> there was never more than $61.5 million backing Tether, even as more 442 million coins were circulating at one point.
Ah, pulling the classic "fractional reserve" I see.
Ah, pulling the classic "fractional reserve" I see.
What I find ironic is that the crypto ecosystem still ended up with something like central banks, only in this case their mandate is make money for its owners, and they have no accountability or obligation to serve the general public.
It's decades from its final form.
That's a pretty poor result for 10 years of this much investment and focus. The internet was waaaaaaaaaaaaay more useful 10 years in.
I don't think crypto gets to claim the benefits of the oft touted protection against centralized bullies or scams. Quite the opposite: You need to go pretty deep into political dictatorships before crypto on net balance seems favourable. So far crypto coins are far more likely to be fleeced, and the vast majority of crypto holding folks are working with mostly centralized entities (such as Tether), which rate, as far as trustability and good shepherdship goes, not in a good place. Better than Pol Pot and Mugabe. Maybe.
Oof.
So if it's decades from its final form, when is it going to deliver on its first actually useful to humanity milestone? I'm still waiting.
These scams existed long before crypto. But, crypto currencies are a better solution to international money transfers so of course they became the preferred currencies for these scams.
Credit scores help introduce micro loans which help with social mobility and is key to bringing communities out of poverty
The big problem here is that the core benefit of cryptocurrency is in removing the bank as a middle man. But the bank is the chokepoint where governments impose constraints.
When you're up against an authoritarian government imposing unreasonable constraints, that's what you need. But it works the same against any constraints. So if you want constraints on "money laundering" or processing transactions related to criminal activity, those constraints are gone too.
The constraints are already gone for anyone willing to break the law. You can't un-invent Bitcoin, so from here on drug dealers will be able to use it or something like it to transfer their drug money etc. That's happened, it's in the past, no regulations you put on law-abiding people will undo it because the people doing it are already the people breaking the law.
We still have all the regulations. They just don't work anymore. We're still paying the cost and the benefit has evaporated. But for all the honest people who are following the law, the regulations still apply. The overhead is still there. All the paperwork and the false positives.
So you can use Bitcoin to buy drugs but you can't use it to buy a sandwich, because to accept Bitcoin the sandwich shop would have to deal with filing fees and lawyers that the drug dealer is just ignoring. Regular people don't get the benefit until we have a regulatory system that makes it as easy to accept cryptocurrency as it is to accept cash.
Even if it was somehow illegal everywhere, the value still wouldn't be zero because of black markets. The drug user uses it to buy drugs, the drug dealer uses it to buy guns, the gun runner uses it to buy stolen art, the fence uses it to buy stolen goods from petty thieves who use it to buy drugs.
Black markets would also exist to exchange it for cash or ordinary commodities so that someone else could get it to buy drugs/guns/art/whatever.
And it has utility over using physical cash or gemstones or bullion in that you can transfer it over the internet.
There is no need for additional "cover" at that point because the illicit transaction is already illicit. If someone just took that Bitcoin and bought a house, the IRS would have questions. It would have to be laundered first. The output of the money laundering process is clean dollars regardless of whether the input is illegal because of the illegal source or illegal because of the illegal source and currency.
The real appeal of bitcoin for illegal purposes is it’s effectively a poor but really cheap way to launder money. Try and deposit even 1 million in cold hard cash and the banking system throws up red flags, liquidate 1 million in bitcoin and that looks significantly more legit at least on the surface. It doesn’t help if you’re under investigation, but then again it’s cheap.
That's the entire purpose of using them.
Someone who has a million dollars in physical cash either needs to get someone local to launder it, which might be hard to find or require paying them a thick margin, or they have to find a way to ship a huge amount of physical cash to the place it's being laundered and risk it being seized at border crossings etc.
Someone who has a million dollars in Bitcoin can buy money laundering as a service over the internet from the lowest bidder who has a good reputation. The Bitcoin gets transferred to some place with favorable banking rules, gets liquidated there where it's either not illegal or the local authorities are corrupt, and it comes back as dollars. Since it's possible to do it over the internet, you have competition from all over the world including some favorable jurisdictions, so the margins get smaller than they would be if you had to find someone locally.
Put another way, banks are already operating on digital money that’s the problem.
Some country will want to cash in on the demand for their currency, and will leave it legal to exchange.
Technologically speaking, most cryptocurrencies are utterly useless. Bitcoin included. There are some good projects though.
Monero, for example. It allows people to transact without anybody knowing anything about the details of the transaction. Where the money came from, where it's going, how much money was moved. Everything is obfuscated. Block chain analysis is at the very least hard and inconclusive, if not impossible. So it essentially works like digital cash.
