Devasini and he was the CFO. He was really, in a way that was different than all my other relationships with other exchanges. All the other exchanges, were run by kids that figured, you just put up a website and kind of runs itself, which is not true.

In fact, Bitfinex and Giancarlo was really the only exchange operator actually reached out to me to just say, "hey, you want to go and Skype some time and chat" or "I'd like to hear more about what you're doing. I see that you're doing a lot of business with us. I want to thank you for your business!" That's how our relationship started, was that he was actually really all about trying to get to know his customer.

Peter McCormack: It's quite hands on?

Phil Potter: Yeah, but that was the secret of Bitfinex, is that we were always hands on with our customers. So he set that tone and I think it was one of the most successful things about Bitfinex, was just how available we were to serve big customers. So that's how my relationship with Bitfinex started, as a customer.

Well when Mt Gox got torched to the ground, the whole trading game kind of ground to a halt and I was looking for something else to do, in a sense, and there was a good sort of confluence of opportunity, because I had gotten to the point where I was talking with Giancarlo on a regular basis and Bitfinex was a tiny exchange then relative to the others.

But they had really innovative features, but features I knew I could make better. So part of my conversation was, "well this is good, but it could be so much better if you did this or you do that." Then eventually ended up starting to talking with the CTO and giving him my input and so it just kind of evolved into a situation and was like, "well, why don't you come and help us?"

Because it was at the time, where there were just a few guys, that's it. It appealed to me on so many different levels, because I like building things. It's what I've been doing in my career up until that point, building trade execution software, risk management software, accounting software, all this stuff and it just seemed like the right thing to get involved in.

Peter McCormack: And a tricky business? It's not an easy one.

Phil Potter: Yeah it has a lot of hair on it. I like hard problems. I've always liked hard problems and I've never taken a traditional path in my career. Most of my friends from Yale went on to lead pretty traditional careers. Mine was simply not that and I've always had an entrepreneurial bent. I just like hard problems! I like trying to solve things that other people can't! Running a Bitcoin exchange is definitely one the hardest things you can do in this world, I can promise you that!

Peter McCormack: So what are the biggest challenges that Bitfinex faced when you were there that you were wrestling with?

Phil Potter: One, technology. The genesis of Bitfinex was that the source code for the platform was repurposed from Bitcoinica, that had gone belly up. The guy who was running the platform, basically open source software. So Raphael Nicolle, who is the really the founder of Bitfinex, is one guy, downloaded the code, spun up a website, change some colors and started running this small exchange. So many of the key features of Bitfinex are actually part of this original source code.

Now, over time all that got completely rewritten and updated and upgraded. But that was a really challenging thing to do, because the thing about Bitcoin or cryptocurrency markets in general, this is a 24/7 business, which is totally different than the business I came from, where the market is open for six and a half hours. Well if you include the extended hour sessions, 12 hours Max.

Peter McCormack: But there's a bell!

Phil Potter: There's a bell! So if you need to do a software upgrade, you do it overnight. If there's a problem, you roll it back. Or you have a whole weekend to do major upgrades, not in Bitcoin. So I've been doing essentially tech startups for a long time and I've always known that one of the hardest things to do, is go from one developer to two, two to three, three to four, building a dev team and expanding from that nucleus, is a very, very hard thing to do. People take that for granted, but it's not simple.

Especially when you're running an organization that is completely dispersed around the world. So that was the other thing that was kind of unique about I think Bitfinex versus a lot of the other exchanges. A lot of the other exchanges had some kind of a nexus somewhere. They're based somewhere and they've got a bunch of kids in an office coding away or doing KYC or what have you. Bitfinex actually was very much a decentralized company to trade decentralized currencies. It had everything.

The whole business was basically run over whatever group, where software at the time made sense. Originally we did everything over Skype and then we started to use like Slack or Telegram. That's how we communicated and it was a very effective way to work. I mean, you're running a global business 24/7, it kind of made sense that you'd want to have principles in every major time zone so that there's always a set of eyes on the platform.

Especially when you're running a platform that includes things like margin and other things that can go horribly wrong, if there's a technology failure or if there's a huge spike in the market, fat fingers, what have you.

Peter McCormack: And there's a huge honeypot for hackers!

Phil Potter: That too! So the security challenges are quite substantial and I'm sure we'll get into that.

Peter McCormack: Because I'll tell you why that's interesting. When I did my Mt Gox series and I interviewed Mark Karpeles, I guess I was a little bit softer than, because I felt like they were the first people to ever deal with all the different types of attacks and vector attacks that came in place. You look even now, even last week Binance was hacked, it's a constant game of whack-a-mole!

Phil Potter: Yeah, there's an image I like, an illustration of a walled medieval city that's under siege. That's what running a Bitcoin exchange is. You are constantly under attack and they're not necessarily coming at you from the direction you think they're coming at you. They might be trying to scale the walls. They may be trying to dig underneath the walls.

They may have spies in your city, I mean I do extend the analogy, but it's new ground. There are, I think, best practices that one can follow. Certainly when you're running exchange, you can run everything out of... You can use cold storage for everything and only process payouts on a periodic basis and do everything manually and things like that.

You can achieve a very high level of coin security. But, there are so many other ways that hackers can take advantage of systems and it's not necessarily about them getting to your hot wallet. Although that, I think as we've seen with the Binance situation is that hot wallets are basically always at risk.

I know the policy of Bitfinex regarding hot wallets, which is probably similar to what it is at other places, you keep an amount in your hot wallet that balances convenience for your traders and you don't risk more than say, I don't know, a month's worth of revenue in your hot wallet.

So for Binance, losing $40 million worth of crypto sucks, but they make that kind of money every month or every other month and I'm sure they have substantial reserves and that kind of thing. So covering that loss, not a big deal.

Peter McCormack: But it was a big deal when say Bitfinex got hacked?

Phil Potter: Well it's a different market. The market was a lot smaller. The big one was at $600 when that happened and that in our loss, totaled about $72 million. That was big.

