US Fed Official Calls Tether a ‘Challenge’ to Financial Stability
nasdaq.com
nasdaq.com
The rest of it is supposed to mostly be commercial paper.
The problem with that is, in one month, they would've needed to buy more commercial paper than was even sold.
So that part is likely false, too.
"The market can remain irrational longer than you can remain solvent"
It's a good thing I was simply closing positions instead of taking a short position, cuz boy oh boy was I wrong.
That was before institutional money started going into BTC. Will be interesting to see if the 'little guy' individual investor will be enabled to take large amounts of early stage profits and saddling the 'big guy' institutional investor (which is in a lot of cases, essentially just lots of 'little guys' money pooled together while the managers skim the profits off the top) with the late stage losses.
(I am long BTC)
Given Bitcoin isn’t attached to anything… what does long mean?
People can be “long USD” because they expect the price to increase. That's not expressing any belief beyond that. People are long on something for many reasons.
In a zero-sum game like Bitcoin, there is necessarily a timing component at play. Being “long” seems at odds with that.
Hope this clears up some of the confusion.
Let’s say we all invested in Bitcoin today and only bought from people who had purchased at $10000. Then, in two years, if we sell our Bitcoin for $100000, we all make money. That’s not a zero-sum game because no one lost money.
> A Ponzi scheme (/ˈpɒnzi/, Italian: [ˈpontsi]) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.[1] The scheme leads victims to believe that profits are coming from legitimate business activity (e.g., product sales or successful investments), and they remain unaware that other investors are the source of funds
Do you see a distinction between this and the system theli0nheart described?
It is pretty silly when people who are calling bitcoin a "currency" and autonomous blockchain agents "smart contracts" complain anytime the term "ponzi scheme" is used for a zero sum speculative asset that only pays out gains to existing holders by bringing in new "investors".
Well, it’s not. Unless you think the entire value of our entire world economy will become zero. Merely predicting that the value of something will become zero doesn’t automatically make it zero-sum.
In order for a game to be zero-sum, that requirement must be built into the rules of the game. That isn’t true in either of these cases (Bitcoin nor $SPY).
From https://en.wikipedia.org/wiki/Zero-sum_game (emphasis added):
> Zero-sum games are a specific example of constant sum games where the sum of each outcome is always zero. Such games are distributive, not integrative; the pie cannot be enlarged by good negotiation.
It is precisely that difference which (I think) makes it zero-sum
Even if this was true (it is not) this still does not make an exchange of Bitcoin a zero-sum game.
I’ll prove it.
Let’s first denominate value in BTC to simplify this. I then mine one Bitcoin with less than 1 BTC-worth of energy (I wouldn’t mine it, otherwise). I now have 1 - (cost of energy) BTC,
I then give my BTC to someone else in exchange for a Widget. I now have a Widget, and they have a non-zero amount of BTC.
At no point are the sum of our two assets equal to zero, and they never could be. This could never be a zero-sum game, either by definition or in practice. There is always a non-zero net value after adding up all assets and debts between all of the players.
My background: I studied Applied Math in college, with a focus in finance, game theory, and computer science. I studied games and game theory extensively.
You are correct mining is at least surface level not zero sum. If you apply the assumption that the energy, computing equipment and time were worth less than the resulting btc. But given the fact it has no intrinsic value… is only valuable in exchanging between fiats… I don’t think those assumptions hold.
Money is created by loans by banks.
It's a digital asset that you buy with dollars (or equivalent). If your position benefits from the price in dollars increasing, then you're long.
By owning BTC, or equivalent economic exposure to owning BTC, ie, you will profit if BTC becomes relatively more valuable, and lose if it becomes relatively less valuable.
> it’s a currency not a stock. You might say “I’m long USD”
People take long position in currencies all the time. That is just a perfectly normal thing that people do, all the time. I have no idea why you think a currency is somehow different than any other financial asset here; it is not (except, perhaps in some cases, taxes).
> but then you are really saying you believe the US economy will grow, and the value of its currency will strengthen.
No. That's not how exchange rates work. The US economy is growing all the time (...well, outside of recessions), but so is everyone's else. A thousand factors go into determining relative strength.
> Given Bitcoin isn’t attached to anything… what does long mean?
It means you have a positive exposure to an increase in it's price, probably by owning some, or something that closely approximates that. Same as being long anything else. Why would it be different? What did you think being long meant?
The fact that people go "long" in fiat currencies is not at all relevant, as there is a government and usually a central bank that controls production of that currency (responsibly or not).
100% exchange rates work based on the economy underlying them (and the governments control on it)... they are not just random numbers fluctuating randomly... There is almost no comparison to crypto here, is there a fiat currency that shows as much volatility for as long as bitcoin has?
It does not. Many currencies aren't stable at all; people still take long and short positions on them, either as part of an explicit investment thesis, or just by, you know, having some paper currency in their wallet. People have been buying gold for centuries as a way of reducing their exposure to unstable currencies.
I would assume it doesn't need to be explicitly said, but just for safety's sake, let's be clear: A long (or short) position is a bet, and you can bet on unpredictable things. Nobody uses the terminology, but technically you're "long red" if you bet on red coming up next on a roulette wheel at Vegas.
Currently equity markets have been consumed with discussions of the "meme stocks". People have been going long on, eg, Gamestop, but the stock has been incredibly volatile, and there are no underlying economic factors that even begin to support the highs it's reached. Again, being long in a super volatile stock because it's funny, or because you're bored, or because you're trying to make a statement, or because you believe it is bouncing around randomly and you're trying to profit from this is still being long on the stock.
Being long is not a moral judgement, it just means you've got an exposure to the asset becoming more valuable. If you own a share in Gamestock, or a USD, or few satoshis, or a house, you're long those assets. It doesn't matter why you own them.
> which as you say has a number of factors... all of which are non-existent in bitcoin
That is also untrue; many factors have exact equivalents, such as evaluating competing currencies for differences in projected inflation or deflation, projected interest rates, projected uptake in usage in new markets, projected change in regulations. If you think DeFi will continue to grow, or that Ethereum's migration to Proof Of Stake will finally happen and be successful, that suggests a relative strengthening of of Ethereum versus Bitcoin. If you think that a pure Bitcoin ETF will be approved by the SEC and will be good for Bitcoin prices, that suggests a strengthening of Bitcoin versus other currencies. And of course, you can evaluate the so-called "shitcoins" to decide if you think they'll ever get a fraction of the adoption Bitcoin and Ethereum have, etc.
> What exactly are you thinking factors into the growth of the currency? Beyond say... hopes and dreams (aka gambling).
As above. Although let's be clear: All currency speculation is gambling. Exchange rates are volatile, unpredictable, and for major pairs, impossible to manipulate. You can (and so very, very many people have) come up with some thesis about why the USD/EUR rate is going to move in a specific direction, go long (and/or short) in the appropriate currency, and get run over, because the market doesn't care about your thesis. Even if you're right about the thesis! :)
> as there is a government and usually a central bank that controls production of that currency
And...?
> they are not just random numbers fluctuating randomly...
They might as well be. Given the closing price of the USD/EUR pair today, there's no amount of information I can give you about relative economic performance of the US versus the EU that will let you predict the closing price of the USD/EUR pair tomorrow. Or next week. Or next year.
