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Comment by VMG | Hacker News Reader

The tokens only have value as long as your tokens are redeemable. Multiple things can make them non-redeemable:

* Your tokens can be tainted, for instance because they were once owned by a blacklisted address. The value of your tokens will be effectively 0.

* The issuer might run a fractional reserve (this is the accusation against Tether, the most popular stablecoin at the moment)

* The asset backing the stablecoin might not be backed by anything. It's not worth getting into FED policy here, but let's just say that a stablecoin denonminated in Venezuelan Boliviar is not attractive.

> Stablecoins seem like they would achieve most of the goals of the original cryptocurrencies such as Bitcoin

The original goals of cryptocurrencies (Bitcoin, to be precise) were exactly to avoid the problems that stablecoins have.

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> The issuer might run a fractional reserve (this is the accusation against Tether, the most popular stablecoin at the moment)

Very important to note - a stablecoin running a "fractional reserve" in the way that people talk about would just be fraudulent/insolvent.

Modern banks have actually never operated under the "fractional reserve" model as described in economics textbooks, but it's true that they only a fraction of their assets are held as bank reserves. Very importantly though, solvent banks always have more assets than liabilities (customer deposits are a liability to the bank). Usually a lot of those assets are loans, but they also hold bonds and other investments.

If Tether has issued a single token without an asset to back it that is worth at least US$1, then that's not operating like a bank does, it's just fraud.

> Modern banks have actually never operated under the "fractional reserve" model as described in economics textbooks

How do they operate, if not under the fractional reserve model?

The “fractional reserve” model implies incorrect ideas of how banks work - either as intermediaries between depositors and borrowers, or implying the “money multiplier” model of credit creation. Those are not the case in the real world. The actual model is often called “endogenous money”.

As I said, the confusion many people have is that it is correct that bank reserves are a fraction of the bank’s assets, so the name “fractional reserve” would intuitively seem correct.

This is a good description of how they actually work from the UK’s central bank: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

Doesn't every bank run a fractional reserve? So when Coinbase deposits those reserves in a bank, the bank will lend them and there actually isn't a guaranteed reserve.

Coinbase has a guaranteed sum available from the bank, that part is regulated. If coinbase operated as a fractional reserve with regard to cryptocurrency deposits it would be unregulated and could lead to losses for users if it goes tits up. If the bank fucks up coinbase funds are secure, if coinbase fucks up customer we funds are not.

Banks only hold some of their assets as central bank reserves, but solvent banks always have more assets than liabilities.

For a stablecoin to operate like a bank they would have to issue loans (loans are an asset to the bank to match the deposit created when they lend. A regulated bank also needs a certain percentage of owner's capital (paid up shares/retained profits) compared to how much they lend in case of delinquent loans).

A stablecoin just creating tokens with no backing would be fraud, same as if a bank just credited an account from nothing.

I would imagine that the secret service would take ownership of the coins and then reissue them thus resolving their criminality.

Why would the Secret Service start help laundering money?

Sorry I meant the Treasury. These would be seized digital coins.

Parent was probably implying that the Secret Service would sieze the tainted assets and the auction them off to new bidders, thus removing the taint for the new owner. the reason for the auction instead of just funding the treasury is that the USG deals in dollars, not in securities or other obligations or paper instrumnets. Compare the actions of the US Marshalls after siezing the Silk Road Bitcoins.

That doesn't help with the problem of accepting possibly tainted tokens, and the resulting loss of the stablecoin stability.

Wouldn't the auction of stablecoins basically have to be at face value? Just by market forces: You don't auction dollars.

Then they'd just cash then in at coinbase, right?

> Wouldn't the auction of stablecoins basically have to be at face value?

Almost certainly not. They would trade at a premium or discount, depending on a number of factors.

Which factors? Who'd buy them at a premium? Wouldn't any auction of >1 bidders stabilize at face value?

> Which factors? Who'd buy them at a premium? Wouldn't any auction of >1 bidders stabilize at face value?

Think of the stablecoin as an ETF. If people need to launder money or take advantage of a programmatic bug, that would raise the stablecoin price over $1.

By default, I'd imagine the reduced liquidity and counterparty risk (relative to dollars) would cause the stablecoin to trade at a discount to cash, particularly when auctioned by the government. (You have to spend resources monitoring the auction, closing the transaction, and cashing out to complete the arbitrage.)

Basically this. It's a shame people don't understand crypto at all.

I don't believe many Cryptocurrency advocates understand Cryptography

I think thats the original problem with crypto

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