This is an invaluable achievement that allows people to reclaim their financial privacy in a world where governments think it's acceptable to surveil everyone.
Isn't this pretty much the description of every company? I understand feduciary responsibilities blah blah, but if the company didn't think they could do both then they wouldn't be running the legitimate buisness. If it was started to intentionally dupe people that's an entirely different thing.
For the most part, sure. But that's the parent's point, I think. Central banks are not companies, they are part of the public financial infrastructure of a nation (or, in the EU case, group of nations).
Actually... it's complicated. The Bank of England, for example, was nationalized only in 1946, and it remains technically a company which is owned by the state, not actually part of the government.
In the US, the Fed is... well, it's not a company, but it's also not not a company... or group of companies...
The UK owns a whole bunch of banks and entities that would need a banking license if they weren't owned by the government, of which only the Bank of England acts as a central bank, but there are also a bunch of commercial banks in (or at least operating in) the UK that are named after parts of the UK even though they're not owned by the government, including the Bank of Scotland.
But they can't issue banknotes, unlike BoS and RBoS.
Also, although these banks have permission to issue notes (whereas if you went around issuing "bank notes" you'd likely get arrested) the notes aren't necessarily worth anything except in the sense that you can assume the Banks will give you Bank of England notes for them if it came to it since they're required to hold those.
They aren't legal tender (Scotland doesn't really bother having legal tender laws anyway) and retailers can choose not to accept them if they want. You won't have a problem exchanging them for tourist stuff in Edinburgh or buying a fish supper in Dundee, but good luck getting some random corner store owner down South in Cornwall or Essex to accept them - even though these notes are in some sense worth the same as Bank of England notes, there is no law requiring retailers to accept any notes and so they might just tell you to fuck off with your weird-looking money.
The rest of the system is, as you note, complicated, but the rest of the system doesn’t set monetary policy.
There world is full of cases where products or services are degraded in order to maximize profit. Has DRM ever made for a better gaming experience? Do clickbait articles result in a better informed public?
Which is why we don't let private companies create currency willy-nilly anymore.
As I understand, private banks extend loans, which while not being printing money, the loans being deposits (which can be withdrawn) the effect of creating currency is the same.
Yes, it's a juggling act: Person A still has $1000 on the ledger in their deposit even if the bank lends $800 of that to Person B, so if the people with deposits want to cash out all at the same time, and the bank can't pull back what they've lended out fast enough, you have big problems!
But they aren't just adding numbers to a cell in a spreadsheet without having the money to back it - a loan that can't be used to pay someone or to be turned into cash is useless. You can't just start a bank and issue yourself a thousand dollars into your own account and expect to be able to use it for anything. This would be closer to the credit card model - short term credit without taking deposits, making money on the repayment - but again, good luck issuing yourself your own credit card to buy a bunch of stuff with to "create money."
And they also aren't doing anything that couldn't be done with crypto!
Fractional reserve banking isn't up-to-date with the modern banking system, where in many cases, like in the UK, and in the US as of 2020, there are no reserve requirements. [1]
> But they aren't just adding numbers to a cell in a spreadsheet without having the money to back it
I disagree; this is the reality. Banks don't have to wait for deposits to extend loans. When creating a loan involves novel financial instruments to hide or offload the loan's risk, this has caused massive bubbles, as in the 2008 mortgage crisis.
This credit they extend to customers is "broad money" that, while not being created by the central bank, is effectively the same, as it is the deposit for someone else, which can be withdrawn.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
like all mirages, it dissolves when you get too close.
So, like private currency-printing banks before government monopolies (and like private banks, which subject to central regulation still create money though they don't print currency), not like central banks.
[0] viewed broadly, but I won't quibble about that.
Yes, nothing prevents a crypto bank from "creating money" (aka lending) in the same way that a fiat bank does. Loan out your deposits. It's that easy.
Not having it blow up on you in a run-on-the-bank scenario is the harder part than "creating the money". ;)
Tell that to an Argentinian who has had their life ruined because of the lack of foresight from the the people who run their society.
Many considered this a violation of their rights. Justly so. I would say that "no such right is necessarily guaranteed" is only true in the sense that no rights at all are necessarily guaranteed.
Society abrogates individual rights by its very existence, and anarchic utopias that exclude all abrogation tend to fail comically^^ and/or catastrophically^^^. It turns out that compromise is a necessary factor of coexistence with other human beings, especially those we disagree with. If you don't feel that your rights are being abrogated by society in some regard, then you either are unfamiliar with the unconscious rights we all take for granted, and/or your circumstances align with the corruption that rich and well-connected people benefit from.