Peter McCormack: You were at the company at the time.

Phil Potter: Oh yes.

Peter McCormack: So what can you tell me about the day, just the experience of going through that? When did you first become aware and how does that ripple through the company?

Phil Potter: I remember very clearly, naturally. It was 2nd August 2016, I was at the beach with my family. I woke up to basically a phone call, early in the morning. I can't forget how early exactly, but it was early, like six o'clock in the morning or something like that. "Get your computer, go! Something's happened with BitGo" and sure enough, we had been looted for 120,000 Bitcoins.

That attack vector was basically because... The fact that that anybody could get to that many Bitcoins, was because we were not using a traditional hot and cold wallet system. We were actually trying to innovate into a better solution, at least what we thought was a better solution. So we had an integration that we were doing with BitGo, which took a year to do. It was basically a custom integration with them to create segregated wallets for all of our customers, so they could see their Bitcoins on the system.

I think a lot has been made about the idea that people have blamed the CFTC somehow on this, because we did have an engagement with the CFTC where we ended up paying a small civil monetary penalty, but agreeing not to do margin trading anymore or not to do it the way we were doing it. So part of it was to potentially address it through, an exemption under the Commodity Exchange Act that allows you to deal... If you have physical delivery, it's not really considered margin trading.

So I wanted to create a physical delivery mechanism and so we were doing this with BitGo and they have a lot of smart people there. We had smart people too. But at the end of the day, what nobody really realized on our side or their side, was that we were basically creating what amounted to be being a huge hot wallet, because of the automation involved in moving these things around, we had introduced a vulnerability, that nobody saw.

Not us, not BitGo and someone was able to take advantage of that. I don't know what to say, it was shocking. Part of it was that we didn't believe what we were looking at at first. So it took us several hours to really understand what was happening and then trying to figure out, "well how are we going to tell the marketplace this? What do we do now?"

Peter McCormack: So that must've been just a very strange day or week maybe, or month?

Phil Potter: Well, it was the next eight days I think it was, it was pretty surreal. So I'm no stranger to crisis management. In fact, I think it's one of my strong suits. I think that when the shit hits the fan, I'm at my best, in terms of problem solving, in terms of staying calm, in terms of thinking through the problem, being able to think quickly. I think that those are skills I bring to the table. Well that was certainly put to test!

The good news was that, if you can call it good news, but it just so happened that my wife and kids were going away to visit another friend and that I was going to be left by myself anyway, thank God! My wife was leaving around 11 o'clock that morning, she understood this very serious thing had been happening, kind of almost a tearful goodbye. Then I was basically locked inside my office, working in the problem for days after that.

Peter McCormack: The solution that you came up with was?

Phil Potter: So Bitfinex has some unusual challenges that perhaps other exchanges don't. Most notably that we have margin trading and we also have a peer to peer lending market, to facilitate that margin trading. So what that means is that we clearly had to, I guess the point was that we had to cease operations. There was no way for us to continue.

Yeah, we had to cease operations and then figure out the next step. So we brought the site down, put up a notice. There were a few things that we thought about ahead of time, so that it makes sure that we didn't give people basically what would amount to being like a free put against us. But we said, "look, we're going to close out all margin trades." We took a snapshot of all the prices of everything at that moment and say, "okay, well these are the prices we're going to use for whatever action we take."

So we wanted to reserve the right to do that, because once we made the announcement, obviously the price of Bitcoin tanked. So we didn't want to create some type of user expectations about using some future prices for operations that we had to take care of then. So we had to essentially collapse any open margin position. We had to deal with the canceling of loans and it was a very, very complex process. Then the question is like, "okay, well what do we do with loss?"

Ultimately what we did is that we took a decision to take a 36% haircut on the entire count value of every customer based upon on those prices that we had set forth. Much has been made about this point. People have said, "well, why did you haircut the Dollars? Why did you haircut my Ethereum?" It turns out that... We arrived at the decision to haircut all assets from a series of sort of very complex analysis.

We arrived at this decision from two angles. One, obviously one of the first things we did, was talk to council and understand what our options are. Under BVI law, we could, well, I mean one option was to declare bankruptcy and we'd just become another Mt. Gox. We certainly had to do our due diligence on that and understand what that is. What we realized in doing that process is that if we did go into receivership, we and all the customers become creditors. What would likely happen is that the court would have just liquidated all the assets, whatever assets remain, whatever they were, and they would have paid people out on a Dollar basis.

At least that's the advice that we got. Well, if that's the case, then everybody would basically get what would amount to a 36% haircut. So that's what we figured like, "if we declare bankruptcy, this is what's going to happen." Then there was the other issue of like, "it was Bitcoin that was stolen, why not just haircut everybody that had Bitcoin?" That would have amounted to, I don't know, a much higher percentage but only on the Bitcoin. The problem with that is that it affects all the margin positions.

So then the moment you do that, if somebody all of a sudden has less Bitcoin, then their margin position is under water, and the person who lent them the Dollars, well now that person can get paid back. So all of a sudden you have a cascading effect. The system of this catastrophic Bitcoin thing actually affecting the economics of all kinds of stuff. Also, Ethereum/BTC trading and other things with things trading against BTC. So it created this very complex knockdown effect, that there was just no way to fairly calculate this for people.

Peter McCormack: So a 36% haircut for every one is just the...

Phil Potter: It just turned out that it would have been too complicated to do it any other way, that's probably the first thing. Even if we chose to go the complex route, there were certain moral hazards involved where there were certain situations where there wasn't a fair way to do it or that there would be some arbitrary element that would have to come in... Any decision is arbitrary.

But we didn't want to take decisions that would've been arbitrary versus one customer versus another. So it was very complex analysis going on here and that coupled with what our alternative would've been, to go into bankruptcy. The decision to go with the 36% haircut on all assets was really a way of saying, "okay, well we're going to do this and we're going to treat this as if we're going into bankruptcy, but we're going to self administer the bankruptcy."

