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Comment by TekMol | Hacker News Reader

What are people holding all those stable coins for?

In contrast to other crypto currencies, nobody is holding it for speculation. I doubt anybody expects stable coins to be a better store of "dollar value" than the dollar itself.

Yet, someone holds those $150B worth of stable coins. Who and why?

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As someone that holds a lot of stable coins (USDC, not USDT)

The same reason you would hold dollars in a bank account.

My local currency (GBP) is weak atm and falling against the dollar. I want to be able to use crypto services (easy transfers, buying/selling crypto, borrow/lend on DeFI), but I don't want any more exposure to the currently volatile crypto markets, so I hold a lot of USDC

Some of that USDC is being lent making ~2%, better than most banks. I can transfer it to someone else ~instantly and very cheap, instead of waiting 3-5 days for a bank transfer (I recently put some money in a crypto investment fund, transferred my investment in USDC)

It's surprising how many times the question you are answering gets asked and people still don't get it.

Yeah but crypto is bad, so why would I buy crypto?

There's no reasoning to be had here.

> My local currency (GBP) is weak atm and falling against the dollar

That's an edge case that isn't a concern for Americans who are most enthusiastic about crypto and most involved in the crypto revolution. This is pointed out often and the crypto enthusiasts don't get it. Crypto for most of us is YAGNI

YAGNI! Because you ain't gonna need it https://www.youtube.com/watch?v=fPJohxVLJu0

Maybe individuals are in a better position to judge whether or not they need something in their own lives. And if they use something, it's usually a pretty good indication that it is useful to them.

Easier to trade, no issues with tax&bank issues, and a lot of crypto exchanges charge to convert from crypto -> cash, whereas crypto -> crypto(stablecoin) is usually just exchange fees, less than the USD charge.

Ok, I understand that a stablecoin it is easier to handle than the dollar.

But who is doing it? What is the use case?

Trading. Quick arbitrage, day trading, pump and dumps, leverage. The same thing you can do by having dollars on your stock trading account you usually need coins on your crypto account and it would be crazy to have the volatile ones.

So crypto traders hold $150B of dollar denominated stable coins at the moment?

With the crypto market cap at $1300B that sounds pretty reasonable to have 11-12% cash on hand

If only Tether and similar could show something, anything, an audit, that shows anything close to this.

I almost typed audit-like. But I remembered they've pulled that shit before. "Attestations of balances" mean fuck-all when even back when they were denying the links between Bitfinex and Tether, the same people were countersigning loans between the two for both parties.

Oh, they did claim that they had had an audit done. But they couldn't release it to the public "because it was in Mandarin".

I very very very much doubt that 11-12% cash is in anyone's hand.

> If only Tether and similar could show something, anything, an audit, that shows anything close to this.

Tether isn't the only stablecoin. USDC, GUSD, DAI, LUSD, etc all have either attestations / audit reports (that are actually legitimate) or are overcollateralized with assets that can be seen on chain.

Not that unreasonable. The total number of crypto traders globally is estimated at between 300M [1][2] (note: close to the population of the U.S.) $150B is an average of $500/user held as stablecoins, which doesn't seem that far off.

[1] https://triple-a.io/crypto-ownership/

[2] https://fortunly.com/statistics/cryptocurrency-statistics/#g...

Traders and tax evaders. With stablecoins you can trade on decentralised smart contracts, and they even allow something called flash loans where you borrow the stablecoin, trade it for profit and then pay it back in one rollbackable transaction! Also there are many high yield investment schemes based on holding stablecoins.

> no issues with tax&bank issues

Sure about that bit? This may be the perception – that holding your assets in 'the crypto system' avoids tax issues – but the taxman will disagree.

Swapping $BTC for $USDC or whatever your tether of choice is is a 'taxable event'. You've sold one security in exchange for another. It doesn't matter that they're both crypto.

Now, it might be harder for the taxman to detect this event, which is a different thing.

You mean taxable for US tax office?

In my country it is not taxable, only exchange to fiat currency is. (and this is explicitly mentioned).

If this is true, it simply means your tax code has a giant loophole that allows people avoid paying tax on capital gains by simply swapping an asset for another.

You still have to pay taxes when you convert back to fiat though. And eventually you have to do this because you don't want a significant portion of your wealth in stablecoins that might collapse overnight.

Sort of like a 1031 exchange in the US: https://en.m.wikipedia.org/wiki/Internal_Revenue_Code_sectio...

