Not an expert here but I don’t think this is correct. They had some money in the bank. They were supposed to have more. It shouldn’t be surprising that they have some cash given that they have sold so much Tether’s.
I also don’t think tether makes it easy (or possible?) to sell Tether’s back for the $1. It’s “backed”, but it is a meaningless idea. It’s all the best parts of a bank without the hard parts. And is basically fraud.
At one point their T&S explicitly said that tether had no obligation to buy back tether at any price at any time. They then changed it to be more opaque.
If there's any financial idea the crypto people just do not get, it's the idea of "backing". A currency is not backed by dollars unless I can convert that currency freely back into dollars. It does not constitute "backing" to have the money nominally somewhere in existence, but not actually available.
Heck, who'd like a few hundred thousand jerfcoins? Come and get 'em! They're backed by dollars, in the sense that I guarantee there exists in the world many hundreds of thousands of dollars. jerfcoins don't give you any claim to those dollars, of course, but they're backed by them just the same!
("But jerf, what are US dollars backed by?" Purchasing from the US government the right to not be arrested and thrown in jail for lack of payment on taxes. Just 11 days ago, many people completed trading in their dollars for the year for that backing, so it's definitely a transaction that can done by real people. It may not be an aesthetically pleasing form of backing, but it seems to be working.)
I agree with you almost 100%, just wanted to add that no current Government/State can back the nominal monetary mass flowing through its economy with real money, no matter the amount of taxes they're collecting. The reason being that the nominal monetary mass it's pretty big (to use an euphemism) compared to the real money flowing through the real economy.
For example in 2008 the CDS market alone was at some point "valued" at close to $36 trillion [1], while for comparison the US GDP back then I'd say was around $14-15 trillion (give or take a few trillion). Yeas, I know the CDS market back then was a financial abomination, and I do know that a lot of those $36 trillion were probably money counted twice or thrice or even more, but the idea remains. And that's just one market.
What indeed still keeps this whole house of cards still standing, what keeps any financial system standing, is trust. And, as you very well put it, once you have the power to put people in jail (or launch inter-continental ballistic missiles) you kind of have a lot of trust by default. But there are moments when no matter how powerful you are you still manage to lose that trust, see the USSR post 1989 or the Spanish Empire during and after the rule of Philip II [2], that's when things turn nasty:
> Charles V had left his son Philip with a debt of about 36 million ducats and an annual deficit of 1 million ducats. This debt caused Phillip II to default on loans in 1557, 1560, 1575, and 1596 (including debt to Poland, known as Neapolitan sums). Lenders had no power over the King and could not force him to repay his loans. These defaults were just the beginning of Spain's economic troubles as its kings would default six more times in the next 65 years.[9] Aside from reducing state revenues for overseas expeditions, the domestic policies of Philip II further burdened the Spanish kingdoms and would, in the following century, contribute to its decline, as maintained by some historians.[10]
I think the point being made is that the exchange rates of any currency -- whether from currency A to currency B, or currency B to "hot dog, fries and soda" -- are essentially set by shared belief, not by some kind of intrinsic value, no matter what the currency is ostensibly backed by. The idea that currency needs to be backed by anything in the sense it's being used here (e.g., a tether backed by a dollar, or a dollar backed by a fixed amount of metal) is a convenient fiction that requires trusting all the entities explicitly or implicitly involved in the transaction. I'm aware bitcoin and other blockchain-based "currency" tries to expunge the need for trust, but in practice it seems like most of them succeed more in expunging accountability.
The argument that state-issued currencies have value because they're the only currency you can use to pay taxes back to the state is true in some sense, but the value is still essentially arbitrary and the trust is still required. (e.g., if I owe money come April 15th, I have to trust my bank, Visa, and TurboTax, probably, even before it gets to the IRS).
The one exception would be the Canadian Tire dollar, it existed for 40 years with only the backing of a major retailer. I've read a few academic economics papers on the Canadian Tire dollar because it's an exception.
