Legal expert says Tether and Binance Coin are likely picks for SEC lawsuit
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If you encounter an unregulated or irregular market participant doing anything that looks like banking, buyer beware-- on average, over time, you're not getting your money back.
The regulations implementing Federal securities laws are perhaps the most nimble, iterative, and “listen to your users” driven regulations in the US.
I am not so certain.
Most scams today are very similar to some classic scam mentioned in that book. There's not that much innovation.
Kids should be taught the classics in school - the short con, the long con, the big store, the pigeon drop, the badger game, the protection racket, the bait and switch, the Ponzi scheme... The list is not that long.
It’s odd that cryptocurrency was designed to work without trust and yet many people are so trusting.
This is not a problem unique to stablecoin providers. Every company with a large number of stakeholders (e.g. public companies, bond issuers, companies that manage assets on behalf of their clients, etc.) faces the same problem.
The traditional solution to this is to have a widely-trusted third party, like a big four CPA firm, examine the company's books and operations and provide an audit. It's still possible to defraud auditors (there used to be a "big five CPA firms" before Enron blew up and brought down Arthur Andersen, and more recently Wirecard made EY look pretty bad), but it's a lot harder than defrauding people who don't get a detailed look at your operations. The reason to go with a big four accounting firm is that the firm's reputation with the public is substantially more valuable than any particular client relationship.
All of this stuff has known solutions, but people don't like what the solutions would show.
USDC seems to be doing it just fine?
https://www.centre.io/usdc-transparency
> Top five accounting services firm Grant Thornton LLP issues attestations each month on the US dollar reserves that back the USDC tokens in circulation.
On the other hand, it looks like USDC's market cap doubled in less than two months, so I guess that's good for them?
[1] https://news.bitcoin.com/usdc-attestations-run-late-raising-...
One non-governmental way to do that is audits. Which is why Tether's lack of serious audits is so concerning. They claimed to be cash-backed for a long time but wouldn't prove it. Once the NYAG force them to open up, it's clear they were lying.
The white paper is complex, and the Emergency Shutdown price stability mechanism appears exposed to ETH price risk such that if ETH moves rapidly around the Emergency Shutdown, there's no guarantee that Dai holders could recoup on a 1:1 basis. Is that correct?
This seems to be not a dependable peg.
DAI has been tremendously successful over multiple years and multiple bear markets and ETH price crashes; it can only do so much of course. If ETH goes to zero tomorrow, DAI holders will not be able to recoup, sure.
In fact, the real problem with DAI is that demand often exceeds supply, the latter being limited by people who want to go long ETH, so they keep having to fight DAI breaking the peg in the other direction. To solve this, they onboarded other collateral types, including the USDC stablecoin, which now unfortunately accounts for >50% of DAI collateral.
I'm not a crypto expert, but naively I would at a minimum expect uncorrelated collateral to be part of the picture. DAI runs on ETH, so collateralizing via an ETH mechanism seems like possibly not the best choice.
I would expect that the peg would depend on something that exhibits a low correlation with crypto asset prices and a very high and dependable correlation with USD, like money market funds or Treasuries.
It seems you would need a trusted party/oracle of some kind, which creates the same problem as centralized stablecoins anew.
Edit: indeed a sibling comment mentions they have USDC as a backing support which means they are as stable as that.
If it is multicollateral, then yes, it somewhat involves trust, but you are dependent on a lot of various people betraying trusts along with ethereum price dipping, whereas a traditional stablecoin is entirely dependent on one entity.
And the value of ETH backing DAI is dependent on Tether not being fraduluent and instead being worth $1.
You won’t find the word audit on that page or in the reports.
And aren't these reports going to take time to complete? Every report in the past took about a month to complete and I don't see why that's a red flag.
An attestation offers considerably less assurance than an audit.