Look at Mt. Gox, it's five years later! Bitcoin went all the way down to like $200 and then all the way up to $20,000. Now back down to $3,000. What a rollercoaster we've had and those 200,000 Bitcoins are sitting there, it's just dead money and the users got really fucked on that.

Peter McCormack: So you also did some token as a way to repay people?

Phil Potter: So the thinking was, we could have gone the Mt. Gox route and people would have ended up with... Well, they would've ended up with less than 64%, because of all the lawyers. Also you discount time value of money, like when do they actually receive the money. So you can kind of kind of discount that and they'd be worse off than if we just re-opened the platform and just gave them 64%. What do we do with the balance? Well we hatched this plan, to come up with a creative solution to try to make our people HODL.

We created a token, that we allocated to everybody, one token for every Dollar of value we took from somebody. We were very careful about how we did that. We had to heavily restrict, for example, what US persons are able to do and we had already been pivoting away from the US for some time anyway and we created a market for it on the platform. We allowed people to use that asset because there's a market price for it now.

We got them to use it as collateral for margin trading. So in some senses, we were able to deliver some initial utility right now. When the market opened, some people just panic sold down at like... I don't know, I forget, but I feel like maybe 10 cents, 20 cents a Dollar. But it very quickly stabilized around 30 cents, 35 cents. So I mean that's our debt trading at 35 cents on the dollar. Then part of the idea was that these tokens could be converted to equity. So we were busily putting together an investor deck and basically talking to people about our business, talking about that one, it's a profitable business.

Also we were kind of coming out of crypto winter, so people were feeling better, volumes were picking up. I think also creating the BFX token, when we re-opened the exchange and by the way, in re-opening exchange, I mean we had to completely... We basically abandoned our data center, the physical data center and we are basically reinitiated everything in the cloud with very, very narrow access parameters for internal people.

So we feel confident that the environment that we were setting up was secure and so that was going on in parallel, to all of the financial engineering. Then we've had to decide on some type of valuation to make the convertibility happen and I think that this is what the key realization at the time was yes, $72 million was an unbelievable amount of money. Still is. It's an enormous amount of money. But Bitfinex as an operating business, earning commissions, it's enterprise value was certainly north of that.

This only worked if Bitfinex, in fact it was worth some multiple of the debt. We said, "okay, well we think that Bitfinex is worth $120 million pre money" and then it'll convert to tokens and they'd get shares. So we worked with Simon Dixon from BnkToTheFuture. He created on his platform, a sort of SPV, that a lot of small traders were able to get access to this conversion. I think all in all, I think there's about some 350 to 400 ultimate beneficial owners of shares an iFinex Inc, which is the company that owns Bitfinex.

So Alistair Milne, created the BFX trust, which was another vehicle to get smaller investors in because we at IFX, we didn't want to have a billion people on the cap table. There was a certain minimum threshold to be able to do it directly with, with iFinex zinc and so everybody else kind of went to these two other special purpose vehicles. I guess part of it is that we were lucky because Bitcoin was going up and volumes were getting strong.

It was crypto spring and that's what made it work. I mean by the time we got to December of that year, we had already gotten a whole slew of people doing these conversions to equity. We further created an incentive to get people to do it quickly by offering them something called the Recovery Right Token, which was basically a token that we were distributing, such that if we ever recovered any of the funds from the hack, these token holders would get paid first. The later you waited to convert, the fewer of those tokens you got per share.

Peter McCormack: It's was only like 30 or 20 Bitcoins recovered?

Phil Potter: There was 26 Bitcoin recovered recently, interestingly enough!

Peter McCormack: So when I heard about that. I was like, "oh, they've recovered some of the Bitcoins" and then it was like 26 BTC!

Phil Potter: I'll tell you what. Only a tiny amount of Bitcoin was actually ever moved. The vast majority is still sitting in the same addresses it got moved to on the 2nd.

Peter McCormack: Do you ever think people are just too scared to move it?

Phil Potter: I oftentimes wonder about the motivation of the hacker. I don't know. I don't know if it's somebody who did it for profit or if they did it for take down, I don't know if it's a rogue hacker or if it's somebody affiliated with a competitor or a state actor. We don't know.

But we've certainly gone through all of these ideas in our head. But a very small amount of those coins were mixed and put into circulation almost immediately and went to some dark markets that got taken down by the US government. So it was because some of those coins were eventually recovered and returned. Now that took three years, but that's an interesting thing. Who knows!

Peter McCormack: See, what else is interesting, because obviously Bitfinex and Tether has been in the news a bit recently. One of the most interesting things I've found is that there's a lot of goodwill towards Bitfinex.

Phil Potter: Overseas yeah. Not In America.

Peter McCormack: But it seems like people appreciate that Bitfinex were navigating very difficult waters in trying to create an exchange.

Phil Potter: Trying to create an exchange that also respected privacy. I think that there were many different routes that exchanges can take and most have taken the highly regulated route. Others have taken sort of hybrid approaches to that. Bitfinex has actually looked at... In the past, we've evaluated a lot of these options, but we always valued the privacy of our foreign traders. I mean most of the volume comes from overseas with Bitfinex. It's not in the US. The US volumes were coming from basically big prop shops that were operating through off shore vehicles anyway. I think that we didn't give up.

Peter McCormack: Yeah, you tried to make people HODL again?

Phil Potter: The expression I use, is that we have a bunch of lemons and so we went ahead and we made lemonade. Then we tokenized lemonade and it worked. I don't know what to say. As crypto spring progressed, volumes were really strong on the exchange. People were trading the crap out of the BFX token. There were a lot of people who just doubled down, they were like, "okay, I'm going to buy a bunch of cheap." In fact, some of our biggest creditors double downed the most on this and became big shareholders as a result. In December of that year, these tokens were trading around, I want to say around 60 cents. I don't know for sure.

