Tether Says Stablecoin Is Only Backed 74% by Cash, Securities | Hacker News Reader

Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

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157 pointschollida1247 comments

It's crazy that they messed this up, Tether is basically a money printing machine, all they had to do was be solvent.

Let me start by saying I don't hold Tether nor have I ever, nor do I think it's a good idea.

Tether is a fundamentally a risk free money making concept, it works just like gift certificates. The only thing Tether has to do is buy back Tether at any price lower than they sold it for and they make profit.

And being able to buy Tether at a lower price is a fundamental market property because of knowledge imbalance. They literally can not fail at making money, the only thing they had to do was not lose their liquidity.

They print free money without it even being a scam, even better they are providing a public service, and still they messed it up...

Kinda like the federal reserve ...

The Federal Reserve is the monopoly issue of US dollars within a legal and policy framework. Tether does not have that legal mandate to issue money!

Perhaps a better comparison would be to banks (as the credit they create is essentially new money), but again, they are subject to restrictions (i.e capital requirements so they can absorb a reasonable level of defaults without ever touching deposits, etc.), operate within a legal framework, and have to stay solvent.

So at best you could say Tether is probably an illegal shadow bank that probably isn’t solvent.

It's so ingenuous for people to compare crypto to a sovereign government backed currency that has remained stable and solvent for nearly 250 years

It’s time we start treating these folks for what they are: the antivaxxers of finance.

Who, exactly?

(Sorry, this ended up in the wrong place and it's too late to edit/delete)

Are you aware that an actual bank - the kind of bank that the entire world economy relies on to function - would on average hold maybe only 10-20% of the money in their clients accounts? How do banks do it? They invent money out of thin air.

If Tether was a bank, its 73% reserve rate would be considered spectacularly high. The crypto world is basically re-inventing fractional reserve banking now.

> The only thing Tether has to do is buy back Tether at any price lower than they sold it for and they make profit.

How would Tether be able to sell Tether at a higher price than market price but then simultaneously buy Tether at a lower price than market price? Tether would have to wait for its price to drop and then rise again, just like any other trader. Curiously, Tether could spread FUD about Tether and then refute it.

If Tether were an actual bank, in the US it would be regulated and insured.

If they sold Tethers for $1.00 but bought them for $0.99 that would effectively amount to a 1% fee that would maybe give them some profit.

Why would anybody buy Tethers for $1.00 from Tether if someone else is selling them for $0.99?

well why do you buy currency and pay a commission?

There is no commission in the example, or alternatively any commission is priced into the numbers given.

Unless Tether can buy Tethers cheaper than anyone else (through some unspecified mechanism) then they can't profit from arbitrage any more than anyone else.

Of course Tether can charge a fee to mint new Tethers, or to exchange Tethers for actual dollars. That's exactly what they do.

People would only interact with the Tether treasury when there's a net increase or decrease in outstanding Tethers. Otherwise people would just trade with each other.

Note that it does not work this way currently since normal people cannot buy/sell directly with the Tether treasury at all.

You give the bank a dollar. The bank loans 90 cents of it to Bob who puts it in the bank too. The bank didn’t invent 90 cents. They’re owed 90 cents from Bob, and they will collect interest on the loan to profit. If no loans are made, the bank will eventually have more than $1.90 in reserves. There is risk here because you and bob might want your money at the same time, or Bob might default, but generally this doesn’t happen at scale.

Now consider Tethers case. You give Tether a dollar. ???. Tether has $0.70 and you’re not even allowed to get it back.

> You give the bank a dollar. The bank loans 90 cents of it to Bob who puts it in the bank too. The bank didn’t invent 90 cents.

There are now 1.90$ credited to both me and Bob, where before there was only 1$ credited to me. The 90 extra cents are now part of the money supply. They appeared out of thin air.

Perhaps it's unfair to say the bank "invented" the money, but it did create it.

> They’re owed 90 cents from Bob, and they will collect interest on the loan to profit. If no loans are made, the bank will eventually have more than $1.90 in reserves.

If Bob eventually pays back and the bank doesn't make any further loans, the bank will have 1$ (my dollar) and a couple of cents of interest.

> You give Tether a dollar. ???. Tether has $0.70 and you’re not even allowed to get it back.

If I give Tether a dollar Tether has another dollar. I get a Tether token which I can exchange on the open market for whatever the market price is. It supposedly is possible (though inconvenient) to get Tether itself to exchange their tokens for actual dollars (of which they hold only 70%) but (just like a bank) Tether relies on that not happening "at scale".

"There are now 1.90$ credited to both me and Bob, where before there was only 1$ credited to me. The 90 extra cents are now part of the money supply. They appeared out of thin air." I think you are confusing money supply and record keeping. The only spendable money is what bank actually has so if you and Bob where the only customers of that bank and bank loaned 90c of your 1 dollar to Bob the only money you could spend would be 10c. The only bank that creates money out of thin air is FED.

The Fed is not the only bank who can loan funds at a fractional reserve. You might want to read a bit more about how banking works.

Fractional reserve does not create money it just specifies what % of money a bank can loan out.

https://en.wikipedia.org/wiki/Money_supply

That isn't true. You might want to take a look at this:

https://en.wikipedia.org/wiki/Money_creation#Fractional_rese...

You might want to take a look at types of calculations that theory is applied to. It's used to model macro economic effects which has very little to do with what people imagine this means.

This is not true. You can spend up to a dollar, because you’re spending from your bank account and everyone trusts that you’re allowed to take up to a dollar. Dollars a fungible, so you’ll be taking someone else’s dollar, but that’s ok, because not everyone needs their dollar at once.

Bob can spend 90 cents because he has 90 cents, though he is obligated to pay it back later.

The bank can loan out (in this example) 81 cents of the 90 cent deposit from bob.

Do you understand what run on the bank is ? Do you understand a difference between physical world and a theory that is used for macro economic modeling? Because majority of people are under FDIC limits and basically attribute 0 counterparty risk when dealing with their own bank the net economic effect can be modeled using a theory that you are quoting in very simplified terms. Any given bank can only operate using deposits they have not loaned out if they run out of that FDIC will take over (greatly simplifying obviously banks can borrow money against their assets, loan portfolio etc.). So in real world terms the only bank that creates money out of thin air is FED.

> If Bob eventually pays back and the bank doesn't make any further loans, the bank will have 1$ (my dollar) and a couple of cents of interest.

This is wrong. The bank will have $1.90 + interest. You have to pay back your entire loan. Yes, bob might default, but averaged out, the risk calculations set the interest rate high enough to cover that profitably. The fractional reserve part of the banking system is a temporary choice that happens continuously. But if stopped, the bank would eventually have all of its cash because it has all of its reserves covered in debt.

> If I give Tether a dollar Tether has another dollar. I get a Tether token which I can exchange on the open market for whatever the market price is. It supposedly is possible (though inconvenient) to get Tether itself to exchange their tokens for actual dollars (of which they hold only 70%) but (just like a bank) Tether relies on that not happening "at scale".

The difference is tether has no title to the missing 30%, and probably even more of it if we are going to be honest. The likelihood of repayment and the fullness of reserves are two separate concept. And banks win on both counts.

> This is wrong. The bank will have $1.90 + interest.

Dude, check your damn math! The bank owes me a dollar. At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (unless Bob takes up a ridiculously high APR and term just to loan a dollar).

> But if stopped, the bank would eventually have all of its cash because it has all of its reserves covered in debt.

This ignores that Bob has deposited his money at another bank which has used it as a reserve to make even more loans. The system can't stop, it would collapse.

> Dude, check your damn math! The bank owes me a dollar. At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (that would be a ridiculously high APR).

Assume that “the bank” in question represents all banks. And so depositing in any bank counts as depositing in “the bank” because this is illustrative.

You give a dollar. The bank loans out 90 cents to bob. Bob buys something (I skipped over this) from Joe. Joe puts 90 cents in the bank. Bob pays back 90 cents he earned using the purchase from Joe. The bank now has $1.90.

You’re right that the system would collapse if it stopped. But so would, say, the entirety of the national economy stop if we decided to just stop making loans. We like loans because loans enable growth. So you can, idk, buy better GPUs to mine poopcoins

> Assume that “the bank” in question represents all banks.

"The bank" can't simultaneously be "all banks". Sure, if we consider "all banks" then $1 paid into the system can "magically" turn into $1.90 (and far more) without even considering interest. That's my original point! Money is being created by fractional reserve banking.

https://en.wikipedia.org/wiki/Money_multiplier

It doesn’t matter which bank the loan is deposited into. That doesn’t affect what’s happening here. I’m saying one bank because it’s easier to understand. If you really want to be pedantic, sure, maybe bank 1 has $1 + interest and bank 2 has $0.90. That’s also possible

But it’s important to get that money is not blindly created. It’s done because value is created at a faster rate than physical dollars. You can view banks as a service that invests your dollars. You give them money to loan out and receive some of the interest in compensation. You yourself can create “new money” by making a loan yourself. The new money is just the result of value creation.

> It’s done because value is created at a faster rate than physical dollars.