> is there a fiat currency that shows as much volatility for as long as bitcoin has?
There are - and have been - some very volatile currencies. Certainly bitcoin is at the far end of the volatility distribution. What of it? Again, you seem to have the model that you can only bet on sure things, and the more random something is, the less you can truly "gamble" on it. That is, if anything, the opposite of how it works.
You used euro/usd comparison… why not Argentina peso to usd… is there a chance it could close higher than the usd tomorrow? - no. Because the underlying economies do effect currencies and they are not random despite the three paragraphs of prose you wrote.
My question, perhaps poorly put, is why would you (rationally) go long on Bitcoin? It looks like pure gambling/speculation. I’m 100% wanting to know the value judgement being made. I’m quite okay if that answer is: gambling.
You are long a thing if you hold a position which benefits from its price going up. You are short a thing by holding a position which benefits if the price goes down.
So not only could I be short gold by not holding it (because I now have more equivalent gold quantity if gold price goes down) I could also be short the market by being long puts on SPY
I don't see any attached factors to bitcoin, i.e. it's purely speculative. So my question was more "Why are you long on bitcoin?" As - it seems quite random.
Apologises for not being clearer... The old "I knew what I meant" problem :\
The more pop culture meaning of 'long' meaning "i support" is post facto the other pre existing meaning. And it's not unreasonable to correlate them. If your money is where your mouth is, they are the same thing.
It's totally possible though to be "long BTC" via a position while thinking bitcoin is a total scam, if let's say you believe you can exploit some short term irrationality.
You rock!
So it isn’t a case of crying wolf, it’s more a case of pointing out a wolf and being dismissed as FUD.
Cassandra was gifted by Appollo to see the future, but then cursed to be not believed.
I often see this repeated on HN, but this is never explained. Why will the collapse of Thether impact the whole crypto market?
Say you’re on a crypto only exchange, like BitMEX, or on blockchain. What are your exit options? You can’t buy USD on Uniswap, only stablecoins. In this case “panic-selling” Tether means a massive rush into Bitcoin and Ethereum.
I’m sure there would be a lot of people who would like to trade their Tethers for Bitcoin in the event of a collapse, but who is going to sell it to them?
When Tether implodes the entire space will deleverage.
It doesn't make any sense from a fundamentals standpoint, but when somebody "sells" something they have to "buy" something else. In 2011, the flight to quality led people to hold bonds and dollars, even though those were the exact assets being downgraded.
If/when Tether ever falls apart, it's a question of what will the average user "buy" when they "sell" their Tether. The answer to that is almost certainly not fiat dollars in the normal banking system, because the whole reason people use Tether is because they can't easily access the banking system. So the only real asset they can trade Tether into is other major crypto. Like BTC or ETH.
If this is true, and everything points to it, then there is simply much less real USD on the exchanges than people think. People often quote the crypto market cap and that Tether only represents 5-10% of it - but most BTC were never really available anyway - they were never bought or traded on any exchange. So the total inflow of USD (or any other real money) is much less than crypto market cap - and a lot of it was eaten by miners, arbitrageurs and exchange fees.
When the music stops - and enough people try to get their real money from the exchanges, it simply won't be there.
> over two-thirds of all Bitcoin — $10 billion worth of it — that was bought in the previous 24 hours, was being purchased with Tethers. [0]
Thus, it is not unreasonable to say the 1 Tether = 1 USD change indirectly affects (read: inflates) the valuation of BTC, and that a depreciation of Tether may have an impact on BTC.
[0] https://crypto-anonymous-2021.medium.com/the-bit-short-insid...
Bitcoin's price is currently artificially inflafed by all the tether printing. It'll go down with it, and so will the rest of cryptko.
Bitcoin's price is currently artificially inflafed by all the tether printing. It'll go down with it, and so will the rest of crypto.
(And, to be clear, I also think it's likely a scam.)
I'd perhaps think it's like the lead-up to 2008 where the people behind the scenes largely knew it was funny money but the general public didn't - but here it seems pretty unanimous from the lowest-level retail investor to the most sophisticated institutional investor that it's a scam.
So what's the deal? Is it gonna be the most predictable catastrophe ever? How have they existed from 2012 until today, seemingly without any issue, despite all of the universally extremely negative PR? What are the odds it's somehow not a scam?
From people who want to pump up the price of other cryptocurrencies, to offshore exchanges that want to avoid KYC requirements dealing with real banks, to ordinary users who like being able to transfer USDT... there's many people incentivized to look the other way and pretend that water isn't wet.
That's only an issue if they blend USDT and USD balances together, which to my knowledge they don't. If you sold a bunch of your bitcoins for USDT rather than USD (which seems unlikely, seeing that BTC-USD has 28x the volume of BTC-USDT), and USDT goes bankrupt, that's on you.
Suffice it to say that everyone figures that SOMEONE big is manipulating the crypto market to their own ends. With Tether serving as the lubricant greasing the wheels of the rest of the market, it has finance's prized "too big to fail" distinction.
Edit: I found one of the posts that explained the theory. I probably misunderstood it. https://www.reddit.com/r/Superstonk/comments/nz0fsz/i_found_...
I know, I know... I present it mostly for you to consider as you may.
What does it mean to be an interest-free asset?
Please stop reading or linking to that sub, it's probably the single greatest free improvement you can make to your life right now.
I think that's a wholly separate issue from that of the specter of bank malfeasance. Which is to say that you're completely off the mark in that regard; it's clear that finance is abusing its position and running right up to the line - if not over it - in spite of the lessons it should have learned after 2008. And the argument here isn't that banks are conspiring to destroy crypto; it's that they are (were?) using crypto as a tool to avoid insolvency due to the fallout from inadvisable activity over the past year or so. Even those not swept up in the cultish thrall of crypto and meme stocks are looking at that behavior with a wary eye; Archegos et al., after all.
That said.
>Please stop reading or linking to that sub, it's probably the single greatest free improvement you can make to your life right now.
No. :) Someone asked a question and I answered with what I thought was a likely explanation. You can disagree, or even be offended by my stupidity, but I presented it respectfully and in good faith, so here it will be. Silliness aside, I do find the core holding of the GME crowd compelling, and likewise, occasionally, their analysis of what is an unfortunately murky subject. If you disagree, the spirit of HN's standard of discourse is to explain the manner in which "obvious nonsense" is such, and not just to simply state so in an offensive and patronizing manner.
That doesn't really make any sense. Holders of USDT are people who sold their crypto, ie. people who aren't invested. Moreover, it's unclear how switching to a more reputable stablecoin would nuke their investment. At best it's a prisoners dilemma and I'm skeptical that everyone chose the "cooperate" option rather than the "defect" option.
It's just an asset that a lot of crypto exchanges use, because it's more convenient to do so than usual (regulated) financial alternatives.
Tether will probably just evaporate in the face of alternative stablecoin competition, before volume decreases to a point that a sudden devaluation kills it off.
There is good stablecoin competition in USDC, or, my favourite, DAI. Unfortunately I think exchanges like Binance are somewhat in kahoots with USDT which is why they will not move off it.
Re: kahoots, it feels like the answer to "What's the easiest way to generate returns?" has one obvious answer: increase leverage.