Then they just kept going up and up and up! Then every month we had more and more people converting shares. By the way, we were making money and at the first month, I think we redeemed 1.3% of the tokens and in the next month, it was more. Next month, it was more and then we get into like 5%. So we were going to make it and I think it was around Christmas time when Bitcoin first went past around $900 or something like that. It started to get really frothy and like, "oh, we're going to definitely going to go to the ATH." That's when I felt like we were going to make it. Then we came to March.

In early March, because tokens are already trading at like 90 cents on the dollar at this point and we really wanted to put this thing to bed. So we said, "okay, well starting after March 31st. You'll no longer be able to convert BFX tokens, one for one, for shares. You have to pay 1.25 BFX Tokens for a share of iFinex. So we wanted to create a incentive for people to act, because there were a lot of people who were on the fence. There are a lot of people who had a lot of tokens. They just didn't know what they wanted to do.

Do they want to sell them and get the money back? But we wanted as many people to convert as possible. Well, it worked and toward the end of the month it was just a flurry of... Of course everybody waits to the last minute, a flurry of activity from a lot of holdout token holders and conversions; converting, converting, converting. I remember the following morning... We were getting paperwork at like 11:00 PM at night kind of thing!

Then the following morning we realized that now the amount of tokens outstanding, was less than the amount that we had on reserve, because when we first did the BFX tokens, we actually printed some extras, because we need to have working capital to defend ourselves against the potential lawsuit or whatever. That was also kind of surprising.

There was no lawsuits and I think it was because it was clear to people that we were doing everything that we could possibly do. What more could we possibly do for them, than what we're doing right now. So that was really weird, like, "wait a second, we can just pay off the rest of these tokens right now and be done with it? Okay our reserves are basically zero, but we're making a lot of money right now" and that's what happened.

So at the end of the day, out of the 80 million tokens that were created, 55 million of them converted to equity and 25 million got paid back, in money and cash. It was done. I'm like, "oh, we've got to put out a press release, got this, that and the other" and I'm drafting it and then I realize, it was 1st April on Saturday morning and I'm like, "well, we can't put out the notice today!" People just won't believe it and will think t's a joke in very poor taste! So we waited until Monday, 3rd April to put out the announcement!

Peter McCormack: Talk to me about the problems you have with banking partners, the on/off ramps and how does this all tie into the creation of Tether?

Phil Potter: So I mean Tether was created some time before this hack occurred, but the real problem that I think Bitcoin exchanges face in general, is that banking is really a big headache. I would say that that is probably one thing that getting regulated would help solve over time. But by the way, when we were making those decisions back then, it didn't really help at all. When I was on that panel today with the other exchange guy, Mihai from Bitstamp was saying, that even when they got their Luxembourg license, no one would open a bank account for them at the time. It was always touch and go with a bank.

The thing is, is that money's coming in and out, we're very careful to make sure that we have very deep KYC on anybody that we're handling fiat with Bitfinex, so we always follow the best practices in that regard. We never allowed third party wires, for example and that's one I know from my time running broker dealers, somebody wires you money for their account and the title on the account has to match the account. It can't even be from a joint account with their wife. If it doesn't read exactly the same, you have to send the money back. 

So yeah, we do stuff like that too. But the US correspondent banks hate dealing with crypto and I don't blame them, I get it. This is why it's very, very hard... See Bitfinex is just in a very difficult spot. It is very, very hard to run a US Dollar based exchange from overseas. It just is, because you're basically at the mercy of the correspondent banks. The correspondent banks have very little incentive to say yes to anything that they think could even remotely create a problem for them.

This goes back to all the problems that they have had with drug lord money moving through some foreign bank that they service. What happened was that in a lot of these prosecutions, it's that the various attorney generals around the United States go after the deepest pockets. So they go after the correspondent. "You should have known. You should know who your customer's customer is", because that's essentially what they're talking about here. Well, when that foreign bank is banking a money service business, like Bitfinex, now you're saying that the correspondent needs to know about their customer's, customer's, customer!

That's just a bridge too far for them. And for what? For the $5 they get on the Swift transmittal for being the correspondent bank? So in their eyes, and I think they're probably right on some level, that the risk is asymmetric for them because if something bad did happen, they would be the ones who would get sued by some enterprising attorney general somewhere. So I get. But I will say as an aside, I think that this is actually a very big problem for the US Dollar in general, because what's happened is the de-risking that's occurred here, has actually made US Dollars very, very difficult to use outside the G-7.

That I believe will have a very chilling long term effect on the Dollar as the preeminent reserve currency of the world. Utility matters I think! For trade finance, if you're in Ukraine and you're trying to import some cotton from say Sudan or whatever, you're not using each other's bullshit currencies. You want to settle in hard currency Dollars, when there's a letter of credit and then there's this, but that is almost impossible to do now.

That's changed and that's a problem. It's a problem for the US Dollar and I think the reason is, is that correspondent banks are being held liable for the activity that passes through their books. So that's the brakes, it's just how it is. So in the case of Bitfinex, Wells Fargo was the principal correspondent that at the time, had been still processing credit, because a lot of the others like JP Morgan or whatever, just wouldn't.

Peter McCormack: Wouldn't touch it?

Phil Potter: We wouldn't even try it. But it was working with Wells Fargo. I'm not the CFO, so I don't really have the detailed insights here, but apparently it was working and then it wasn't. That was just yet another headache. I mean we figured it out eventually. We always do. But at that point just started to get harder and I think it's apparently culminated in whatever's going on with Crypto Capital.

I don't really have any knowledge of that, but I think that if anything this de-risking that's occurred is basically forcing exchanges, that are otherwise trying to run a legitimate business, into dealing with shadow banking services, which are arguably less reliable at the end of the day. They're not licensed banks. You don't have the protections or the transparency that you perhaps want.

Peter McCormack: So let's talk about Tether then, because it would be good to know a bit more about that. So I didn't realize until recently, you issued Tether against the Euro and the Yen. You created...

Phil Potter: I don't think... I think maybe? But it's not on the website.

Peter McCormack: Yeah, it was never used. It became a Dollar tool. What was the background to creating Tether? What was the problem it was solving for you on the website?

