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> What if the value of those assets is already below 1:1 because of recent market events?

The statistics you're bringing up are as of March 31. Do note that 6% of reserves are in "Other Investments (including digital tokens)", and Bitcoin (as a proxy for all cryptocurrencies) is down ~30% since then, so that's at least 2% of their assets that have been wiped out by market conditions. Keep in mind that said report also said that, as of March 31, liabilities are 99.8% of assets, so Tether's accounts says it should already be underwater.

(Although, if I'm reading the attestation correctly, all of the assets--including cryptocurrencies--are actually valued at purchase cost and not fair market value, so what the actual present value of those cryptocurrences is now or was 2 months ago is extremely unclear. Transparent is the opposite of how one could describe Tether's financials.)

They only need to have made 2% on those other investments and the 2% lost on crypto is irrelevant.

Also, if 2% of outstanding tether has been lost (forgotten wallet keys etc) then those can never be redeemed and again, tether wins.

Inflation is another factor worth considering here: tethers deposits are deminishing but it's investments are (or should be) shielded.

I think people fail to notice how similar a (non-fraud) tether model is to a traditional bank: you take short term deposits, you make long term loans, and you hope to have enough capital on hand to deal with any runs. Given the liquidity of modern capital markets, it's very rare for the fed to have to bail out small deposit banks. So it's reasonable to assume the same will apply to tether.

> They only need to have made 2% on those other investments and the 2% lost on crypto is irrelevant.

A quarter of their investments are commercial paper, which hasn't averaged as high as 2% yield since a brief period in March 2020. Actual cash of course has 0% yield. US Treasuries (sub 1-year), which make up nearly half their assets, also hasn't hit 2% yield any time recently. So no, they aren't recouping their loss on cryptocurrency.

> I think people fail to notice how similar a (non-fraud) tether model is to a traditional bank: you take short term deposits, you make long term loans, and you hope to have enough capital on hand to deal with any runs. Given the liquidity of modern capital markets, it's very rare for the fed to have to bail out small deposit banks. So it's reasonable to assume the same will apply to tether.

One of the reasons why banks rarely have to be bailed out is because there are stringent regulations on bank holdings. For example, a minimum tier 1 capital ratio, the amount of equity that needs to be held to cover unexpected asset shortfalls. This requirement is I believe 10%, and based on the evidence Tether has produced, Tether's tier 1 capital ratio is... 0%. It should also be noted that Tether is perilously close to insolvent, with (claimed) assets about 100-101% of total liabilities; most financial institutions prefer to be at least ~110-115% of total liabilities.

Compare Tether to banks if you want to, just be aware that it just makes Tether's financials look even worse in comparison.

Don't mistake me for a tether fan. I don't pretend to know if it will work or if it moral or if it's all a scam. I don't own any.

I'm just laying out the maths...

And to be clear, they only need to make 2% total to cover their crypto loses. If the average tether coin exists for 18 months before being redeemed, 1.5% per annum will net them 2.2% over that period and they're golden.

That extra 0.2%, for a $10bn withdrawal is 2million USD in profit right? Not bad split equally between 5 employees, for a month with massive crypto loses and 10bn in net withdrawals...

Cash has a negative yield, because rats and other vermin nibble on it.

Close. Cash has a negative yield once savings exceed investments because any additioan investment in physical capital will produce capital that rats and other vermin nibble on. If the yield is stuck at 0% then the physical capital is gone but the money is still there, leasing to inflation. Since money is a claim on the production of other people, it would be wholly absurd to distort the market by forcing the interest rate to never fall below zero as this does not deal with the rat problem. In fact it makes it worse because holding onto money let's you avoid costs associated to rat damage and therefore it fools our brain into thinking we have something that really isn't there anymore, the rats ate it. So instead, to prevent rats from eating our physical capital, we decided to produce none and leave a portion of the population unemployed. As it is illegal to trade without money the division of labor breaks down, people can no longer feed themselves because it is illegal for them to do so. The masses get angry at the rich because they took all the remaining opportunities while simultaneously pretending to be the heroes with their philanthropy.

Slightly lower actually according to https://en.m.wikipedia.org/wiki/Capital_requirement, though the exact figure doesn’t matter that much. The 10% figure in your mind was probably the old reserve requirement, which was recently eliminated in the US.

> I think people fail to notice how similar a (non-fraud) tether model is to a traditional bank

That’s exactly what’s unethical about it. They’re operating a bank, but have skipped all the regulations and oversight that banks operate with.

I have no issue with Tether operating a fractional reserve deposit system, if they are subject to the same oversight (and insurance) that banks are subject to.