An audit is the most comprehensive type of assurance. Often called positive assurance. A clean audit opinion means the auditor collected sufficient and appropriate evidence to form an opinion on the financial statements (or reserves in tether/usdc case).
On the other hand, an attestation or review is a form of negative assurance where auditors state that nothing has come to their attention to indicate that subject matters or financial statements contain a material misstatement. In this type of assurance, auditors do not give an opinion; they simply say that financial statements look "reasonable".
Unlike positive assurance, auditors are not required to obtain sufficient and appropriate evidence to form an opinion. Instead, they only need to review if there are any problems with financial statements or subject matters.
Would an attestation have no ability to verify that the statement was fraudulent? In other words we must trust the entity undergoing attestation in order to rely on the attestation, and the attestation merely certifies there is no error of math or logic in what was presented.
With an audit, the auditors get a representation from management that they will provide the truth etc. The auditors would also get third party evidence eg. from the bank providing the audit client's account. For important things you would always get third party evidence from banks, custodians, etc or even just go and check to see if physical things exist!
With an attestation or limited/negative assurance engagement, there's no third party evidence. Instead, the auditors just rely on what they are given and whether it looks reasonable. The auditors would state in their "report" that only limited evidence was gathered and not enough to form the basis of an opinion.
Basically, limited / negative assurance is not really that useful in most circumstances.
Regarding fraud - auditors are not expected to find/uncover fraud under any type of engagement, which is a common misconception.
The biggest audit firms won't go any where near tether, and this alone, tells you quite a bit :)
> Basically, limited / negative assurance is not really that useful in most circumstances.
So what exactly can we glean from USDC having attestations? It’s certainly a step up from Tether in that respect but I’m also not sure it tells us all that much.
Or maybe a better way of asking is: how exactly would you prove that a stablecoin was backed?
1) review the processes and controls which operate the business to check they were operating correctly for the period under review
2) interview the various key stakeholders to assess competence and get representations
3) perform substantive testing over the collateral balance for the whole period. Eg daily bank reconciliations. Get third party confirmations for EVERYTHING.
4) perform a contingent liabilities review and a legal review.
5) see if there are any related party transactions
6) do a going concern assessment
The key thing would be to check existence, completeness and valuation of collateral and existence and completeness of liabilities (issued tokens).
Depending on what the assets are that would entail different procedures. For tether I would want to see their whole CP portfolio to perform a thorough credit risk and systemic risk assessment. Do some modelling to understand valuation implications under various scenarios.
Is worth noting that it's not feasible to do this on a monthly basis because it's so onerous. Hence why probably they just do monthly attestations. I would expect that the legal entity which issues the tokens and holds the collateral is audited at least once a year.
Never knew my audit knowledge would ever be useful/interesting :)
Cheers
I’m not an expert, but I think an attestation just examines if a statement makes sense. My accountant did one for my revenues and the percent that were in USD. I sent them a spreadsheet with my revenues from various sources and calculations showing total USD.
The accountant verified that my spreadsheet said what I said it said. However, they did not actually verify the info underying the spreadsheet beyond examining some screenshots of customer addresses I provided. They samples a handful at random.
In USDC’s case, I think the auditor would look at a bank statement and say “the bank statement on May 31st indeed says Circle has $X” and Circle says this money is theirs for backing USDC.
Stuff they wouldn’t verify:
* Was the money there before that specific minute of the day?
* Did it remain there after?
* Was the money from deposits, or was it from a loan or some other source? (Bitfinex did this with a prior attestation, mixing up Bitfinex’s money and reserve funds)
So most people would assume these attestations mean “At all times USDC had backing of basically all of their tokens by $ in a bank account, free and unencumberer” but the attestations don’t examine that claim at all. They examine a very specific moment in time, and don’t examine the source of the funds.
In an audit you might actually examine the accounts at a time not chosen by Circle.
https://news.bitcoin.com/usdc-attestations-run-late-raising-...
Which has been collateralized by centralized stable coins including tether, if i recall correctly..
