My personal, completely unsubstantiated view is that Tether is probably a huge scam. Does this decision force it to reveal whether it is or not, um, or not?
I don't know how the fine details of all this will shake out, not well enough to make any money off the affair, but I know the rough outline of exactly what is going to happen. Read up on the early history of fractional reserve banking if you'd like to know too.
Since the company is so evasive and has been for years nobody outside really knows.
Basically tether mints a bunch of USDT, 'loans' it to bitfinex which then creates an asset on tether's balance sheet of the loan. Bitfinex then goes and buys BTC with the USDT raising the price of BTC.
The problem here is that there is no actual USD anywhere in this system. Net, the system is just one where tether is getting minted out of thin air and then sold to the public for BTC or whatever coins.
Bullshit turns to dust in the harsh light of the sun, and i reckon a massive dust storm is what will remain of most tokens that were never really needed for any practical purpose whatsoever, except maybe laundering illegally gotten gains from drugs or corruption, IMHO
Now of course they still have $74B to account for and maybe I'm just naive but I have a little more faith in USDT now than I had a week ago, I still think that it's mostly backed by monopoly money but maybe not as much as I thought.
It is quite possible that a number of exhanges which had traded IOUs for Tether, Traded that Tether back to have the IOUs canceled.
Edit: Now that I think about it, it really would make sense. They are fighting to keep these records secret, but they may also be cleaning up their books a little in case they lose and have to make their holdings public.
The risk is that there could be a bank run. People panic and drive down the price trying to get rid of their tether. Now crypto as a whole has lost a lot of the liquidity used to buy/sell crypto. This causes a further panic across other crypto assets.
In addition, I’m surprised so many people defend them by effectively saying ‘this time they’re not lying’ — with no evidence. All I can see it as is wishful thinking than sound judgement.
Been waiting for Tether to take a K.O. punch for some time, as a cryptocurrency maximalist (eventualist?).
Case in point I was buying tether when the peg looked like it was failing a few days ago - so I bought a few dollars for about $0.98. Obviously a tiny trade because I'm not crazy - more for the fun of being able to say I did - but whether the crypto is backed or not was a non-issue. This was to buy a completely different cryptocurrency on a different exchange, and Tether was just a conduit to get fiat money in to the system.
Tether failing might be catastrophic for the crypto ecosystem. It also might not be. Technically speaking, the stablecoins look easy to replace. There is a big test of the whole crypto ecosystem coming to find out how it weathers a recession - total collapse? holds some value? most value? heaven help us, makes money? - which will make for interesting times.
Holding their reserves in something other than cash is the way they can make money. The community will consider it betrayal because it essentially relies on the existing system they loath. But other than that, there isn’t too much wrong with it.
That may also point at a reason why they would want to keep this private, which otherwise seems suspicious.
That doesn’t mean people won’t lose all or some of their money with them. Some of these holdings may not be as liquid as needed in a full-on bank run, and they, like all stablecoins, suffer from the mismatch of having no upside by definition but some downside risk.
Depending on what it is, that's also a way they can lose money.
If you think of Tether as an investment organisation that takes $ and hands out claims which they say are worth 1$, while making a bunch of investments, what's that in regular investment land? A money market fund. What can go wrong? https://www.investopedia.com/articles/economics/09/money-mar...
In the real world, literally no-one would own that.
A bank.
But if Tether is a bank, then UST isn't a 'stablecoin' it's a deposit. And Tether is engaging in what banks have done for centuries, that is increasing the money supply through credit. They are doing it in an illegal and unregulated way which most likely will result in tears and recriminations. But ultimately there is nothing new under the sun.
Edit:
I was wrong in what I wrote above.
Tether is acting as a bank, and yes UST's are simply deposits, but all those people correcting me are right. Their assets (at least nominally) should match or exceed their libailities.
What they are likely doing is trading that USDT reserves on Bitcoin. Bitfinex is a well known market maker - and a very profitable one. That's probably why they are very much reluctant to disclose their reserves, because they don't have that in cash - unlikely. Knowing how much they own of everything would open the door to critics, and to attacks - the latter is essentially what happened for UST - attackers knew exactly how much cash they needed to depeg UST
But in general, Tether is part of what's known as the "shadow banking" industry--something that quacks like a bank but isn't regulated as if it were a bank. And shadow banking has caused the last several financial crises.
Please provide a current example of a bank with <$1 in assets for $1 of liabilities. I ask because if that's how you're defining a bank, that's not (I think) the usual definition.
I think you are mixing up fractional reserve and assets. Banks have more assets on their books than liabilities, or they are failed/insolvent. Even if tether wants to be a bank (in which case, they should be clear about it) it's not clear that they have the assets in any real sense.
On the other hand if they're exclusively in something as safe as US Treasury notes, satisfied by profiting a very small % but on a large pile of money, then they're on more solid footing. The fact that they say "commercial" paper makes me doubt this somewhat.