Although Wikipedia has "but is not considered a private currency" for that. But you are backing up the point that there isn't much that's existed a while that isn't backed by something. The other thing I thought of as a well known non backed currency was literally monopoly money. Though that "can also be used as a derisive term to refer to money not really worth anything"
It'll be interesting to see how the cryptos work out. I'm optimistic that bitcoin will still be valuable in decades to come due to scarcity and fame. Bit like Van Goghs and that kind of stuff.
The ability to settle taxes and debts with money is a rather large part of why it's useful, especially relative to things which pretend to be equivalent but are not possible to settle tax bills or debts with...
One of the explicit major purposes of fiat currency is to make currency a hot potato so that if you try to hoard it you lose wealth. This is almost precisely counter to what the people who desire money want; so why would they accept fiat if they weren't forced to?
You'd also get pressure from workers who don't want to be paid in tokens that lose 2.5% of their value each year. Who can say with a straight face that they will accept a default 2.5% pay cut each year built in to their wages, no questions asked? That would verge on crazy.
If fiat isn't backed by some sort of government compulsion it is difficult to justify why savers or workers would deal in it. It isn't stable enough - it's value declines too quickly. The people who benefit are borrowers, the big banks and to some degree employers - powerful players, but not enough to force fiat in a battle where government isn't involved. The uniform acceptance of fiat is strong evidence that compulsion is involved.
> You'd also get pressure from workers who don't want to be paid in tokens that lose 2.5% of their value each year. Who can say with a straight face that they will accept a default 2.5% pay cut each year built in to their wages, no questions asked? That would verge on crazy.
Getting no raises is a pay cut, yes. But most workers spend their wages in the same year, inflation is not a problem here.
Here is an analogy in real terms just to make sure we are on the same page:
Contract A:
I'll give you 1,000 warm meals in the first year, 980 warm meals in the second year and 960.4 in the third year, progressing according to meals = 1000 ^ (year - 1). There is an understanding that I'll maybe give you a raise every year or maybe not depending on market conditions.
Contract B:
I'll give you 1,000 warm meals a year. We'll renegotiate next year. If market conditions have changed I might offer you less.
Now, in principle these two contracts are not that different and market conditions should force the employer to pay market wages. But if you offered a worker the choice between the two options they'd pick B. The structure of contract A is clearly not in the workers interest because it involves a lot of bureaucratic foolishness just to get offered a steady real income. It can only encourage shenanigans.
If I were on Contract A (which, since I'm payed in fiat when I work, I am) then I have to semi-regularly run figures against a diverse array of facts to figure out if I'm making or losing against my starting salary and I have to fight my employer for a wage raise if inflation is 4% but they offer a 2% increase. In addition there is opaqueness about what inflation really is; the government agencies do their best to measure it but it isn't a perfectly distributed phenomenon. I don't think I can accurately estimate what wage increase would be maintaining a fair wage when I am working. I don't have enough information about, eg, inflation by postcode or asset class vs my consumption.
I don't accept that that compensation structure is good for me as an employee. And more broadly the incentives for workers is to be paid in something that looks almost exactly like currency but does not inflate away year on year.
Yes, the same nominal amount of dollars is worth less in the future, but the employer can also raise prices for the same amount without any loss in revenue. Talking about spherical cows here.
Since inflation affects everything at once, it can be ignored when calculating wages vs profits. It's all about the distribution of money, not some esoteric "value" derived from macroeconomic variables.
For wage-sensitive jobs, the minimum wage is usually raised every year (or couple of years), so that should correct for employees without leverage over their wages.
Inflation affects different economic actors differently, but at "regular" levels of about 2% a year, it's too low to matter for the majority of people.
Yeah, the employer is fine. This is about the people earning the wages.
> Talking about spherical cows here.
> Since inflation affects everything at once
Are we dealing in spherical cows here or not? That is a friction-less spherical cow if ever I've seen one.
The agreement on inflation is to use the best-guess, which is the government number, but the as-experienced effect of monetary creation would varies enormously depending on where and how people are engaging with the economy.
> at "regular" levels of about 2% a year, it's too low to matter
The ordinary people I've dealt with care a lot about small amounts of money because they don't have much to spare. 2% p.a. represents a significant risk to them. And, critically, if a wage earner had a choice they wouldn't choose to be subjected to it.
By too low to matter I mean the employee doesn't meaningfully change their situation.