[citation desperately needed]

I think you're just letting your imagination run wild on how things work and why that makes sense.

> You yourself can create “new money” by making a loan yourself.

No I can't. If I make a loan to myself, there is no new money to circulate. If a bank makes a loan on fractional reserves it is new money than can circulate and that can itself be the basis for new money creation.

> The new money is just the result of value creation.

The new money is the result of fractional reserve lending, period. Whether "value" is created along the way is absolutely not a given.

> I think you're just letting your imagination run wild on how things work and why that makes sense.

If value were not being created fast enough, then people wouldn’t be able to payoff the loans. The loans are made either to enable value creation (business loans) or to fund a purchase and the loan taker agrees to funnel their value creation (salary) back into it.

> No I can't. If I make a loan to myself, there is no new money to circulate. If a bank makes a loan on fractional reserves it is new money than can circulate and that can itself be the basis for new money creation.

Obviously I meant to someone else. Though perhaps this one is too hand wavey to be useful

"No I can't. If I make a loan to myself, there is no new money to circulate. If a bank makes a loan on fractional reserves it is new money"

If that was true, that every loan by a bank was multiplying assets by 10, because they're required to hold 10% in reserves, then we would instantly have runaway unimaginably huge inflation and everything would collapse. So even if you don't understand why it's not true, common sense should make you pause and look for that understanding.

> If that was true, that every loan by a bank was multiplying assets by 10, because they're required to hold 10% in reserves...

It is true. Assuming that banks are exerting their full capacity for lending, banks would be multiplying the money supply by 10.

https://en.wikipedia.org/wiki/Fractional-reserve_banking#Mon...

> ... then we would instantly have runaway unimaginably huge inflation and everything would collapse.

That isn't true. If you get loan to buy something, that isn't free money. You're going to have to not buy other things to pay back the loan.

You're saying it's free money for the bank. So the banks would have all the money and nobody else would have any and the economy would collapse.

Look, how do you know you're not the equivalent of a flat-earther? Is there any doubt in your mind about whether you have correctly understood the situation? When did you become convinced of your views?

> You're saying it's free money for the bank.

I never said anything like that. I'm saying the bank is creating new money that is becoming part of the money supply. I gave you a Wikipedia link so that you can convince yourself.

> Look, how do you know you're not the equivalent of a flat-earther?

Wikipedia says what I am saying.

> Is there any doubt in your mind about whether you have correctly understood the situation?

That is a question that you really have to ask yourself.

Do you think banks destroy money?

I think you messed that up a bit.

You give the bank $1. The bank then goes ahead and loans $0.90 to Bob, who then uses it to invest in a business or a home. That $1 still exists, just most of its backed by the debt that Bob has to the bank. I don’t believe bob would take that $0.9 that the bank loaned him and put it back into the same bank.

It’s so frustrating that the crypto folks are basically the antivaxxers of finance. They refuse to understand how it works and yet are sure they’ve got a better plan because the status quo is a scam. At least unlike antivaxxers it’s only their own welfare at risk.

Actually, their electricity usage makes this everyone's problem, just like antivaxxers.

This is what I was thinking but I didn’t have a way to phrase it. Many people are convinced that fractional reserve banking is terrible without understanding the basics of how it work, writing it off as too complicated for people to comprehend and therefore bad... but their solution is a system which is orders of magnitude more complicated and, in all likelihood, will still result in fractional reserve banking entities popping up. Tether isn’t a fractional reserve bank. It’s far worse. It’s just taking your money and showing that that they “only” spent some of it. But people in this thread are comparing it __favorably__ to traditional banks.

I never said that Crypto was any good or that fractional reserve was bad. It obviously works for the banks (until it doesn't), it seems to work for Tether as well.

I'm just pointing out the parallels, which are far more striking than the differences. People here point out that fractional reserves is backed by loans and securities of (supposedly) equal value, or that it's all regulated and insured, but it wasn't always like that, it's not a strict requirement for the system to work.

> but it wasn't always like that,

Insurance and regulation is good for you as a consumer, and yeah that is new.

But assets have always been backed by loans of (greater than or) equal value. That’s the point of banks.

Tether is not a bank. You have no guarantee of being allowed to exchange tether for dollars. It’s just... a weird service that doesn’t make sense. Tether doesn’t “work” because tether doesn’t do anything

> But assets have always been backed by loans of (greater than or) equal value. That’s the point of banks.

Greater or equal face value, not actual value. Tether is basically making the same claim.

> Tether is not a bank.

I never said that Tether was a bank.

> You have no guarantee of being allowed to exchange tether for dollars.

To be pedantic, no such guarantee exists for bank deposits either.

> It’s just... a weird service that doesn’t make sense. Tether doesn’t “work” because tether doesn’t do anything.

Tether obviously does work, it's probably the most stable cryptocurrency out there, despite being run by sketchy people. You can exchange it for other cryptocurrencies and you can exchange cryptocurrencies for ordinary currencies. Absent proper access to ordinary banking, Tether has been a tool for exchanges to perform settlements in the hundreds of millions of dollars. The view that Tether "does nothing" is just uninformed.

The guarantee you can withdraw funds from a bank account does exist, it’s the FDIC. Tethers terms of service specifically state you’re buying funbucks / chuck-e-cheese tokens and they have no redemption value. A unit of value in your bank account represents a claim you have against the assets held in the bank backed by the weight of the US government. A Tether is worth whatever you can get the next guy to buy your bags for representing no obligations on anyone.

> The guarantee you can withdraw funds from a bank account does exist, it’s the FDIC.

Like I said, I'm being pedantic. The FDIC doesn't give you a guarantee that you can withdraw any money from a bank account. It offers you insurance on the amount - up to 250,000$ - in the event of bank failure.

> Tethers terms of service specifically state you’re buying funbucks / chuck-e-cheese tokens and they have no redemption value. A unit of value in your bank account represents a claim you have against the assets held in the bank backed by the weight of the US government.

While I think the characterization of Tether as "Chuck-E-Cheese tokens" is fair, a claim beyond 250,000$ against a bankrupt bank may well be worth 0$, despite the (considerable!) "weight of the US government". In that event, I would probably prefer to have the Chuck-E-Cheese tokens instead.

> A Tether is worth whatever you can get the next guy to buy your bags for representing no obligations on anyone.

While there may be no legal obligation for Tether to exchange its tokens for actual dollars, there still is a reputational obligation to do so, if we're assuming that Tether is intended to run as a legitimate business (which is admittedly a big assumption). In that sense it's somewhat comparable to PayPal.

Haha I think we’re on the same page.

From my perspective you’re just justifying tether’s failure to keep its promises by saying it’s not as bad as banks, but also saying it’s not a bank when it’s pointed out how it utterly fails as a bank replacement; when it’s then pointed out that tether doesn’t serve any real purpose and is just a temporary store of value before it eventually collapses, you go back to the fractional reserve comparison.

It also feels like you’re jumping on a worn out bridge and telling me it hasn’t broke yet. Look! It only lost 30% of my money so far!

I'm not justifying anything, I'm making an observation. I don't hold any Tethers nor do I have any intention to do so. I'm absolutely not saying Tether is "not as bad as a bank".

However, as far as a cryptocurrency goes, Tether obviously works even when it's only backed by fractional reserves. Remember, most cryptocurrencies are backed by nothing.

> It only lost 30% of my money so far!

If I held any Tether, I could exchange them right now for dollars almost one to one. That's been true for most of the time of Tether's existence. The peg worked even when it wasn't clear whether Tether had any money whatsoever.

Ponzi schemes also hold value- for a while. Right now, we’re in the while. The peg has worked. It seems unlikely to me that it will continue to work. I suppose that’s the last I’ll say on the matter.

Ponzi schemes also need to produce persistent returns, Tether doesn't. Ponzi schemes aren't priced like free-floating currencies, Tether is.

If we look at the peg carefully, Tether has often traded above one dollar. That's because of Tether's utility as a cryptocurrency. Actual dollars are far harder to move around than Tether. Other cryptocurrencies are backed by nothing and often far more volatile.

The market is certainly pricing in the risk of the fractional reserve, but it priced it so low that it's almost imperceptible. In lieu of any catastrophic events, the peg will probably hold, because it held for the longest time, when it was unclear if there was any backing whatsoever.

Tether works great in the actual goal: give shady exchanges access to USD without having to do all the KYC/AML it takes to get access to traditional financing.

I’m not sure why this one is getting downvoted. It’s not wrong. Technically bob would probably spend it somewhere and the recipient of bob’s spending would put it in the bank. But the outcome is pretty much the same. I just threw out some bits that didn’t affect the state much.

But for illustrative purposes it’s probably best to assume that the 90 cents is eventually put into the same bank, so people can follow why the bank is allowed to do this.

Well, typically the interest from Bob's loan would be deposited, making the bank's balance go up to a maybe $1.03 or $1.04.

If we’re getting really technical, the interest belongs to the bank as profit. The bank decides to give you a cut of it, which you put in the bank anyway.