TLDR: if their 100% backing is in anything with even moderate risk, they could be doomed.
My suspicion is that a large fraction of Tether's claimed assets aren't valuable at anywhere near Tether's claimed value, and so Tether has actually been insolvent for years, and this is the main fuel for their reluctance to be precise in what their asset pool looks like.
Speaking of banks, another question: which legacy bank would be able to redeem all money of all account holders? the answer is: none. The money you have on your account is "safe" only because there is no panic. Does that make traditional bank a huge scam?
b) Individual bank accounts (in the US) are backstopped by the federal government, via FDIC. It might still be a scam, but it's a scam whose validity is backed by the most expensive military on Earth.
Tether is "backed" by USD and they can't print USD, that's where the problem lies.
I imagine you're bringing this up to say that crypto is no worse than traditional banks. I disagree strongly with that.
So it's not even that the bank can't pay out, it's just that it costs them a little extra.
They hold 10% in _cash_, and 90% in debt. That debt is liquid and can be traded for more cash easily in the case of a bank run (possibly even guaranteed by the fed?)
Tether _may_ be holding cash and assets covering 100% of its reserves, but 1) it's not sure, 2) it's not clear how liquid those assets are (e.g. dubious CP)
If Tether hold cash+assets covering 90% of issuance then it's a scam. If they hold 99% then it's a scam. It's not equivalent to fractional reserve banking
It's not a perfect system; see the subprime mortgage crisis for an example.
That's exactly why traditional banks are subject to heavy oversight and regulations, and deposits are protected by govt guarantees. Tether on the other hand is operating completely in the dark and has been involved in a lot of shady activity that does nothing but undermine trust in their ability to do treasury operations in a responsible manner.
One difference is that there are apparently strict rules that banks and central banks are supposed to follow (though the rules seem to change or bend expediently), and they are backed up by the government ('bailed out') if they screw up.
Also the Tether people themselves do not appear to be revered for their integrity.
That answer is correct only in a very limited sense. All legacy banks have more assets than (non-equity) liabilities. In addition to that, banks have liabilities with lower seniority than deposits, which take losses before deposits. So yes, if a healthy bank faces a liquidity crisis, all deposits can't be paid out immediately. But they can be paid in full after the assets are liquidated. That's why banks are not huge scams. They are machines that create long term lending from short term borrowing, which actually is a useful thing. And yes, that contains many known risks, which is precisely why banks are regulated and audited. (I have yet to hear an understandable explanation how a mortgage or business loan works in crypto world - without fractional reserve banking, that is.)
What potentially makes stablecoins scams is if they do not have assets to cover their liabilities. And funny thing is, that would be extremely easy to show to be not the case by being open about the details of the reserves. So easy, in fact, that it is practically impossible to come up with any other reason for not being open about the reserves than them actually being scams.
2) Historically, bank failures and bank runs were a major recurring problem. Our current financial regulations are written in the blood of those past failures.
3) Among the many safegaurds in place is the FDIC, which insures depositors against bank failures. The FDIC is backed by the US government.
There are two different failure modes for Teather
1) A liquididy problem (bank run). Teather pauses redemptions while until it is able to liquidate its other assests. Might cause a panic, but long term, your Teathers can still be redeamed for dollars. If their is trust in the market about this, 3rd parties can provide liquidity as a form of arbiteage (causing the value to dip below $1, but not crash)
2) A solvency problem. Tether runs out of money and the remaining holders get 0. Or, Tether knows they haveva problem and pay everyone pennies on the dollar.
People are concerned about failure (2)
It should be obvious to any observer that they have little reserves and have basically taken the money and run.
Playing devil’s advocate, their users clearly don’t care if they’re backed. As such, they’re running a hedge fund with zero cost of capital. Those typically have good reasons for treating their strategies as proprietary.
Tether.to lists a US address and phone number. Their ip returns a cloudflare ip in California.
They are definitely subject to US law. Pretty sure the US could do things like have them arrested in their home countries, extradited, have their bank accounts seized, etc. I suspect the US could also seize all US dollars without the consent of any foreign nation as well, seems like a natural way to defend a currency. Hard to claim you're backed by US dollars in that case.
Where?
>Their ip returns a cloudflare ip in California.
Cloudflare uses anycast. Their IPs don't have a single location.
https://www.centre.io/usdc-transparency
> Top five accounting services firm Grant Thornton LLP issues attestations each month on the US dollar denominated reserves that back the USDC tokens in circulation.
Same for BUSD:
> A top auditing firm will attest to the matching supply of BUSD tokens and underlying U.S. dollars on a monthly basis.
Attestations are not audits, in significant and important ways.
Tether's not really doing anything different from the what banks do every day. If it crashes the government should just bail them out like they did with the banks in 2008. They will spare banks from the consequences of their actions, so there's no reason why they can't do the same for Tether.