If they need to work for a living anyway, earning 2% more doesn't make them retire earlier.
Inflation mostly affects people that can save significant amounts of money for longer periods of time, not wage earners.
The alternative to getting payed in fiat is some other value storage thing that is even harder to turn into rent and groceries. Unless it's actual groceries and corporate housing, or token for corporate shops, which is even more regressive.
> By too low to matter I mean the employee doesn't meaningfully change their situation. If they need to work for a living anyway, earning 2% more doesn't make them retire earlier.
If somebody doesn't have savings, then they are spending everything they earn. A 2% real change in wages would require them to reduce their real consumption by 2%.
> Inflation mostly affects people that can save significant amounts of money for longer periods of time, not wage earners.
It changes the situation from one where wage earners will maintain their lifestyle if nothing obviously changes to one where wage earners will be worse off if nothing changes.
There is a practical difference between these two. If there was a choice, by far a majority of people would rather not live under that second regime. Similar (in a very minor way) to standing around on railway tracks; in theory there is no problem because when you see a train they could move - but still a normal person would not choose to stand there at all. Use of fiat and the associated inflation creates risk of costs for wage earners.
A system wouldn't stably settle on that sort of outcome without government backing the token with some serious clout. The uniformity of fiat for labor is very suggestive that it isn't a social construct. Society isn't that uniform.
I agree that wage earners lose real purchasing power with inflation. However, agressive minimum wage adjustments and welfare (for lower incomes) and unions (for higher incomes) should provide all the incentives for employers to keep raising wages, I don't think banishing fiat money is necessary for that. There are other ways to achieve the same purpose.
I also agree that it was preferable to be payed in non-deflationary tokens, but I fail to see any real-world examples of that.
"Money is purely a social construct. It only has value because people collectively find it useful. There is no backing."
You're missing a very important point: US dollars are special because they are the only thing accepted to pay US taxes.
No matter how valuable of a thing you own - gold, euros, a truck full of mona lisas, shares in TSLA ... it will not be accepted as payment for US taxes.
Understanding where the value of money comes from and what it is actually used for and what the nexus is between financial entities and physical force ... it all starts with understanding what it means that the government will not accept anything from you, no matter how valuable, for payment of taxes other than the currency it issues.
The government starts accepting any asset for tax payments. You can now sign over fractional ownership in your factory, or your rental real estate, or your Mona Lisa to pay your tax bill.
Are dollars now worthless, because they're not required to pay taxes? Do you abandon your bank accounts because the dollars have no value?
Certainly not! It's too inefficient for the grocery store to appraise your Mona Lisa and negotiate a 1e-8 share of it. Dollars are still useful, and they still have value even if they don't have a monopoly on tax payments.
The point with taxes is they are denominated in dollars or similar so if you conduct your US business in French Franks or Bitcoins or whatever, converting each transaction to dollars on the return would be a pain in the arse which is why most businesses don't do that. Paying isn't a problem - send Franks or whatever to your accountant and they'll sort it.
Let's try something that isn't a thought experiment, but a natural experiment, that is, something that has happened dozens of times throughout history. Why is it that when governments collapse, their fiat currency simultaneously goes with them? If money is just a social agreement, why do those two things always happen together? If money is just a matter of convenience, why isn't that money still useful even after the government collapses, if nothing about the state of that money has changed? Why aren't people still accepting Confederate State Dollars somewhere?
The answer is that the state has changed. The backing of the currency collapsed, and it turns out that currencies collapse hours, if not minutes, after that news gets out. In the modern era, probably minutes.
There's an irony to cryptocurrency advocates claiming money doesn't have backing, which is that the only reason you can claim that is precisely that you're so casually used to fiat currency being rock solid, to the point that you literally can't imagine it collapsing, that it leads you to misunderstand the nature of currency.
> For example in 2008 the CDS market alone was at some point "valued" at close to $36 trillion [1], while for comparison the US GDP back then I'd say was around $14-15 trillion
People say this all the time, but regardless of whether or not the CDS market was or wasn't a shitshow at the time, comparing the outstanding notional to GDP is meaningless.