It essentially tags parts of videos and it's pretty customizable - it only highlight a certain type, have it skip automatically, etc.
I already pay for YouTube Premium and am not a fan of ads.
Or at least it would have been clearer and more educational; I haven't seen his videos before and maybe other people watch him for entertainment.
Usually, this works fine, they make a lot of money, and everyone's happy. When there's some unexpected macroeconomic issue, which empirically happens with some regularity, they have massive problems as loans default en masse (or everyone tries to redeem their token for USD at once.)
* Pay them a nonrefundable $150 fee.
* Wait for your account to be verified, if you're approved - they have "sole discretion to approve or not approve accounts"
* Send them a minimum of 100,000 USDT
* Pay an additional $1000.
To be clear, it's likely that all of this is a lie and they simply aren't processing redemptions for anyone. I'm not aware of any documented story from the last few years of someone successfully performing a Tether redemption. The US policy is just easier to talk about because it's explicit: they say, in black and white (https://tether.to/faqs/), that "no issuance or redeeming services will be available to these users".
"Nobody knows you're swimming naked until the tide goes out ..."
If my deposit account gives up the ghost, I know the FDIC or the Fed will make me whole (or SPIC for my brokerage account). Who will do the same for Tether and other stablecoins?
Not good!
You mean they will print more money to fill your loss (dilution net effect zero)
>the Fed will make me whole
Says who?
This is in stark contrast to offshore crypto operations who refuse transparent auditing of their reserves.
As for the backing, let me go through this in more detail (see https://www.bloomberg.com/opinion/articles/2021-06-10/maybe-... for a decent coverage of how this works). There are three categories to keep in mind here: assets (which include loans, cash, precious metals, etc.), liabilities (i.e., the value of all of your deposits), and capital (which is money to support the assets that's actually the bank's owner's).
Regulation requires liabilities to hit no more than about 90% of assets. They also require the bank to stake about 8% of its own capital to support the assets, on a risk-weighted basis. The risk weighting reflects the likelihood of assets crashing in value: a typical loan might have a 100% weight, so $100 in loans requires $8 in capital. Safer loans (e.g., residential mortgages) would require less capital. Stuff like cash or T-bills have a risk weighting of 0%. Riskier things include stocks (which tend to go down big when they go down), requiring maybe $24 per $100 of stocks, or cryptocurrencies... which require $100 of capital per $100 of cryptocurrency.
What this actually means, when you combine stuff together, is that you really do have something like $100 in safe things for every $100 in deposits a bank has.
Yet another tired implication of Tether printing coins without backing, so let's break down the NYAG's announcement of Tether's fine. The fine was for:
1. Buying a bond (= lending out their backing) in a related party transaction, and
2. Not updating their customers that Tether backing had changed from 100% cash into a mix of cash+bonds.
The guy with the handle bitfinex'd was an extremely prolific screamer about fraudulently unbacked tether and folks seemed to believe him. If you still believe him, it now means you believe that NYAG Leticia James looked at Tether's books and gave them a pass on fraud in order to collect a few million dollars in a fine. Not bloody likely.
https://www.youtube.com/watch?v=-whuXHSL1Pg
Even in the off-chance that people with a track record of lying about being backed have suddenly gone legitimate, it's a pretty big indictment of the system that it could grow to the size it did while looking incredibly like a scam.
- Tech is a literal JSON parser designed as a Rube Goldberg machine.
- They came out with a whitepaper 2.0, even though not even 30% of what was promised in "WP" 1.0 was delivered.
- All the founders are in the USA, and the company was initially in the USA when they ICO'd, but now their company magically migrated to the Caymans, even though their operations are completely in the US, San Fran and NY.
- Literal 4chan coin, to the point, one of their execs, Mark Oblad, was some sort of staff at 4chan.
