Coinbase Drops Promise of Token’s Cash Backing That Wasn’t True
bloomberg.com
bloomberg.com
https://news.ycombinator.com/item?id=27640730
anon9001 was an extremely good sport about the trap they fell into, which most people do, when they don’t realize all of these “audited reports” are actually “attestations” which aren’t worth the pixels they’re rendered into.
If you’re confused about why Coinbase’s move is a big deal, there’s a good place to start... It’ll be great if A16Z/Draper/etc ever come clean about all of the regulatory cowboy nonsense they’ve supported and encouraged under the “backed by leading Silicon Valley VCs” label. Which is part of why this has gone on for so long, and why so many smart people assume nobody “real” will actually pay the price for fraud/unregulated activity/etc. Based on what we are seeing in terms of prosecutions and enforcements, that seems about right.
If the past is any indication, the crypto markets should actually trade higher on news of improprieties... Bizarro world we live in, with no adult supervision.
Why would that give people confidence?
Silicon Valley business model is to make money via externalizing risk onto users or society at large.
Some have said this from the beginning but been shouted doen. Same with crypto/nfts et al.
In fact can someone show me something actually good that's changed the world for the better from SV VCvs?
If Tether and USDC have the billions in funds that they claim to, they wouldn't hire no-name accounting firms , because those firms don't have the resources or knowledge to audit such vast amounts.
An audit also puts the firm's reputation and CPA license at stake, which explains why even the no-name firms aren't committing to anything besides an attestation.
Or do you think a more likely explanation is that they all went into this space trying to do it correctly and hold only USD, and maybe outdated regulations prevent them from holding just USD so they have to find a different way to do so that may not be clean enough to be auditable?
Yes.
As a first point of evidence: “get into a space and cowboy it up” is basically the whole SV operating procedure. See Uber, Airbnb, Tesla, etc.
As a second, auditors have no problem auditing every multinational corporation and signing off that their complex shuffling of funds to utilize tax loopholes follow the letter of the law. Even people who are breaking the law can successfully be audited. If your books are so unclean that they are literally impossible to audit, it’s hard to fathom how you’re possibly operating legitimately.
You clearly are trying to do a good thing here by making people aware of risk, but you are inaccurately stating that attestations aren't meaningful.
This is skepticism for skepticism's sake, if you have anything real to indicate what's being claimed by stablecoin attestations isn't true or does not mean that there is $1 USD backing every attested stablecoin, please come forward with that information. Otherwise, it's wildly irresponsible to continue to say what you're saying.
Nope. For an example of why they're useless:
https://ag.ny.gov/press-release/2021/attorney-general-james-...
> In the face of persistent questions about whether the company actually held sufficient funds, Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’
> On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.
Nothing here invalidates the concept of attestations, this only calls into question the reputation of the individual firm that issued the attestation, which is the whole point of attestations.
The new language is "Backed by fully reserved assets. Each USDC is backed by one dollar or asset with equivalent fair value, which is held in accounts with US regulated financial institutions".
They've have been open about their partial non-cash backing. Here's their latest attestation (page 4 is the relevant bit):
https://www.centre.io/hubfs/pdfs/attestation/Grant-Thorton_c...
61% as "Cash & Cash Equivalents", the rest in very low-risk investments.
Marketing language or not, the old language was very straightforward and claimed full USD backing - only the new language relates to your claim of “ open about their commercial paper backing”.
what's the difference between that and whatever tether's doing with their "commercial paper"? Are "US regulated financial institutions" prohibited from holding shady commercial paper?
I'm confident that Facebook (and not Coinbase) will make cryptocurrency mainstream by enabling cross-border micro-transactions through e-commerce across its WhatsApp and Instagram userbase.
Crypto/defi/etc is high risk and requires you to DYOR. If that makes you uncomfortable, this space may not be a good fit for you.
Because you've promised "investors," or at least made lots of strong statements that led them to believe, that you're letting cash sit in an account?
When I invest in a fund, and it says that it does X, but then secretly does Y because they believe it's obviously better, that's something between totally untrustworthy and outright fraud.
Investing in high quality short term commercial paper or treasuries is essentially the same or less risk vs. letting $XX billion sit in some bank account.
In accounting, these instruments are actually regarded the same as cash and called “cash equivalents”.
If they take the money and invest it in ‘good’ companies, that is too much risk to the underlying assets.
Though I’m American and could see foreigners not thinking US bonds were safe enough.
Part of Coinbase's implicit strategy is to become the "too big to fail" of the crypto space. And if its collapse would threaten to destabilize the broader financial system, the US gov absolutely would bail it out.
We've not reached that point yet (and hopefully never will), but it's important to understand the play here.