Phil Potter: So I came up with the idea for Tether in late 2013 and started to explore it a in early 2014. The issue, I think was... It's really centered around basically the regulation of cryptocurrency exchanges. At the time, there was no regulatory framework anywhere for anything. The principal idea was that we understood very clearly that regulators just couldn't get their arms around cryptocurrency. First of all, hardly anyone knew what it was at the time and all they'd heard about was like Silk Road. So how do you regulate a cryptocurrency exchange?

So at the time we had like Cripsy out there and they didn't do fiat and it seemed at the time, that if you're running a crypto only exchange, that's much easier to deal with. Then I said, "well, if we could separate the fiat operations from the crypto operations, then there would be a much better chance of us be able to find some type of regulatory certainty."

So the whole idea is to separate the two, in some senses, the regulation of either one of them separate, like an easier problem to solve than the regulation of the two together.

Peter McCormack: So have a crypto Dollar makes your life a lot easier than having a real Dollar?

Phil Potter: That was the idea. The idea was like, "okay, well we'll handle all the fiat operations through here" and then Bitfinex would basically become like a crypto only exchange. Then hopefully other exchanges would do the same thing. It turned out that people... There was a usability issue with that. People just wanted to send us money to Bitfinex and they're like, "I don't want to send money to Tether and then move Tethers to Bitfinex."

They're also like, "who's this Tether company?" It was a good idea, but that concept didn't catch on. But when we thought about Tether, the way I always explain Tether, it's PayPal on the Blockchain. Hold the money and you can move it around to other people. It used to be back in the day you could move your PayPal money around without being KYC. You just had to have an email address and you move it. If you wanted to cash it out, you had to KYC, you had to link a bank account and what have you.

So I'm like, "okay, well that's what we're going to do. We're going to use Blockchain technologies, so that people could move this stuff around." At the time we, one of my early discussions about this was with was with Craig Sellars who is one of the guys at the Mastercoin Foundation, developing what was really the first protocol for asset issuance. We talked about it, he got interested and then I had kind of gone on to kind of focus more on the branding and on developing the business model and trying to find other partners.

We wanted to get other exchanges involved in this because... The original conception was that this should be like a utility essentially owned by the industry. That was the original idea, but we couldn't get anyone to buy in. I had conversations early on with Bitstamp and Kraken and others and everybody though it was interesting, but for either regulatory reasons or just focus or other things, just couldn't get anyone...

Peter McCormack: But you did eventually, because you went from millions to billions at one point! So what was the tipping point?

Phil Potter: Well, but that was 2017 and I feel like before we get there, I think it's important to understand how it was working and what purpose it solves, because at the time, the idea originally was just to break up the regulatory burdens, for Bitfinex. That was originally the original idea. Then we were trying to get other people, but we couldn't. So even when we create Tether and Craig Sellars had gone on to then work with Brock Pierce and Reeve Collins to further that concept.

Then we kind of partnered with them and kind of brought everybody involved in this back under one roof. But even in our efforts to try to drive some kind of adoption with other industry players, we really failed. We just couldn't get people to do the integration with Mastercoin, now called Omni. I mean it was just work for people to do, at a time when people were laying people off and we are in crypto winter. It was tough. The real inflection point for Tether was when Poloniex, a new exchange, a tiny exchange, integrated Tether as it's as it's fiat option. because they didn't handle fiat.

But they were like, "okay, we're going to have these fiat pairs and we're going to use Tether." I think Craig kind of sold them on it. I didn't have the relationship. It was negligible at first. I mean they didn't have any volume and so Tether was just going to be another one of those things. It's a product that nobody used, because there was no network effect.

But it was, I think, when Ethereum started trading, when altcoins started to appear out of nowhere, Poloniex became a really popular platform for that stuff. All of a sudden they were doing crazy volume and then that's when the magic started happening. People started doing cross exchange arbitrage with Tether really for the first time in 2015. Then it kind of kind of spread from there. Others started to integrating it.

But even still, even at the end of 2016 and by the way, in the middle of all this, we had the hack and that was a substantial distraction from other projects. To be clear, by the way, the ownership structure of Tether and Bitfinex are different. One does not own the other. But there are many of the same principles involved, but there are different people in both companies.

So we had, in this intervening time, we had taken over the project from Brock's group Real Coin, to drive it forward. I think at the end of 2016, even then it was like $5 million in there. I mean it was something in the single digit millions.

Peter McCormack: But I guess even at that time though, $5 million felt like, "okay it's cool that people are using this." That is still $5 million!

Phil Potter: It is. $5 million is $5 million.

Peter McCormack: It seems small now because of how far Tether's gone. But at the time...

Phil Potter: Hindsight offers a lot of perspective there. At the time, it was actually starting to gain some momentum. We were getting more and more people going to the Tether website to create and redeem. It was happening, but it was still slow. But it was the advent of this arbitrage opportunity that certainly seems to have really picked up the usage.

I think that people saw... See the interesting thing about the exchange space is that we've seen time and time again, where you have exchanges come out of nowhere and then all of a sudden be very popular.

Peter McCormack: Binance did it.

Phil Potter: Well Polo did it, Bittrex was big for a while and Binance is certainly the most recent example, but you've have others. It happens. They offer something good and people gravitate to it and that's what people do. But people were noticing Polo and they're like, "well how do we replicate their success?" I think one of the things that people noticed was, "well this Tether thing, let's use this." So that's when it actually started to grow quickly.

So end of 2016, $5 million and then I think into the first quarter, it was something like $45 million, something like that. In middle of 2017 at the end of the second quarter, I think it was like $250 million or something like that. But it kept growing and it got up to like almost $500 million by the end of September or something! Then like $2 billion by the end of the year.

Peter McCormack: It was insane!

Phil Potter: It was crazy. Then you had just an explosion of exchanges using Tether. I mean, you look at all the top "exchanges", I question a lot of the volume figures on CMC, but they all use Tether. Why? Because banking is almost impossible.