Why? You eventually have to pay it when you cash out (or buy service, goods with crypto).

If you wait you loose tax returns for the amount you invested in crypto (with each year you have it halved). Basically this is the same as in case of stock market. You don't pay taxes until you sell stock. And here stock is whole crypto market.

I buy 100 USDC. I use these to buy some crypto-currency. 6 months later, I sell the crypto-currency for USDC, making a 10% profit. I sell the USDC for USD. Notice that I have made no profit from the sale of USDC, which is (supposedly) the only taxable event in this series of transactions. I bought 110 USDC worth $1 each, and sold 110 USDC worth $1 each. And I don't even have to sell the USDC for USD, I can buy stuff directly with USDC.

That's not how capital gains works.

> I use these to buy some crypto-currency. 6 months later, I sell the crypto-currency for USDC, making a 10% profit. I

In every tax jurisdiction I know of in the world, this is a taxable transaction.

Of course, it is, but they are arguing that it's not a taxable event, in some jurisdictions.

What jurisdictions are they?

edit: I see you're asking the same question as me! Sorry!

Poland.

Also in France swap between crypto is not a taxable event (https://koinly.io/guides/crypto-tax-france/)

Excuse my scepticism, but I'd like to hear a lawyer confirm that.

Cool, but do you think people paying taxes always go to lawyers for that?

No no, you pay not the gain of transaction, you pay tax for the whole amount. And then deduct the amount of fiat you used to buy crypto.

So, you buy 100 USDC for $100 - you report that in your tax information (for use in following years tax deduction).

Then some time ago, you sell 110 USDC for $120, you pay tax for the amount $120 - $100 (unless the $100 was used year earlier, then you can use just $50 as a cost).

If you didn't report any costs (meaning buying crypto) you pay tax for the whole $120 amount.

> You don't pay taxes until you sell stock. And here stock is whole crypto market.

No, each coin is equivalent to a stock. A transaction involving swapping one coin to another is a taxable event in every country I'm aware of.

Sorry, but I'm aware how it works in my country and the taxable event is only when you exchange into fiat, service or a physical object.

Example for Poland: http://lexplorers.pl/en/polish-taxation-rules-virtual-curren...

German law is even better, you don't pay any tax for selling digital currencies if you hold it for at least a year.

My reading of that article is not the same as yours. It clearly state dthat gains due to crypto are to be taxed at 19% - the CGT rate.

> German law is even better, you don't pay any tax for selling digital currencies if you hold it for at least a year.

That's absolutely not the case - gains are treated as income if held over a year, not tax free. Coinbase has a really solid article on it [0]

[0] https://help.coinbase.com/en/coinbase/taxes-reports-and-fina...

Thanks I wasn't aware that Germany has such taxes.

As for Poland see Google translate page of official guidance from goverment: https://www-podatki-gov-pl.translate.goog/pit/rozliczenie-ze...

I poked around on Google and it looks like it is similar to France where crypto swap is also not taxable. (but I don't pay taxes there so it might be more complicated).

Depends on the jurisdiction. In most European countries for example, you only pay tax when cashing out

> when cashing out

Cashing out meaning "selling crypto for fiat"?

What about if you sell BTC for another crypto or for gold or ...

In the UK swapping between crypto is a taxable event.

It means selling the asset, full stop.

> It means selling the asset, full stop

So it seems from the outside that stablecoins exist primarily to take advantage of grey areas in taxation legislation - and possibly also KYC/AML legislation - which allow investors in certain jurisdictions to avoid taxable events which would otherwise occur when trading.

Building a business model on dodging taxes isn't a great look, is it?

We also have umbrella investment funds doing the same thing but without crypto.

Note that “cashing out” in some EU countries means transacting your cryptocurrency tokens in any way, not just trading them for money.

Example:

Sweden taxes your gains when you transact a cryptocurrency holding, also when you exchange from one cryptocurrency to another. [1]

Same for Denmark [2].

Check your relevant tax legislation for your local rules.

[1] https://skatteverket.se/privat/skatter/vardepapper/andratill...

[2] https://skat.dk/skat.aspx?oid=8953

That makes no sense. You pay taxes on realized gains (i.e. when you cash out), not unrealized ones... otherwise people like Elon Musk would have to pay tens of billions of dollars in taxes and sell off part of their stock to even be able to pay the tax (and probably ruin the company in the process). The same applies to crypto, and even though it's mostly not needed (you pay tax on realized gains in most countries and it makes common sense crypto would be similar), some countries alredy explicitly codified this, just to be crystal clear: You pay your taxes when you convert back to cash. That's the "taxable event". Same as when you sell your stock.

