Comment by uconnectlol | Hacker News Reader

Comment by uconnectlol | Hacker News Reader

What exactly is hard about running a fiat backed stablecoin? Don't you just accept money for your token and invest it in low risk crap? Isn't this exactly what a consumer bank does? Even Paypal does this [1].

So is the issue that they just (allegedly) got greedy and made high risk investments? Can't Google or some company just make their own stablecoin overnight and have guaranteed profit then? Of course only if it fits with their PR.

1. https://www.paypal.com/us/webapps/mpp/ua/useragreement-full

> Any PayPal balance you hold represents an unsecured claim against PayPal and, except as provided below, is not insured by the Federal Deposit Insurance Corporation (FDIC). PayPal combines your PayPal balance with the PayPal balances of other PayPal customers and invests those funds in liquid investments in accordance with state money transmitter laws. PayPal owns the interest or other earnings on these investments. However, the claim against PayPal represented by your PayPal balance is not secured by these investments and you do not have any ownership interest (either legal or beneficial) in these investments. These combined balances are held apart from PayPal’s corporate funds, and PayPal does not use these balances for its operating expenses or any other corporate purposes. Additionally, PayPal will not voluntarily make these balances available to its creditors in the event of bankruptcy.

Note: quote obtained by proxy (https://www.paypal-community.com/t5/My-Money-Archives/Does-p...) as Paypal needlessly block my shared IP.

> What exactly is hard about running a fiat backed stablecoin? Don't you just accept money for your token and invest it in low risk crap?

That's what Centre (Circle+Coinbase) is doing. They're emitting USDC and publish the individual identification numbers of every single short term US treasury (and the bank at which they're held) they buy with actual USD from customers. I don't know, from their terms of services, what happens with the returns/yeld on these treasuries.

For now that interest rates went up suddenly Centre is getting several percent on tens of billions (!) yearly. They're certainly not distributing the yeld to each individual address owning USDC.

So it looks like Centre may be a very profitable company by now.

But tether's case is believed to be different: many believe they never had anywhere near the amount of real USD backing the USDT they emitted and that they emitted USDT mostly out of their arse, tens of billions of them, and used these to pump the price of BTC (and of the whole ecosystem).

The stuff banks invest in isn't really "low risk", they invest in things like long-term loans that have a non-negligible risk of default. In order to be properly safe, a stablecoin would need to invest in much lower risk investments like money market funds and high quality commercial paper, which tends to have very low returns. The stablecoin would also need to have proper custodial arrangements in place which would cost money. Companies like PayPal do something similar as a way to avoid holding many millions in a bank account (which, as well as being subject to the credit risk of the bank, could attract significant fees and possibly negative interest). They almost certainly don't make significant profit from the practice.

What you are describing does happen, but it's not banks that do it, it's money market funds.

> invest in much lower risk investments like money market funds and high quality commercial paper, which tends to have very low returns

As I wrote in the other comment: Coinbase says the tens of billions of USD backing their USDC are in short term US treasuries. ATM the return on these is 4.7% yearly? 4.7% yearly they pocket on more than $50 billions. Without giving the returns back to the USDC holders (as far as I know people keeping USDCs in their own private wallets do not get any yeld).

Or is Coinbase not actually putting these tens of billions in short term US treasuries (which mean they'd be lying)?

Or am I misunderstanding what's the yearly return on these short term US treasuries?

The return on US treasuries is usually lower than inflation. You lose real money by keeping only US treasuries. It could maybe be done with TIPS, but that would be a little tricky to accomplish.

For example a couple years ago, 1 year treasuries had a ~0% rate.

Yes, but it doesn’t matter if the money you are losing to inflation is being lent to you for free. Although coinbase does pay a small percentage to usdc holders on their exchange I think it is one of the ways to convince people to switch away from tether.

Inflation is irrelevant if your stable coin is pegged to the currency that is inflating.

Just to expand on the comments made by other places: The holders of Tether lose money (effectively) due to inflation. The owners of Tether the corporation (Binance) can collect the interest, which is cash money. Billions is billions.

They only have to repay the face value of the deposited cash. Yes, the real purchasing power goes down over time, but that's not their problem!

> 4.7% yearly they pocket on more than $50 billions. Without giving the returns back to the USDC holders (as far as I know people keeping USDCs in their own private wallets do not get any yeld).