Peter McCormack: But with that rapid growth, also came a lot of scrutiny on Tether.

Phil Potter: Absolutely.

Peter McCormack: Endless, relentless scrutiny to the point of almost becoming quite boring to read about from our side. It would be great if you could explain some of the myths around Tether and also some of the challenges you faced. I know obviously auditing is the one thing that people talked about relentlessly.

Phil Potter: I mean I can say a few things about that. What I can say about auditing is that the original conception of the product was that this should be something that's easy to audit. So that's kind of what was put into the "white paper" and a lot of people make the point that somehow we owe people audits. I think that the purpose was to suggest that we have third parties reviewing this stuff for the benefit of the shareholders frankly.

When we were in Taiwan... The promise of the money was that there was such little money in there, that we never got to that point. But even when we were in Taiwan and the balances started to build, in that first quarter of 2017, we had like a local CPA firm in Taiwan do some monthly... Essentially balance attestations.

Then we were in Taiwan after that and we eventually landed at Noble Bank in Puerto Rico and we pursued doing an audit with Freeman at the time. I think that that process, and they did an initial attestation for us in mid September, because we were really under attack. This guy, this Bitfinexed guy, came out of nowhere and started basically making just accusations that are false, on an ongoing basis and not just about Tether, about Bitfinex, about trading and this, that, and the other.

I don't really want to get into that on this podcast, but there was certainly... We felt the need to try to get something out there as quickly as possible and an attestation is something they can do pretty quickly. An attestation is when they look at the bank balances and they look at the Blockchain and okay, well you have more Dollars than what the Blockchain says, you're good! Well, the thing is, it's not really an audit and it just comes with a ton of disclaimers. So the theory, the Tether truther theory is that, "well, even if they had the money, they only had it on that day.

They borrowed it from somebody and then they gave it back to them." I'm like, "well, that's kind of ridiculous", because first off, even if somebody's doing an attestation is going to look at the history to make sure that something as basic as that, is not in fact happening. But you can't argue with people like that, "well, where's the audit? Where's the audit?" Well, it turns out that we tried and we couldn't get it done.

The bottom line is that Freeman couldn't really do it for us. Couldn't, wouldn't, I'm not really quite sure. But at the end of the day, the problems that we were having, especially as we got further and further into the year and the balances got really big, there were I think, a couple of legitimate questions that any auditor would be asking. It's one thing to do and attestation, "okay. They asked us to look at this. We saw it. This is what it says."

Like I said, not really an audit. By the way, no stable coin has realized, all they have is attestations, because the accounting industry doesn't really know quite how to deal with this. So there's a couple of problems. In the case of Tether, the problem that we had was that we had, in Bitfinex, we basically had all our money at Noble Bank and it was billions! So we were a very large percentage of Noble's deposit base. So it got to the point where they... Usually when you have auditors, they go and independently confirm your bank balance.

But here they had to dig deeper because we were such a big... Again, they wanted to make sure, presumably want to make sure that we're not in cahoots with Noble Bank or that somehow they're not participating in some giant fraud, which they of course weren't. But it just meant that we'd have to look at their audit, the bank's audit. Well this is the end of 2017. 

They were working on one, but it wasn't going to be ready for seven, eight, nine months. These things take a long time. So we would have this situation where potentially, we wouldn't have got this far, but that if we're trying to get an audit of the year end balance, that may or may not come for a year, because of the upstream issue with the bank maybe.

Peter McCormack: How does a bank holds $2 billion like that? As they're not a huge bank?

Phil Potter: Not anymore, as they folded! So it's a 100% reserve bank, right. So most banks, if you give them $1 billion, they're loaning that money out and your fractionally reserved. But Noble was a 100% reserve bank and all the money was custodied with Bank of New York at the time.

Peter McCormack: But is it $2 billion in cash, sat as a big pile of cash somewhere? How does it work?

Phil Potter: No. Well it's fully reserved, so it's at Bank of New York and it's for the benefit of... But it's not being loaned out. So it is a part of the balance of the Bank of New York's balance sheet, that is fully reserved. They have other activities that aren't fully reserved, but when you're acting as custodian, then it's a separate legal entity that holds some monies.

Peter McCormack: But I've always wondered, how does the money exist?

Phil Potter: Well, it exists at the Federal Reserve.

Peter McCormack: So the Federal Reserve guarantee it?

Phil Potter: I presume so. I don't know the ins and outs of it, but I think that if you're a money-center bank, then you have an account with the Fed and you hold money or with them overnight or you can hold reserves at the Fed. They pay you some small amount of interest on that or what have you. So in Noble's case, when people complain, because one thing that people say, "well fraction reserve. You can keep your money in the bank." Every stable coin is fractionally reserved, if you look upstream to the bank.

Peter McCormack: Of course.

Phil Potter: It's kind of strange reasoning, but I suppose that's true on some level. What I think is people throw around the term "fractional reserve", without really understanding what it means. I think people think the idea of the disposition of assets or not having enough, they confuse fractional reserve with insolvency. So those are two different ideas and in the case of I guess Tether, money was there.

But sorry, to back up to the auditors, the issue is like, "okay, well it's such a large amount of money that the auditors have to look at the bank." Then the other factor too, and again, this is all kind of speculation and or certain things I can't directly get into, but I'm guessing one of the other problems that Freeman or any other auditor would have had, is that the amount of social media pressure around a situation, it was like the whole thing was about to boil over.

They were getting harassing phone calls from people asking for the audit, when's it going to be done? So on some level, I'm just not sure we were a desirable customer. What's their upside? Several hundred grand in fees? Okay, because auditors are not cheap. What's their downside? Entire reputation. Enron went down and so did Arthur Anderson, auditors.

I guess they were kind of in cahoots, I don't know the whole... I don't recall all the details of the Enron story, but when auditors get it wrong, their reputation suffers. Or if we kind of somehow pulled the wool over their eyes, and then they get exposed. So with a situation, where there is so much media scrutiny, which wasn't there when we first started talking to them.