- They dump $20-60M every 2 or so days, depending on what the price is (they dump the same amount of tokens, amount in USD depends on price). Yet have nothing to show for it, apart for a Lambo for the Russian founder's Papa, plus 2 of the founders bought a whole block of NY condos apparently.
- Thousands of "Partnerships" done purely for marketing, to get 4channers/linkers to hopefully shill their products too, even though there is no actual partnering of any kind.
- Rampant insider info leaks happening from their founders, for announcements and dealings that will pump or dump the price. I'd even be able to showcase some in court myself.
It's pretty cheap and easy to take a short position in Tether. You can borrow USDT on Compound for 3.37%, convert it to USDC at Curve for 0.06%, then collect 2.32% on USDC at AAVE. If/when Tether collapses, you'll only have to cover your short at the collapsed value.
Many in comment sections like these will argue that Tether is less than 50% backed by hard assets. If you genuinely believed that to be the case, why would you not be happy to pay less than 1.5% per year to earn a 50% profit when the house of cards collapses?
1) I'm pretty confident Tether will collapse, but I have no idea when that will actually happen. The old saying is that "The market can remain irrational longer then you can remain solvent"
2) I'm not an expert in cryptocurrency shorting, but the scenario you stated involved shorting Tether against other cryptocurrencies. Since Tether is heavily integrated with the rest of the crypto market, if Tether falls, it will likely heavily impact the rest of the market. It may be possible to make money off of that, but it would also be possible to lose money if you time things incorrectly.
3) It's not all about the money. I'm making plenty of money at my day job, and feel confident in my existing investments. I don't need to spend my time gambling in the crypto market.
I think most people would be more worried about counterparty risk with FTX than with Circle though.
It's not so much as the insurance coverage, anyway, so much of the vote of confidence that an insurer is willing to cover them.
The trouble with this is that it’s not a very meaningful epistemological claim unless you can put some ballpark timeline on your prediction. Will it happen before the Sun is a red giant?
https://twitter.com/Bitfinexed/status/1405037796172222466?s=...
``` PSA: Do not attempt to short Tether. If you obtain a large enough position in Tether, the exchange will leak your position to Bitfinex shareholders who will coordinate to liquidate your short position.
This happened on Kraken. Tether went over $400 per tether, twice. ```
If someone was short and got wrecked by this, I'd expect them to raise a big fuss about this, but that's not happening (maybe it is, but they didn't link to it). Kraken is also one of the more regulated exchanges out there which puts more doubt on it. All in all, the only thing I'm seeing is witnessing an event and making up an explanation for it that fits their narrative, while offering zero evidence to support it.
There's not that many rich people fat-fingering huge orders all the time..
The downside is that you have to trust USDC at the same time and if tether breaks, there is n o guarentee taht USDC holds its peg
so you can lose the following ways
1) be wrong and tether is fully backed
2) be right but way too early
3) be right but the peg only breaks by a couple of pennies so you really make peanuts for the risk you put on
4) be right but USDC also breaks and you end up losing
5) be right but6 tether falling sinks crypto so there is not real crypto position you can hold in this case that makes you money.
6) Counterpary/exchange risk, you have to close out your tether position or remove it from the exchange, in the case that new broker that Tether is worthless, every exchange would suddenly lock out withdrawals and go down like they do each time there is a crash, which means you may end up losing even if you were right.
I mean there are so many ways to be right and lose on this trade:) Its not something too many hedge funds would dare put on.
The upside to being right just isn't anywhere near enough to be in this trade in a fully leveraged way and this is crypto and everyone accepts its manipulated in some way so its hard to rationalize leveraging this trade up to make any meaningful return
Instead of shorting USDT directly, I'm short a public market company which I believe will drop if Tether blows up (it's a pretty junky company, so it's already a profitable trade). If I could convert that to a direct USDT short without crypto exposure, I'd do it.
The way I understand it, I could borrow $10 USDT collateralized by (say) $11 of USDC, but then I couldn't convert that $11 of USDC to $11 USD until I bought back the $10 USDT and returned the loan.