In the US, the Constitution guarantees you specific and inalienable rights, and lays out clear terms that the government is not permitted to violate without consequence. While corruption exists, and no constitution is ever written or enforced perfectly, your declaration that no rights are guaranteed is incorrect for US citizens in the US. Other countries have similar guarantees of rights, such as the EU and GDPR, not to mention many older ones as well, so that statement is incorrect in various ways for those as well. Societies vary wildly in who is granted rights and what rights those are and when they may be abrogated without consequence. Corruption is endemic to virtually all modern societies, small and large. Regardless, rights are granted in most of them.
I respect those that feel that their rights are violated by the laws of the society they are members of, but that is no excuse to declare provably false statements ("no rights at all") as if they're facts. You'll need to invest more effort in your arguments to make headway with that declaration, or define what "rights" means to you that lets you declare that you have none, or declare that the society you are a member of does not guarantee you personally any rights whatsoever.
^ For example: https://www.law.cornell.edu/supremecourt/text/294/330
^^ For example: https://news.ycombinator.com/item?id=28441794
^^^ A popular counterexample is an Icelandic system of government from a thousand years ago, frequently held up as an example of libertarian utopia that lasted for centuries. However, the governmental laws that implemented the godord specifically abrogated the rights of the citizens of Iceland, binding them without individual consent to the societal system of godords, laws, courts, judgments, and enforcements. If you ignored the judgment of the courts, you were stripped of your societal right to live; anyone could kill you without being punished for doing so. Ironically, this meant that in this ancient system, societal outlaws were truly freed from all abrogations of their rights, as they were cast out from society as a whole. However, being marked for murder by those who do accept societal abrogations tends to diminish the enjoyment somewhat.
Interestingly enough, the Supreme Court of the time seems to have upheld part of what was done to the Japanese-Americans[1]. "In effect, the two rulings held that, while the eviction of American citizens in the name of military necessity was legal, the subsequent incarceration was not"[2]. About the first ruling, Wiki says: "Chief Justice John Roberts explicitly repudiated the Korematsu decision in his majority opinion in the 2018 case of Trump v. Hawaii. The case is often cited as one of the worst Supreme Court decisions of all time."
We haven't gotten as far as large-scale violations in the U.S. of a right to not be killed by official government policy (death penalty notwithstanding). (Also notwithstanding the FDA delaying the introduction of lifesaving drugs.) It has certainly happened in other countries, though. In the small scale, the U.S. government does sometimes assassinate individuals, and seems not too squeamish about killing whoever else is in the blast radius (some may protest that those people aren't citizens). I would admit it's pretty unlikely they'll go that far on this particular right (in the absence of a revolution), but for the majority of rights, it seems there will be circumstances where politicians will plead "emergency" as a reason to violate them, and often enough will get their way.
[1] https://en.wikipedia.org/wiki/Korematsu_v._United_States
[2] https://en.wikipedia.org/wiki/Internment_of_Japanese_America...
If you ignore the genocide of Native Americans, which in many cases did not stop once those Native Americans accepted US government jurisdiction, maybe.
Many people told that society where to shove it when they came to repossess their assets by force.
If you are trying to explain why I owe some debt to society to support their currency you aren't making a very convincing argument.
I don't think very many average people are invested in crypto significantly, if at all, despite the hype, so hopefully the harm would be limited.
How much of the demand for these tokens is being driven by money that never really existed? 100%? 50%? 0.02%?
There’s no way of knowing until it crashes - then what? e.g. if the price dives by 50%, and that really equates to 200% of the actual capital ever invested, what happens then?
I was listening to Darknet Diaries episode 102 today about the Canadian money printer, and I was thinking the entire way through it that it was basically describing tether but with paper and ink.
It got especially eye-opening when he talked about having to manage how it was released into circulation slowly so as no-one could track where it was coming from.
Did you miss the part about them lying?
"I have a right to choose to buy something" for whom the value is deceptively obfuscated is quite the argument.
Pretty sure the answer is no, because they have so much power they don't need to lie. They do what they like then change the rules so they can do the same thing legally.
The argument here isn't that what Tether is going is good (it isn't). It is that if the government did it, it would come with "and all you plebs have to join in because bankers making money is good for us all".
They would work if some country was crazy enough to sell barrels of oil for cryptocurrency, indirectly setting the price of everything else. That will probably get them invaded and destroyed by the US military for threatening the hegemony of the petrodollar.