Unfortunately, a significant part of this risk free, high quality commercial paper was issued by Lehman. And that risk free, high quality commercial paper turned out to be worthless, causing the oldest money market fund to fail and forcing it to liquidate, at well below $1.
We don’t say that because new spacecraft have a high risk of failure vs a 747 that there is a “major problem” with space exploration.
How do you do this when the parties involved are not transparent about their holdings and have a history of misleading investors? Go off of rumours? Given their history, why would I believe that USDC is actually holding short term commercial paper and not higher risk, higher return equities?
It is tricky situation. Consumers want assurances, protection but the crypto true believers abhor regulation and disclosure. Trust is difficult in this space and right now many people are speculators consumed by FOMO vs. rational individuals/institutions. No one knows how this will all play out.
If you sell early enough, you might get most of your money back because other people aren't paying attention, or have been similarly misled.
Do you know how much money depositors lost? $0.00
And I don’t mean only up to the FDIC insured amount. Even those with WaMu deposits well in excess of FDIC coverage didn’t lose a penny. And it wasn’t thanks to the complex system of placing overnight deposits at various institutions for pass-through coverage in excess of the FDIC amount.
Because do you know how much money the FDIC insurance fund lost paying out claims to WaMu depositors? $0.00
Do you know who did lose a lot of money? WaMu investors and shareholders.
That is not even remotely close to how a stablecoin or crypto “bank run” would play out. Our banking system has built-in safety nets that work. Crypto safety nets don’t even exist.
The real solution is DAI, right?
Not financial advice.
You can. It's called a 'bank' and they're heavily regulated.
Instead, what crypto has are wildcat banks. You've never heard that term because when they existed, 150 years ago, "[b]ank closures and outright scams regularly occurred, leaving people with worthless money."[1] Sound familiar?
* Crypto exchanges have the problem of collecting fees in crypto, and wanting to make a profit in USD.
* Stablecoin operator receives commercial paper (IOUs) from businesses, usually crypto exchanges. Issues tokens in return. (Note that the Stablecoin issuers are connected directly to the biggest exchanges e.g. Bitfinex/Coinbase/Binance)
* Now the crypto exchange has a debt to the Stablecoin operator, some crypto profits, and some stablecoins.
* Crypto company trading desk does the following:
* Trade crypto (e.g. Bitcoin) for USD and take profit
* Trade stablecoins for crypto on any number of exchanges
So yes… there is something very wrong.
What is amazing is how many people are blind to it.
This is basically a giant distributed Ponzi scheme resembling wildcat banks of the early 1800s. Customer US dollars come into the market, USD goes out into the pockets of crypto insiders, and the crypto market remains propped up by the “value” of these stablecoins.
The only thing that keeps it going is that the stablecoin issuers (same people who are running the exchanges) have no incentive to collect the debt they are owed so everyone is happy (for now).
Crypto fans like to think they are innovating but all they’ve done is found a way to circumvent regulation and try a concept that was ended in 1863 by the national bank act.
https://en.m.wikipedia.org/wiki/Wildcat_banking
If you think this ends any other way than regulation and tears I’m not sure what to tell you.
There's about 1,000,000 BTC in cold wallets of customers of stablecoins. They prove to the stablecoin issuer that they control the wallet (send two small transactions to some address somewhere). Then the issuer loans them the stablecoin and holds the paper against that debt, denominated in dollars. This provides a service to create liquidity out of BTC cold wallets, which is why it is popular to begin with.
Since the debt is dollar denominated that means if the stablecoin falls to $.50 then they have to pay back half the debt in real USD. So that creates upwards pressure to maintain the PEG. Downwards pressure is easy and just profit taking if it exceeds $1.00
Also explains why Tether printing stops once the outstanding number of Tethers is worth roughly 1,000,000 BTC and BTC pulls back. Once the BTC price falls much lower than that, you start to see redemptions and burn. Then when it rises near that point again you start to see more issuance.
This also answers the question of "who buys Tethers with USD?" Nobody does, it is all crypto debt.
And this all creates a positive feedback cycle driven by debt, backed by crypto. What could go wrong?
Maybe you knew all along USDC wasn't actually backed by real US dollars. Apparently Coinbase and its customers didn't. And given the ongoing slow motion disaster of Tether, the actual backing of stablecoins is important to be very precise about.
But let's do a little game theory. Say the market starts losing faith in USDC and people start selling 1 USDC for, say, 0.98 USD.
Coinbase can either let this happen, or they can start using their cash and investments to buy back USDC at a 2% discount.
If Coinbase has every reason to believe that USDC is just fine, then they have a large financial incentive to start buying USDC back. This will raise the market price back to near $1 USD.
That is how they stabilize their stablecoin.
It is game theory and market mechanics and not a government that stabilize stablecoins. If you don't trust this, then you should not hold USDC.
