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.
All of this stuff has known solutions, but people don't like what the solutions would show.
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.
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.
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-...
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
Which has been collateralized by centralized stable coins including tether, if i recall correctly..
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.
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.
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.