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Tether expands into AI with investment in Northern Data, reneges on promise not to issue new loans

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(Kitco News) - Tether, the company responsible for issuing the top stablecoin by market cap, has announced a strategic investment into Northern Data Group, a data center and cloud environment services provider based in Germany.

The investment was made through Damoon, a Tether Group company, and will see the firm partner with Northern Data Group to develop accessible solutions that service many communities already engaged with other Tether products at a global and local level. The firms will utilize artificial intelligence (AI), peer-to-peer communications, and super-resilient data storage solutions to aid their development.

“This investment is significant for Tether as it demonstrates its determination to support emerging technology,” the announcement said. “Tether recognizes Northern Data Group as a trailblazer in this domain and believes its commitment to resilient data storage and high-performance computing aligns perfectly with Tether's forward-looking perspective.”

The announcement from Tether noted that a report from Forbes, which claimed that Tether “spent some $420 million on 10,000 H100 GPUs in an unusual deal that will see it gain a 20% stake in a controversial German-listed bitcoin miner Northern Data who plans to rent the chips to AI startups,” contained “inaccuracies regarding Tether’s stake size in this investment.”

According to an August press release from Northern Data, the firm "entered into an agreement with an investor under which Northern Data agreed to acquire Damoon for a valuation of EUR 400 million, and the investor agreed to capitalize Damoon prior to completion of the acquisition with the funds needed to acquire latest-generation GPU hardware for a purchase price of EUR 400 million."

By the end of 2023, “Northern Data Group will hold a controlling interest of c. 70% in Damoon,” the release said. “Northern Data Group has a unilateral option under the Investment Agreement, which can be exercised until 31 December 2024, to acquire the remaining c. 30% of shares in Damoon for cash or additional shares in Northern Data Group. Northern Data Group intends to exercise this option as soon as reasonably practicable in order to own 100% of Damoon and the associated latest-generation GPU hardware with a value of EUR 400 million.”

Northern data said the hardware will be “deployed within Taiga Cloud and will, when deployed, substantially increase the compute power of that division.”

Tether also noted that these investments are separate from the reserves that back USDT and do not impact the firm’s reserves or customer funds.

"We are excited about this investment into Northern Data Group as it represents a fresh venture into new technological frontiers," said Paolo Ardoino, chief technology officer at Tether. "This investment underscores our commitment to responsible growth and innovation while preserving the strength and integrity of Tether tokens’s reserves.”

This investment follows other recent investments made by Tether in energy production, bitcoin mining, and communications technology, highlighting the firm’s effort to expand beyond fintech.

Aside from its partnership with Northern Data Group, Tether’s latest quarterly financial update showed the stablecoin issuer has increased its issuance of USDT-denominated loans as another income source.

According to a report from the Wall Street Journal, Tether spokesperson Alex Welch confirmed the company had made new loans.

“During the second quarter of 2023, we received a few short-term loan requests from clients with whom we have cultivated longstanding relationships, and we made the decision to accommodate these requests,” Welch said, adding that the loans would be eliminated by 2024.

She said the company’s goal “is to prevent any significant depletion of our customers’ liquidity or the need for them to sell their collateral at potentially unfavorable prices, which could result in losses.”

This development stands in contrast to a December announcement from Tether that they would reduce their loans to zero by the end of 2023. The move was made in response to the collapse of the FTX cryptocurrency exchange as a way to restore faith in the market.

The WSJ report warned that “Tether Holdings’ lending represents a potential risk to the crypto world” as loans are riskier than the majority of assets listed in Tether’s attestation reports, which are primarily Treasury bills and other safe instruments that can easily be converted into dollars.

“Loans are different,” The WSJ said. “Tether Holdings can’t be certain the loans will be paid back, that it could sell the loans to a buyer for dollars in a pinch, or that the collateral it holds will be adequate.”

The latest quarterly report reserve breakdown shows that Tether has issued secured loans to the tune of around $5.5 billion, which represents 6.36% of its total assets. Treasury bills account for around $55.8 billion of the company's reserves, and they hold roughly $3.27 billion in precious metals and around $1.68 billion in Bitcoin.

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In response to the report, Tether released a statement highlighting the struggles of the banking sector over the past year. “The banking industry is facing significant challenges and has proven incapable of keeping up with evolving global financial markets, something the Wall Street Journal has disregarded countless times in pursuit of tarnishing the reputation of true innovators like Tether,” they said.

Tether said that traditional financial institutions have failed to address the needs of their customers “in a way that is detrimental to a thriving economy and few have taken the time to examine this further,” and have instead elected to spend their time “scrutinizing Tether, who, in the interest of its customers, has accrued more than $3.3 billion in excess reserves to effectively reduce secure loan exposure as net result.”

“Anyone with a minimum understanding of financial markets would see how a company having $3.3 billion in excess equity and on track to make a yearly profit of $4 billion is in all effects offsetting the secured loans and retaining such profits within the company balance sheet,” they said. “Tether is still committed to removing the secured loans from its reserves.”

Tether closed its response by saying, “This demonstrates the need for a more nuanced understanding of how stablecoins function and dispels any misconceptions regarding Tether's security.”

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