Why crypto giant Tether bought a South American farming company

Young cows stand in a barn at Mystic Valley Dairy in Sauk City, Wis. on June 29, 2017. (AP / Carrie Antlfinger)

NEW YORK — Crypto powerhouse Tether, the world’s largest digital assets company, is leveraging its recent acquisition of a South American agricultural firm to make a strategic play for the multi-trillion dollar a year global commodities trade.

The company aims to embed its stablecoin, a digital currency pegged to the U.S. dollar that trades in crypto exchanges, into the core of markets where raw materials are bought and sold, promising to slash cross-border payment costs and times from days to seconds.

New York-listed Adecoagro, a company that produces dairy in Argentina, rice in Uruguay and sugar and ethanol in Brazil, among other products, agreed in April to sell 70 per cent of its shares to Tether in a deal valued at around US$600 million.

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It is another sign that the quickly-expanding crypto industry is moving into brick-and-mortar businesses, and broadening investments in physical assets.

“The crypto industry is increasingly focused on bridging digital finance with tangible assets,” said Joe Sticco, chief executive of Cryptex Finance, a company that created indexes that mirror cryptocurrencies’ market caps.

He said that by adding income-generating assets like farmland or food processing plants, Tether could strengthen its balance sheet and provide a hedge against inflation.

Tether’s main business segment is USDT, a digital currency backed mostly by U.S. Treasuries. Launched in 2014, USDT has grown sharply in trading volumes amid rising interest in cryptocurrency and token prices.

It is a way to make payments outside of the traditional global financial system. The big difference between USDT and bitcoin or another cryptocurrency like ethereumis that USDT is designed to track the U.S. dollar, the currency dominating global trade.

Commodities trading

Tether has issued US$143 billion in USDT so far, and it said in its first quarter report that it has US$149 billion in reserves, including US$120 billion in U.S. Treasuries.

“Tether wants to boost the use of its stablecoin to make cross-border payments, something that I think will grow a lot in financial markets, particularly in commodities markets,” said Marcos Viriato, the chief executive of Parfin, a South American company providing technology for transactions with cryptocurrencies.

“If a company in Brazil sells commodities to someone in Bolivia, the payment through conventional channels could take more than three days. With USDT it would take seconds,” he said, adding that operation costs would also be much lower.

Parfin has a pilot project with Brazil’s third largest bank, Banco Bradesco, where Brazilian commodities exporters sell products to clients abroad who pay with stablecoins. Bradesco then uses Parfin’s infrastructure to convert those USDT to local currency, which is deposited in exporters’ accounts.

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“Tether’s investment approach prioritizes companies that expand our distribution network and enhance the real-world utility of stablecoins, with Adecoagro as a prime example,” Tether said in response to a Reuters request for information on the deal.

The company said it is evaluating, alongside Adecoagro’s management and other industry experts, how stablecoins could enhance efficiency and liquidity in commodity trading.

Tether reported late last year that it had financed a physical crude deal between a major oil company and a commodities trader, which was settled using USDTs, the first time a deal on these terms was done.

Reuters reported earlier this year that Russia was using cryptocurrencies in its oil trade with China and India to skirt Western sanctions. Venezuela has also sought to use digital currencies to trade.

Sugar token

Another possible option for Tether as it enters the agriculture world is the so-called tokenization of commodities, said Gracy Chen, chief executive of crypto exchange Bitget.

Tether already has a gold token, which mirrors gold’s value and is backed by gold reserves. It could look now into a sugar or corn token, that could be used for hedging or as a collateral in pre-harvest financing, Chen said.

“In effect, they are turning farmland, sugar mills and renewable energy plants into programmable financial instruments,” she said.

Tether said that it sees “significant potential in exploring the tokenization of real-world assets, including agricultural commodities,” although it stressed that there were no immediate plans to launch a sugar or corn token.

Instead, for now, the crypto company will use its acquisition for a different application. Tether said it will tap renewable energy produced by Adecoagro in its operations in South America, such as the electricity coming from sugarcane mills, to power a bitcoin mining operation.

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Reporting by Marcelo Teixeira, editing by Deepa Babington