It was right after we did the redemption, I started shopping for auditors. I'm like, "okay, we solved that problem. Let's go get ourselves some honors", because we promised to do it for the shareholders. We're like, "okay, we're going to run this company as upfront and legitimate way possible."

So I spearheaded that effort internally and you know what, I'll be honest with you, I was naive. I thought that I could do this. I'm a CFA charter holder, I I know accounting really well and I thought... I knew it'd be a lot of work, but I thought we could get it done and I was wrong.

Peter McCormack: Are there any other myths with Tether, like things you have to fight and deal with which are just not true?

Phil Potter: So the myth that I'm trying to get at here really, is that... The myth is that we don't want to be audited. That's not true. There was an intense effort to try to get outside parties to audit, do attestations, anything! It's very, very frustrating to have a very successful product and all the money is there.

Peter McCormack: And you know it's there.

Phil Potter: Of course I know it's there! By the way, there are many media, sort of influencers out there, who were talking shit about Tether. We got a bunch of these people to sign NDAs and we showed them the books. "Well look, let me show you the Noble system. Let me show you this!" Now they didn't become Tether supporters, but they certainly stopped being negative on Tether.

Peter McCormack: Apart from Bitfinexed!

Phil Potter: Yeah, you know, anonymous guy! I mean the guy just tweets nonstop, day and night! I almost feel like it can't be just one person. So one myth is that we don't want to do audits. No. We have tried and no one will do it. Then it becomes a question of reputational risk. It's funny because every time I say this or I go to a conference, there's always auditors, because they're looking for business.

The guys who are trying to get your business are like sales guys and they're like, "yeah, no problem!" Then when you go to customer acceptance, they say, "sorry, we won't do it because there's too much heat." So that's unfortunate. I think that that's going to start changing. We see there's some firms out there that are doing these attestations for other coins and are doing them regularly. 

Perhaps Tether will avail themselves of that in the future, I don't know. But I can say that the experiences we've had to date, left a very bad taste in everybody's mouth. I feel like that was my big failing. I couldn't get that done.

Peter McCormack: But it didn't stop people using Tether, the retail traders, the exchanges, people still use Tether!

Phil Potter: Everybody uses Tether. All these other stable coins are just... They all have their own problems. For example, in order to drive adoption, I think Gemini passes off at discount, like a printing bonus they call it, where I'll let you buy my Paxos for 99 cents and all the big prop shops are buying it up. Then when Huobi allowed convertibility of certain stable coins at face value, then people were trying to bring those things back and try to arb the difference.

Apparently, and I don't know this for certain, but I have heard reports that Gemini and Paxos have either just not allowed certain people or certain coins to get redeemed, they're like, "no, no, no. Those were issued at a discount. Can't redeem those for another six months or a year or whatever the terms are." I don't know. I think that's pretty shady if you ask me. Shady is probably the wrong term.

I think it was a marketing employee gone bad. That's not the way to drive adoption. You want this stuff to be liquid, you want people to be able to redeem it and because especially since their whole edge is like, "we're US based, we're regulated and NYDFS!" Then why introduce some other complaint? At least initially and I don't know what they're doing now, but I definitely think it really hurt their initial adoption. The other thing too is that I'm suspicious of any stable coin where all of a sudden it gets created like $300 million, $200 million, like the USCC, but it's not really being used. If you look in the circulation numbers, it's more like for marketing purposes, and they just printed a bunch.

By the way, who's earning that interest? So I don't know, but my suspicion is, is that there is some behind the scenes deal going on with whoever put in all that money, that they're getting interest paid, they're getting interest on the side. Because why would anyone park their money in a stable coin, if they weren't actively using it? Because otherwise you're giving up 2% interest on a couple hundred million dollars! It's a lot of money. So why would you park your money there, if you're not using it? Well it may be that, I don't know, maybe it's Circle's treasury or maybe it's a Bitmain or maybe somebody agreed to seed the stable coin, but there's some kind of quid pro quo happening behind the scenes?

I don't know, but that's what Occam's razor suggests to me! So I think that you have a couple of these problems out there. It's sort of like where you've got other stable coins that have some convertibility issue or there's some marketing gimmick that goes, goes wrong or the figures you're seeing, are meant to, not deceive, but to have a different impression about what's actually going on. It's kind of like when people look at fake volume on exchanges, because there's wash trading.

You think, "oh wow, this exchange, look at all the volume that they're doing!" But you try to trade there and you realize that the liquidity is not what it seems. So I think the only stable coin that people really seem to use worldwide is Tether and I think if you look at the turnover statistics, those just don't lie. You can pull it up now if you wanted to, but stablecoinswar.com, it'll show you the turnover and probably in the last 24 hours, I'll bet you it's like maybe 1000% turnover for a bit.

So you're talking about $20 to $30 billion moving around in Tether, whereas all the others are like less than 100%. I mean, Paxos actually has been gaining some traction in terms of usability, but those are the statistics people should look at it. So when it was like, "oh, well Tether's dominance has dropped to 76% or whatever in terms of assets." Yeah, but Tether's dominance is still, in terms of network traffic value transferred, it's like 97%/98% every day!

So people are using it. I also think that, and I learned about novel uses of Tether all the time. I had no idea until recently, certainly after I'd left the company, that people are using Tether as, especially in Asia, as collateral for all kinds of things like OTC trading, other things where you need to collateralize something, but the banks are closed because if you're moving dollars, you can't do that during Asian hours first off.

Even if you are, you're bouncing it through some international bank and then it's taking a couple of days just to move the money. So Tether becomes really super useful and because there's a lot of it, you could be pushing around $100/$200 million and people do. I think that there's interest in using it for supply chain management and other things because it's got all the qualities of crypto in terms of its transferability, its security, this, that and the other. But it's open 24/7.