And what prevents leverage? Regulation.
So wouldn't it be great if you could create an unregulated instrument via which you could balloon the amount of funds you had to play with?
Technically USDT is a cryptocurrency but I can't think of a real reason why someone who cashed out of BTC would keep it in USDT rather than cashing out for real USD (the FDIC insured and in a licensed bank kind). If you're only cashing out for a short period of time and are planning to buy back, then you're not really "out", and I doubt that all the tether that's out there is coming from people who wants out for only a week or two.
I can't think of a good reason to keep it in USDT that sits on a centralized exchange, but maybe someone has one.
It was seeing these rates that made me believe the market was a ponzi. Somehow the system has created a strong incentive to hold USDT rather than USD in the form of divergent interest rates. And 12% is crazy high: Madoff claimed returns of 10%.
There could be a benign explanation but my bet would be that various market actors are propping up the system short run with unsustainable interest payoffs to stave off withdrawal attempts to maintain the Tether peg. Huge house of cards.
1. do the defi contracts not accept other stablecoins? Does USDT have a disproportionately higher interest rate than more reputable stablecoins?
2. This situation (large amount of USD being parked in USDT, people warning that it's a fraud) has existed since the last run-up (2017-2018), before defi got popular. So while there might be people parking their money in USDT to earn absurdly high interest rates, I don't think that's the whole story. It'll also be interesting to see how much USDT is locked in defi contracts vs that's issued.
The second actually isn’t compelling though. If you have a fraud with, say, 10% daily interest in will unwind in months. But a fraud with 10-20% annual interest will take years. Madoff kept his scheme going 20+ years.
This is, after all, how Bernie Madoff got caught, how bank runs generally start, and how most currency crises occur.
But why is everyone keeping their USD in USDT? For ponzis it makes sense because you're promised a rate of return, but for USDT you're essentially losing money every day due to inflation.
There are a plenty of rebuttals to the Tether criticism, but on sites like Hacker News no one bothers anymore. It's not worth dealing with the vitriol and downvotes to even try.
That being said I also have concerns about Tether, but I think they are way overblown.
"So we know that Tether is at least partially backed and has functioning wires in and out of the bank they use, Deltec."
Lol okay, nothing to see here, your money is definitely safe.
Then one day someone will wake up, decide they don't want that kind of exposure, and the whole thing collapses.
If you look at the classic definition of a ponzi scheme, bitcoin doesn't fit, though central bank fiat currencies do. See macro economist Lyn Alden's excellent article for the full explanation: https://www.lynalden.com/bitcoin-ponzi-scheme/
Deposit a "good" stable coin (for what counts as good in this space, which is USDC) on Aave or Compound and borrow Tether against it (75% and 80% loan-to-value respectively). You can now either send it to an exchange (e.g. Kraken) and swap USDT to real USD, or go to curve.fi and swap USDT for more USDC and deposit back to Aave or Compound. Repeat until either 4x/5x leverage (theoretical max) or your personal risk tolerance is reached. Remember to service the position by depositing more USDC occasionally (otherwise will be liquidated with penalty). As of this writing, variable interest rate is ~3.5%, fixed interest rate is 11%.
Scenarios:
- USDT goes to zero, buy as many as needed for scrap, pay back the loan, free the original stablecoins, sell for real USD and make between 1.75x to 4x/5x, depending on which route you chose above.
- Both USDT and USDC go to zero, you lose between 25 to 100%, depending on the route you chose above.
- There's a USDT shortage (real or somehow engineered) and it goes way above $1 causing your position to be force-liquidated, causing you lose between 25 to 100%, depending on the route you chose above.
- Only USDC falls below peg (temporarily or permanently) and you get force-liquidated (25 to 100% loss)
- You forget to service the debt or a spike in the variable interest rate causes you to get force-liquidated (5% penalty)
- Tether never goes to zero and you keep paying 3.5% interest (variable)
- Smart contract hack / Ethereum shuts down, you lose up to 100%
- Unkown scenarios
While there's no explicit exposure to a crypto exchange, there's still the implicit exposure to Coinbase/Circle via USDC. DAI offers no escape here, since its 50% collateralised by USDC (the other 50% crypto would likely be in serious turmoil in case USDT collapses potentially losing its peg as well).
In spite of this, I think this is a considerably better way to profit from a Tether collapse then the much more dangerous route of shorting BTC futures, or shorting via an unregulated crypto exchange where there's no guarantee that they'll pay or even be operational in such an event.
I know apes will ape, but seriously, don’t.
> Tether is bound to collapse soon
I've literally been hearing soon™ for years on this one. I think I was sent from a post here in 2018 to http://www.untether.space/ because it was going to collapse any day at the time.
If USDT is worth $1 because everyone agrees it is, everything works fine. It's been that way for a long time and will likely continue.
If there's a run on the bank because people believe it's not worth $1, everyone tries to sell their USDT, then it is no longer worth a dollar. That's the risk of holding USDT. Everyone who takes 5 minutes to research it understands that USDT is kind of shady but has a long record of maintaining peg anyway.
This is true of every partially-backed stablecoin, of which there are many.
We have a recent example of one failing: https://news.ycombinator.com/item?id=27539368
In that case, IRON was only 75% backed, and now the price is $0.75.
There are other products, like DAI, which keeps reserves of ETH equal to 150% of the value of DAI. Occasionally liquidity becomes thin and DAI loses peg by a few cents, but it quickly returns as liquidations happen and the ETH is sold off to return DAI to peg. Synthetix does something similar with sUSD.
Gemini has GUSD, Coinbase has USDC, Binance has BUSD, all of which claim to be fully backed by USD and have audits to bolster that claim.
Here's a whole list of them, each offering various models of trust, decentralization, audits, etc: https://www.coingecko.com/en/categories/usd-stablecoin
If USDT implodes, it could cause a liquidity crisis, but it will lead to investors demanding more proof of funds before using a stablecoin, and long-term strengthen the crypto economy. If USDT fails and creates a liquidity crisis that tanks the rest of the crypto market, I'll be shopping for bargains.
That is, Tether loses its peg, $X dollars go missing, and firms start to fail like dominos, even outside the crypto sphere.
Tether is far from that level but theres nothing stopping its growth.
The solution isnt to ban tether, but rather launch central bank stablecoins. Put the official USD as a ERC20 token.
If this happens, we need to let it fail. I'd be furious to see the fed bail out USDT to make sure the crypto market stays "stable".
> That is, Tether loses its peg, $X dollars go missing, and firms start to fail like dominos, even outside the crypto sphere.
If firms fall because they bet too hard on USDT, they deserve to fall. Tether has not offered sufficient evidence that they are fully backed, so that risk needs to be accounted for by the firms that use USDT.
> Tether is far from that level but theres nothing stopping its growth.
Hopefully what's stopping that growth are better stablecoins with alternative risk profiles that are more favorable to investors.
> The solution isnt to ban tether, but rather launch central bank stablecoins. Put the official USD as a ERC20 token.
That's still just trading one set of risks for another, which is fine. Having multiple stablecoin options is good.
We already know its going to happen: some "blessed" TBTF tradfi bank is going to have some massive tail risk exposure on chain and will go insolvent unless FRBNY steps in so that they can get more tethers minted for them on chain.
