I'm out of the loop. What's the deal with tether?
More details:
https://seekingalpha.com/article/4129543-bitcoin-one-way-go-...
Even the Bank of England failed to maintain the peg to the German Deutschmark some years ago. Can someone with more knowledge in the FX market area explain this better?
Edit
Unless of course tether is not a store of value in any way and just a fancy name for a dollar.
If you do not verify my claims, you think this is a great idea, because now you can transact with usd(t). Formally these exchanges only used cross-coin exchanges.
Now this is not a problem as long as you have _enough_ money to support withdrawals on an ongoing basis. Nobody knows you dont have enough cash to support all issued tokens, because seemingly, everything works nicely. With the recent hype, money keeps flowing. Until a mass withdrawal happens.
Can I buy a can of coke with it directly? What if the coke seller is a bit skeptical of tether and asks for 1.2 tether instead of one usd, just to play safe. Isn t this pressure applied to the exchange rate?
> Because most exchanges cannot and does not support withdrawals - they are virtual.
Can you elaborate? I'm not familiar with these exchanges, really curious. You mean exchanges accept cash for coins and don't allow withdrawals? :)
To allow deposit or withdrawal of fiat, exchanges tend to have to comply with international banking regulations, which requires a great deal of paperwork. As a result, only a few exchanges offer this - examples are Coinbase, Bitstamp, Bitfinex, Kraken.
Before Tether existed, you couldn't buy or sell dollars or Euros on a pure crypto exchange. That's a big limitation.
Among other things, Tether allows you to trade in USD on these crypto-only exchanges.
Basically, one problem Tethers solve is allowing exchanges to operate more completely without regulatory oversight. As such, the limitations in their transparency may be acceptable to many users, who know that they're not operating in a regulated market and are willing to accept some risk for doing that.
Bank of England couldn't maintain the peg because they weren't holding DM for literally all pounds in existence.
In principle, it's simple: people pay you USD for Tether, you charge them a small percentage fee, put the remaining USD in a reserve account, and issue the buyer a corresponding amount of Tether. You do the reverse to buy Tether back from people.
For the trust issue, you get a reputable company to audit your reserves and Tether/USD transactions.
If you do this, no defense of anything is needed - if someone wants to sell Tether, they can always come back to the company that issues it and exchange their Tether for some of the dollars in the reserve account at an exchange rate of 1:1 minus fees.
In practice however, the auditing and transparency for Tether is not sufficient to be sure that this is what's actually happening. So the "having people believe you" part is definitely an issue right now.
> Even the Bank of England failed to maintain the peg to the German Deutschmark some years ago.
That's not the same kind of peg, at all. A Tether is just supposed to be a proxy for a USD. The pound and Deutschmark were two otherwise completely independent currencies, so the idea of pegging one to the other was dubious to start with. Here's a brief article which covers some of the issues with that peg: https://www.investopedia.com/ask/answers/08/george-soros-ban...
That would make sense indeed, so for every tether coin issued they’d normally have to pull a dollar out of circulation. Otherwise they re printing money isn’t it? Even if true, saying that they back it up is not enough.
Now that I think of it this would make sense for the FED to actually use the blockchain tech to manage its currency supply. Instead of the printing press they issue cryptodollars which supposedly are better than paper because they can be easily and fastly moved around or whatever. But not for a 3rd party to just say: This is a dollar, but called differently, trust us, we issued it.
Correct.
> Otherwise they're printing money isn’t it?
Correct.
> Even if true, saying that they back it up is not enough.
Right. The original idea was that they would provided audited statements proving they held the necessary reserves. They did start out doing something like this, as described here:
https://medium.com/@bitfinexed/the-so-called-tether-audit-th...
See the screenshot of their "previous release" which showed reserves of $44 million across seven banks.
However, for various reasons, including avoiding regulations which would make running this kind of business much more difficult, subsequent releases were less specific and suffer from a host of issues described in the above article. Nevertheless, the latest release mentioned in the article did show $442 million of reserves backing Tethers.
You're correct that the Fed could certainly use a blockchain. However, there's nothing wrong in principle with the idea of a 3rd party issuing a token representing a dollar, if they provide appropriate auditing and comply with regulations in a respectable jurisdiction. No-one is currently doing that.
Having a dollar token is very useful, since you can move in and out of crypto trading positions into a stable store of value, good old USD.
Converting to real money takes a long time so you can't react to the market, and is also taxable and often has other fees on top.
Are we sure about this?