This is more interesting. Thanks for explaining it.
Read what you just wrote and then ask yourself if figuring out / validating / executing that is actually "easy" to the average person. As a casual observer, and crypto owner, that is definitely not easy for me.
I would strongly advise against anyone trying to learn and devise a shorting strategy in 10 minutes
> Instead you decided to use that time for commenting and complaining
... ditto?
With a short, you can't just be right in the end, you have to find a way to not blow up if things get more irrational in the meantime.
https://twitter.com/Bitfinexed/status/1405037796172222466?s=...
Isn't there an enormous risk in manipulating the price as high as $400/tether just to liquidate (someone elses) short position ? Who else, then, has the opportunity to sell at the temporarily inflated price ?
Again, some more details would be very interesting ...
So it's pretty easy to get the price of tether on a single exchange to momentarily hit $400, just blow through the order book. However no one is getting margin-called just yet, so the trick is to sustain that price, which means buying tether at $400 a piece. Unless you've got hundreds of millions of dollars to blow, it's simply not possible. And something as obvious as that, manual circuit breakers are going to be getting hit before they let margin calls cascade.
I used to write financial trading software, so I am reasonably familiar with the topic. But there's no way in hell that I as an individual would use 3 different unknown services to make bets in an unregulated and likely manipulated market. There are all sort of risks there.
If I were managing $100m it would be a different story. I could have analysts carefully looking at the financial risks and a lawyer or two gaming out the legal concerns. If all that looked good, then I might go for a short, because believe it's a fraud. But there's no way a typical individual investor should be making bets like that.
I am genuinely interested in exactly that short trade and your list of counterparties, above, is the reason I have never pulled the trigger on this.
A handful of new, interesting and untested entities all need to function properly at a time of market panic for that trade to complete as expected.
EDIT:
Somewhat off-topic, but given the actual real-world economic pain that chiacoin has caused me, I am much more interested in the prospect of an IPO of (chia parent) which could then be shorted (or optioned) properly through normal channels.
I daydream of being on the right side of that trade with every batch of triple-priced SAS drives we have purchased in the last 4-6 weeks ...
- Borrow USDT with USDC as collateral
- Sell USDT for USD, put it in your regular bank account (you'll end up with slightly less cash than you had originally, since your loan needs to be over-collateralized)
Outcomes:
- USDT collapses, USDC does not: best outcome, buy USDT for pennies and use it to get your USDC back
- Both collapse: pay back your loan only if USDC > USDT
- Only USDC collapses: just don't pay back your loan. you lose whatever "extra" collateral you paid
I don’t know enough about fully decentralized protocols to know what the risks are there.
Proceeds to describe a Byzantine crypto solution, which neglects the inherent risk of each counter-party and interaction along the way.
If you're wrong on either, you lose money. You don't get the really huge blowout risk due to the stable nature, but the other two still apply.
https://twitter.com/Bitfinexed/status/1405037796172222466?s=...
>stablecoins are basically guaranteed to never exceed $1
Why it happened is debatable, but not that it happened.
The moral of the story is: your exchange will always find a way to screw you.
https://twitter.com/Bitfinexed/status/1405037796172222466
It seems there is a fair bit of collusion with some of the 2nd/3rd tier exchanges and Tether. If there is strong short interest it seems that they are willing to pop the price temporarily to wipe out the shorts. If Tether/Bitfinex has $62B and a printing machine it is pretty easy for them to wipe out the other side of a trade they are against.
My above understanding is just thinking about it in terms of what I have read and what I know of short selling equities. If you can take a put position (option) against tether I suspect that could work. Even if your bet was right, you would just have to be concerned the counter-parties survive the fall and that there is liquidity left in the market to close out the trade. Considering how much funny things went on in the GFC in regulated markets I suspect there is a good chance that in the unregulated crypto markets that even the correct trade would quite likely not be honoured if a full meltdown happened.