What they wont be able to do is halt trading for all the derivatives on all the dex's on chain to help minimize the cost of that bailout.
Issuing a token, and claiming it will always be worth $1, simply by hoping that someone, somewhere will buy them for $1 is fraud.
I'd guess most of the centrally managed ones make their money investing the deposited USD to earn a safe rate of return as profit.
The defi ones that take colleteral, like DAI, make money by charging a borrow rate on the DAI that's minted and another fee if your account is liquidated.
Yeah and liquidating these might tank something else, which might tank something else, which might piss people off enough to get serious regulation through. That is the problem.
Contagions are all over the credit markets. The whole thing is a house of cards and always has been.
We have all kinds of regulations for just how much collateral a bank must have, for example, but 2008 still happened.
I'd rather have firms fail if they make bad decisions.
Risk-taking is incentivized when banks can say "oh no, we followed all the rules but somehow still went insolvent, must be someone else's fault... definitely not ours for not researching our investments... so how about a giant free loan?"
If there's a bank account, it's possible the entity managing that account could become insolvent or that someone could run off with the funds.
If your collateral is locked in a smart contract that's properly secured, it's possible to create a situation where it's technically impossible for anyone unauthorized to lose the collateral, either by embezzlement or by losing it with poor managmeent.
I'm honestly not sure whether it's more likely that DAI has a contract bug or USDT/USDC/GUSD/BUSD/TUSD/etc becomes insolvent due to some external factors.
If we had a global credit crisis and banking institutions were failing, I'd feel a lot more comfortable holding DAI than one of the stablecoins that relies on the traditional system.
In Crypto the miners cannot suddenly issue more currency, meaning there is an inherent risk of capital grid-lock. I get this is a trade off for the other benefits of crypto but it's one people should be aware of, and why you can't treat it the same way... or rely on it the same way.
CFR 417.201 defines a public institution as “an institution that is operated by or controlled by the Federal government, a State, or a political subdivision of a State such as a city or county.”
For example, as you stated the government sets the Fed charter and thus enumerates their powers and duties. Congress also pays their salaries, so (to a very limited extent) the Fed receives government funding to operate and reports to Congress for accountability.
Most federal “public institutions” do not have elected officials, but rather are led by appointees, just like the Fed.
Though yes, it amuses me to see crypto advocates' reaction to 2008 was to enthusiastically defend the right of crypto companies to do worse whilst pretending not to.
Banks are required to more in assets than they have in client liability, and to write down the value of those assets based on risk. So they have >100% coverage.
Very little of this is "cash" in the physical sense, it's more about how much the bank can absorb losses through selling various tiers of asset as well as through its own share capital.
Congratulations! You’ve just fallen into the rabbit hole of trying to find actual auditors’ reports that back up your statement.
Please note that “attestations” don’t count, and that cash held in bank accounts aren’t proof of reserves that are specifically used for 1-to-1 parity unless backed by certified auditors’ statements that this pool is not also being used for, say, I don’t know, a merchant bank operating on top of crypto, or something..
These offerings are pretty transparent. If you choose to use a stablecoin that's not backed by on-chain collateral, you're accepting the attestations are true and putting trust in the reputation of the companies.
Personally, I'd rather be able to verify the collateral on-chain, which is why I think fully collateral-backed on-chain stablecoins like DAI make a lot of sense.
The willingness of these operators to target poor, unsuspecting muppets who aren’t aware that attestation ≠ audit, without any disclaimer or explanation of this fact, is a HUGE red flag that their claims of “transparency” are anything but.
I think it's very reasonable to accept that you're mostly betting on Gemini (or whoever) being an honest broker, and the attestation reports give some reason to believe that they can produce the dollars on demand. The attestation reports do show that they're able to come up with that available balance, even if only for a minute, which does add credibility.
If you're concerned about the solvency of the institutions offering these products, that's fine, but I think everyone (including Tether) is incentivized to do everything possible to never become insolvent.
Aligned interests do count for something.
1) You retract your claim that the stablecoins you listed have audited reserves.
2) You’ve found the auditors’ reports and we all get some excellent reading material for the weekend.
Your theories of crypto monetary policy are completely irrelevant within the context of a regulatory conversation. Which, by the way, is the problem the entire crypto community will have — if the hammer ever drops (which may never happen due to intense lobbying pressure by VCs and Big Crypto), the regulator won’t have any patience for any of the various theories about “the future of money” etc.
Answer basic questions about audits or admit you’ve got a problem.
To use GUSD as an example, this is the document in question: https://assets.ctfassets.net/jg6lo9a2ukvr/4HRkKKmHejTvQ32jfv...
It is not a full audit of the entire history of the movement of the funds.
I agree that having a full trace of every penny publicly available would increase trust in GUSD.
I suspect that if you're an exchange partner with Gemini, you could ask for more visibility into how the funds are actually being allocated when they're not being summoned for attestation.
Keep in mind that the risk here is insolvency, and the firms best suited to evaluate that risk are also the ones holding large amount of GUSD.
I don't know if regulation would be helpful here or not. I think exchanges considering holding GUSD should accept the risk of possible insolvency, and adjust their business to account for that risk, perhaps by buying insurance.
Great! So you agree that your claim that these stablecoins have audited reserves was false, and you retract it. Pleasure doing business.
Since you were a good sport about this, I’ll say that I agree that Gemini is one of the better participants in that market. That being said, I’ll leave you with the notice on page 4 of your linked document, which is the only relevant passage for legal/regulatory purposes:
This Information Has Not Been Examined by the Company’s Independent Accountant
Independent audits do two things. They examine process, and create an environment where you have to operate in a sane manner, because your auditor can drop in at any time, pick out any particular starting point, and will expect to be able to have delivered to them where that transaction came from, and ultimately will go to based on GAAP and in house supporting process documents. This basically draws a complexity boundary around how exotic you can get within the context of one organization, because if one of the big independent auditors can't make heads or tails of you in a reasonable amount of time, it is a gigantic red flag w.r.t your operational processes.
An audit also results in a snapshot of your entire cash/value flow through an organization. This is verified and cross checked for valuation by someone who doesn't know you from Adam to ensure objectivity. This is just a guarantee that the numbers add up, and over time continue to make sense. Massive discontinuities that can't be ascribed to something in the real/business world measurable by someone else are also red flags that there may be something going on there that may be valid, but you need more info to get to the bottom of it to ensure it is sound.
t. Quality Assurance person who has spent entirely too much of his life digging into how finance works even though they allegedly hate it, but a statistical analysis of how much of my mind I devote to financial analysis, modeling and prediction tells another story.
Ironically, if you mentally audited my thoughts you'd easily come to the conclusion I love finance. I don't. I like measuring things. Measuring finances effectively is a pain in the ass, and a perennial issue, that there are more than a few groups constantly working to frustrate people like me who try to distill truth out of account ledgers.