They just got punished for not having actual reserves match their circulation. What basis is there to presume that their reserve is matching their circulation now?
This all boils down to two questions in my mind:
1) Do you trust the unsigned report from the auditor, who appears to be a fairly unknown entity?
2) Do you trust the asserted quality of the commercial paper, which makes up 50% of the putative reserves?
The last time Tether claimed to have something that was an "actual" audit, they claimed they couldn't release it to the public because ...
"... it is in Mandarin".
Here's the big problem with this attestation:
> Our opinion is limited solely to the CRR and the corresponding consolidated total assets and consolidated total liabilities as of 30 June 2021, at 11:59 PM UTC. Activity prior to and after this time and date was not considered when testing the balances and information described above.
They're very, and repeatedly clear that this is a snapshot. There is nothing stopping Tether taking a 72 hour loan before this attestation and then closing that loan after it.
They claim $6B in cash holdings, in an undisclosed bank, presumably Deltec, whose "deputy CEO" demonstrated in an interview (among other problems) that he did not know the names of the two banking licenses available to banks in that country, and he wasn't sure which one they had.
You can't get a mortgage with a simple attestation of funds - why should it be okay for these guys?
At this point, what basis is there to presume that their reserve is non-zero?
This is the best reference I could find in relation to what I've said above:
In newly published research, with Amin Shams of Ohio State University, he finds evidence that Bitcoin’s 2017–2018 bubble was inflated by a lesser-known digital currency called Tether. [0]
[0] https://medium.com/texas-mccombs/tether-connection-puts-bitc...
And yet the cryptofans were telling us we were curmudgeons for not buying into the hype (or in this case, the bullshit).
For example (admittedly this is probably way off-base here), let's say there were only two stablecoins (USDT and USDC), and only one of which had true 1:1 buyback (USDC) where >=1 entity would exchange one USDC for 1 USD (I know the reality of USDC is muddle too). Let's also say the amount of USDT in circulation was $10b and the amount of USDC in circulation was $1b. If there's a well-established "distrust" of USDT, where people only "temporarily" keep it on hand or use it as an intermediary, they're still using it to acquire other cryptocurrency, and thus inflating prices, right? If everyone attempts to exit onto the USDC, the available supply will dry quickly, causing the <X Crypto>/USDC price to plummet (?).
Thus even if you thought Tether was intolerable I feel like it's an implossible belief to simultaneously think (1) that Tether is a scam, and (2) cryptocurrency can be seen a store of value. (I know there are others who recognize and highlight other utilities of cryptocurrencies).
(I am super interested in the flaws in this logic because as an aside, if there's any general reading material regarding these kind of economic thought experiments, doesn't have to even be crypto-related, I will certainly take any recommendations! I find them really fascinating. Someone mentioned a Darknet Diaries episode on counterfeit currency; Probably the first thing I have to look into.)
1. Tether influencing solvency of other stablecoins.
2. (Tightly related to point 1) Inflation of Tether as it becomes an intermediary.
3. That it is logically inconsistent to view Tether as a scam while also viewing cryptocurrency as a store of value.
Point 3: There is a difference between a store of value and a store of value that is stable with respect to some specific other value.
Consider Bitcoin and Ethereum. The rules by which these blockchains operate are quite transparent. The software is free (as in freedom). Anybody in the world with the means can run a node and participate in these blockchains. Thousands of people are doing so right now. These currencies are open in a sense that no other currency has been open in the entire history of the human race.
Tether on the other hand is completely opaque about its operations. In fact, the people at Tether actively spread misinformation about how Tether operates. It has repeatedly dodged and attempted to fabricates audits of its reserves.
Given all of this, I do not see any logical inconsistency between thinking of Bitcoin and Ethereum as stores of value which is largely orthogonal to the value of the fiat that you hold while simultaneously thinking of Tether as a scam stablecoin whose value is pegged to that of a fiat currency.
Point 1: I agree with you that the existence of Tether improves the solvency of other stablecoins. It reduces the pressure on anyone backing another stablecoin by offering an alternative means of a holder of that stablecoin to realize the dollar value of their stablecoin holdings (albeit with a slight overhead in transaction costs).
I think this is more significant of a factor for centralized stablecoins like USDC than it is for decentralized stablecoins like DAI, although I suspect the existence of USDT puts less pressure on collateralized DAI positions as well.
This is not a compelling reason to encourage or even tolerate the existence of Tether. A true stable coin would not experience any significant difficulties even if Tether became insolvent. I believe that decentralized stablecoins like DAI would only experience negligible effects from Tether's insolvency.
