The Kill-or-Be-Killed Fight for Crypto's Future — WSJ

By Angus BerwickLUGANO, Switzerland — Giancarlo Devasini, one of the world's newest billionaires, leads a reclusive life in this Alpine town. He stays in a modest apartment by the lake, strolls the cobbled streets with a black hoodie pulled over his head — and rages about the American rival he believes is trying to kill his business.Devasini is the main owner of Tether, whose eponymous digital dollar is an indispensable part of the cryptocurrency industry. Tether's centrality has earned Devasini tremendous wealth and vast influence over the sector, and the support of a top ally of President Trump.Critics say Tether has become the tool of choice for criminal groups to spirit money around the globe.Out to disrupt his business empire is Devasini's almost perfect foil, Jeremy Allaire, founder of Tether's archrival, Circle, which issues its own so-called stablecoin, called USD Coin, or USDC. Allaire, a suit-wearing executive as comfortable in Davos as he is on Wall Street or the halls of Congress, is running a campaign to regulate Tether out of existence.Devasini has told business associates that Circle is bad-mouthing Tether to politicians and whipping up enforcement actions against his company. They said that in his view, Circle wants to turn the industry into just another regulated corner of finance, while Devasini wants crypto to stay true to its swashbuckling, antiestablishment roots."Circle will not win if Tether is alive," Devasini told an associate several months ago.The fight is over the future of the $3 trillion crypto industry. The pro-crypto Trump administration is meant to usher in a golden age for the sector, and on Sunday, Trump announced the formation of a crypto strategic reserve. But in reality, the call to bring crypto into the mainstream through government regulation has opened up a kill-or-be-killed battle among crypto players. Laws, while expected to be broadly friendly to the industry, could be devastating for individual players such as Tether if they are on the wrong side of new rules.Allaire has encouraged the U.S. and other governments to pass laws that ban the use of Tether's tokens, which are issued offshore. One such law fully took effect in the European Union in December, and similar bills have been introduced in the U.S.Tether is the clear industry leader — its stablecoin is used in four out of five cryptocurrency transactions. Tether's holding company, of which Devasini owns half, said it earned $13 billion in profit last year, double that of BlackRock and mostly generated from the pile of supersafe Treasury bills that Tether owns to back its currency 1-to-1 with the dollar.Allaire has regularly testified in Congress to call for greater regulation that would benefit Circle at Tether's expense. A top deputy pressed lawmakers last year to target Tether, citing its tokens' use in terrorist financing. The Wall Street Journal reported in October that the Justice and Treasury Departments were investigating Tether for possibly violating financial crime laws."We want to make sure that USDC is the preferred digital dollar," Allaire said in an interview.Devasini, in contrast, eschews the spotlight and almost never speaks publicly. On paper, the 60-year-old has been Tether's chief financial officer, and on Monday the company said he would transition to become chairman. In reality, he has always run the operation — even though he passes out business cards that say "No title, No job, Nothing." Behind the scenes, he is counting on allies such as Commerce Secretary Howard Lutnick, whose firm Cantor Fitzgerald holds much of Tether's reserves, to snuff out hostile legislation backed by Circle, associates said. Lutnick stepped down from Cantor after his confirmation to the cabinet in February.Both companies declined to comment on the other directly. Circle isn't focused on the "unregulated money world," Allaire said, but rather the entire $100 trillion market for legal electronic money. When the host of a crypto YouTube show asked Devasini's top deputy Paolo Ardoino in February about Circle, he responded with a grin: "You named the name, I didn't name the name."Tether has repeatedly denied aiding criminal actors and has said it cooperates with law-enforcement agencies.Make the dollar screamDevasini, an Italian, charted a peripatetic career, first as a plastic surgeon in Milan, then as an electronics importer in Hong Kong. In 1995, Italian prosecutors charged him with fraud for helping run a software piracy gang. Devasini struck a plea bargain with authorities and paid a settlement to Microsoft.He later discovered the nascent crypto industry, and around a decade ago spotted an opportunity. Crypto companies couldn't connect their digital currencies with the real-world banking system.Launched in 2014 and registered in the British Virgin Islands, Tether aimed to fix this problem. Traders could exchange their real-world currencies for tether at a value pegged to the dollar, and exchange the stablecoin for other tokens near instantaneously via digital blockchains.In Devasini's eyes, tether was meant to subvert traditional finance. His wife, an artist, exhibited paintings of dollar bills with the image of George Washington screaming because, she said, they had "no more value."Allaire's mission was different. The American, now 53, was an established Silicon Valley entrepreneur who had served as chief technology officer at software firm Macromedia, which pioneered Flash animation. With Circle, which he set up in Boston the year before Tether's debut, Allaire wanted to create a new financial system for the internet age that would update an inefficient patchwork of banking networks that often snarled international payments.While most of the crypto community relished the unregulated marketplace, Allaire's strategy to grow Circle by working with regulators was ironically "the contrarian bet," said Hemant Taneja, CEO of venture-capital firm General Catalyst, where Allaire had also worked.Taneja and other big-name U.S. investors, including fellow venture