That's why numair is absolutely right. An attestation is one slice. You know money was there. You don't know where it went afterward, which subtransactions it spawned (fees, taxes, interest accrual, etc...). That's what auditor's look at and collate. It's why it's a big deal. At the end of the day it's all arithmetic, and an audit is just having someone else run the numbers and vouching they get the same result. It's actually a little more than that, because regulation wise, the auditor's number is more reliable than yours, because they have all the incentives in place to keep their processes and interpretive liberty taking to a minimum. You want to match the auditor's numbers if you can coax your process into doing so... Of course again, there's arms race there as well. Note, auditor's don't find or investigate fraud. They just check your process is being followed, and that when someone else does it, everything works out. It just so happens that this is also a great way to shake out anything that might be used to as a basis to make fraud effectively doable.
It is a rabbit hole. One that I've explored many branches of, but after a while doing it, you can pretty quickly measure how uncomfortable a group is by their level of nervousness around letting an auditor drive.
I might try spinning up a Blog one of these days when work slows down a bit. It's funny the insight you pick up having to dissect these types of things on a semi-regular basis. Financial Auditing, Risk Management, Quality Assurance, we're all doing the same schtick in different ways.
Also, I'd add that one needs to keep in mind that what I posted only covers audits of singular organizations. If you're actually up to skulduggery, as I understand it, it's almost always distributing things between multiple corporate entities, audited by different groups so that no one auditor gets a complete view of what's going on. Once you start looking at groups of entities, especially jurisdictionally distributed, the complexity balloons, and you're now firmly in financial engineering and forensic accountancy territory.
Financial engineering and forensic accountancy is a rabbit hole that I'm pretty sure encyclopedias could be written on, and would outdate themselves as quickly as you could propagate the info, as there is always an arms race going on between those wishing to move large amounts of money gained in less scrupulous ways, and those wishing to make those enterprises an impossibility.
I think intuition is what I'm lacking here. It's unclear to me just how dangerous the situation is likely to be.
Before this discussion, my understanding was that only attestations are available, and that the company wouldn't become insolvent because the company would incur huge losses if that happened.
That's still my understanding, though now I know the difference be attestation and audits, that a complexity boundary exists due to audit resources, and that auditors don't even look for fraud (you'd think they would without knowing how this works). Thank you for the color around it, it helps me understand how people in this business think about finance.
However, I'm still of the (apparently wrong?) opinion that Gemini/Circle/Binance/Paxos at least, are staking their real businesses, with things like executive pay and employee payroll and all that, on these products. "We lost the money and our stablecoin is now worthless" should sink any of these companies.
I think we're in agreement that failure to maintain peg would sink these companies, but my conclusion was that it's very unlikely. You and numair seem to conclude that it's more than just likely, it's almost inevitable.
This tells me that my intuition is probably wrong, but it's still difficult for me to understand why a company like Gemini would decide to risk insolvency.
And even if they did release a full audit, if it can't detect fraud, then why would you trust it? I know it's better than just attestations, but I'm not sure how great the risk of fraud is relative to the risk of other routes to insolvency.
>and that the company wouldn't become insolvent because the company would incur huge losses if that happened
Something there is parsing off to me, but I'm not going to try to pretend I have a mastery of insolvency vs. losses, but generally speaking, insolvency doesn't cause losses. Insolvency happens as the result of losses, which may be caused by any number of factors. The state of becoming insolvent itself is actually a bit of an information propagation problem, because once that state is reached, in many jurisdictions, all transactions must cease, but no one has a master "stop all business processes this instant" button.
>However, I'm still of the (apparently wrong?) opinion that Gemini/Circle/Binance/Paxos at least, are staking their real businesses, with things like executive pay and employee payroll and all that, on these products. "We lost the money and our stablecoin is now worthless" should sink any of these companies.
You are correct. They are. What you're missing there, though, is that the company != the people. Incentive problem again. If things do go belly up, the only things "lost" are company assets (equipment, patents, licensing, the brand, etc...) and "potential income" (exec pay) in the form of Stocks and equity that would need to be sold off first to realize that income, which they probably have been doing all along. No skin off their nose if they have to restart a new chain. In fact, the old one going under would make doing so easier due to the chunk of assets about to be sold off on the cheap.
The danger, at least from my understanding, is exactly tied to the holding of assets to back the stablecoin. Say everything goes up in smoke. The company gets liquidated through bankruptcy or restructured, but all of that paper they hold is not cash value. It has to be sold at market rate, and large volume paper moving can move prices in unintuitive ways. Under bankruptcy, particularly the liquidation form, most of that will sell for way below value since there will be quite literally no other choice than to sell. In fact, these stablecoins, if their USD peg is ever called to be accounted for as collateral, being in the form of held paper they state they can liquidate to cover their cash liabilities: may at any time become insolvent if something big happens in a particular sector of the market to which they have exaggerated exposure. Then again, that could pass with nary a whimper because nothing happened that required them to actually pay out that USD denomination. The risk is still there though. I've developed a waryness of anything that passes itself off as stable, but is, in fact, subject to normal market volatility. Given that it's taken me years of intentional effort just to kinda grok things to the point I semi-reliably seem to be able to explain things without a professional coming out of the wings and enlightening me to my dead wrongness 100% of the time, and the fact most everyone else doesn't bash their head bloody doing so, I tend to personally look at these as extremely likely sources of unexpected second and higher order effects.
It's a threat to market stability, because that much paper getting dumped on the market at once creates a supply glut. These stablecoins are operating like banks in a sense, without any of the controls. We now have two kinds of bank runs to worry about, one isn't audited at all, and if something were to happen, would potentially leave a rather large blast crater.
So I won't go so far as to say your opinion or outlook on these companies is wrong per se. I will say there is enough lack of information on my part I wouldn't put my money into it, and it makes me nervous what'll happen if the seeming risk check being written ever comes due. This may turn into another mess of a recession or other market shaking calamity. Like, just me thinking about it right now took me through every bit of research I've done over the last 5 years in spare time, and I'm still not even confident I've got a solid grasp of the second and higher order consequences.
What I do know, is that someone betting their business on something is never in isolation a good enough reason to put your hard earned capital into it; and I implore you to do your own research and really try to wrestle with it. It's hard, but that's capitalism. We're all capital allocators, and if we don't make the decision of how we want our hard earned capital allocated, then we're never really factoring into the invisible hand, someone else is.
This is literally what happened.
https://davidgerard.co.uk/blockchain/2021/03/30/tether-produ...
The problem with DAI is that it is backed in large part by other stablecoins such as USDC and BUSD that are not transparent in their holdings. For example, USDC has an unknown amount of their backing in unspecified "approved investments" (language copied from the latest attestation).
These investments could be boring, stable, liquid assets like US treasury bills, or they could be risky, unstable, illiquid assets, like loans to cryptocurrency exchanges. Without knowing what they are, its hard to determine how backed USDC truly is.
Where a full-on legit audit would take a snapshot of all the finances including debts, AR and AP.
1. Attestations are not audited financials.
2. Do not cite attestations when asked to produce audited statements, which carry specific legal and regulatory burden.
3. When others provide you with attestations when you ask for audited statements, ask them what they’re so afraid of. Especially when they’ve raised hundreds of millions of dollars and could easily pay to have some of the mid-level kids at their accounting firm on retainer to have them produce a daily audited financial report if they really wanted.
4. Following on 3, attestations are the stablecoin equivalent of what “non-GAAP earnings” were for late 1990s dotcom stocks before they blew up.