The reason banks are regulated is the risk of contagion and the risk of short term drops in markets making them illiquid or shallow so banks can't meet their commitments.

But tether has no risk of contagion to a bank does it?

And markets have never been more stable or deep or liquid.

So the case for regulation here is weak.

Again. I don't actually know if tether is a giant fraud, or how much actual business case there is here for stable coins. I'm just saying, it's sort of easy to make a case at least that they're fine.

Banks are regulated to protect your money from the bank stealing them. Before those regulations keeping your money in a bank was riskier than keeping it at home. That same situation now plays out with crypto, the crypto bankers create banks with high risk investments that nets them huge profits, but that will easily fold to market fluctuations. But them folding doesn't matter to them, they still keep all the profits generated before them, while you the guy who put your money in the crypto is the big loser.

I think there is just no way you could have a traditional bank provide the capabilities that tether provides. It acts like a bank, but it certainly does things that banking regulations to not actually regulate, and there is no way tether would have been granted a bank charter. Like it or not, waiting for regulation is not a way to build something that is new. As for forgiveness, not for permission.

I think that that idiom is perhaps overstated, it can be good, but it can also be an excuse to be morally corrupt.

> They only need to have made 2% on those other investments

Made, realised and not spent/withdrawn by them. The required assumption here is that the pool of money behind tether grows / is reinvested. But given they only need to keep 1:1 (assuming even that is true) the investment profits may have been exchanged for hookers and blow for all we know.

The federal reserve is a backstop for banks, if they need cash to pay depositors they are there with unlimited cash. Part of why they are there is because they know every banks assets exceed their deposits. Tether doesn't have that backstop.

Tether, or rather Finex is a famous MM. Don't worry too much about their "other investments", they are up a lot no matter BTC price.

Tip of the iceberg https://bitinfocharts.com/bitcoin/wallet/Bitfinex-coldwallet

Also, you're going with the assumption they shall be able to redeem 100%. Crash happens, like we have seen, but everyone cashing out their USDT is not a scenario going to happen. Or if you want to account for this scenario, then you can as well assume that crypto is going to disappear, and that would not happen without a cataclysmic event in the stock market either. Probably we will be back to the stone age at this point, and will have other things to worry about

> but everyone cashing out their USDT is not a scenario going to happen

Didn't bankers say something similar in 1928?

If I recall correctly, the stock market _only_ lost 90% of its value during the crash that proceeded the Great Depression.

It would be more relevant to compare to bank runs. How many banks got only 90% of their deposits withdrawn and managed to go through this?

> Crash happens, like we have seen, but everyone cashing out their USDT is not a scenario going to happen.

This seems wildly optimistic. All it would take is for users to adopt some new FOTM stablecoin faster than Tether backers can liquidate their reserves. It needn't be rational, either; it could be catalyzed by, let's say, a *ism scandal involving someone connected to Tether.

Without commenting on the likelihood of a tether bank run in general, it seems incredibly unlikely that it'll be catalyzed by an *ism scandal purely based on the general political leanings of crypto whales (hard to pin down on the left-right spectrum, but definitely highly libertarian for obvious reasons).

Correct. Finex may have started out on shaky ground, but now passed a NYAG lawsuit and is working to become more legit. Even the CEO is out in public now doing podcasts and he never used to be. The only way USDT fails now is a concerted attack, likely by a government, thru some mix of disinformation, lawsuits and new laws.

> What if the value of those assets is already below 1:1 because of recent market events?

My long-term treasuries are down well over 10% this YTD, in case anyone wants to know. So if Tether had say, $50-billion in 10-to-30Y treasuries at the start of the year, they only have $45-billion of that now.

There are serious market risks when you buy/sell Treasuries. Yes, they're among the safest instruments on the market, but rising interest rates and inflation are huge issues and absolutely wreck the value of long-term treasuries.

> So if Tether had say, $50-billion in 10-to-30Y treasuries at the start of the year, they only have $45-billion of that now.

They don't. As stated at the link:

> U.S. treasury bills comprises U.S. treasury bills with a maturity of less than 120 days.

Except USDT doesn't have any audits or proof of their reserves.

My overall point is that USDT could very well be buying up dollar-backed securities, such as 30-year treasuries, and yet still lose a ton of money if the market moves under them. Unless Tether allows 3rd party audits of their reserves, I don't think its necessarily safe to assume that they actually hold those reserves.