Please check your local regulations on this. What Uwuemu says makes sense, but tax law does not have to make sense.

I might be wrong, but I believe the IRS views every transaction as a taxable event. Crypto -> crypto included.

You are right. When you trade crypto->crypto, the IRS views it as if you traded crypto->USD then USD->crypto.

so when you buy 1 btc for $30k, trade the btc for 100 of bscoin, bscoin rises to 50 bscoin pet 1 btc, you change back to btc, now you have 2 btc, but the next day big crash occurs and 1 btc is worth just 10k... you cash out and there you have it, a $10k loss... but, you're supposed to pay the tax man on the bscoin -> btc trade? That makes no sense. And then what, you'll want that tax back because of the loss? More BS paperwork for no reason? And all this for what?

That's correct, but under US tax law, in certain cases you are able to realize the loss on the BTC to offset the gains you made earlier (tax-loss harvesting)

This is also what happens when you buy and sell stocks or bonds, FWIW. Each sale is a taxable event, even if you receive payment in the form of a different stock or bond.

That's nice and all and I don't live in the US, but just imagining the way you would track all of this makes me shiver. Anyways, from my point of view (and also many countries point of view), the entire point of realized gain tax is to be the income tax for stock traders... i.e. income is what the government typically collects taxes on... when I convert BTC to DOGE (or whatever), there is no income, so there is nothing to tax. Otherwise you're getting into a dangerous territory of soft banning crypto trade by way of purposefully obtuse tax code. Ban on a good by abusing the bureaucracy instead of properly dealing with it through the voters and their representatives.

In the vast majority of countries including the UK, US and Europe this is a taxable event.

Which country are you talking about here?

In the Netherlands you pay tax yearly, based on an estimated profit for your total holdings on January 1st. Taxing every stock trade seems insane, is it really how it works elsewhere?

It's the same as stocks. Let's walk through an example.

You have 1 share of Stock A and I have 1 share of Stock B. We both paid 1 USD for each of our different stocks.

Now I want Stock A and you want Stock B, so we'll trade with each other, and lucky us, both stocks are now valued at 2 USD per share.

After performing this trade, ask yourself these questions (from my perspective, or swap A and B for yours, it's the same either way):

* Have I held Stock B?

* What did I pay for Stock B?

* Do I now hold Stock B?

* Why not?

* What did I sell it for?

* And how much was that valued?

* So then how much did I gain?

* How much is owed in tax?

Unless your local tax law specifies "cashing out" not only as a taxable event, but the only taxable event, which I assure you it does not for stocks, the correct answers are as below. The equivalent to what you seem to describe for crypto would be transferring money in and out of the exchange where you trade stocks, and it would be ludicrous if this was the taxable event, which it isn't - but this is a common misconception among amateur crypto traders.

* I did hold 1 Stock B.

* I paid 1 USD for it.

* I don't hold it anymore.

* My dog did not eat it, so I must have sold it, which I did.

* I sold it for 1 Stock A and it was valued at 2 USD at the time of the transaction.

* 1 USD of value was gained at the time I sold from the time I bought.

* I owe a percentage of the 1 USD of value gained, depending on the capital gains tax rate, which differs.

I'd ask the local tax office anonymously. Not knowing doesn't fly as an excuse, everyone says that and it doesn't matter if it's true. Where is this place, if you don't mind?

Bonus question, what if we trade 1 DOGE for 1 Stock C? Is that different? What about 1 DOGE for 1 USD? What about 1 DOGE for 1 token backed by 1 USD? What about 1 Stock C for 1 token backed by 1 USD? Somehow it seems to get more complicated with "cashing out" laws, not less. Also I don't believe they exist, but I'd like to know too if they do anywhere.

> when I convert BTC to DOGE (or whatever), there is no income

That conversion is the sale of property. The IRS doesn't care whether you receive payment for your BTC in DOGE, USD, or corn futures; you divested funds from BTC, and the difference between what the BTC was worth at the time of acquisition VS sale is a capital gain or loss.

You do pay taxes on realized gains, but they are realized when you sell the asset, not then you "cash out", and it makes perfect sense.

There are many true horror stories of amateur traders going from in the green to losing more than they own. I don't know any place where what you describe is legal.