Please, please, PLEASE stop scamming people who ask for audited financials with lousy attestations! You are not helping to make stablecoins look stable and trustworthy, at the very moment when everyone’s looking for a reason to shut them down!
(Disclosure: I think stablecoin technology is SUPER important and I would like to make sure it isn’t killed like the Concorde by a bunch of casino owners hiding under the guise of “fintech”)
but the whole point of crypto is that we don't believe in legal or regulatory burden.
Until that agreement starts to wobble
Financialisation problems. Rosengren seems to be worried, for example, that a liquidation of backing assets triggers something ugly. IE, USDT drops in value>> Reserves liquidated defending USDT price>> Assets in reserve plummet in price, perhaps triggering more stuff elsewhere.
..Meanwhile to that, crypto markets are disrupted.
I think it makes sense for a financial regulator to start raising a brow. Also, how fast is USDT growing? At some scale does stablecone presents a different flavour of risk.
The problem arises when large numbers of people do not research it and jump on the meme blindly. Depending on the number of people involved, this could have knock-on effects (see also people flipping houses in the US with reseting mortgages pre-2008).
"Nevertheless, Tether Limited states that owners of tethers have no contractual right, other legal claims, or guarantee that tethers will be redeemed or exchanged for dollars. On 30 April 2019 Tether Limited's lawyer claimed that each tether was backed by only $0.74 in cash and cash equivalents."
It seems that it is unlikely that Tether poses any risks, on the basis that anyone who cares can find out the whole thing is shady with even the flimsiest investigation. A risk that large and obvious can't in itself be systemic, because the system will insulate itself from the risk. Everyone knows.
The systemic part is when people start being able to buy Tethers without realising it. Eg, if the banks start selling them to retirement funds or something.
But nobody cares if they think there's still time to get in and make money.
This is true of most bubbles.
In the South Sea Bubble people speculated on the value of a company that basically never even started business in its market and had no hope of a profit. Ponzi’s scheme was mail reply coupons, which could never have worked even in theory. The Mississipi company in France flourished despite the abject failure of the underlying Mississipi company to establish itself or a colony.
People can be very wrong. And indeed in crypto you regularly hear such stupid beliefs as “Tether is only $60 billion and crypto has a market cap or $1 trillion, so it’s just a tiny risk”*
The fact that this is a common belief suggests that you’re wrong. People may correctly think Tether is a fraud but have an extremely incorrect belief about the consequences of Tether being a fraud. Just as people understood people with no incomes couldn’t afford mortgages once teaser rates expired but did not understand how that would richochet through the system.
*The error is that unlike a company, no one would ever buy all the crypto outright, and market cap is a meaningless term. An injection of $1.5 billion from Tesla was enough to send crypto markets skyrocking. What would a subtraction of fiat 40x as large do to markets?
Groups of people can hype themselves into anything. with the advent of digital networks we are literally hit by recurrent storms on digital teacups. unless things get tied back to physical reality those metastable collective mental states can flip back as inexplicably as they have formed.
While a good part of the existing financial system is also based on little else than belief there are some critical parts that aren't: the use of its tools (cash, bank money, credit systems etc) to support real economic interactions. you can't simply switch that system off at will because it is a way for society to keep account of its function. think also of the enforcement of contracts and obligations (eg taxation) - ultimately with the use of physical power.
In other words, for the bitcoin nation its a case of: get real or go to zero.
Their collateral is clearly worth much less than the total value of Tethers created by the company, and at this point we'are talking about tens of billions of dollars.
,, stablecoin market that is currently, pretty much unregulated'' -- This is not true for all stablecoins though, for example Circle is a regulated company, and USDC is regulated by US law.
Things will get real when SDNY get involved.
Imho, it’s far more likely that Tether has very few assets backing their issuance and that a crypto implosion could spark contagion in other markets.
As I understand it, exchanges wire Tether large amounts of USD, and then Tether mints and equal amount of USDT and sends it back to exchanges.
Then one day it all blows up, the fraud is exposed, and everything goes to zero.
That way Tether prints USDT out of thin air and makes an income from a sum of money they largely don’t hold while the exchanges get to hold the bulk of fiat that gets deposited. The “commercial paper” could just be these loans owed by exchanges via a seperate shell company.
How existing eurodollar system works… yet people constantly whine about USDT… lol
Tether is essentially crypto with all the properties of fiat except the good ones. A tool that allows people to trade and avoid triggering tax events in certain jurisdictions because it is still technically a cryptocurrency.
Sure, _maybe_ for a US bank with another US bank within the US (you have to ignore collateral rehypothication, which in practice you really can't ignore…).
But this is not how it works with an Indonesian bank dealing with a Chinese bank when they denominate their OTC bilateral transactions in USD…
Unless you think that their respective governments are issuing USD and not just those banks swapping USD liabilities with one another, as well as unless you also think that those respective governments are guaranteeing USD deposits in those banks are fully backed by USD in a bank account somewhere and not just mostly USD denominated "assets" (future USD cashflow on those swapped liabilities)…
> A tool that allows people to trade and avoid triggering tax events in certain jurisdictions
Which is not even unique to Tether… who operates just like any other bank in eurodollar markets (and withdrawls from blockchains to tradfi fiat will trigger easily taxable events, $100k min with USDT).
Like i said in another comment, i fully expect peoples minds to be blown (if they are currently clutching their pearls with USDT) with an on chain entity does exactly what tether does but has no physical offices nor employees because its a DAO…
How does Tether prop up the value of USDT if there is a mass sell off into fiat? Is this the duty of the exchanges? Does Tether buy USDT off exchanges in order to push up price when there is a sell off? How big a sell off can they contain?
How would a DAO offer the same promises of “backing” that made USDT possible without government issued stable-coins?
SSDD with pretty much every bank/branch not domiciled in the US that has accounts denominated in USD… they make the same promises
> How does Tether prop up the value of USDT if there is a mass sell off into fiat? Is this the duty of the exchanges? Does Tether buy USDT off exchanges in order to push up price when there is a sell off? How big a sell off can they contain?
As long as Tether continues to have higher cash flows than many tradfi banks operating in eurodollar markets now (esp in smaller countries), you'd be better off asking these questions about those other banks now…
> How would a DAO offer the same promises of “backing” that made USDT possible without government issued stable-coins?
On chain liabilities between DAOs and centralized orgs on chain denominated in decentralized uncollateralized stablecoins, and the desire for people to purchase such liabilities at discounts with fluctuation price of the stablecoins that freely float against things like USDT/USDC/DAI/TUSD/etc (not too different from the incentives involved in eurodollar futures markets).
It doesn't make any sense.
What does make sense is the exchange wants to do business. No one wants to give the exchange USD. So they accept USDT.
1. Tether prints USDT then offers above market price on the exchange.
2. People put their crypto in the exchange to arbitrage the high/fake price.
3. Tether buys real bitcoins for fake printed money.
4. The exchange is happy with taking a small cut, even if it's just fake USDT money.
5. Now Tether is backed by Bitcoin - an asset they can guarantee appreciates.
6. The exchanges can use their USDT cut to buy crypto on their exchanges, too.
This is risk free for Tether as long as they can keep the scheme going.
