That's fine. I was recently discussing the American financial system's exposure to Tether [1]. It appears there isn't much. Ceteris paribus, when that blows over, it shouldn't hit us. It will hit the next guy, in the next town or state or country.
People are using DeFi to make degenerate bets on various crypto projects. That typically involves
(1) buying tether, (2) using it in an overly collateralized loan to borrow tether, (3) then using that tether to buy another crypto, (4) watching/hoping the price of that go up (5) selling that corresponding crypto, locking in gains, and repaying the loan
If tether drops dramatically in price due to a lack of confidence, these loans will be affected. Such crypto tokens may be bubbling up only because these DeFi loans are possible.
Which will wipe out those investors. Not anyone else. People are free to lose their own money. It becomes a regulatory issue when those losses cascade, or if someone who didn't realize they were taking those risks is forced to bear them.
I personally know people who have gotten into the GME craze, I know people who are stupid enough to day-trade options, and I know people who spent a paycheck on buying dogecoin. They are all relatively normal people, and while some of them should not have gotten into these transactions, given what I understand of their personal finances, I understand why this happens. They live in America, where nobody's stopping you from spending your rent money on buying dumb meme stocks, and RobinHood has a cool mobile app for trading options, and maybe you win, or maybe you get burnt, it is what is, yolo, etc.
But of all those people, I don't know of anyone who dipping their feet into borrowing tethers to trade crypto on margin, or investing into crypto ponzi schemes. Who, exactly, is getting roped into that sort of thing? Posters on the crypto equivalent of r/wsb? Day-traders? Or is it Joe Average?
Meaning buying and selling the same options contract in intra-day transactions?
Or just retail trading options?
They're two very different things and I think only the former is actually stupid.
A recent fear was Tether holding dollar-denominated commercial paper. If they went under, they'd dump that paper. This happened in '08 with money market funds, and we passed a lot of regulation to ensure that failure mode can't happen again.
Fortunately, to the extent Tether holds anything, it isn't cash or U.S. dollar commercial paper. So contagion vector contained.
Why the huge disparity? From an economic point of view, the bank is just as required to redeem its obligations as Tether.
https://www.prnewswire.com/news-releases/usd-coin-reserves-e...
The better comparison for stablecoins are money market funds. The lockup of those caused the worst of the 2008 financial crisis. They also have much stricter regulations than stablecoins.
Fitch today released an opinion that stablecoin liquidations could cause a similar sort of systemic risk. They need some kind of regulation. No stablecoin has even done an audit! (Attestations are not the same)
Yup. They’ve had attestations. In those, an auditor just looks at an account at a moment in time. So you could, for example:
1. Get a loan
2. Put it in the reserve account
3. Ask accountant to verify the amount
4. Accountant attests to seeing money in the reserve account
5. Afterwards, move money out to pay off the loans
Sound crazy? Tether actually did this, it only came out in the NYAG settlement.
USDC uses a US accountant, but nothing in the procedures they use would prevent such a scenario. The auditor merely relies on management assertions in an attestation.
Tether by contrast is a pretty much an obvious ponzi scheme that everyone is just playing along with because they're making money and hoping they get out with profits before it implodes.
https://www.google.com/amp/s/amp.reddit.com/r/MakerDAO/comme...
In one chart ETH still predominates, but in the second USDC is the largest portion.
With Tether they print it and give it out to their buddies for who knows what, maybe a pinky promise to repay some day.
The US dollar is backed the US. All banks are supervised and insured by that same government. If a bank takes on too much risk, a) there are people watching that, and b) the US can wind it up and pay everybody back. So a single bank failure causes approximately zero currency risk. As long as you stay under the FDIC limits, you'll get back every dollar you put in.
Tether, on the other hand, is backed a bunch of shady characters who have been caught lying about what backs their currency. They claim it's 1:1 with US dollars, meaning that people buying Tether have no risk. But the more we learn about what they're doing, the clearer it is that it's not the case.
Tether, well who knows? Tether has cash + nothing which very likely is less than the redemptions they may face. If people want to get real cash out tether has no one to go to to make sure they have cash.
Most countries that peg their currencies like China buy USD or "cash equivalents" like US treasury bonds. They don't lend out their reserves to a third party.