capitalist Jim Breyer, known for his early stake in Facebook, lined up to fund Allaire's vision. Goldman Sachs, asset-managers BlackRock and Fidelity, as well as crypto exchange Coinbase, all later invested, too. Allaire remains Circle's largest individual shareholder.Regulators were skeptical when Allaire knocked on their doors and sought money-transmitter licenses. He quickly gained a reputation as the adult in the room amid a young, untested industry, full of mavericks and grifters. Allaire first testified before Congress in late 2013 and called for the U.S. to take the lead in putting guardrails on crypto to avoid allowing criminals to seize the advantage."He is as good as anyone I know at sitting down with very senior Washington politicians," Breyer said.The mudslinging between Circle and Tether started when crypto trading hit the mainstream in 2020.Tether's "greatest feature is its non-compliance and opacity," Allaire tweeted in January that year, noting it had become a solution for those wanting to bypass the financial system.In letters to authorities in the U.S. and elsewhere, Circle raised the alarm about how unregulated stablecoins could harm consumers. Circle that July flagged to the Financial Stability Board, an international body that monitors global finance, an incident that happened two years earlier in which tether temporarily lost its dollar peg because authorities seized a chunk of its reserves as part of a money-laundering investigation. Circle said this showed how such stablecoins could potentially fail, wiping out consumers' crypto holdings.Circle promoted its transparency and released audited financials in 2021. It later hired accounting firm Deloitte to sign off on comprehensive monthly statements covering USDC's reserves, which consist mostly of Treasurys, plus some short-term Treasury loans and cash.Tether, in contrast, releases financial statements that are far lighter in detail, and did so only after it was forced to by New York state regulators. Tether also supplements its Treasurys with bitcoin, commercial loans, gold and unspecified other investments.Devasini griped to associates in messages reviewed by the Journal about unfair comparisons with Circle. He branded USDC a "shitcoin" and said auditors wouldn't work with Tether due to its reputation, claiming others were spreading lies about his company online.'Flight to quality'After years of mediocre returns, Tether and Circle stumbled into a gusher of money in 2022. When the Federal Reserve raised interest rates, Tether's Treasury holdings went from earning tens of millions of dollars a year to hundreds of millions a quarter.Devasini spent little of the windfall on himself. He often turned up to meetings in a worn tracksuit with a cap emblazoned with the word "FOOL" and a tangle of keys and memory drives clipped to a sling over his shoulder. Nonetheless, he liked to brag to associates about how much Tether was raking in each day.He also felt his new riches painted a target on his back. At a meeting in the Bahamas that December, Devasini told a business partner he believed Tether posed such a threat to the U.S.-dominated international banking order that the White House could seek to shut down Tether at any moment.Allaire, meanwhile, was deepening his ties to the traditional financial world. By the end of 2022, Circle kept most of its reserves at Bank of New York Mellon, the world's largest custody bank, as well as some cash at other regulated financial institutions. BlackRock managed its Treasury portfolio.Tether was largely run by Devasini and a small band of fellow outsiders, including Ardoino, a pugnacious Italian computer programmer, according to people familiar with the company. Circle had hundreds of staff, along with a board of directors stacked with former corporate executives.Allaire tweeted "Flight to quality" about traders ditching tether for USDC as his stablecoin gained ground on its rival.But Circle stumbled when Silicon Valley Bank collapsed in March 2023, trapping over $3 billion of Circle's cash reserves. Spooked traders rushed to sell USDC, knocking its price down to 87 cents. Like a money-market fund, Circle's price isn't meant to fluctuate from $1.Tether rubbed salt in Circle's wounds by touting that it had no exposure to SVB. "Flight to safety," retorted Ardoino on Twitter as traders flooded back to tether.USDC recovered its peg after regulators rescued SVB, which included many depositors who held cash far above the federal insurance level. Some $20 billion drained out of USDC over the rest of the year.Ardoino warned that people should "truly beware" of a stablecoin company like Circle for keeping reserves in uninsured cash deposits, which he said made USDC vulnerable to a bank failure, despite Tether's own money-seizure incident a few years earlier. Allaire said Circle needed to keep a small portion of its cash reserves outside BNY Mellon and other major global banks to facilitate customer redemptions.That June, Allaire petitioned Congress for a stablecoin bill that would mandate strict reserve requirements and allow issuers to hold cash at the Federal Reserve. In a broadside against Tether, he called for measures to bar the circulation of digital dollars issued offshore that "do not play by U.S. rules." He said, "At worst, they are actively undermining U.S. national interests and security."He and his deputies fanned out around the globe — Japan, Singapore, the EU, Brazil — to advise other governments to impose stablecoin laws, and sign up foreign banking partners that would allow local Circle customers to deal directly with a regulated institution.Circle gains groundAt home in Lugano last year, Devasini was unnerved by tightening legal strictures — caused both by growing regulations and allegations of criminal use of tether.The small Swiss city was his "refuge" from the outside world, according to Lugano's mayor, Michele Foletti. Devasini often worked out of a bland office above a sports bar, and dined with Foletti at a restaurant that served bitcoin-themed panettone. Devasini's wife unveiled a