It also makes complete sense to me why when Tether is printing vast sums - meme coins explode.
It's easier for the exchanges to convert their USDT into meme coins. No one wants to hand over their bitcoins to a shady exchange for fake money. But they'll fork over their Shiba Inu coins for 1000x the price. Why not?
Just look at the volumes on the exchanges that trade Tether and meme coins while Tether is printing money.
In 2019, Tether's lifetime holdings were $2.1B and even that was not fully backed, and they're now printing nearly $4B a week.
At this rate, and recognizing that comparing to revenue is not a strict apples-to-apples, this would put them on track by the end of 2021 within the top 20 largest companies in the world, eclipsing Alphabet, AT&T, even Samsung and Saudi Aramco.
How anyone can say that with a straight face beggars belief.
Many central banks themselves failed to perpetuate fixed exchange systems. How is it different at a smaller scale?
That a stablecoin could blow up is, IMO, unavoidable. The important question is what's at risk. What happens if USDT fails to maintain parity? Is USD affected? Seems far fetched, in this sense, considering current scale.
Regulation might make it more likely that these will be "attacked" with a Soros/GBP strategy. Explicit rules mean more certainty about what Tether's "central bank" will do in extreme circumstances, and how much liquidity that have to target.
I wish regulators had more of a "fail gracefully" approach than a "never fail" one.
Your other question is a good one. Nobody knew that the collapse of LTCM would cause a market wide collapse at the time, so the question is how big are the hedging risks that financial firms dabbling in Bitcoin will be multiplied by the collapse of tether.
That is, if it is being used as a hedge, what kinds of financial instruments have the quants cooked up based on tether, then how much worst case exposure are we talking about? It might be nothing, but who knows until the tide goes out.
If the market says USDT = $0.95, and that someone's market activities fail to achieve USDT = $1... something gives fast.
How on earth would you hedge a Bitcoin position with tether? This is like saying you’re going to hedge your SPY position with dollars.
Also, a CDO is a variety of debt packaged into a single instrument that pays out cash flows to tranches, some of which are paid before others.
I don't know if its possible to short bitcoin via a reputable dealer, but its possible to construct a CDO out of anything that can be borrowed.
Edit: holy mother of meltdowns you can short bitcoin.
I’ll save you some trouble and point out that it’s impossible. You can hedge bitcoins with Bitcoin options or perpetual swaps/futures, it’s impossible to hedge Bitcoin with tether, full stop.
At this point, I’m going to assume you have a fundamental misunderstanding somewhere, I won’t be responding any more. If you want to believe you can hedge a volatile crypto coin with a pegged stable coin, I could care less, just don’t spread that nonsense here.
In practice many stable coins are similar to money market funds or eurodollar banking, so mechanisms and risks are somewhat well known.
I guess i'm basically asking how stablecoins could be immune to something the GBP isn't/wasn't imune to.
..Could be some part I'm missing. Don't know much about stablecoins.
They are only immune to the degree that the market mechanics in place surrounding each of them in particular to incentivize people to keep them pegged.
Can't wait for people to start complaining about uncollateralized decentralized stable coins that will eventually be even more leveraged against other stablecoins that are backed fully by USD deposits (or over collateralized by crypto assets, or even USDT [can hear the screams and pearl clutching now lol]) where there is no specific entity to go after like Tether Ltd…
Im glad for this all, because I think we are quickly approaching the point where we will no longer be trapped in bailoutistan… where risk will need to get priced in and over capacity/ team save-zombie-companies/ bad trades at tradfi bank desks and overall malfeasance (and failure to hedge against such) will be punished severely.
> rather than derivatives.
I don't think this will go away, just that we'll find ourselves in a new steady state where those who can enable better management of the derivatives through decentralized protocol's will become more in charge (to the degree anyone can be in charge if a after deployment of contracts, operation is mainly done through incentivized contract function for management of the protocols that any one can call, and the core logic of the contracts cannot be modified without redeployment of new contracts) of resource allocation.
In the end,money market funds are highly regulated.
https://twitter.com/BennettTomlin/status/1375900452798234634
https://bennettftomlin.com/2021/03/27/before-bitfinex-and-te...
And finally, how does tether profit from it? Directly via fees or some other constellation?
But hey, people have invested in shit coins, ICOs which were held by even more intransparent companies.
Makes me wonder how the marketing for such things is propagated.
This is how it was explained to me, and it doesn't make much sense - except that "moving" a lot of BTC between exchanges might affect the price, and depending on which exchange is on tthe receiving end they could take a loss on the "conversion" - whereas the dollar is much slower moving, and moving a hundred million "dollar" valued things is unlikely to devalue the dollar to any significant amount.
I've never paid in or cashed out actual currency into crypto and i've never used an exchange, so i may be 100% off base and i hope i am corrected.
Yes, if you kyc on a proper exchange, or live in a country with nice banking rules you can. It takes about 12 hours usually for me. Faster than most international bank transfers, usually also way less fees.
I can only speak for myself, but tether is a kinda safe way to store value short time in a fluctuating market. Usd is suboptimal for me as it looses value compared to my local currency, however on big crashes crypto loses value faster, while USDT stays at USD value. Hope that makes sense :)
I have no trust or knowledge about tether, it's just a tool for me.
Imagine you're a restaurant (or any other business) and you want to allow your customers to pay with digital transactions on a blockchain. If your customers pay you in Bitcoin, you are taking on a huge amount of risk due to Bitcoin's price fluctuations. I just looked up the price of Bitcoin and it has dropped 6% in the last 24 hours. If you sell a $100 steak dinner for Bitcoin in the morning and it drops 6% by the time you're converting it to dollars at the end of the day, you've just lost 6%. You have to pay your expenses (labor, food, etc) in USD no matter what but you're holding a currency that is now worth 6% fewer dollars than what the customer paid. The reason I picked the restaurant business for my example is because restaurants have really thin margins. A 6% loss due to currency fluctuation is a huge problem for a restaurant.
That is why people have created stablecoins that are constructed in a way such that their value is pegged to some kind of external asset (like the USD). This allows business to accept payment via a blockchain without being exposed to the price risk of volatile cryptocurrencies.
If BTC loses 10 percent of its value overnight, the people who lose are the people who sold at the lower prices. When we say "the price of BTC is X", what we really mean is that a trade happened at that price. That means that someone thought selling at that price was the right thing for them to do and someone else thought that buying at that price was the right thing to do.
So it can be the case that no one takes the 10 percent loss. Everyone who is selling may have bought at a lower cost basis (and thus will realize a gain). The price is lower because it had to go down to entice new buyers to bet it will go back up again.
There is a funky situation where you try to sell your assets and you find nobody willing to take it at any price. At that point, you can turn around and say "I don't want to own this worthless piece of paper anymore," strike it from your assets list (i.e., "write-off"), and now you realize a 100% loss.
You can’t keep USD in a crypto wallet, only tokens that operate under various protocols, ERC20 being the most popular. ~Most people don’t keep their tokens or USD on an exchange on a long term basis (probably not a bad idea given past events), so they need a way to keep USD in a crypto wallet they manage themselves. So you get tokenized forms of USD, so-called stablecoins, to fill this need.