Clearly the "free" profit Tether could make from float is smaller than the legal compliance risks they're taking. It's not the solvency they messed up; it's the money laundering.

If they printed 2 billion tethers and bought them all back at 99 cents each (which is realistic, because tether typically floats at basically a dollar), that would only be $20,000,000. If they get 5% per annum on the float from just keeping the cash in the bank, that's $100,000,000. So I'm not sure what's best to do in typical circumstances.

There have been ~two historical exceptions. From April 20 - May 20, 2017, they could have absolutely cleaned up by buying their own tethers back. Hundreds of millions of dollars of tethers were traded at an average price of 95 cents or so.

2,000,000,000 * 0.99 = 20,000,000 ...wat?

2,000,000,000 * 0.01 = 20,000,000 in net profit

If Tether worked as it was advertised there would be no profit opportunity. The purported reason Tether exists is to help the crypto markets deal with the liquidity problems because of how difficult Fiat banking is, essentially Tethers value proposition was “we (by some miracle) have reliable banking, we can buy and sell 1 Tether for 1 USD at any time regardless of other crypto currencies value”. In reality Tether is a shit-show because it doesn’t provide reliable banking (even before considering the fact that it isn’t even solvent) and that’s why the value of Tether offers any arbitrage opportunities.

If we were in a fantasy land where Tether wasn’t fraudulent then the price variance of Tether on exchanges would be so minuscule that there would be no arbitrage opportunity for anyone to take advantage of. Your hypothetical profit opportunity only exists because Tether is (ultimately) fraudulent.

Remember that Tether was pitched as a 1:1 USD backed cryptocurrency that could be exchanged 1:1 at any time (in both directions). The mess that it is now (only liquid on exchanges at a variable rate) is not what Tether was marketed as.

Tether (as promised) is the equivalent of you accepting $100 USD from your friend and giving them $100 of Monopoly money and promising them that at any time they can trade their monopoly dollars for your real dollars... and you won’t ever use the USD for anything, it’ll be locked away untouchable by you. How do you profit from that? You can’t lend it, you can’t invest it, you can’t use it as collateral, it has to be unencumbered at all times and you have to incur the costs of managing it.

Read the original whitepaper and try and identify a profit opportunity. This is all before considering that Tether is a fundamentally flawed concept: if Tether could operate a reliable banking relationship, so could others, and Tether would be pointless.

$100M in deposits is $5M/yr in returns on float, just as your bank and insurance companies do with your deposits and premiums. It's technically not risk-free (FDIC notwithstanding) but that doesn't stop anyone.

I’m not clear how that applies to Tether:

“[...] each tetherUSD in circulation represents one US dollar held in our reserves (i.e. a onetoone ratio) which means the system is fully reserved when the sum of all tethers in existence (at any point in time) is exactly equal to the balance of USD held in our reserve.”

Where does the 5% come from?

I, too, am interested to learn more about this totally risk-free 5%.

5% isn't possible, but you can make over 2% on treasury bills currently. The risk of the US government defaulting on loans can be essentially ignored.

This might be a dumb question but can you sell a treasury bond to a 3rd party before the terms are over without losing too much money?

Yes, they are completely liquid.

You can sell them before maturity, but their value will depend on current interest rates, of course. If rates are up, you will have to discount the price.

This might not be exactly answering your question, but you can buy 4 week treasury bills. Even if you can't sell bonds, having money tied up for 4 weeks might not be a big problem.

Except in the crypto industry, where US bonds are likely to be seized, and therefore probably have an average payout rate below parity.

Do you have any information about US bonds being seized like this? I don't understand how it could happen.

Exactly. And even if the US government were to default on loans Theter would be the least of your concerns since the USD and consequently the global economy would be in a pretty bad shape.

It's the gamble that banks make. A bank holds your money and will give it to you at any time. To fund this, they make an assumption about how many of their customers will actually want their money at any one time, and they invest the rest.

If all their customers decide to withdraw their money, this is a "run on the bank" and generally dooms the bank.

Presumably Tether planned to do the same: a percentage of the money they held would be invested, based on the assumption that not everyone who held Tether would want USD at any one point in time.

Of course, this stretches the meaning of "reserve", and utterly fails if they mismanaged the investment bit and lost the money they invested

Who’s making 5% risk free?

Can you point me in their direction?

You take some risk while externalizing the risk of insolvency to your customers.

It’s what every insurance company and bank does.

Or if you don’t want to do that, put it in treasuries or something and take your 1,2,3% of whatever it may be.

Tether could have replicated either strategy, but seems to not have.

They could also have profited from those that lost their keys (it happens).

They would need access to a broker to invest in treasuries and pass KYC/AML. Which treasury broker would onboard them if they struggled to get a bank?

Even treasuries are not risk free, nor are they unbounded. Tether is trying to play in the big league, I'm not certain what the rules are, but I'm pretty sure making 1%-2% annually on the float is a pretty good deal, and that might even be a conservative estimate.

In addition you have to keep in mind that it is also about absolute numbers. No one invested these billions with them, no one is charging them some kind of relative rent. Every dollar is profit. If you could make 0.001% off storing 5 billion, that would still be an attractive business model.

You can invest the money, the same as banks do. It's why they don't charge you to store money with them, especially if your balance is high.

You only need and should keep enough liquid cash needed to handle day to day withdrawals. Everything else is fair game up invest.

See: https://en.m.wikipedia.org/wiki/Fractional-reserve_banking

https://en.m.wikipedia.org/wiki/Bank_run

I’m talking about the specific promises made by Tether. The question is not about whether or not fractional reserve banking exists, the question is how can Tether engage in fractional reserve banking (or any profit making activity) without being fraudulent when they explicitly claimed to hold 100% of their USD in cash reserves at all times?

For the record, I think all this crypto currency stuff is plain dumb, and that tether is likely a fraud.

That said they don't state anything about what their reserve is. Wealthfront has a 2.3% savings account for us normal people. If I created a stable coin like tether is and had a billion dollars of investment; I could make 23 million dollars a year and tell people that I have a 1:1 backing without lying.

If I went to a bank with a billion dollars I could likely negotiate an even higher rate for such a savings account.

> If I went to a bank with a billion dollars I could likely negotiate an even higher rate for such a savings account.

I don't think that's how it works. As others have mentioned, FDIC insurance only covers 250k per depositor per bank. Typically when entities have that amount of cash (think Apple, Google, etc.), they put them into US government bonds, which are effectively equivalent to deposit accounts.

Edit: this is an interesting point, though. Ignoring the insurance issue, what would a bank do if you asked to open a deposit account with a billion dollars (paying, say 2%/year)? My uninformed layman's speculation would be that they would reject you because they wouldn't know what to do with that much money: they have to somehow lend out enough of it to at least break even on the 20 million/year that they're paying you for interest, but at the same time they have to be able to give you back your 1 billion at any time you ask for it.

I think they would totally take it, with all sorts of special terms. Also, they don't need to have a requirement to say they will get you all that cash immediately to keep the tether promise.

Lastly, putting that money in bonds, index funds, and other such things scales well. The wealthfront example I used took on a billion in deposits in a short timeframe: https://www.cnbc.com/2019/04/23/wealthfronts-new-high-yield-...

To your first point, if you have another entity do that type of investments for you and present it as a bank account with a variable interest rate; then you can claim you have a 1:1 cash backing truthfully, even if the reality is different. If you just stored the money in a normal bank, the reality would stay the same.

It’s also a thousand million dollars. That’s between 500 and 1000 mortgages in SF or NY. Any direct lender would love that opportunity; they’ll charge 4-5% on a 30-yr fixed and give you half.

> Edit: this is an interesting point, though. Ignoring the insurance issue, what would a bank do if you asked to open a deposit account with a billion dollars (paying, say 2%/year)? My uninformed layman's speculation would be that they would reject you because they wouldn't know what to do with that much money: they have to somehow lend out enough of it to at least break even on the 20 million/year that they're paying you for interest, but at the same time they have to be able to give you back your 1 billion at any time you ask for it.

Large banks deal with deposits in total orders of magnitude greater than that (the top banks have over $1 trillion each in deposits.) $1bn in a single demand deposit account is stupid for the depositor, but it doesn't move the needle on a major banks total of deposit accounts, and they can deal with it just fine.

Its multiple billions of USD they had. The most shrewd investments would yield tens of millions per year.

> If Tether worked as it was advertised there would be no profit opportunity

Of cause there would. Even if the tokens are backed 1:1 by dollars it still has an exchange rate. So tether could issue at above 1 rates and buy at below 1 rates. That provides a very simple profit making scheme.

For users, they would often like to “cash out to tether” quickly, which means they’d undercut the exchange rate thus providing tether with a profit in exchange for swift processing.

> If we were in a fantasy land where Tether wasn’t fraudulent then the price variance of Tether on exchanges would be so minuscule that there would be no arbitrage opportunity for anyone to take advantage of.

I’m reminded of the joke where two wallstreet stock brokers are walking down the street, one says to the other “look a 50$ bill on the ground!” The other without looking down replies: “that’s impossible, if there was a 50$ bill on the ground someone would have picked it up.”

