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Comment by tinco | Hacker News Reader

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...

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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.

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.

> 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.

>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.

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

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.

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