I think there's a 90 percent chance that this will blow up and a movie like the Big Short will be made about the story behind it.
Tl;Dr Tether is ran by very dubious people, don't trust anything they do or say
Plenty of sovereign nations (and individuals in those countries) hold reserves of USD and the US has no authority over them.
At least for ofac
However, I'm not sure "fully backed" means what most people think it means. If for every 1 USDC there is 1 USD on a bank account, that doesn't mean there are stacks of USD sitting in a vault somewhere. It only means that the bank has a liability towards the account holder on their books, and hopefully that same bank has a reasonable balance of their assets and liabilities.
So, forgive me, if there is not much actual wealth been put in, if it collapses why is it a risk?
For a toy example, suppose there's only 200 coins of XCoin. Person A buys 100 coins for $1 each ($100 total). Person B buys the remaining 100 coins for $100 each ($10000 total). The total amount of USD put into the system is $10100 but the market cap is $20000.
To get the value you're looking for I think you would need to get the cost basis of the last transaction for every coin in existence.
There is zero wealth put into Bitcoin. When you buy Bitcoin, someone else sells their Bitcoin and gets your money. The money enters and leaves instantly.
The USD works a little bit different. New USD are created when you borrow. Loans create future buyers, therefore USD has value in the sense that people need it to repay their debts. People will willingly exchange real goods for USD to pay the loan. The wealth used to pay the loans doesn't exist in the banking system. It exists in the real world. So loans encourage real wealth generation to some degree and the presence of real wealth makes USD a very convenient medium of payment as people willingly exchange real wealth for USD.
> US Fed Official Calls Tether a ‘Challenge’ to Financial Stability
The URL is the same. So...why did you change it?
And why would they? People keep giving them real hard cash in exchange for the exchanges USDT's.
The secret to this is to kick the can down the road far enough that you don't have to deal with the consequences. The US can print money long enough for the beneficiaries of cantillon effect to enjoy a rich lifestyle then let future generations deal with the consequences.
They'll tell you it's going to drive growth, and that inflation will be transitory but it won't be enough to stave of the decimation of the working class. To hell with them
A common misconception is that banks use "fractional reserve" lending, in reality private banks create money out of thin air when making loans, constrained only by regulated capitalization requirements (and the obligation to take the write-off on their own balance sheet should the loan default) [1].
Another common misconception is that unregulated banks lead to financial instability and panic. The theoretical and historical evidence for this is pretty weak [2] -- people are much more vigilant with their money when banks are unregulated, and much more aware of the inherent risks of financial systems.
(If all of our regulations worked so well, why are our financial crises worse than ever? cf 2008)
[1] https://www.bankofengland.co.uk/knowledgebank/how-is-money-c... [2] https://www.jstor.org/stable/1814673
Tether has an capital ratio of about 0.36%. Banks have a minimum capital ratio of about 3% (both of these are looking only at cash/cash-equivalent, not full risk-adjusted capital ratio).
(Cite: https://www.bloomberg.com/opinion/articles/2021-06-16/don-t-...).
Here's a way to reality check the difference: if 90% of Tether holders redeem their deposits tomorrow, 100% of them will get their money back and Tether Ltd will remain 100% solvent and liquid. If 90% of JPMC depositors redeem tomorrow only 10% of them will get their money back and JPMC will be insolvent.
Where would you rather have your money?
That's not true. If you read Tether's own description of its reserves, most of it is not in cash. The largest single component is commercial paper; if Tether needed to redeem every single depositor, it would have to fire-sale something like $20 billion of commercial paper. It's also not clear how good quality that commercial paper actually is, and whether its value is what Tether claims it to be--given the shenanigans they've done in the past, and the lack of anyone else in the financial system apparently transacting commercial paper with Tether, I would speculate that a good portion of that is basically Tether loans to cryptocurrency companies that are hand-waved to be commercial paper because Tether is unregulated and isn't required to follow regulated accounting rules to break down its reserves.
It's rather specious to claim that we can't analyze Tether under the spectrum of bank regulation because banks can create money out of thin air when creating tether out of thin air is precisely what Tether is accused of doing.
> Where would you rather have your money?
I'd rather have my money in the institution that is required to spend reams of paper proving that it's solvent than the one whose attestation amounts to "we're solvent, we pinky swear" and has refused to provide any more details on the basis of "crypto is too complicated for anybody to audit."
2008 did not compare to the Great Depression. I think we’re still (as a species) learning how to regulate banking well, but it does feel like we’ve learned some things.
So Tether's founders are shady? Bitcoin was founded by a shadowy figure and nobody knows if his early tokens will reappear on the market someday, making him a bazillionaire and the rest of us take a 20% haircut (vs the float, not the total).
That’s not how this works. Tether represents the vast majority of trading volume. If it turns out that it’s worthless, it will be catastrophic.
Also you’re conflating market cap with hard assets. Apple is a $2T company but if you tried to sell $60B of AAPL in a short period of time, it would collapse.
"The total crypto market volume over the last 24 hours is $85.97B, which makes a 6.53% decrease. The total volume in DeFi is currently $5.78B, 6.73% of the total crypto market 24-hour volume. The volume of all stable coins is now $69.59B, which is 80.95% of the total crypto market 24-hour volume."
The other large stablecoins are trading <$2B/day vs tether, so indeed you're correct.
As for Apple, sure it would slam the market temporarily, but why wouldn't it quickly recover?
I fully recognize the tether collateral situation is shady and could blow up. It also could remain shady and not blow up for a very very long time. It'd be a big deal for crypto but I'm not convinced it would be for the wider world.
I hate sounding like the maximalist who calls everything FUD, but it's really hard not to here
The broader goal here whenever this is brought up is to push people away from Tether towards other less problematic stablecoins.
This isn't FUD, it's a call to action for communities and exchanges to start minimising their exposure to the risks that the current Tether situation poses.
> This isn't FUD, it's a call to action for communities and exchanges to start minimising their exposure to the risks that the current Tether situation poses.
This seems a fair description of your posts. It does not seem to describe the Fed governor's statement
Eventually the market will sort itself out but that initial bloodbath could cause serious financial issues and the recovery could take years.
https://crypto-anonymous-2021.medium.com/the-bit-short-insid...
If I was the Fed I would seriously consider creating my own TheRealUSD stablecoin. Create a token that you have mint/burn control over, and create a portal that allows people to exchange USD for the stablecoin and the stablecoin for USD. No doubt a number of the crypto-libertarians out there will not trust that thing and might object to using it. But from the other perspective which would you trust more? A USD stablecoin run by some random collection of tech people? Or a USD stablecoin run by the Fed?
People act like you have to take gold bars to the grocery store to make exchanges as opposed to just using your bank card and electronically settling up in USD.
Because of this conflict of interest, plus natural human/animal greed, I always wonder if the message is really important or if it was just to create a wealth opportunity for the insiders. Most statements by any influential financial source create a temporary change in markets which tend to return to their previous state, so one could assume that these messages could serve a little hit and run opportunities without lasting (negative) impacts.
But there is also the fear of loss of control. Governments and dictators like to have (or appear to have) control over money. So inevitably, third party, non-governmental competitors such as stablecoins are a threat to the powers that be. Thus, they have a potential bias which could color or even form their public statements and actions.