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Comment by dr_faustus | Hacker News Reader

Well the argument completely hinges on the assumption, that this Paxos outfit is not the same kind of shit show practically all the other crypto exchanges/issuers/brokers/funds are. Since the majority of major crypto companies have to be shown to be either incompetent or fraudulent, I for one would not bet on that.

Since there is almost no money to be made with the "stablecoin" business model (at least compared to the profits/illicit gains of other crypto business models), the probability that something shady is going on is unfortunately quite high.

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Stablecoins seem like the stereotypical ZIRP (zero interest rate phenomenon).

When you couldn’t get a return on deposits (or safe government debt) anyway, it didn’t seem completely crazy to park your dollars with a company that doesn’t pay interest either, but at least lets you do highly leveraged trading against hapless crypto retail investors around the world.

Now that the crypto retail boom is over and money has a price again, the notion of sending your dollars to a one-horse-show outfit like Tether or Paxos is much less appealing. They can vanish overnight and you don’t even have the $250k federal insurance like on US bank accounts.

Stablecoin operators are making money hand over fist in the post-ZIRP era. Real, actual revenue.

If crypto has demonstrated clear PMF for anything, it's that the world loves stablecoins denominated in dollars.

You have to ask, who are the people who love this product? Sure, if you make moving dollars easy, there are people who will use it. But is it an investment product at all?

Here’s an example of how Tether gets used in the real world:

“I’d been hearing rumors about illicit uses of Tether—I’d seen court documents containing intercepted messages from a Russian money launderer promoting it to his clients, for one thing—but pig butchering was the most concrete example I found. People around the world really were losing huge sums of money to the con. A project finance lawyer in Boston with terminal cancer handed over $2.5 million. A divorced mother of three in St. Louis was defrauded of $5 million. And the victims I spoke to all told me they’d been told to use Tether, the same coin Vicky suggested to me. Rich Sanders, the lead investigator at CipherBlade, a crypto-tracing firm, said that at least $10 billion had been lost to crypto romance scams.”

https://www.bloomberg.com/news/features/2023-08-17/my-crypto...

I'm far from being a crypto apologist, but your comment is based solely on your opinion of other crypto companies.

The article is quite clear that Paxos is a regulated Trust Charter, and "...100% backed by the safest sorts of short-term collateral".

> Paxos is a regulated Trust Charter

Developments in the crypto world have made clear that this doesn't necessarily mean much in this space, so that's why people remain skeptical. Two examples: Prime Trust filed for chapter 11 bankruptcy last month and turned out to have mishandled many millions in customer assets. Fortress Trust was hacked and then bought by Ripple, presumably to cover the losses, just days ago.

Now neither of these are Paxos, and it's possible that Paxos is well managed, but if all the other trees keep falling at some point people are going to judge the forest as a whole.

You could make the exact same argument about the traditional banking system.

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The difference is that the government will save the banks, but probably not this random company.

> No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.

https://www.fdic.gov/consumers/banking/facts/

> and "...100% backed by the safest sorts of short-term collateral".

Tether also claims to be backed by something.

It's also complete nonsense.

Safest short term collateral? Cash.

A dollar will always be worth a dollar.

> Since there is almost no money to be made with the "stablecoin" business model

Currently, holding USD and giving out crypto USD makes a lot of money for the holders. Just look at Tether making $850 million last quarter alone.

Source: https://www.bloomberg.com/news/articles/2023-07-31/tether-at...

I used to do some contract work here and there for Paxos, all opinions are subjective and my own etc. The whole thing is a tour de force of the senior heads in the legal department frantically trying to work over, under and around the management crypto bros without them finding out. The churn in some of the departments is over a hundred percent per year. When all is said and done, I find it incredibly impressive that it hasn't gone tits up yet.

Fiat-backed stablecoins have one of the most reliable business models out there: collect money from depositors, buy short-term treasuries with rate X, and distribute interest to holders at rate Y < X (usually Y=0). Excess interest is pure profit.

For depositors, this is safer than a typical bank subject to bank runs - AS LONG AS the issuer actually holds the backing treasuries.