> Of cause there would. Even if the tokens are backed 1:1 by dollars it still has an exchange rate. So tether could issue at above 1 rates and buy at below 1 rates. That provides a very simple profit making scheme.

If USDT is credibly backed by dollars this spread is tiny, not least because other holders of Tether can play the same game. And if USDT is backed by dollars held in cash in customer accounts as originally claimed, there's an enormous opportunity cost of not investing those dollars.

Holders of Tether can play the same game, but they don't have the same advantage. Because of the knowledge imbalance, Tether has zero risk in this game. Any other player has the risk that they might lose money on a trade for whatever reason.

I agree the spread might be tiny though. Though if Tether puts itself in a bad light every now and again it could force the spread a bit wider.

> If Tether worked as it was advertised there would be no profit opportunity.

Everyone gave multiple good profit opportunity already, but what about having a transaction fees? They still have a cost related to operating this business, you put that cost toward a transaction fee and you put a small profit on top.

That's how credit card works, though their fees apply much more often than it would for a stablecoin, where most transations aren't from the coin to fiat money.

> you accepting $100 USD from your friend and giving them $100 of Monopoly money

That's pretty much the definition of a bank. Banks does it for free ALL the time and has actual physical locations on top of that and has to operate locally too.

>Tether is a fundamentally a risk free money making concept, it works just like gift certificates. T

No, it actually works like fractional reserve banking, which for some reason, nobody has a problem with.

"Some reason."

Could be, and now I'm just spitballing here, but it could be the use of government backed currencies, the heavy degree of government oversight and regulation, and the federally insured deposits.

You should really, really look at how a bank actually works. You're in for a big surprise!

Barring that you should look at Lawler's article on tether: https://kevinlawler.com/stablecoins

He offers forward contracts if you think he's wrong. He's good for it.

No bank pretends to be fully backed and simultaneously not FDIC insured when in reality 1/2 their assets (before they fired up their printer) are locked up in various jurisdictions because they were laundering money for the cartels. Even HSBC was only laundering a tiny, teensy smidge ($881M total out of $871B in assets, 0.09%) and that was the worst scandal in recent memory.

> It's crazy that they messed this up, Tether is basically a money printing machine, all they had to do was be solvent.

> Tether is a fundamentally a risk free money making concept

To me it sounds like you don't really understand the risks of tethers business. It is light-years away from being risk free, because you are on the mercy of the banks where you store the fiat. The banks can freeze your money any time, as they now did (AFAIK).

If you are operating a business with unclear regulation at this level, you can't really rely on banks like normal businesses can. The banks will cause problems with pretty high probability.

Well ok, maybe I should have said "theoretically risk free", I meant more in the economic sense. You are right of course, I guess in practice there's no 100% safe way to store billions worth of assets anywhere.

Though.. I can imagine there's a lot safer options than some small polish bank.

Maybe they could become a bank themselves to contain some of the external risks.

To become a bank you need an account at the central bank. Getting a banking license is difficult. And even after you get it, central bank can freeze your assets any time.

Bitfinex money was on an account of a small Polish bank. It was confiscated by a US government when they chased Colombian drug cartels earlier in 2018. There was no proper segregation of client funds by their payment processor Crypto Capital Corp. Looks like Tether was collateral damage.

Polish source: https://zaufanatrzeciastrona.pl/post/gielda-bitfinex-zgubila... (please use Google translator)

What would happen if the US Government stepped in and took over Tether? Would it be feasible for a different foreign government to do so?

What would they take over? Massive liabilities?

Just business as usual.

They would almost certainly not have the jurisdiction. They’re a BVI Corp (a jurisdiction that tends to look the other way at corporate fraud) and I believe operate out of Hong Kong. Lately it seems the Chinese government practically encourages companies to commit securities fraud in the US so I can’t imagine they’d be much help either.

I suspect the likely outcome (eventually.. and if Bitfinex doesnt fold first) is the US government seizing their domain to prevent them from continuing to commit fraud.

Edit: missed a word

> Lately it seems the Chinese government practically encourages companies to commit securities fraud in the US so I can’t imagine they’d be much help either.

The China Hustle is a good movie if anyone wants to see how these schemes work.

Every government in the world has dissuaded its citizens to get involved with crypto. If there is a bankrun on ING or WellsFargo the government will act. With Tether you're on your own. Cryptocurrency places you outside the financial system- the system r/bitcoin professed to hate.

Wouldn't the US government taking over Tether give them a toehold to monitor or control Cryptocurrency? They couldn't control all of crypto, but they could possibly control the favored way of getting the value out.

Tether is alleged to have been far more deeply and willingly involved than just "collateral damage." Per the AG's statement: "Those transactions – which also have not been disclosed to investors – treat Tether’s cash reserves as Bitfinex’s corporate slush fund, and are being used to hide Bitfinex’s massive, undisclosed losses and inability to handle customer withdrawals."

https://ag.ny.gov/press-release/attorney-general-james-annou...

The only reason to swap funds between those accounts would be if the parties knew that there was more risk than normal cash reserves for the money that Tether would end up having - and this was deemed by Tether operators to be an acceptable risk not worth disclosing. Not a shining beacon of cleanliness here.

That source does not reliably support the claim "Bitfinex money was on an account of a small Polish bank. It was confiscated by a US government when they chased Colombian drug cartels earlier in 2018."

That's just some dude's crypto blog. There is no citation or first or second-hand info.

Citation, the equivalent of the AOG over there proudly said they have taken it and will return the money to the state after fees and bribes: https://www.rmf24.pl/fakty/polska/news-lodzkie-w-malym-banku...

Everyone talking about how tether should have profited from either investing the cash, or buying and selling tethers at slightly different rates is missing the point.

The original value propitiation of tether was... "A one to one, 100% reserved USD backed cryptocurrency that you can buy/sell any time directly from them"

They originally promised a website where you could buy/sell tethers directly for 1 USD. This is different from all the other stable type coins that achieve their pegs using various chain and exchange strategies. Tethers proposition was to maintain it's peg to USD by literally holding the cash and being the primary point of purchase/sale. Not investing it. Not operating fractional reserve. And not buying/selling with a spread. Every profit making strategy goes against their original proposition.

The reason this was the proposition was to supposedly make it easier for crypto traders. At the time everyone was having problems cashing out their cryoto. Tether was basically promising that they could fix the USD exchange problem by holding all the cash and not being an exchange.

Now they never actually delivered any of that. The website never reliably appeared and now tethers are traded on an exchange like any other crypto coin. And I suspect they did actually make a stack of profit by printing tether and selling them on exchanges. But that makes it a scam because they weren't following their own rules that they laid down at the start.

Wow, an actor of the crypto-verse doing something unethical, almost unheard of.

> Now they never actually delivered any of that.

Yes they did, they delivered exactly this for years, ever since US banks shut them down. A whole ecosystem was built on top of this which to this day seems to run smooth (poloniex, bittrex, binance).

> And I suspect they did actually make a stack of profit by printing tether and selling them on exchanges. But that makes it a scam because they weren't following their own rules that they laid down at the start.

The only thing that has come to light after numerous of subpoenas and investigations is the Crypto Capital mess. Your claim is very much unsubstantiated. Yes, Bitfinex&Tether did some things against their original promises, but clearly to keep the system running. And clearly with the intention to resolve everything once they got their money from CC back (I'm not saying that was ever going to work).

No, they didn't. Their original proposition was that you could buy and sell tether from them at exactly 1 USD.

What happened was that website for doing that was only ever available for very short periods and instead tether was traded on exchanges. Poloniex/bitfinex etc are exchanges, not the promised single source of tether. Exchange trading with a market set price and a bid/offer spread is not the same as a direct purchase website from the creator. It means the price moves. The original promise was for a fixed price set buy the sole supplier.

> Their original proposition was that you could buy and sell tether from them at exactly 1 USD.

That depends on who "you" is, as far as I know this was possible for retail until a few years back. But I wouldn't say it was "promised" at all (or are you referring to the whietpaper?). It's still possible for trading firms right this very moment. Active OTC markets for tether right now as well.

Note that even though it's possible for some to redeem a Tethers 1:1, that doesn't mean the price is always exactly worth 1 USD. Just like how USD stored in Coinbase is not worth exactly the same as USD stored in Bitstamp. Of course you can transfer them between each other, but that takes days - after which certain price spreads caused by temporary offer/demand discrepancies have ceased to exist.

Also, thanks for the downvote!

(BTW, not me doing the downvoting)

I don't think that only allowing the purchase of tether to retail really meets their original plan.

The whole point was meant to be that anyone could take their coins and go to tether and get exactly 1 USD for each one. It was designed to solve the problems people were having cashing out from exchanges. The idea was that you sold your bitcoin on poleniex or wherever for USDT the then took that to the tether website and got your USD. Safe in the knowledge that your USDT would be exchanged exactly 1-1, with no bid/offer spread or moving price. The reason this was needed was because most exchanges were really struggling to get their banks to allow the USD processing.