What they're doing is, creating a USD bank. It's not just about bank guarantees. Game theory describes the stable outcome, it doesn't predict it.
This scenario is not implausible. It literally happens every few years in the modern economy with different assets. Real assets that are backed by real things, not a completely synthetic currency.
The dollar assets backing USDC are the only thing that really secures it. Not "game theory". Sometimes you lose games.
That is what USDC did. And it turns out not to be true. Which is… concerning.
Also banks are highly regulated about requirements for backing assets. Triply so since the 2008 collapse.
A rational market would react by revaluing USDCUSD and pushing the price point to where they'd expect.
But we should look to what happened when USDT openly admitted they were backed somewhere around nine cents to the dollar: absolutely nothing, the peg held.
So has the market really priced in the risk of 39% of assets not being cash/cash equivalent? I suspect that's unlikely, but I also expect no material change to USDCUSD. Today, at least.
https://www.economist.com/leaders/2021/08/07/why-regulators-...
Step 2: Print USDC equivalent
Step 3: Use USDC to buy bitcoin
Step 4: Repeat
If you tell people that they’re buying the crypto equivalent of T-bills on one side, but then turn round and lend those $ to a combination of Chinese construction companies and crypto exchanges on the other side then you’re not being straight with people - you’re exposing them to a sizable risk of loss in return for nothing.
In the trad finance world, unsophisticated investors get the benefit of Fed / BoE / ECB banking bailouts for their (relatively) small balances if the bank they put their cash in goes under & bigger players understand the risks & choose their counterparties accordingly. There’s no central bank of crypto out there to bail out USD(T|C) if they go tits up & if they’re lying about their risk exposure then you won’t know anything about it until suddenly there aren’t any $ to be had.
offtopic, but I don't believe banks will be bailed out any more. They did so, and it didn't turn out so great.
They haven't been open at all about the ISSUER of that commercial paper though. It's one thing if it's Walmart or ExxonMobil, quite another if it's Bitfinex or some other crypto-related company.
It now says: "Each USDC is backed by one dollar or asset with equivalent fair value, which is held in accounts with US regulated financial institutions."
The former statement was not true. Or at least is not now.
https://web.archive.org/web/20210126125109/https://www.coinb...
https://www.federalreserve.gov/faqs/what-is-a-central-bank-d...
A digital dollar would be spent on actual goods and services, and would leave crypto coins in an "emperor with no clothes" situation.
It's not like you can't trade dollars already.
Some here would present these ideas as positive, but I'd argue that "common people" would be the losers in this scenario.
Depending on how much tinfoil is in your hat, central bank digital currencies open the door to surveillance and control. Consider the elimination of physical cash and the implementation of a social credit system that sees exactly what you buy, and from who. I don't think the US will get that far, especially not soon, but also think having cash as an option is fine.
China has moved faster with the digital yuan; there are discussions over things like whether there will be capability for anonymous small transactions, or just private transactions, still viewable by the government, just not by the other party.
I'm not versed in the space but also heard payment processors and especially banks are against CBDCs, since they would get cut out of various transactions and even loans.
There are proposals to use consumer's electronic trail to create "alternative credit scores". CBDCs will allow this. The WEF proposal includes AI/big data hype, psychometrics, social media use, contacts and purchase history.
Social media and smart devices have also been proposed for use as part of gun control schemes in the US. Some called this a "social credit score".
https://yro.slashdot.org/story/19/08/30/2037251/the-plan-to-...
Source for that claim? Because it sounds like you just pulled it out of thin air.
Most every “common” person I know with any Bitcoin is using it as a get rich quick scheme and very much do not have other financial investments to offset potential losses. I’ve begged one buddy to hedge his bets because I expect like others here he’s going to lose his ass at some point.
For smaller banks if you assume that an alt coin would continue the goals of the FedNow instant payment system that's currently in the works would cut out the banks that currently operate as a payment intermediary [1, "The structural bank disintermediation issue" ] and seems like it could indicate a shift away from fractional reserve money, where the bank could for example hold $2.5 and create $100 in loans, which then increases the power of the central bank.
I think in such a scenario people stand to potentially lose out due to a increase in state power that would result.
[1]https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2351~c8c18bbd...
There are plenty of other countries that peg their currency to the dollar, by the way. That is very different from making your currency digital-only.
Have they gone back on it, or was it a misrepresentation and on whose part? I used to hold a fair bit of it before diversifying.
1) Trying to avoid obviously falling under banking / financial / market regulations
2) Fraud
The travesty of the situation is that there's so much ignorant money in crypto that there's little pressure for them to actually clarify, even if they have the best intentions.
The market doesn't care, and isn't pushing them to do so.