I was researching this a bit in the last couple of weeks. My current view is that I see Tether/Bifinex as a fraud which is bigger than Madoff and more serious since it is growing and the currency is (at the moment) a key part of the crypto markets infrastructure. Since tether provides the daily liquidity it also plays a levered role beyond what something like the Madoff fraud would have done to the wider markets.
The fact that the next billion can be safely redeemed doesn't mean the token isn't a scam.
We did just fine without it at the beginning, we can do just fine without it now.
I am skeptical of USDT, but maybe I'd like to keep my savings out of speculation, especially shorting that leaves you with nothing if your bet turns out false (a long mistake at least let you keep the valueless assets lol).
There s no binary choice between speculating for USDT or against USDT, you can say this entire thing stinks and you're better not speculating at all.
If Tether does collapse, and you manage to engineer a solution so that at the end of that event you are holding some of the resulting money... whose money is that you've got hold of? The victims of the crime?
What percentage of tether doomsayers here have ever traded a significant amount of tether? Don't get me wrong, I also don't trust tether and think there's an unacceptable amount of sketchiness there, but simply looking at who's at each side of the debate should show you that it's not as slam dunk as you think it is.
"But what percentage of people who say that dioxins are dangerous have ever jumped into a big swimming pool full of dioxins?!"
I mean, if you think tether is a scam, you are probably going to refrain from going anywhere near it.
Tether is a controversial[1] cryptocurrency with tokens issued by Tether Limited, which in turn is controlled by the owners of Bitfinex.[2][3] Tether Limited formerly falsely[4] claimed that each token was backed by one United States dollar, but on 14 March 2019 changed the backing to include loans to affiliate companies.[5][6] The Bitfinex exchange was the subject of a lawsuit by the New York Attorney General of using Tether's funds to cover up $850 million in funds missing since mid-2018.[7][8] The investigation found that iFinex — the operator of Bitfinex and Tether — made false statements about the backing of the Tether and about the movement of hundreds of millions of dollars between the two companies to cover up the truth about massive losses by Bitfinex. According to the New York Attorney General, "Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie".[4]
I've always understood this to mean "if people stop accepting the USD, the military will make them do so by force". But by all means, do tell me of what other ways aircraft carriers can be used to support the value of the dollar.
I'm not even saying that this is factually incorrect (though I don't know if it is). I'm just pointing out the perversity of this argument. It gets brought up surrounding the current inflation debate all the time too. I don't like the casual-ness with which people can say what amounts to, essentially, "don't worry, we can always resort to deadly violence if we need to."
Given that people already disagree about the status of Tether, it's not nearly as obvious.
I don't see why there is so much focus on it. Either they have funds to back up the printing or they don't (yes, they didn't for a period of time in 2018, but settled that lawsuit). If they still don't, and Tether goes away, I would think it would only lower Bitcoin/crypto volume and volatility as there is one less funding source. But, anyone that bought Tether to buy Bitcoin has already done so, and that Tether is sitting with someone else like an exchange, lender, or liquidity pool.
If they truly are a fraudulent weak-link in the ecosystem, than I am all for figuring this out so we can move on.
Tesla made waves for injecting 1.5 billion into Bitcoin. The Tether injection is 42x that.
So the strong probability is that the crypto market has been raised by a flood of fake money and the actual dollar demand for Bitcoin et al is rather low.
As for backing, it is surely not present. It would be trivial to audit Tether’s assets but they have dodged it for years and been caught in lies.
As Dan Davies said about the Iraq War lies, “ There is, as I have mentioned in the past, no fancy Latin term for the fallacy of "giving known liars the benefit of the doubt", but it is in my view a much greater source of avoidable error in the world. Audit is meant to protect us from this, which is why audit is so important.”
https://blog.danieldavies.com/2004_05_23_d-squareddigest_arc...