They do if your USDC is in Coinbase account.

https://www.coinbase.com/blog/coinbase-customers-around-the-...

Of course you won't get any yields on private wallets, how would that even work?

It would work by the issuer buying slighly higher than they sold for.

Do you see any problems with that? Like, the fact that it is trivial to exploit?

What's hard is the temptation. If you are running a fiat backed stablecoin with a big market cap, and you are willing to be a bit dishonest you can make yourself obscenely wealthy. There is no one making you keep your hand out of the cookie jar. Resisting that is hard.

And here "a bit dishonest" is just a matter of leverage. Slightly increase the risk, and on average you'll come out ahead and have extra money you can siphon off.

This is one reason why economic downturns always expose fraud.

I think a wire fraud/bank fraud charge is on the table for people who give in to the temptation.

We only need one case to be successful for the precedent to be set that you cannot fraudulently issue unbacked stable coins for there to be a sufficient deterrent effect.

It seems that with the FTX bankruptcy, SDNY is looking to set that precedence now.

"got greedy and made high risk investments? Can't Google or some company just make their own stablecoin"

Interesting that you contrast "greedy" with "Google". Why would Google want to ruin its own profits by investing in what you call "low risk crap"?

The problem with "low risk crap" is that it pays low interests. If Google were to invest in "low risk crap" then that would drive down Google's margins and profits. This is the opposite of what investors in Google want.

If Google could make large profits running a stablecoin, then they already would have set it up.

> What exactly is hard about running a fiat backed stablecoin?

The hard part is with a press of a button you can get enough money to keep your family living in luxury for several generations. The success of the stablecoin requires that you not press the button.

> What exactly is hard about running a fiat backed stablecoin?

That probably isn't what Tether is doing. They're likely running a crypto-loan backed stablecoin pegged to the dollar.

A fiat backed stablecoin is a bit useless since it just looks like bank deposits and withdrawals. Lending USDT against crypto collateral is both what they've explicitly stated that they're doing and it makes them look a bit more like a central bank (and the issuance of Tether tends to fuel trading bots that push the price of crypto up which leads to more issuance of Tether in a nice positive-feedback loop in a way that should make any student of supply and demand perfectly happy).

They've named their crypto-collateralized loans "Commercial Paper" which has been a huge success and managed to get literally everyone searching and speculating about what kinds of CP they've been buying up in the real world, when the real answer is pretty much none--creating a great distraction.

What's hard with Tethers stable coin business is anti money laundering and KYC regulations. That makes it hard to find banks and other such institutions that will work with them and why they are secretive and use odd hacks.

tether, at no point in its history, has pretended to claim a 1:1 ratio of tether to actual dollars received or in reserve. They regularly mint huge chunks of coin and give them to exchanges under legal agreements that have nothing to do with cash transfers.

This is plainly false. You can use any search engine and cap the date at 2020 and search tether fully backed.

https://duckduckgo.com/?q=tether+fully+backed&t=fpas&df=2015...

"Tether says" is the crypto equivalent of "Putin says".

Nobody believes them, especially since the company lied repeatedly in the past. They lied about the co-ownership by Binance, they lied about printing money out of thin air, they lied about getting a proper audit, and all but a few of the founders are fraudsters with a history of lying.

We're not saying it is actually backed 1:1 by USD or another fiat or anything. We're saying that Tether _claims_ such.

What the actual fuck are toy talking about?

Yes they did. They claimed every Tether was 1:1 backed by US Dollars.

Not assets with equivalent dollar value but full on actual dollars.

They kept doing so until they lie was fully exposed. Then they changed their story.

Except according to Tether, "All Tether tokens (USD₮) are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether's reserves."

[0] https://tether.to

But other than that, yeah.

If you read further, you will find that Tether is not currently claiming that "reserves" would equal "dollars". This used to be different, though, so your parent poster is still wrong (though they are wrong due to a different reason than the one you spelled out).

Reread your quote. It says the value is "pegged to fiat" AND "backed 100% by reserves"

Nowhere does it say every tether is backed by a $1 reserve.

You're falling for their slick scam words.

(Around 2017 I did a lot of research into tether, even reading their entire legal terms)

It’s literally on their homepage

Nope, not anymore.

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