At the time, the CDS market worked like most derivatives markets: you face a small set of players and you are constantly offsetting existing transactions and subjecting them to netting rules on a master isda.
So like, let's say Foocorp has 100m bonds out there. I want to buy protection on 1m of this (basically, I want to buy default insurance). You agree to sell this to me. Ok, there's 1m in CDS contracts' notional value outstanding.
Now, our views, other risks, whatever changes. Maybe I sell the bonds, and holding this CDS is too risky for me now because it's just a naked short of bonds I'm not long. Maybe you buy a bunch of these bonds, and now you're not only facing the default risk of the bonds but paying the default insurance to me.
So you decide to buy another CDS offsetting your existing one. I'm also trying to flatten out here so I sell a CDS offsetting my existing one. Now (mutatis mutandis) we're both at 0 CDS risk. We each have entered into 2 swaps, they're directly cancelling.
But the total notional? Now it's 2m. Contracts expire, so the number doesn't strictly go up, but given how the products are bought and sold, it mostly does. It would be like looking at the stock market not in terms of the market cap of all the companies, but as the dollar value of all the trades made in a certain time period. It's not that this number is meaningless, it's just that it does nothing to explain how much is "at risk".
Of course in reality this is all much more complicated, but the basic principle holds.
The US Government will not arrest and throw you in jail for lack of payment on taxes, as long as you have accurately declared all of your income. Failure to pay is a civil violation, not a criminal offense. However they will garnish your wages and forcibly seize your assets to settle large tax debts.
It's true that the first failure to pay is just civil, absolutely. In fact the government and I are currently involved in a mostly-friendly dispute about my 2016 taxes, and I'm not currently worried about the men-with-guns. However, if you defy them on payment, and then defy them by hiding your income from them, and defy them on the next thing they do, and defy them by failing to pay your civil violation penalties, etc., they will eventually come after you violently.
The wage garnishment and forcible (note the word) asset siezures are themselves backed by men with guns. If they tried to just go around and sieze assets politely, while never threatening a fly, it wouldn't take long before people figured out there's no particular reason to let them have it.
One advantage of this is Ponzi schemes never have to fall apart. As long as people are willing to HODL forever your crows never have to come in to roost.
Let's assume that it's impossible to sell Tethers for dollars. I don't think that's completely true, but that's the "steel man" argument.
Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency?
You would know this was happening if the price of Tether dropped far below $1.00, or if the supply of Tether contracted as Tethers were destroyed on redemption.
The fact that we don't see either of these things tells me that the backing isn't actually "meaningless". Rational traders with their own capital at stake don't appear to be selling.
>Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency?
They (or at least some) are. BTC crashed about 10% yesterday.
My understanding is that the existence of Tether provides liquidity and confidence in BTC (especially the ability to sell quickly). If Tether takes a big confidence hit that might affect BTC strongly.
Have you bought large quantities or are you relying on what exchanges say? Are you sure that that large quantities are not wash trades? I’d be very wary.
But if there were widespread problems selling Tether to buy Bitcoin, and withdrawing Bitcoin from the exchange, then we'd hear about it and there'd be a run on the exchange.
You can't really go from USDT -> USD directly. You go from USDT -> BTC and then BTC -> USD. So the drop in BTC is really people accepting fewer BTCs for the same USDT.
> Let's assume that it's impossible to sell Tethers for dollars.
You can directly do this and the market is pricing it at 5% discount. Anyone can short it or buy tethers at a discount. It's been down to 85c in the past.
> The fact that we don't see either of these things tells me that the backing isn't actually "meaningless". Rational traders with their own capital at stake don't appear to be selling.
This is the equivalent of arguing "if roulette was a negative sum game, economically rational actors would cash in their chips". There's plenty of reason to believe that the USDT market doesn't even closely approximate economic rationality, and no reason to believe that there are ordinary investors with large sums of cash tied up in USDT who have superior insight into the level of backing Bitfinex actually have than the people questioning them.
The "why aren't more rational people shorting it?" argument makes slightly more sense, but then if you shorted Madoff when his fraud was first highlighted, you'd have been bankrupted in the ensuing 8 years...