Peter McCormack: But also, there's something about Tether, it feels a little bit more rebel as a stable coin. It feels a little bit closer to kind of the feeling you get with Bitcoin. It feels like a very good sister cryptocurrency to Bitcoin, whereas the others feel very much along the lines of, I don't know, conformity, digital Dollars, highly regulated. There's something just kind of, I don't know, a little bit more radical about Tether. Do what I mean by that?

Phil Potter: I do. I think that with Tether, there's a bit of the Bitfinex ethos as well. They are service a global market. A lot of these other exchanges and other products don't. So I think that, yeah, Bitfinex Tether has always been trying to thread the needle on making it work and it's a great product and it works well. Again, a lot of the criticisms... There's a lot of goalpost moving going on all the time with the Tether critics.

For example, the fact that Tether to my knowledge doesn't have any auditors, they're engaged. I don't know. I mean I haven't been there, like I said since February 2018, but certainly the amount of interest that various government agencies in the United States have expressed in Tether, allegedly going as far back as December 2017 with the CFTC, allegedly.

That I'm pretty sure and I think that people should put their thinking hats on and realize that if in fact the CFTC has been looking at Tether since then, how long do you think you would take for them to discover a massive fraud of the money not being there? I mean, they would be able to discover that essentially overnight. And yet Tether went onto print billions more after that, after that event, allegedly. So what does that say?

And by the way, I live in New York City. I'm a free man and I'm not hiding, I'm not running. Because the money is there. I mean it's always been there. So what's interesting about the revelations from the New York attorney general, is that the reason why they are apparently looking at this, is because of this transaction that occurred between Bitfinex and Tether, I guess apparently in November.

Peter McCormack: Was that the like $625 million?

Phil Potter: Something like that, yes and which in turn meant that Tether's current asset reserves only accounted for 74% of total assets. Well what seems to be lost upon the guys moving goalposts all times, is that up until November 2018, during that whole period of all the, "oh, it's fake money, fake money that pumped..." What's lost is that, no, in fact, this almost basically unilaterally should prove to the world that no, it was fully backed, Dollar for Dollar, certainly at least up until that. But now you just move the goalposts.

The other one is that, "oh, well the fact that you can send crypto and send these crypto Dollars to one another anonymously, means it's money laundering and they're going to get shut down." So it is interesting to note that the New York Department of Financial Services has approved two stable coins. Both of which operate exactly the way Tether operates. Everybody is KYC'ed at their on ramp and off ramp. They have AML procedures and this, that and the other.

But those things can move around on the open network, wherever, NYF. So that concept is apparently okay, at least with the New York Department of Financial Services. So it would be hard pressed to make that point that Tether, which is structured the same way would have... And plus, just like those other coins, Tether is centrally issued and controlled and Tether has the ability to freeze coins, if something untoward is happening like a theft or this or that or at the request of a government or this or whatever.

So I would not say it's a good tool to use if you're a criminal. You would want to use something like Bitcoin that's actually decentralized! So that's the thing, that's the other myth, that just the existence of it. The fact that you can move it around to suit anonymous Bitcoin addresses is proof that it's somehow money laundering and that's just not the case at all.

Like I said, the way it operates in terms of technology, it's the same thing as these other coins. Tether doesn't have the same sort of regulatory oversight. Obviously it's not licensed, well not licensed in that way. But it's certainly licensed with FinCEN as a MSB and they take those responsibilities very, very seriously. We'll leave it at that I guess!

Peter McCormack: Can you talk about any part of the current situation with the Attorney General?

Phil Potter: Not really. I mean other than what's been publicly disclosed. But I think when authorities think something is going on, they're going to investigate and okay! But I do think it is interesting that whatever did happen, it's pretty clear that in my mind that Bitfinex and Tether are trying to fix whatever problem created this in first place. By the way, what created this in the first place is not Bitfinex. It's the payment process that we're using.

I don't really want to get into that, but they are apparently raising $1 billion in what appears to be a very successful token offering. We don't have any confirmation, but they say it's happening and there's been lots of talk. I've been hearing that this thing is basically oversubscribed. It's pretty remarkable, but whatever's going on here, these guys are trying to fix a problem, just the same way that they always tried to fix problems when I was there.

There's no ill will or ill intent or anything like that. These are smart guys who have innovated their way out of all kinds of other problems in the past and will continue to do so. Why is this possible? Because despite what the critics will say, Tether and Bitfinex still have an enormous amount of value. I mean, Coinbase. Bitfinex makes more money than Coinbase and when you think Coinbase raised money at an $8 billion valuation. Kraken raised money at a $4 billion valuation, if I'm not mistaken.

You're going to tell me that Bitfinex isn't worth it, at least a couple billion dollars? Of course it is. It's a profitable company and so they can raise money. I think that's always been an option that they've had. I really wish them all the success and luck in that process. Well luck has nothing to do with it, but I guess we'll presumably, by time you air this podcast, we'll have some more concrete news about that token offering.

Peter McCormack: So you're out on the Bitfinex and Twitter game now. So what are you doing with your time? What are you working on now?

Phil Potter: I am taking some personal time I guess! I'm looking at other projects, do some sort of VC type investments. I'm looking for good ideas, looking for good people. But I'll keep myself busy, that I'm sure! But I have enjoyed not, I mean the stress level there is always high.

Peter McCormack: Yeah, I can fully imagine!

Phil Potter: Always high. But it was also a really invigorating place to work, because there's a small team. It's like a hundred people. There's smaller exchanges in terms of volume that have way more people. Bitfinex has always been a company that does more with less and has really good people and working with them was a pleasure. I mean it was hard. We didn't always agree. But everybody's head and heart was always in the right place for sure.

Peter McCormack: All right, well we breezed through 90 minutes there! That was pretty cool! Well listen, thanks again for coming on. Again, thank you for the absolutely lovely wine last night, that was beautiful.

Phil Potter: Oh, my pleasure!

Peter McCormack: It's great to get to know and I hope we will do something together in the future.

Phil Potter: Likewise! Yes, you know how to get ahold of me!