Point 2: This is a very good point and I don't understand it well enough theoretically to confidently make predictions about how it would play out on the market.
My intuition tells me that the most powerful factor against inflating prices of USDC in your scenario is that Coinbase (and the USDC consortium) will stick to their position and always offer $1 in exchange for 1 USDC.
The other factor is that there are many more legitimate stablecoins that could partly fill in the vacuum that Tether would create if it imploded. So not all attention would be focused on USDC. If people really needed a stablecoin, then they would not want to purchase an asset whose value was increasing.
There are a lot of parameters involved, though, and I find this very hard to reason about. Would love any input here.
They don't claim 1:1 USD backing. They claim that every tether is backed by 1 USD of value. So, when their crypto holdings go up in value, TADA!, more reserves to print tether against. The problem here is they never explain what happens when the value of their backing assets goes down.
[1]: https://web.archive.org/web/20150814185145/https://tether.to... "Every tether is always backed 1-to-1, by traditional currency held in our reserves."
[2]: https://web.archive.org/web/20160417000232/https://tether.to... "Every tether is always backed 1-to-1, by traditional currency held in our reserves."
[3]: https://web.archive.org/web/20171201230600/https://tether.to... "Every tether is always backed 1-to-1, by traditional currency held in our reserves."
[4]: https://web.archive.org/web/20180809053152/https://tether.to... "Every tether is always backed 1-to-1, by traditional currency held in our reserves."
[5]: https://web.archive.org/web/20190426055956/https://tether.to... (current language)
Surely they learned their lesson when they only had 442 million tethers issued and only 61.5 million dollars in the bank.
Edit: typo*
I’m not sure where my statement implied what you are assuming here. I think you may have your dogmatic blinders on.
Both tether, and crypto unrelated to tether are implicated in what I stated. That doesn’t make tether any less a result of libertarian ideology drawn to its conclusion.
As for my point, it's pretty simple: the market moves away from tether on its own just as libertarian ideology suggests it would.
Those who use tether are aware of the risks and are choosing to use it anyway, and if they lose money no one will bail them out.
I suggest you reevaluate what you think a libertarian market, where adults are treated like adults and not like children who are subordinate to high up regulators, evolves into.
And really, that's what you're implying: that certain people, should control other people, for their own good, and I find it bizarre that any one would advocate for that when you can see the extreme inequality and dysfunction this approach has produced in traditional finance.
I think it's holding to your belief - not to the belief in a free society - that requires having ideological blinkers on.
With crypto, the "average" person gets to feel "in on it" in a way usually reserved for coked up Goldman associates. That is possibly not a good thing, as you're pointing out.
One of the first empires to use fiat currency was the Yuan dynasty, and it worked, because if your currency is backed by the mongols, you're absolutely going to act as if it makes sense, even if it seems crazy to you. The backing of money is not precious metals, nor currency, but rather force - a state can demand tax in it, and exact retribution if their taxes are not paid. The state could demand taxes in cowries, and people would collect cowries, because you are going to get imprisoned if you don't pay your tax.
The fiat-currency house of cards collapses when people think the state isn't going to be able to pay their bills and collect their dues. Cryptocurrencies are more like tulips. There's nothing behind the curtain - it's just a weird social eddy that's grown out of all proportion.
It’s only hidden in the sense that the definition of “decathect” is hidden. The definition isn’t “hidden”, I just haven’t looked into and learned its definition and i havent considered all the implications of its material interactions with the world yet.
This notion of “hidden” will not be solved by a coin were it to become ubiquitous. People would just have to learn a completely different set of complexities—many of which will actually be hidden by the grifters who take advantage of lack of regulations.
Much of (not all, but much) of this “hidden” argument rests on people who would just prefer simple barter/exchange—but they just don’t seem to understand the complexities that scale inevitably brings. Along with this is that they just don’t understand that crypto is not an answer to the scale complexity problems.
And if someone attempts to make a coin which addresses these complexities, oops, now we’re back to a complex, messy, and steep learning curve.
All of the grifts that we’ve seen throughout society’s history with finance will be repeated in the coin sphere and these people will sadly fall victim to these same grifts yet again.
Does our current financial system have problems? Absolutely. Does crypto solve them without reintroducing previously patched bugs? Nope. Not at all.
*I think it's a pretty good guess, based on the fact that Tether is still in business.
Current market cap is up to 70 billion! 90% of which has been printed in the last 2 years, and wasn't even covered by the report. Looks like they're going on a last ditch printing spree