sculpture of Satoshi Nakamoto, the pseudonymous creator of bitcoin, in a lakeside park.Devasini told associates he wouldn't travel to the U.S. In a chat group, he asked for information about the fate of Kim Dotcom, founder of the defunct Megaupload website, whom the Justice Department was seeking to extradite on piracy charges.In April 2024, Treasury singled out tether for being used to help fund Russia's war machine. In June, the slogan "Tethered to Corruption" appeared on billboards in Washington, D.C., and New York's Times Square. It was part of an advocacy group's campaign to bring attention to tether's use by terrorists and drug cartels. It called the company "the next FTX," after jailed Sam Bankman-Fried's bankrupt exchange.Devasini saw Circle's hand in the negative attention. "They are behind every single attempt to bad-mouth Tether," Devasini told a business partner.Ardoino later publicly accused Tether's competitors of funding the advocacy group's campaign. The group, Consumers' Research, which in the past has led campaigns against environmental, social and corporate-governance investing, said it never discloses donors' identities.Circle declined to comment on it.Circle executives, however, regularly met with high-ranking Treasury officials and other authorities throughout 2024 to flag tether's national security risks, according to people familiar with the discussions. Asked about tether at a congressional hearing that February, Circle's senior policy director said she hoped U.S. authorities were studying how its rival was enabling "malign activities."Treasury was so concerned by tether's proliferation among America's enemies that it considered whether to impose sanctions on Tether itself, the people said. This would lock Tether out of the U.S. banking system, likely dooming its business. The department also requested new powers from Congress to target offshore dollar-backed stablecoins, aiming to rein in Tether, though the powers weren't approved.Sens. Kirsten Gillibrand (D., N.Y.) and Cynthia Lummis (R., Wyo.) introduced a bill in April that would ban unregulated stablecoins. "I would choose Circle over Tether," Lummis said at the time.Circle also obtained a license to operate across the EU under new regulations that required stablecoin issuers to hold at least 30% of their reserves in cash in local banks. Tether opposed the condition as creating more risk, citing SVB's collapse. Coinbase and other exchanges delisted tether tokens for their EU clients in response.Another win for Circle came in December when Binance, the world's largest crypto trading platform, partnered with it to grow USDC's adoption. The once freewheeling exchange had been the center of the tether trade for years. But after pleading guilty to violating U.S. financial-crime laws in late 2023, even Binance was siding with Allaire.New administrationDevasini had one ace up his sleeve: Commerce Secretary Lutnick, whose firm Cantor Fitzgerald held Tether's Treasurys.Lutnick had personally negotiated a deal for Cantor to invest in Tether's holding company via a convertible bond in April 2024. Following a meeting with Lutnick in Lugano the following month, Devasini told associates the Trump ally would seek to kill any bills that could harm Tether. Lutnick shared his dislike of Circle, Devasini added.The Commerce Department didn't respond to requests for comment. A Cantor spokeswoman declined to comment.Lutnick helped Devasini cultivate ties to the Trump camp, the associates said. A month after Trump's election win, Tether paid $775 million for a stake in the conservative streaming platform Rumble. Cantor managed the deal. Rumble Chief Executive Chris Pavlovski, a close friend of Donald Trump Jr., tweeted that Tether was spreading "American freedom."Senators pressed Lutnick about his potential conflict of interest over Tether during his confirmation hearings. He claimed criminals only used tether more than USDC because it had a larger market. "It's like blaming Apple because criminals use Apple phones," he said.When Sen. Maria Cantwell (D., Wash.), asked Lutnick in written follow-up questions whether he would ever undermine any bills to regulate Tether, he responded that he had repeatedly conveyed his belief that Congress should take care not to undermine "dollar hegemony on blockchain," indicating Congress shouldn't make legislation so onerous for companies like Tether that they lose market share.He didn't commit to not interfere in any federal investigations into Tether, writing he would fulfill his duties in line with government ethics laws. Regarding his earlier discussions with Devasini, Lutnick wrote, "I have never suggested to anyone that I would do anything improper with respect to Tether."Trump issued an executive order to promote "lawful and legitimate dollar-backed stablecoins worldwide." The order established a presidential crypto working group, which would include Lutnick, to review the regulations that should be scrapped or altered.After Lutnick stepped down from Cantor, his son, Brandon Lutnick, who once interned with Tether in Lugano, was named the firm's chairman.Circle, meanwhile, contributed $1 million to a super PAC that backed pro-crypto candidates, and it gave another $1 million to Trump's inaugural committee.Lummis and Gillibrand joined two Republican Senators to debut a new stablecoin bill in February, which Allaire publicly cheered, and the House introduced a similar proposal. Gillibrand said in an interview the legislation would allow serious crypto companies to compete in a fair marketplace, "and not be disadvantaged or undermined by charlatans or purveyors that have no safety standards and have no transparency.""I don't think Tether today would qualify for the requirements," she said.Tether's growth has slowed since mid-December after its token's removal from some exchanges.Circle has been rocketing, with the total value of USDC finally eclipsing the pre-SVB level in early February. The company is soon moving into new headquarters in New York's World Trade Center.Write to Angus Berwick at [email protected]