EDIT: Caveat here is the non-treasury part of the stablecoin backing reserve, e.g. reserves put in a bank. If the underlying bank has a bank run, the stablecoin has a bank run too (effectively without any FDIC insurance, since all stablecoin holders are lumped together, easily exceeding the $250k limit).

Holding the treasuries is not enough in a run, need to able to sell them at the required price, too.

The GP mentioned “short term” treasuries which, assuming something like an 7 day maturity, are very stable in price. Reverse repo is also an option.

If everyone in the street knows you are under pressure, watch what happens - even getting $0.9999 back on the $ of your "deposit" would probably have people being upset. And 7 days to get your money is probably longer that what people expect.

You wouldn’t need to wait 7 days. The price of a short-term treasuries is purely based off of the current interest rates. Given that expectations for rates are generally priced in over a 7 day period, there is very little risk.

Even treasuries don't have infinite liquidity.

Just a cool 750B a day plus 4T is repo operations.

I know! But I think being a forced seller would have implications (e.g., would repo lines even stay in place?).

You actually don’t if you throw in a clause in the redemption contracts that grants you up to X days of delay.

That only helps if the treasuries get redeemed by then (and it also isn't quite what people would expect in terms of liquidity, I suppose. Kind of similar to other options then, e.g., looking at some recent situations, FDIC stepping in also doesn't seem to take forever for retail).

That’s exactly the point. If you have up to X days, you hold US treasuries with maturities of up to X days.

You can also add clauses to the contract that allow earlier redemption into the underlying securities with redemption less than X days.

There’s a lot of ways to skin this cat and still pocket the spread in the general case.

Sure, but doesn't that business model kind of exist then in the form of money market funds (and somewhat related in bank deposits) anyway? What's the new thing from a customer and business perspective?

Being able to take part in the defi ecosystem.

Being able to have all your money stolen with no recourse when you misplace your crypto pass phrase is new.

Point taken. But since it's short-term, as long as they delay deposits for a short time period, there is no problem.

Comparison with bank deposits: Consider March this year, when Circle-issued USDC stablecoin had a "bank run". It wasn't because of their treasury holdings, but because they put reserves in Silicon Valley Bank, which had a bank run. A transitive bank run, if you will. It only recovered because of FDIC insurance, which went above and beyond their legal $250k/person limit.

Treasuries are backed by the full faith and credit of the US government, without any per-person or monetary limits.

Isn't the whole thing conceptually the same as or very close to a money market fund then (absent the specific regulations there)? What is the advantage?

Yes, I would say so. Advantages are liquidity & ease of transfers (both within custodians like PayPal, and on public blockchains).

If you want ease of transfer and liquidity then you are kind of back to a bank demand deposit, no? Why go the extra steps?

If you want to transfer treasuries, that can be done, too.

I mean conceptually this is just VUSXX (with a lower interest rate probably), but you can buy something online with it through a PayPal checkout page, or send it to a friend through the PayPal app, or send it across borders in seconds. I do think that has value from an ease-of-use standpoint.

Feels quite similar to normal banking products, but I suppose retail banking in the US is so poor, that it might already be an advantage there.

US treasuries are probably the one thing you can liquidate in huge quantities at par at almost any time. I suppose you're vulnerable to stupid duration mismatch issues like SVB.

Generally true, but if you have a lot and people know you need to liquidate, you perhaps shouldn't rule out losing a little compared to your marks.

If the US treasuries market is no longer liquid enough for a (comparably) small player like PayPal then you got much bigger problems.

> For depositors, this is safer than a typical bank subject to bank runs - AS LONG AS the issuer actually holds the backing treasuries.

And duration is really short, and rates don't shoot up too much. (You have no credit risk (as long as Congress keeps getting their act together wrt the debt ceiling), but still have rates risk, as measured by duration.)

Do you have any reason to believe this about Paxos?

> the majority of major crypto companies have to be shown to be either incompetent or fraudulent

Now we're just broadening the net from "third parties that back coins with short-term collateral" to "crypto companies"?!

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