If this is your strategy (as in method to cheat with taxes) now is probably a good time to calculate how much you owe and put that aside into something less volatile, not to accidentally ruin your life.

The “taxable event” is the sale of an asset.

I wonder how many other jokers are accidentally conducting life-ruining levels of tax fraud.

Sorry all, should have been specific: Australia.

https://www.ato.gov.au/General/Other-languages/In-detail/Inf...

But be careful! Actually read what your local tax office puts out. Assume nothing: it can be very easy to get yourself in to trouble.

For example:

- You buy BTC @ $1

- You exchange BTC @ $11 for $RANDOM

- You just made $10 :-) and you owe the taxman ~$3 (if you're in Australia)

- $RANDOM falls to ~$0

- So you didn't actually make a material profit

- But you still owe the taxman $3! (though you might be able to claim some sort of offset on your material loss of $RANDOM; IANAA)

- Now multiply all amounts by 10,000 and be sad

It's analogous to selling any asset. You buy gold, you sell gold at a profit and buy silver. You owe tax on the sale of the gold; you assume you'll pay this from the value you now hold in silver. The price of silver plummets. You still owe the tax on the sale of the gold.

You can deduct capital loss from capital gain, unless it occurs in the next financial year then you get to carry it forward indefinitely.

>- But you still owe the taxman $3! (though you might be able to claim some sort of offset on your material loss of $RANDOM; IANAA)

From what I understand, you have to actually realize your losses/gains if you want to claim tax on them. So if $RANDOM drops to ~$0 then you can't use it for capital losses until you trade it to another crypto (or cash). You could probably just trade $RANDOM to something else and then back to realize the losses.

You handwave away $RANDOM falling to zero as something which doesn't count as a capital loss that you can carry forward to offset all future gains?

As another Australian you should really speak to an accountant if you ain't going to claim that massive loss because this is either comically wrong or intentionally misleading advice.

It's just like any other capital gains event and very simple to grok.

> Who and why?

IIUC:

    a) exchanges for short-term liquidity

    b) traders for whom going in and out of actual USD is a giant PITN

Or to put it differently: when you want to trade on e.g. Binance, it's a lot easier to trade in and out of Binance's stablecoin than in an out of actual USD.

I associate the term "short-term liquidity" with money that can be used to pay employees and suppliers.

Are exchanges really holding stablecoins for this purpose?

No, Crypto isn't used by people who have "employees and suppliers", those people use currencies instead.

The crypto community just like to co-opt all sorts of terms from economy to give themselves a veneer of faux credibility.

I was mining BTC when it was 68K. Should have transferred it over to a stable-coin right there and then. Now I still hold the same amount in BTC but its worth a lot less.

<coin> -> <stablecoin> is a non taxable event in some countries. You can decide when you get to convert to fiat and pay taxes.

Which countries?

France AFAIK

It doesn't mean you are holding. If you want to transfer money using crypto (which is it's original purpose) and you don't want to be affected by crypto volatility, then stable coins are perfect.

Perfect for P2P on and off ramps too.

Also some countries such as Argentina have literally stolen the money of their citizens bank accounts in the past. So stable coins are more trustworthy than the banking system.

https://en.m.wikipedia.org/wiki/Corral%C3%B3n

Its a much nicer experience for moving around large sums of money. I have heard of a fair few people who use it primarily for funding angellist investments since its more hassle free than a wire.

I don’t understand how this works, but according to [1] it’s used as collateral for loans. This seems to be a form of betting on price changes? See [2].

[1] https://bam.kalzumeus.com/archive/stablecoin-mechanisms-and-...

[2] https://en.wikipedia.org/wiki/Perpetual_futures

Provided you trust the stablecoin, it's a lot safer to keep e.g. USDC in a wallet you control rather than hold USD fiat balance on an exchange or some other shady crypto service.

Why is it safer? Isn't USDC issued by some entity, which promises to convert USDC back into USD?

Multiple parties need to fail for USDC to not be tradeable or redeemable to USD - holding in an exchange just requires one party to fail (exchange hacked, exit scam etc.)

It's pretty simple risk logic.

If the issuer of USDC fails to redeem USDC with USD, the price of USDC in the market will collapse, so I'm not sure which "multiple parties" have to fail for USDC not to be redeemable.

Further, keeping funds in a non-custodial wallet entails a huge operational risk that you're glossing over entirely.