In reality, you could never really do that. And now exchanges have been able to get the USD payments working, so the USDT<->USD exchange market has picked up the slack and now serves the purpose that the tether website never realised. Although it's now not quite 1-1, there is a market and a spread and prices move.

As others have mentioned, the likely reason they never have is that they would hit exactly the same challenge all the exchanges did with their bank and the KYC rules.

I think we're kind of on the same line.

> It was designed to solve the problems people were having cashing out from exchanges.

Tether technically predates the legal trouble between Wells Fargo and Bitfinex, but imo Tether as we know it got to it's current size specifically to allow American residents to get their non crypto money out of Bitfinex after no American bank wanted to work with Bitfinex.

> The idea was that you sold your bitcoin on poleniex or wherever for USDT the then took that to the tether website and got your USD. Safe in the knowledge that your USDT would be exchanged exactly 1-1, with no bid/offer spread or moving price.

Whose idea was this? Most big exchanges that trade tether don't support any fiat. Only recently most added support for competing stablecoins and Binance is playing with fiat. But it was never the idea from the beginning.

> In reality, you could never really do that.

I really don't agree that the plan was all along that everyone could do that. Tether would simply face exactly the same problems as Bitfinex. Instead Tether allows you to trade on many different exchanges and big traders can directly convert tether into dollar. But definitely not everyone, in the beginning retailers could create a tether account but that's about it.

> As others have mentioned, the likely reason they never have is that they would hit exactly the same challenge all the exchanges did with their bank and the KYC rules.

Yes exactly, as such it was never (or since the Wells Fargo suit) supposed to work like this. I'm not sure why you think this was the plan or design?

----

To sum up:

- We both agree it's hard for every day traders to convert tether into USD. They have to use public crypto markets to achieve this. Though I don't agree this is against any design or plan (ever since Wells Fargo anyway).

- This has worked fine for years since the biggest traders are able to convert tether into USD (and the other way around). The second they can't you'll see price divergence (a lot bigger than what we see right now - since firms will be trading out of millions in tether exposure).

- The risks of Tether are well documented, most retail is aware of the danger.

The reason why those other exchanges had a USD problem was because they didn’t want to do enough KYC/AML to gain access to legitimate banking. Providing an entrance and exit ramp for exchanges that are enabling money laundering probably put them in legal risk from day 1.

Honestly, 74% is a much higher number than I was expecting.

Conveniently enough, it works out that they're about $740 million short of their obligations. That's a lot of money.

Maybe Deutsche Bank will step up and loan them some money since clearly nothing shady is going on.

If only some scary entity with far reaching powers could make everyone scared enough to make a run on the Tether bank...

Ditto this.

I thought it would be like less than 50%

If 74% is what Tether is claiming, then the reality is probably less.

They’re claiming 74% “cash and cash like securities”, which is one hell of a caveat. We know that they’ve “loaned” 900m to Bitfinex, a company run by the same people as Tether. My bet is that some of those “cash like securities” are unrecoverable “loans”.

I was reading through Apple’s 10K, and they define cash like securities as being highly liquid and having a maturity in less than 3 months.

Apple shouldn't have to suffer the horrible fate of being even implied in the same conversation as Tether/Bitfinix as far as reporting standards and corporate trust go.

Cash-like (or cash-equivalent) securities is a common expression in accounting and indicates highly liquid securities that can be liquidated in short term (less than 3 months usually). "These securities have a low-risk, low-return profile and include U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, corporate commercial paper and other money market instruments" (from Investopedia).

I know, I just think they would lie about it. It’s not like they have had any qualms about lying continually.

This is assuming that the stated 74% number is true. Fool me once...

If it's a fake number, it's an interesting choice.

They aren't claiming to be 99% or 90% backed, which would be similarly disbelieved by the same people who disbelieved the 100% claim.

Suppose the real number is 3%. 74% sounds pretty good as a way to soften the blow a bit. It would be best to let the air out over a matter of weeks than minutes.

I feel like there could be a lot of real numbers that are much bigger than 3% but still devastatingly low. 10%? 30%? 45%?

Also, do they break down the composition of that backing between "cash" and "short-term securities" anywhere, and how many of those "short-term securities" are real assets like T-bills, and how many are unsecured debt that there isn't the money to repay?

74% could be a "real" number ... but it could still be the case that there is only cash to cover 10% of the existing Tethers, and the remaining 64% is loans to companies that can only repay that ten cents on the dollar.

They’ve been lying for years and are only admitting they’re not fully backed now because they got caught. Who knows how much they’re really missing.

Glad it's been brought to light, but does seem to be a problem that is solve-able.

Yet the Tether price of BTC is only 6% below the USD price:

http://www.untether.space/

The market can remain irrational...

... longer than you can remain solvent.

Or, perhaps in this case, longer than Tether can remain solvent.

Question -- why does this matter to me? As long as the market agrees to trade it for around 1.00 USD, +/- a few %, which seems to generally be happening, it shouldn't matter to me whether it's backed or not. It's just an abstract notion that the market has agreed to trade at a certain price.

(It's not like I would hold onto USDT for a long time anyway -- it's only there to facilitate short-term needs. If I wanted to hold USD I'd just change it for USD and hold that instead.)

Is the gap between issues tethers and backing USD widening? At what rate?

At some point people will not believing USDT is pegged to the dollar and it will be a race to the exit.

It is a matter of time I would think.

Sure, but nobody would hold onto USDT for a long time anyway. It's not meant to be a long-term investment.

As long as it facilitates short-term transactions and people are agreeable to trading it at 1 USD, that black box system fulfills its mission as a product, and doesn't need to fulfill anything else.

> Question -- why does this matter to me?

If you don't trade cryptocurrency and aren't invested in the market day to day, it very likely doesn't matter.

> As long as it facilitates short-term transactions and people are agreeable to trading it at 1 USD

Right now this is the case because the US AG announcements have not fundamentally changed the day to day use of the token, as you stated.

However, as the lawsuit moves forward, the probabilities of Bitfinex having to shut down due to bankruptcy or criminal liability, and the probability that the Tether blockchain has to be shut down, are going to change and may possibly increase.

The likelihood of these events occurring will cause the Tether premium to change accordingly, and as it increases, more and more market participants are going to cease to use it in favor of more reliable stablecoins.

The problem is that it's impossible to predict what the catalyst for these events will be, and it's up to individual traders to determine whether or not they think the day they're holding Tether is going to be the day something happens to cause the market to lose confidence in it.

> Right now this is the case because the US AG announcements

NY AG, not the US AG.

Correct, thanks.

Because if there is a "run on the bank", someone will end up short. Either the first people out will get 100% of their money and last 26% will get zero, or everyone will get 74% of their money.

This very fact will actually cause a run on the bank in any sort of crisis. You don't need to actually believe that tether is a complete sham and has no money to decide to withdraw. You just need to worry that 74% of people might get worried. Because if they all withdraw, you will get none of your money.

The point of FDIC insurance (aka lender of last resort) is that when you hear that Wells Fargo is in trouble you don't worry about your checking account going to zero. This used to happen quite a bit as late as during the great depression in the early 1930s. Being 100% backed by liquid assets was supposed to serve that function, it's not a nice to have, it's the whole point.

Ironically, tether is pretty much immune from bank runs... because it's impossible to withdraw money at all.

>because it's impossible to withdraw money at all.

I heard this meme being repeated since forever and it never made sense to me. As I understand it, you could exchange USDT for real USD at any participating exchange. Not being able to convert USDT would mean not being able to withdraw from any of those exchanges, but there's no widespread reports of this. Also, you could convert USDT to USD at Kraken, and they definitely don't have any withdraw problems. Finally, if you really couldn't withdraw USD from an exchange, it would become evident because BTC priced would skyrocket as people scramble to find other ways to withdraw their cash. We saw this with mtgox, but not here (there's a premium but nowhere close to mtgox levels)

edit: clarified which part I'm replying to

The point of having the reserves in US Dollars is that Tether could theoretically buy back surplus USDT's from an exchange that trades in it. Otherwise an exchange could be left holding millions of worthless USDT with no means to move that back to US dollars.

Imagine if Bitfinex shut down with no warning. All the USDT stored in Bitfinex would simply be lost so it wouldn't cause a bank run. But massive amounts of USDT would flow from Bittrex, Hitbtc, and Poloniex to Kraken where the price would drop to pennies due to lack of liquidity. Maybe then Kraken suspends trading "to calm the market" and never resumes.

I am reminded of the default of BTCST which I guess no one remembers.

> As I understand it, you could exchange USDT for real USD at any participating exchange. Not being able to convert USDT would mean not being able to withdraw from any of those exchanges

That's selling Tether, not withdrawing Tether from the pool.

The point is, since it was already effectively impossible to withdraw any Tethers from the pool, does it really matter that the fund that backs those tethers can only support withdrawing 74% of the available USDT?

Currencies doesn't have to be backed to have value. Ours used to be backed by gold, but then we figured out that doesn't necessarily matter as long as people have to use it and the supply of it matches demand consistently enough.

So the interesting question is, will they be able to keep the price pegged to USD by selling and buying USDT in sufficient quantities to keep the price stable.