If you assume that the attestation is fabricated, there's really no reason to talk about treasuries - might as well assume they embezzled 50-70B. Personally, I think it's mostly accurate, with discrepancies being around things like marking securities to market. (Just look at VC practices there, for example.) The explicit statements of "X amount of treasuries under Y maturity" are likely to be true, a vague catchall like "other investments" not so much, which puts an upper bound of ~ 15B short.

Lastly: a temporary liquidity crisis that drives USDT down far below the peg is something that would be incredibly profitable for the operators. With perfect information, it would be a situation of trading 50 cents for dollars, and could be used to erase a partial deficit overnight.

>> So if Tether had say, $50-billion in 10-to-30Y treasuries at the start of the year, they only have $45-billion of that now.

This is nuts - they dont and it wouldnt make any sense. You cant have a short term cash-equivalent backed with long-duration bonds. It would be a total asset-liability mismatch.

For reference:

T-bonds mature in 20 or 30 years and offer the highest interest payments bi-annually.

T-notes mature anywhere between two and 10 years, with bi-annual interest payments, but lower yields.

T-bills have the shortest maturity terms—from four weeks to one year.

This (more yield with longer duration) is true most of the time, but sometimes the yield curve inverts. Especially in recent months, the yield curve has flattened quite a bit.

Billions is a small number in the US Treasury market. They do not move the market with that kind of size.

True. The US Treasury market is backed by war. That's solid business that you can rely on :-)

So buyers thought they were buying some kind of novel risk-free crypto asset tied to Real Dollars™, while in reality they were mostly just buying T-Bills with unknown maturity dates and probably sound commercial paper.

Nice.

I read that selling off commercial paper can impact just about everything because it is used extensively between banks. I don't quite understand it, but apparently this is how crypto came to impact the stability of other markets; through buying and selling huge amounts of commercial paper and impacting its price. I'd like to understand that better, if anyone feels like writing an ELI5.

Everything you’ve just said would apply equally well to money market mutual funds (which hold the same kinds of assets), and yet they very rarely have problems honoring redemptions or keeping $1/share peg.

https://www.investopedia.com/terms/b/breaking-the-buck.asp

Edit: Just providing context for those who may be interested.

Right, I’m familiar with an alternate expression for what I just described. Were you disputing that it’s rare, or…?

First, MMMFs target $1/share, they do not promise it nor are they legally beholden to honor it. It's a goal, not a promise.

It also works because the US dollar has been remarkably stable and most of their holdings are USD. No crypto is so stable, with a bunch of them being about the most volatile assets you can lose money with.

> First, MMMFs target $1/share, they do not promise it nor are they legally beholden to honor it. It's a goal, not a promise.

How is that relevant to the claim in question? (Which, if you’ll recall, was whether tether can maintain the peg and redemptions while holding the same assets as MMMFs, which generally do that just fine.)

> It also works because the US dollar has been remarkably stable and most of their holdings are USD.

Okay, now you lost me, and I’m not convinced you have the recent discussion in mind. The original comment was claiming that Tether can’t maintain the peg, because it holds non-dollar assets. I pointed out a trillion dollar industry by that maintains a peg, using those same assets, and you’re saying the non-dollar assets only succeed there because the dollar is stable? Which is somehow an argument about how these assets are good enough for MMMFs to work but not Tether?

Please take a minute to review the thread and see if you’re still supporting the claim I disputed.

So the financial system is mostly reluctance ?

Well, friction in transactions, arbitrage, and collective belief in the value of an asset.

>....and collective belief in the value of an asset.

Among other things the financial system is a web of trust.

IMO one of the fundamental things that crypto gets wrong is replacing trust with algorithms. I do not think that can be done. Trust is about people.

Time will tell if an algorithm that can automate trust can be found. I do not expect it will

I think a sufficiently advanced algorithm can over time.

Bitcoin is an example of a system of trust that has worked pretty well so far (although it requires a lot of electricity, but that is the trade off). There are also people on the Bitcoin core team, so there is some trusted element there.

Crypto will likely continue to innovate on algorithms, given the chance.

I think there can be trust in people, plus algorithms, with algorithms taking over more over time. This is already happening even in traditional finance, i.e. giving more control over to algorithms that participate in HFT. People do monitor those, but people monitor crypto, too, and maybe the failures in crypto so far mean too much control has been given.

I would argue that some more things in finance can be automated, without things being so black and white (i.e. no control vs total control given to algorithms). I do think the trust model given to governments and traditional finance gatekeepers can be iterated on, with some regulation involved too. I don't think we've figured everything out yet.

See this is just low quality FUD,

They have 39B in US Treasury Bills, how much do you think these will drop if they sell? The truth is next to nothing. and a 39B moat for sell offs seems very reasonable