Going to Circle to redeem your USDC for FIAT USD is not the only way of receiving FIAT USD from USDC. You can also sell it for another asset, and sell that for FIAT. Or sell it for FIAT on an exchange.

The OP was about the safety of "holding" fiat on a single exchange vs USDC on your wallet.

Your point about non-custodial wallet risk is a misonemer as this is purely about can you trust yourself more than trust an exchange.

I don't think you understand how a currency peg works. If USDC loses the peg, arbitrageurs will buy USDC and redeem them, pocketing the difference. This will create a buying pressure that will re-establish the peg. Therefore maintaining the peg depends crucially on the issuer's ability to redeem USDC. If the issuer fails to redeem USDC, it's game over. The point that I made about the risks associated with using non-custodial wallets is also very valid.

I don't think you understand how USDC's redempetion works. It's not a website accessible by anyone open for redemptions 24/7. Read on that first before discussing this topic please.

And this matters why? Being an economist, I think I know how a currency peg works, but if you think I'm wrong feel free to explain it to me.

: D

Being an economist does not mean you automatically know how Circle (a payments company based in the US) issues the ERC-20 token that is called "USDC", or how the redemptions for that work.

You can read about it here: https://www.circle.com/en/usdc and here https://www.centre.io/usdc

You can see centralized and decentralized exchanges with USDC liquidity here: https://www.coingecko.com/en/coins/usd-coin#markets

This is like suggesting that a mechanic should read some car's owner's manual in order to learn how internal combustion engines work.

Look, don't try derail the conversation. Your claim is that in the event that the issuer of USDC would fail to redeem the tokens, you could still redeem them elsewhere. Explain how that would work.

Okay I think I see what you're saying better now - you're talking about the long term if such thing happens while I was purely thinking "in the moment".

Sorry for the tone, internet discussion can sometimes spin off quite fast just because its a pseudonymous environment. Have a great day!

It's safer cus there are hundreds of crypto exchanges that exist, in jurisdictions all over with varying levels of regulation or compliance. Many of which have run off with customer funds. You can always be sure that your funds are safer in your own wallet than on an exchange.

However, USDC is issued by a consortium spear headed by Coinbase which is a publicly traded US company that has a wealth of regulatory compliance hoops they jump through, and have routine independent auditors track the reserves of USDC.

But youre right in that there's elements of trust that you need to place.

> You can always be sure that your funds are safer in your own wallet than on an exchange.

How is that so? Do you also think that keeping cash under a mattress is safer that keeping it in a bank?

Speculation, tax avoidance and money laundering, mainly.

They combine one strength of sovereign currencies (stable unit of account and store of value) with some strengths of cryptocurrencies, chiefly self-custody.

If someone is invested in e.g. Bitcoin and thinks they can sell the peak, turning it into $stablecoin is the easiest way, and the only compelling reason to then move that value into sovereign currencies is: you want to spend it, or there's reason to hedge on the stability of the peg. If you're planning to re-enter the market later, (actually stable) stablecoins are just as good, and are what a lot of these traders will have when they sell, so why do two additional transactions, even if they don't trigger taxable events, which they would.

I don't own stablecoins.

Because they provide nice yield. I can stake USDT on most exchanges and get 5-7% APY. I doubt those yields will hold for much longer though.

Which exchange pays you those 5-7% and why do they do that?

I don't know about 5-7% but you can get paid by uniswap for providing liquidity to speculators.

There is even better rates available. The Anchor protocol pays 20% APR! And the principal is protected as described in the white paper,

> Anchor offers a principal-protected stablecoin savings product that pays depositors a stable interest rate. It achieves this by stabilizing the deposit interest rate with block rewards accruing to assets that are used to borrow stablecoins.

source: https://www.anchorprotocol.com/docs/anchor-v1.1.pdf

You literally cannot lose! And the gains are in a stablecoin (UST) so you don't even have to deal with the volitality of crypto

https://www.coindesk.com/price/terrausd/

Tradfi doesn't offer these kind of risk-free rates because they are greedy vampires, unlike your friendly smart defi devs.

> You literally cannot lose! And the gains are in a stablecoin (UST) so you don't even have to deal with the volitality of crypto

...who wants to tell him?

https://fortune.com/2022/05/19/luna-terrausd-ust-algorithmic...

Uhmmmm lmao have you not seen the algorithmic stable coins getting smoked recently?

Is this satire? I'm 50/50 about it.

It is satire. I thought putting in a link to the UST price chart would make it clear...

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