This is rather the point this comment is making: https://news.ycombinator.com/item?id=19793326

Only if you ask for permission from Tether, first. If you have power to seize the bank accounts, however...

https://www.investopedia.com/terms/t/tether-usdt.asp

"On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers."

"We have been informed that" is lawyerspeak that has as an implication of "we don't actually believe the following and it almost certainly isn't true, but what we were told is..."

And "seized and safeguarded" itself sounds suspiciously like a polite way of saying "our accounts are frozen on suspicion of financial regulations (and/or money laundering), and we hope to be able to successfully defend ourselves in court."

"Because if there is a "run on the bank", someone will end up short. Either the first people out will get 100% of their money and last 26% will get zero, or everyone will get 74% of their money."

I'm not clear on whether they have discovered fractional reserve banking or whether they are insolvent. There's a big difference. If they are insolvent, I'd tend to assume tethers not trading at a discount just means people are idiots. But if not, not.

I think the difference is that in the end a Bank is backed and regulated by the US Government.

Tether is not. So it is solvent or insolvent.

I don't see why being regulated or not has anything to do with whether you are practicing fractional reserve banking. As I understand it, the concept is just that your assets are not all liquid, but rather some of them are long term loans.

Which is not to say I think unregulated banking is the same as regulated banking.

Bank reserves have little to do with money creation:

> Lord Adair Turner, formerly the UK's chief financial regulator, said "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo (out of nothing) – extending a loan to the borrower and simultaneously crediting the borrower’s money account

> the German central bank explains that the money supply is not determined by the reserves of private banks, but by market factors and regulatory decisions.

https://en.wikipedia.org/wiki/Fractional-reserve_banking#Cri...

Do you think the US government could cover every single cent if all the depositors wanted their money out now?

Not even physical cash, just a transfer to an overseas account. The money simply isn't there and the scales are enormous. US banks only can pay back 3-10% of cash deposits. The FDIC only has enough to cover a tiny proportion of bank liabilities.

It seems very disingenuous for people in this thread to say "well if everyone cashed out tethers" and then handwave away the alternative of "well if everyone cashed out USD". These scenarios playing out would have Tether actually being able to pay a reasonable percentage of creditors.

The USA gov can just print the money to pay off the backed cash. Everyone gets their money. It may not be worth much if everyone actually demanded they could hold the dollar amount of their accounts in their hands in paper money - indeed, I imagine, you'd cause severe privations on the government funds in order to produce the money.

"It may not be worth much if everyone actually demanded they could hold the dollar amount of their accounts in their hands in paper money"

If literally nobody (hypothetically) is willing to own actual land, factories, and so on, then it's the tangible assets that are worthless, not the money. It would be the ultimate in deflation.

I certainly agree it's possible, but at that stage you've gone down the Venezuelan path and I'd assume there are far smarter regulators in the States. The money wouldn't be given out, not even a fraction, it's a such a huge risk to stability that they'd cancel withdrawals and work from there. We saw this happen in Cyprus.

It is literally impossible for the US to be "insolvent" when it comes to US dollars.

They just print more money.

"Do you think the US government could cover every single cent if all the depositors wanted their money out now?

Not even physical cash, just a transfer to an overseas account. The money simply isn't there and the scales are enormous."

What do you mean by "money"? How can money "simply" not be available, when it's a matter of updating a row in a database? The issue is whether assets exist. Googling suggests the US contains assets worth $124 trillion; is that incredible to you?

And if we wanted to print $124 trillion of cash to represent all the assets, that would be silly, but just as doable as a wall on the Mexican border.

> Do you think the US government could cover every single cent if all the depositors wanted their money out now?

Yes, because the US government can literally fiat dollars into existence.

OTOH, the big point of guaranteeing deposits is that a credible party doing that prevents bank runs, which are caused by fear of bank collapse that will destroy access to deposit balances.

> The FDIC only has enough to cover a tiny proportion of bank liabilities.

The FDIC’s funds are just the zero-effort first-love of payment; FDIC insurance is guarantees by the government, not just the gives held by the FDIC.

> It seems very disingenuous for people in this thread to say "well if everyone cashed out tethers" and then handwave away the alternative of "well if everyone cashed out USD".

Tether isn't backed by an entity which can simply will USD into existence; FDIC or NCUSIF insured bank or credit union balances are.

You could look at it as fractional reserve banking where one single borrower accounts for 26% of the assets.

Tether is technically solvent (at least, assuming they aren't lying). However, they made a loan of $700M to Bitfinex. If Bitfinex pays back the loan on schedule and no more than 74% of Tether holders run for the exit, they're fine.

However, that's a lot of counterparty risk, particularly considering it isn't clear whether Bitfinex is solvent, and that the big debtor (Bitfinex) and all the creditors (Tether holders) have correlated behavior. If Bitfinex becomes insolvent and defaults on the loan, Tether becomes insolvent. Bitfinex is more likely to become insolvent if Tether holders start withdrawing their money, which is the same event that would trigger a run on the bank and require that Tether call in its loan to Bitfinex.

It actually looks a lot like the derivatives bomb in the financial industry from 2006-2008. You had some institutions that were insolvent because they made bad trades. You had other institutions that were technically solvent, but were standing next to insolvent ones, and would become insolvent if they had to write off the contracts they had with the insolvent ones. It's possible that all of your books would balance at the end - but do you want to be standing next to the bomb when it goes off?

A fractional reserve bank is only fractionally liquid, the rest is invested in a variety of interest bearing loans. Obviously there’s always a risk of many loans not being repaid or sudden rushes for withdrawal, hence all the regulation and the FDIC.

Tether is admitting that they only have enough cash and securities to cover 74% of the outstanding tether balance. This isn’t fractional reserve, this is just straight up insolvency. If your bank only has enough cash and mortgages to cover 74% of their deposits, then it’s time for the FDIC to step in.

Can you tell me what the difference is between tether and roenxi-coin where I take dollars and give you an "IOU" that is, formally, not going to be redeemed? I can do better than tether. You give me $1, I'll keep 80c that I still won't give back to you later. I'm pretty trustworthy on promises like that.

The only difference I can see is I wouldn't be willing to actually run that scheme because at some point I'd be jailed for running a fraud.

Anyone who deals in tether now has to admit that supply is not limited in any way and the people behind the creation of new supply are crooked. Only an idiot would deal in tether now. If the price trends downwards there is literally no reason for it to ever trend up again. It has the worst value proposition of any scheme involving millions of dollars I've ever seen.

I find this pretty interesting. On the one hand, it's similar to the situation a lot of lenders are in. But on the other hand Tether isn't owed that money back as far as I understand it. You also have the fact that a lot of crypto people are very against fractional reserve.

This is going to sound absurd, why is the cryptocurrency market not reacting negatively? In fact prices are green and well https://www.coingecko.com/en

Market is uninformed and do not know better...

> Market is uninformed and do not know better...

The market knows and has known that Tether is a scam and not fully backed. This is not what is causing the price to be what it is. Price arbitrage is one major factor keeping it up, as well as pure old fashion faith. Plenty of currencies operate that way. Including, perhaps, the paper in your wallet right now.

This doesn't make it right, or viable, or stable, or anything else. It's just a known phenomenon.

Another option is that 74% would be positive compared to what quite a few people believed might come out. "It's 74%, that's great news, we thought it's closer to 25%".

Of course, it's hard to trust this news, it might still be 25% or 2.5%.

There is some premium on the BTCUSDT pair, compared to BTC/USD pair. You can still, for a relatively small premium buy BTC with your USDT and change them back to fiat USD. And it seems that plenty of traders are ready to accept that premium and accept the risk of holding tether. This effectively solves any liquidity issues that Tether might have. And as other have noticed, 74% coverage is a lot more than many were fearing, particularly compared to other Tether news of the last 12 months. Also, this 74% would imply that if Tether had access to those 850 millions that went missing (leaving out the issue of wether Tether may or may not be responsible for the missing), then the coverage would be full and had been full during the peak of the crypto bull-run in 2017 (which was speculated to be supported by printing tether without any fiat backing).

Remember it’s simply Bitfinex saying they have 74% reserves, just like they used to say they had 100% reserves. There has still never been an audit. Nobody has seen their books. They don’t recognize the jurisdiction of the NY AG.

Bitfinex is the only one who can give a number, and a company in that position usually places themselves in the most generous light, and they still only claimed 74%.

They claimed this 74% in filings to the NY Supreme Court, so, while I agree it is not as strong as an auditors' report, it is also a bit stronger than a PR release or a Twitter burst.

I’d strongly disagree, seeing as that filing was in a court they see as a joke

> Bitfinex and Tether dispute that the court has jurisdiction over the companies because, among other reasons, they do not operate in the U.S., and because both companies bar New York residents from doing business on their platforms.

the NY Supreme Court

Before you get too excited about that phrase, the courts in New York State have funny names. The words "Supreme Court" have a much different meaning than they do in any other state.

https://en.wikipedia.org/wiki/New_York_Supreme_Court

According to other comments I've seen, they don't redeem tethers for dollars in the first place, so the amount of reserves they have doesn't matter, does it? Liquidity is beside the point if they don't even offer redemption.

