Comment by kvh | Hacker News Reader

Comment by kvh | Hacker News Reader

The article isn't saying what people think it's saying, but tether fud makes good clickbait I guess. Tether has indeed misrepresented its balance sheet at times, but the reality is it's a highly over-capitalized bank -- whereas most banks have liquidity ratios of ~10% (less than that pre-2008) no one is questioning tether is >50%.

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 indeed misrepresented its balance sheet at times, but the reality is it's a highly over-capitalized bank -- whereas most banks have liquidity ratios of ~10% (less than that pre-2008) no one is questioning tether is >50%.

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-...).

I like Matt, but that's a misleading comparison. You can't compare banks with non-banks, since, again, banks have the special regulated right to _create money out of thin air_ and put it on their balance sheet (or if you prefer the fractional reserve metaphor, they can double count your deposit -- lending it out while pretending they still have it for you).

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?

> 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.

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."

> If all of our regulations worked so well, why are our financial crises worse than ever? cf 2008

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.

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