Well, every previous incident, those who bet against tether lost. Those who went long on tether picked up a nice quick profit and laughed at the fools on the wrong side of the trade.
> The real mystery to me is why rational traders continue to buy Tether at $0.9926
Unless there is reason to believe otherwise that I'm not aware of, shouldn't we assume that this is just Tether buying up the supply to keep the peg? Isn't that how a stablecoin is supposed to work?
> this is just Tether buying up the supply to keep the peg
Buying up the supply with what?
Skeptics claim Tether isn't backed by actual dollars, so it's impossible to convert Tether for dollars.
But if Tether is buying up the supply, what are the sellers of Tether receiving in return? If they're getting dollars, then doesn't that refute the skeptics' claims?
Skeptics generally claim it's not backed 1:1, not that they have zero dollars left. They can afford to buy up the demand until at some point they can't.
Usually by insolvency is meant that the bank doesn't have enough liquid, hard assets to cover up the withdrawals from the bank. Bank can have varying assets such as bonds that it has lent out, but if the bank has lent out a lot of money to some people who can't pay the loans or other banks are unwilling to buy, it can be insolvent even if on paper it has "assets".
> But if Tether is buying up the supply, what are the sellers of Tether receiving in return? If they're getting dollars, then doesn't that refute the skeptics' claims?
No, since Tether and Bitfinex are the same company. While it's the opposite direction of the recent NY AG issue, if Bitfinex company or client account funds were raided to buy Tether for price support purposes, that doesn't require Tether to be backed by any dedicated reserves.
After taking $700m out of whatever funds were backing Tether to paper over the loss of Bitfinex funds, raiding Bitfinex funds to prop up Tether wouldn't be out of character, though obviously that kind of back and forth shell game would be unsustainable in the long term.
> No, since Tether and Bitfinex are the same company.
Right, despite previous protests to the contrary, the court filing noted (and I'm surprised that the article didn't, though it hinted at that) that the "arm's length" loan document was signed by the same two corporate officers, on both sides of the contract.
The price of Bitcoin as denominated in tethers is increasing (supply/demand as people attempting to exfiltrate value to a safer asset) and Bitfinex has quite a lot of Bitcoin, both their own, their reserves, and other people's, so they can hold a peg until they can't, making trading profits all the way, as long as their counterparties and regulators let them.
The claim is that Tether isn't backed by enough dollars to cover the number of Tethers in existence. There could still be a bunch of dollars in the bank.
Could also be unattended arbitrage bots. These are programmed to look at the price on multiple exchanges and if it diverges, buy on the cheap exchange and simultaneously sell on the expensive exchange. Under current market conditions, that means buying (for USD) on Coinbase, Gemini, and other fiat exchanges, and selling (for Tether) on Bitfinex, Binance, and other Tether-based exchanges. When the music stops, they'll be left with zero dollar reserves, zero Bitcoin reserves, and a hoard of worthless Tether.
On the other hand people have been saying the same about tether for many years, and it still has kept the peg at pretty good levels. And it is still the most liquid and biggest "stablecoin". Many seem to need this kind of thing so they keep using it even when there are risks involved.
If they are not actually backed by dollar numbers, but with volatile assets (like real estate, stock, metals, or bitcoin, etc.), their holdings are not correct.
> Tether Tokens are 100% backed by by Tether’s Reserves.
But...
> “Reserves” means traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities;
and...
> Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves.
So even if they agree to redeem your Tether Tokens (which they do not promise to do), you might get some other kind of "security" rather than actual cash. If that happened to be another crypto token, for example, and if you then have trouble exchanging that token for cash (or its value is busy crashing)... well, too bad.
Tether could be intervening in the markets and propping it up with reserves, similar to how banks prop up a stock for a while after IPO.
Or it could be that Tether market is still irrational. Everyone in the crypto space really wants
a stablecoin that trades for a dollar. The number of people who trade and desire to have such a coin could outnumber the more rational market participants who say it's worthless.
Full reserves aren't required to maintain the peg, fractional reserves can work as well. However with fractional reserves there is a risk that the backer might lose money.
People trust banks, even when the fiat in banks isn't fully backed. Usually the reserve ration is backed to something like 10%.