Did you honestly believe they were 100% backed? If not, why would you assume Tether users believed it?

What matters is that when someone cashes out their Tether, as people do from time to time, that there is enough money there to do so. The risk is that there is a run on Tether and they exhaust their available funds.

So the degree to which a trader is willing to trust tether is based on their judgement as to whether such a run will happen and that they will end up at the tail end of it and be one of the ones that loses out. But traders make those sorts of calculations and take those sorts of risks all the time. Of course every now and then some of them lose.

This poll should provide some context: https://twitter.com/thecryptomonk/status/1123265349175119872

Seasoned cryptocurrency traders are used to Tether breaking its dollar peg from time to time, its reputation is infamous. Honestly it's a relief that it's not a complete scam, 74% is better than most people expected.

https://imgur.com/42Nn10h

Uninformed? Most sane traders know about the Tether issues (have been warning for years as well) and will only try to take advantage. They are not ignorant.

IMO, if USDT actually turns out to be a scam, prices will go up for bitcoin. People will rush to buy back in since money sitting in USDT is money that is waiting for a good entry. If USDT becomes worthless everyone will buy back into actual cryptocurrencies.

"Short term securities". Personal IOUs from the 3 guys who run Bitfinex?

No. The short term securities would be things like treasuries. The loan to Bitfinex represents the 26% shortfall in the reserves.

Normally it would, if the guys behind Tether were trustworthy

It does whether or not they're trustworthy. You may think the loan will not get repaid...but it's in their interest to repay it. They're making plenty of money at Bitfinex. The idea that they're going to run some elaborate ponzi scheme to steal money, when they're making several hundred thousand dollars per day in fees is kind of silly.

Their account is over $700 million short right now.. Several hundred thousand per day isn't exactly going to move that dial.

It's a loan. The way loans work is that you make payments on them over time. $300,000/day generates ~100mm/year in revenue. That's enough to repay the loan in 7 years. However, the loan is actually for $625 million, so a bit shorter than that. But you get the point.

7 years wouldn’t exactly be a short term security, and a bespoke loan from one guy to himself isn’t something easily sold enough to be called “cash like”.

> 7 years wouldn’t exactly be a short term security

Nobody said that it was. They have 74% of the reserves in cash and short term securities. The other 26% is this loan. That is, it is not a short term security.

I don’t know how else to say this: I think Tether might lie about what composes that 74%.

Then why did they bother to update their webpage when they made this loan? On the date they made this loan they updated their page to say that it was no longer fully backed by cash. If they were in the business of lying, they'd have no reason to have done that - nobody knew about the loan at that time.

Once again, people here are ranting about Tether, while the market price is re-converging to parity. I wonder who's right, the people yelling in the comments section, or the people with skin in the game? What's been established here is that Tether is 74% collateralized by cash and short term securities. The other 26% is in the form of a loan to Bitfinex. Bitfinex is a cash-generation machine, and should not have any trouble making payments on that loan. Your local bank has a much, much lower reserve ratio than this.

> while the market price is re-converging to parity

Given the "market price" of most crypto is based in USDT not USD it kinda makes you wonder how legit any of the "market price" figures really are? Plus given there is absolutely no auditing for any of the exchanges in the market, for all you know "market price" could be determined by nothing more that scripts that just SQL INSERT fake transactions in their database (assuming they are using SQL.... which given this is crypto is suspect.... I wouldn't be surprised to learn many of these people are using things like mongo to handle their financial transactions)

> Your local bank has a much, much lower reserve ratio than this.

My local bank is also audited and heavily regulated. I sleep every night without ever worrying that my bank is suddenly going to lose all my money.

Also, given that bitcoin's ethos is all about being anti-fed and "no printing money" it is rather funny to hear somebody defend tether being anything less than 100% backed by some "real" asset.

> Given the "market price" of most crypto is based in USDT not USD it kinda makes you wonder how legit any of the "market price" figures really are?

Coinbase, Kraken, and Bitstamp are all legit exchanges that offer non-tether USD pairs. Binance offers many other stablecoins besides Tether. More than enough trading is conducted in non-tether pairs for the price to be legitimate.

"My local bank is also audited and heavily regulated. I sleep every night without ever worrying that my bank is suddenly going to lose all my money."

2008.... those "heavy regulations" and "audits" meant nothing.

How many deposit accounts evaporated in 2008?

I don't know the right number but I do know of at least 2 acquaintances who lost all their families life savings. The legal process to get the money back is actually still ongoing but during that time we changed our national currency to euros and those life savings are worth about 10% of what they were back then.

Thing is, with crypto you invest (usually) what you can afford to lose and you accept the risk. With banks most people think it's safe and risk-free so then the impact of losing it all is so much harder, it ruins lives.

You're describing a different process.

People lost their life savings because they purchased assets that went down, or they lost their jobs in the general economic downturn. Nobody lost their life savings because their bank suffered a run and their deposits were lost.

To extend the metaphor, this is the difference in getting wiped out in the 2017-2018 crypto crash, and getting wiped out by Mt. Gox.

Im not describing a different process, they had their money in a savings account on a bank that went under, they have been liquidating it's assets since the 2008 crisis to repay people and it's still not done.

Which bank?

You paid for it via a bailout

I looked into tethers withdrawal process, and the barriers to withdrawal are high enough that a run on tether is quite unlikely.

It really only makes sense if you hold over a million tether, and even then you'd probably be better off selling on a USD exchange and converting for withdrawal there.

It's a nice racket they have there.

I was surprised to see the site let's you create an account now... for the longest time you couldn't and the only way to buy / sell tether was second hand on exchanges for as long as I could remember.

That said, either tether.to account creation seemingly functional, I wonder how difficult they have made the process?

There are licensed and regulated stable coins on the rise ( like USDC, PAX ), that will play by all the rules, have better protections, be audit-able and have the ability to be revoked in cases of crime.

In a free market there is also a place for a non-US company to offer a product like Tether. Why this is at all the business of the AG of NY is the real question here. Who benefits from these AG actions?

> "Why this is at all the business of the AG of NY is the real question here."

Because investors based in New York are being swindled by Bitfinex/Tether?

From the AG's site:

"In November 2018, the Attorney General issued subpoenas to Bitfinex and Tether, which are owned and operated by the same small group of individuals, and claim not to do business in New York. As alleged in court papers filed by the Attorney General’s office, the Bitfinex trading platform allows New Yorkers to purchase and trade virtual currencies, including the so-called “tether” stablecoin, a virtual currency the companies long claimed was “backed 1-to-1” by U.S. dollars held in cash reserve." https://ag.ny.gov/press-release/attorney-general-james-annou...

You can't escape financial regulations by claiming that you don't do business in jurisdiction X while simultaneously taking investment money from people in that jurisdiction.

"A Tether USD is backed by 74 cents" is a fun quote seen on twitter

It’s highly unlikely that those undefined securities will be something easily liquidated to cover costs. This is the company that “loaned” 900m to Bitfinex, a company run by the same personnel as Tether.

Surprised Tether is willing to open it's mouth on this subject.

Glass houses...stones...

They have to. They're under investigation by the New York State Attorney General.[1] That sort of thing usually doesn't end well.

[1] https://ag.ny.gov/press-release/attorney-general-james-annou...

They don't have to. The NYS AG doesn't have standing.

You'd be surprised how far the power of the NYAG goes... Crypto Capital LTD. is registered in Panama and legally they have no a rather poor political/diplomatic relationship but you never know what goes on behind the scenes.

I believe the NYAG wants Crypto Capital LTD, not bitfinex/tether per se.

I was expecting something more like 1%.

And yet it's still 1:1 on coin market cap and everyone is all "what me worry?"

If you don't plan on holding Tether for a longer time, the chances of some catastrophic pricing event (such as full seizure) are slim.

That risk is weighed the utility of sending Tethers around. If Tether was somehow backed 100% by an assortment of reputable institutions, it would probably trade at 5% premium to its face value, purely due to its utility.

More surprisingly the market cap on coinmarketcap is at $2850m, up from $2845m a week or so ago when the news hit. You'd imagine at least some people would be cashing in Tethers for other assets (BTC, USD) and so the number of Tethers out there would drop. It shows daily trading volume of $12,308,023,802 USD yet the market cap doesn't budge significantly. Something seems not to add up.

By the way I just tried selling 1000 tether short on Kraken. Dunno if anyone else is trying to trade this thing?

Tether is basically a one way ratchet to keep money in the crypto system. You can trade Tether for USD on various exchanges but actually selling Tether back to Tether itself, which would reduce the market cap, is restricted heavily. The result is that if you trade Tether to someone else on Kraken for USD or BTC, the Tether market cap remains unchanged, which I suspect was the point.

Maybe though I figure they must be buying back to keep the price above 99c. My hypothesis is they are burning through the cash but not showing it as if they showed the cash going 2bn, 1.5bn... there'd be a bank run of people trying to get out before it was gone.