As for the triviality of auditing, I don't think it's that simple, but point taken.
Of course, if you don't want to be easy to audit, you can introduce a bunch of complexity - play a shell game shifting money around, intermingle the clients' money with the company's money, operate independent lines of business and intermingle those too, and so on...
Why wouldn’t auditing be trivial? It’s just checking the level of funds in account and whether they’re present over time. All major companies do audits, it’s a simple, common procedure.
Except that we know for a fact that Tether is not mostly backed by bank deposits. They hold a bunch of different types of assets, some (most?) of which is probably debt with varying levels of collateral. Assessing debt risk is doable but mote complicated than just checking a balance number.
For years Tether said they were backed 1:1 by dollars, but blocked audits. The audits would have been simple. It turns out Tethers were not backed 1:1.
It would also be simple to audit their dollar deposits now, but they haven’t done that either. And no one in the commercial paper market has heard of them.
So, if they were bonafide, there are claims it would be simple to audit. They have not audited them.
Which makes Tether effectively backed by crypto.
As the price of crypto/bitcoin rises that collateral is worth more and those loanees can come back and borrow more Tether.
Tether then gets used as fuel for arbitrage bots which pumps up the price of crypto (which is literally just monetary inflation, you have more and more Tether chasing after roughly the same amount of crypto so you wind up with inflation).
This also explains how the peg is maintained since if the loan is dollar-denominated then nobody who has borrowed $250,000 in Tether wants to see Tether drop to $.90 USD and have to pay back 250,000 Tether plus $25,000 in actual USD (while on the other side everyone wants to buy Tether once it goes over $1.00 since you can flip it and arbitrage it).
I'll let you do the math though on what happens if crypto were to say drop by 90% or so...
Most crypto trading actually takes place outside of the US. Imagine I want to predict the whole crypto market goes down, I want to short it. Ideally I'd like to short it relative to the USD, the world's reserve currency. But, as a random unregulated firm trading on an unregulated exchange, getting USD or something close to it is super painful from a compliance perspective, so ideally I'd prefer something that follows the price of the USD but is outside the scope of US regulators. Tether fulfils this shared need of non-US market participants, so they have incentive to keep acting as if it were real even though they know it's a scam. Tether then gets to extract a fee for this service by printing USDT.
Thoughts?
It provides fiat-pegged stability with crypto-level defi liquidity. So people choose to hold it for use in defi products.
It's a blight on the blockchain world.
I guess I see the people who are buying Tether (exchanging bitcoin for Tether for example) are market makers or lenders and appreciate the liquidity that Tether offers, who would certainly be crushed by Tether collapsing. Overall though it shouldn't affect the demand for other blockchains... but negative news / narratives can do a lot of damage
To answer your question as directly as possible, people hold stablecoins because they want to use USD in smart contracts.
The basic idea seems sound: people want to transfer around cryptocurrencies (or speculate on them, fine), but actually selling them for USD is somewhat hard and peppered with regulatory issues. So swoop in with a partial solution: a stablecoin worth exactly 1$ USD that you can transfer quickly around using the blockchain, but doesn't have any price volatility so is a safe store of value until you can move out and redeem for USD through a slower, regulated offramp (of which there are fewer).
That seems like the hard part? They solved all the hard problems, and it's so useful that it should be possible to get rich just by charging small transaction fees, success just requires doing all that plus not being crooked and lying about the 1:1 backing.
Just one example (from [1]):
> At the time, Bitfinex (theoretically a Hong Kong entity but whose location, like a Bond villain, changes moment-to-moment to fit the needs of the scene) was banking in Taiwan at Hwaitai Commercial Bank, KGI Bank, First Commercial Bank, and Taishin Bank.
> Taiwanese banks do not have direct access to the U.S. financial system; they engage via correspondent banking relationships. These banks corresponded through Wells Fargo. Wells, in the wake of publicity about the Bitfinex hack, told the banks they would no longer clear USD wires to or from Bitfinex.