> "Each USDC is backed by one dollar or asset with equivalent fair value, which is held in accounts with US regulated financial institutions."
Is the part about being backed by USD or "asset[s] with equivalent fair value" the point of contention? Did they originally claim that each USDC was backed by USD (cash) only?
> FDIC insurance applies only to the USD reserve funds. GUSD exist as ERC-20 tokens on the Ethereum blockchain; tokens are under the user’s self-custody, and are not insured through Gemini.
If you "lose your keys" to your account, you lose your account, as is standard in crypto; no KYC backup/protection.
In the middle you have "what if Gemini the business shuts down anyway, and stops letting you redeem GUSD for USD? You can sue, but legal expenses might eat away a lot of the value.
And if Gemini itself isn't trustworthy, FDIC does absolutely nothing. FDIC insures Gemini's bank's failure, not Gemini's failure. Gemini is not a bank.
According to the gemini dollar site, it's insured for $250k per account, not for all the accounts combined.
> ¹ FDIC insurance applies only to the USD reserve funds. GUSD exist as ERC-20 tokens on the Ethereum blockchain; tokens are under the user’s self-custody, and are not insured through Gemini.
So if you send them USD, they'll hold your USD in an FDIC insured account. If you hold GUSD, and it turns out GUSD is a fraud or is otherwise insolvent, your SOL.
While USDC is undoubtedly way better than Tether, it's nice that the upcoming New York Stock Exchange listing will require more transparency than the attestations they provide now.
"Some 96% of the reserves were held in cash and cash equivalents, while 4% were invested in U.S. Treasury bills as of June 30."
https://www.coindesk.com/paxos-reveals-assets-backing-stable...
https://www.paxos.com/a-regulated-stablecoin-means-having-a-...
FDIC only insures deposits to $250k. If you put $30B in a bank, you're placing a pretty big bet on the solvency of that bank. I'm not sure this would be a great plan.
It seems like they're receiving commercial paper from clients and redeeming it for USDC. And then likely giving the tokens to exchanges.
I can see where they are coming from, because even Apple doesn’t really keep literal cash laying around, I assume no one does.
https://www.quora.com/Where-do-large-companies-like-Microsof...
Apple's cash reserves and are not the same thing as a stablecoin reserves. One is cash that a company owns, like Apple, and their shareholders own it along with the rest of the company. The other is the cash reserve backing an etherealized USD bank account. It's an "other people's money" problem.
That's kind of the interesting part, to me. USDT is, a "private money" in a more real sense.. or at least different. As long as coin prices float, no one owes anyone anything. A stablecoin implies a price guarantor, a currency peg operator.
If things play out the fun way, stablecoins get sansacked by WSB's version of George Soros. Then, in the next iteration, CoinBanks are offering fixed interest accounts.
Commercial paper does have a default risk, see https://en.wikipedia.org/wiki/Commercial_paper#Defaults
While anybody with a Coinbase account can do USDC->USD conversion on the fly, Coinbase ultimately controls the speed of withdrawals and conversions.
So... what? When demand is high issue/sell USDT, and when demand is low liquidate securities, buy dollars to cash out USDT sellers? One side of that equation is notably different to the other.
It's a totally different game if you keep all outstanding cash on hand, in USD and can answer the question "what if everyone want to sell their stablecoins today?"
Regardless, the curious/frightening thing about these stablecoins is what tf is going on in their "central bank" ops room to stabilize them.
That's why institutions that do this are usually banks. This isn't just a large company holding liquid assets. These are reserves backing what is, mechanically, a USD account. IDK what the explicit promises, if any, exist. Either way, there can be a run.
This is banking, not business.
USDC on the other hand is run by one some the biggest and most trusted crypto companies in the world, and will to go public on the New York Stock Exchange soon.
If you can’t see how stablecoins backed by “commercial paper” (Mostly IOUs from crypto exchanges) is a bad idea I’m not sure what to tell you.
I mean we have a name for when a company does this with actual dollars and it’s called a bank, and we regulate and license those.
How do you know this is true?
For me the biggest red flag is that these "stable"coin companies don't make their escrow books public. There is zero reason to keep it secret, except fraud.
https://cointelegraph.com/news/coinbase-removes-backed-by-us...
My real questions are (1) Did Coinbase know? (2) If they didn't, Circle presumably lied to Coinbase... so why the hell should we trust USDC any more than Tether? (3) Why is it so hard to create a stable coin where at least 90% is cash? The carry on 10% in treasuries on billions should be sufficient to cover operating costs.
[0]: https://www.bloomberg.com/news/articles/2021-08-11/coinbase-...
The story on Tether seems to be that it was fine, except that the owners also owned something else that wanted funding, and they couldn't resist funding themselves with Tether's backing funds.