I'm not really sure how Tether is maintaining their $1 peg on the open exchanges, it seems to me that they shouldn't be. But explaining why the market cap hasn't gone down is very easy, it's very hard to actually destroy Tether.

Weird so many negative comments, this is astronomically better than what banks have in reserve. https://www.google.com/search?q=how+much+cash+must+a+bank+ha...

You're stretching the definition of reserve too far.

Banks are fractionally liquid, but they're actually fully backed by non-cash assets, such as mortgages, business loans, and bonds. The reserve requirements and risk levels are tightly regulated and they pay insurance (FDIC) to protect against the risk of sudden withdrawal demands or market downturns. In practice this has been working for a very long time, with runs on banks and FDIC involvement being quite rare.

Tether is only 74% backed "by cash and cash-like securities", which means that they are insolvent, with their assets column being worth less than their debits column. This is massively worse than any consumer bank; a bank might not be able to cover all their liabilities at once, but Tether can't meet all their liabilities at all.

Uh, I think you are the one now stretching. Tether can meet 74% of their liabilities all at once. Where a bank can only meet 3% or 10% of their liabilities all at once. Tether is way more liquid than a bank.

Liquid and solvent are different things.

Tether is more liquid, if you trust that the 74% are actually in "cash equivalent securities" and not loaned to themselves (again), but they're absolutely insolvent.

I am sure the "and securities" is rock solid.

Just kidding! Suckers.

Keep in mind that for the longest time there have been strong doubts about Tether being backed by any significant amount of money whatsoever. Yet the price hovered around 1$. The risk of default for holding a Tether was priced at less than a cent.

Stableishcoin!

Stablecoin? I can think of at least 2 things wrong with that name!

Stableishcoinish?

“Water is wet”

So are all of the banks in the world? It’s called fractional reserve.

Don’t like to defend tether in these posts, there’s clearly shady shit going on, but it’s been FUD’ed against for years now and yet USDT has kept within few percent of USD. I still don’t buy the argument that bitfinex is printing money to prop up BTC.

Right but I think the obvious point is that if you Google Tether you get

"Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets ..."

The entire selling point is that they aren't a fractional reserve bank.

My bank only needs to keep 10% of its deposits backed by cash, securities. [0]

[0] https://en.wikipedia.org/wiki/Reserve_requirement#United_Sta...

> My bank only needs to keep 10% of its deposits backed by cash, securities.

True, but your FIAT is FDIC insured to an extend. Neither Tether nor any of these funny moneys are.

Furthermore, I'm pretty sure non accredited banks cannot run fractional reserves legally.

Also, fractional reserves are fully backed by outstanding loans due for repayment, which is not the same as being backed by nothing. A decade ago, we saw how bad it was for the whole ecosystem when more loans than expected turned into nothing...

That's not at all similar to Bitfinex only pretending to back Tether.

Also also, banks don't falsely claim "we're not fractional reserve" on their websites for years.

You are misunderstanding fractional reserve banking. Fractional reserve banking means that the bank only has to keep enough cash on hand to meet their expected reasonable obligations.

Banks still need their books to balance. That means that their liabilities can not exceed their assets. A bank can be solvent on paper but if there was a rush to withdraw by their customers, they may not be able to pay cash for all withdrawals because that cash would be tied up in loans.

In the Tether case it isn't that they loaned out the money they took in, rather their liabilities exceed their assets. Thus Tether is bankrupt on paper. And if everyone tried to withdraw their assets, they would also not be able to pay everyone back.

Thus banks may be illiquid with a balance sheet that ultimately balances (e.g. not bankrupt), but tether is both bankrupt and likely also illiquid because of the 850M loan fiasco.

I swear tether is like Wiley Coyote who has run off a cliff but hasn't yet looked down. I question my sanity a little bit because I do not understand why tether isn't completely disreputable at this point, I must be missing something.

I tend to agree with your Wiley Coyote comment and it made me laugh. Thanks.

Because Tether is the de-facto way for the exchanges to bypass USD regulations.

Bankruptcy doesn’t mean assets < liabilities. It means you can’t pay off the liabilities you have and are basically giving up on doing so in the future. As far as I’m aware, tether doesn’t really have any liabilities. They claimed that each tether was backed by a dollar, but didn’t say it was redeemable for a dollar. They don’t need to pay anything. There can’t be a run on the bank because this bank doesn’t give you your money back.

Why does the market allow this? ... I have no clue but I would guess that money laundering fits into it somewhere.

That’s not correct; Tether does nominally allow redeeming for USD, although only in bulk, and the service has opened and closed over time and generally been a mess AFAIK.

Fine. Sometimes they do, but legally are not obligated to do so. So it’s a moot point. They’re protected from runs because they don’t have to cash out. Their current terms of service state:

> Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all.

Not sure whether it's moot. Even though they're not legally required to provide cash, Tether's accomplishment of establishing and then maintaining a $1 market value is presumably assisted at least to some extent by their offer to provide it. To what extent precisely remains to be seen. The longstanding doubts about Tether's reserves didn't impair its market value; the more recent revelations may not either, but that's not certain yet (in particular, if the market is being manipulated, the muted short-term response may not last).

But yes, they are protected from runs.

Edit: Also, that text wasn't always there; in 2015 they claimed Tether was "redeemable for cash at any time" [1] and didn't have any similar disclaimer in their terms, as far as I can tell [2]. In addition, even with the disclaimer, if someone sued Tether for breach of contract (because they breached their promise to hold 1:1 reserves), fraud (because at certain points they made false claims that they did hold them), etc., they might be able to recover some USD in the form of restitution.

[1] https://web.archive.org/web/20150320090830/https://tether.to...

[2] https://web.archive.org/web/20150921163244/https://tether.to...

What parent claims used to be true:

> There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money. There is no guarantee against losses when you buy, trade, sell, or redeem Tethers.

https://web.archive.org/web/20171224172135/https://tether.to...

Currently:

> Any individual who is a U.S. Person and any entity that is a U.S. Person is prohibited from using the Site or any Services, including but not limited to using a Digital Tokens Wallet on the Site

[and we know that there is a limit on the Reserves]. I'd be _extremely_ wary about claiming they can be redeemed.

https://tether.to/legal/

Wow. The US ban seems... unbelievable considering it’s USD based. Surely this breaks some sort of commercial law that the government can swoop in on?

Why does it seem unbelievable? The US is a pathological jurisdiction that frequently tries to indict people with no direct connection to it and extradite them. Avoiding it seems pretty reasonable to me, I'd consider doing the same.

Whether doing so breaks US commercial law seems by-the-by given that they are very pointedly not operating within US jurisdiction.

What you're missing is that Tether is not truly bankrupt yet. Yes, sane accounting would say their liabilities exceed their assets, but only because 26% of their assets are a high risk loan to Bitfinex. They still have assets > USDT supply. What makes the liabilities exceed the assets is the credit risk associated with the loan.

You can't undisputedly say Bitfinex won't be able to pay the loan. Maybe the frozen assets are real and will be unfrozen soon. Nobody knows. They aren't bankrupt yet, but in a very risky position of becoming so.

Another possibility is that you misread the article title, which seems kind of misleading. It says that only 74% of Tether is backed by cash or cash-equivalents. The loan to Bitfinex is neither, so it should be the remaining 26% (26% of $2.8B is $745M).

That being said, I agree with you on the Wiley Coyote point. Tether should be completely disreputable, not only because of it's risky situation, but because the whole move was completely shady. Silently changing the wording of the website, after assuring everyone that they had it 100% backed... I don't see how anyone can trust it anymore.

> Banks still need their books to balance. That means that their liabilities can not exceed their assets.

Tether's books do balance. They've made a loan to Bitfinex. That loan is an asset equal in value to the missing funds.

Now, you could make the case that Bitfinex is insolvent, and therefore you ought to mark down the value of that loan. However, Bitfinex is generating a ton of revenue, and should have no trouble making payments on that loan. So, your argument pretty much falls apart, unless you have some other reason to expect Bitfinex to miss payments.

> they may not be able to pay cash for all withdrawals because that cash would be tied up in loans

How is that “assets”? Loan can be defaulted on and where bank has $X in the books it’s actually $0.

The non-bankrupt case for tether looks like this: people realize tether isn’t worth $1, but they still need to get rid of it and so they sell for $.74c, that’s the risk they took buying tether in the first place.

The idea is fractional reserve banking is that the loans are at least good enough in aggregate in normal course to cover its liabilities. Of course there are black swan events (https://www.investopedia.com/terms/b/blackswan.asp) that are so far out of expected that banks fail anyways, or the banks are incompetent and make things like sub-prime mortgages (https://en.wikipedia.org/wiki/Subprime_mortgage_crisis) that tend to fail all at a once.

Yes, I understand that, I just don’t see this bitfinex situation much different from what is generally accepted as normal in banking sector.

A loan is an asset, it just isn't a riskless one. A great example are bonds, typically considered to be assets, which are technically a loan that you have given to a government or company.

It's not really an issue of sufficient reserves so much as it's an issue of co-mingling corporate and client funds.

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