[1] https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/
If the price was lower, then the mining activity would be reduced as would the interest in speculation.
The interest in tether is thus directly associated with the price of bitcoin.
It makes sense then to use the power of controlling Tether and Bitfinex to pump up the value of bitcoin, in the hope (I guess) that the value becomes self-sustaining.
But, basically, we have been duped at a civilizational level and this whole crypto pyramid needs to come crashing down for the good of electricity, chip shortages, limiting ransomware and criminality, and wasting technical talent.
Crypto is basically the Uber of money laundering and ponzi schemes.
A tether token is a financial asset. It represents a loan to Tether in return for the promise of getting a dollar back when a customer wants to withdrawal dollars from Tether. It is like a bank deposit, which is also a financial asset (a liability of the bank), not dollars themselves. Stablecoins allow anyone to trade their 'account or claim' at the Tether Bank by transferring the entire account to someone for dollars or something valuable like bitcoin on the secondary market. Tether doesn't have to satisfy demand deposit withdrawals as much as a bank because you can trade your account to someone else who accepts tether. People only accept it because you can get dollars out in the secondary market. Tether's value comes from ownership claims and confidence in Tether to be the exchanger of last resort and honor claims on dollars for tethers. Tethers are fungible (they are all 1 dollar or represent the same claim) and they can be traded, therefore it is a security. Thinking about claims and trading and what are financial assets is more useful than Howey test.
Imo the Howey test is overused to explain securities with crypto context. People just rattle off 1,2, 3, 4, talking points (the questions) without really explaining fundamentals or connecting it. In terms of Howey, Tether the company is taking your investment dollars (loan) and investing it, they are in the business of making profits (they just don't share profits), but they are expected to repay the loan of dollars you gave them, and this repayment depends on the work of others (Tether investing wisely). Tether the company is in a common enterprise with anyone that holds tethers (loans them money).
For those who are looking for the usual HN summary: The tldr is that BCB is likely to incur SEC lawsuit mainly because of an ICO back in 2017, and the "legal expert" did not actually give a probability of Tether incurring an SEC lawsuit.
There’s also a certain point where they can no longer “print” coins that are believably backed. If tether is to be believed (and, for the record, I’m of the opinion they shouldn’t be) then they’re already responsible for an absurd portion of the commercial paper market.
Pretending to be fully backed by USD didn't work out, so now they pretend to hold equivalent assets.
SEC action could be a cause for such a loss of trust, but you can imagine many others, such as leaks (of damning information) from insiders, other exchanges unlisting USDT, and so on.
Is it really any surprise those which aren't overly invested in the current house-of-cards are willing turn to what might amount to the wild-west of financial investments? Get off the self-righteous horse and drop that Pravda. All of your hands are dirty from the current propped up system, and your feigned ignorance of it's glaring mismanagement shows there's little to no value in the arguments here against using crypto.
Side note: this lot have clearly lost control of the narrative, that means it's about time for taking a back-log of medicine. Oh gnashing of teeth.
Also, this affects the entire cryptocurrency market. If you own any cryptocurrency, you're exposed to risk from Tether's collapse even if you hold no Tether yourself.
Right. Financial people.
Nonetheless I would rather make the decision for myself. Financial regulations are already looser for the rich in the United States than the poor. There are many more shackles on what you can do with your money as a retail trader than a institutional trader. At least one benefit that crypto has over traditional finance is that all participants have the same opportunities. For the most part it is open source code for nodes that anyone can run themselves.
Finally I'd like to add that the nature of crypto means that when the United States removes its regulatory ambiguity, or if USG decides to crackdown on the whole endeavor, there will most likely still be some country like El Salvador where it is still legal and accepted. So to me it seems that the future of crypto is still bright despite what may be seen as increasing regulatory pressure from the elephant in the room.