To my understanding tether is just like a bank, except the accounts are kept on Blockchain instead of private database. So, it is rational to use them if you think they habe enough reserves to keep them liquid. Full backing is not needed, as it isn't needed with banks as well.
Banks generally have full backing, verified by frequent auditing, it just may not be all cash or cash-like assets.
But then again, not all of bank’s liabilities are cash either. E.g.: CDs.
Things get hairy when their long-term assets go down in value and/or there’s a sudden demand for withdrawals triggering a mismatch between short-term liabilities and long-term assets.
We have strikingly little audits from this stablecoin. Do assets match liabilities or not? For a bank, they always will or else they get shutdown before losses become too great.
Yeah they are loans, like apartment loans. The loan might be for something like 20 years and might default.
In my opinion having assets like house loans is pretty far away from being "backed". If enough customers want their money out, bank can go bust. If they have lent the money to wrong people, they also can go bust. Banks go bust now and then.
The bank can sell the loan off to another bank if it needs cash now. It could be at a loss, or it could be at a profit depending on how interest rates chgd since issue.
It takes a lot for a bank to go bust when they can do that with their assets if they go through their reserves.
The value of their loans may be good enough to sell shares to investors instead of selling to another bank.
The trick is to loan out to lots of different people so any one group being “wrong” is made up with profits.
We’re seeing none of that with this stablecoin. They’ve put a huge chunk of money into a ???bank(s) in a ??? country, at best.
What’s your definition of “backed”? Banks will gladly keep your fiat in an insured safety deposit box, but they’re going to charge you for the privilege. And the government will just inflate away your attempt at deflation.
Well, banks can give out loans too eagerly to wrong people meaning that the resell value of the loan can be much less than the value of the loan. In fact nowadays it is not that rare for bonds to have negative returns.
Banks can fuck up and go bust. It doesn't happen often but it happens.
Actually they don't quite get shut down. At least not in the USA. Instead they get taken over by a more stable bank, which receives some money to make the transaction make sense. People with deposits in the bank do not lose their money.
This is how FDIC insurance actually works in practice.
However there is a systemic risk if the entire system cannot absorb the bad banks. According to multiple people involved, in 2008 we came within a few hours of the whole banking system having to be shut down with no idea how much chaos that would cause. This is why TARP got passed.
I get that. When people say “they lost their house”, they still know where it is, it’s just not theirs anymore.
When your bank is forcibly taken over by the government and the assets forcibly sold to someone else with nothing going to the owners of the bank, most would say the bank was shutdown.
In 2008, since TARP recipients didn’t wipe out their shareholders and sell shares to new owners (perhaps .gov), I would say they had plenty of time left before needing a bailout.
The gov should have created an express bankruptcy protection process instead of bailing out shareholders and boards that took too much risk.
The problem wasn't that the banks were unsound. Most of them were sound. But each bank didn't know which others were solvent, and that fact was about to shut down the ATM and credit card systems.
Once the government stepped in, everyone was sure that normal operations were safe, and chaos was averted.
In fact, as https://www.americanbanker.com/opinion/tarp-was-not-a-bailou... points out, the government actually made a $30 billion profit on TARP in the end. (It can be debated how much of that profit was a result of other Treasury actions, like quantitative easing.)
One of the primary arguments in favour of cryptocurrency is avoiding the fragility of fractional reserve banking. Building a cryptocurrency with a fractional reserve is basically building an unlicensed and uninsured bank. That's not a particularly attractive prospect for depositors, so naturally Tether were incredibly dishonest about it.
> One of the primary arguments in favour of cryptocurrency is avoiding the fragility of fractional reserve banking.
Only by people that don't understand fractional reserve lending. For example, the exchanges are loaning BTC for the purpose of shorting. This is exactly fractional reserve lending, just like the banks.
If you have 10 BTC in your wallet that says you have 10 BTC, it will always be 10 BTC and available to you.
If you have 10 drachmas in your bank account that says you have 10 drachmas, there are a lot of different* ways that it can suddenly become partially/fully unavailable to you that wouldn't happen with your self-hosted BTC wallet.
Then you have failed to counter the claim of "One of the primary arguments in favour of cryptocurrency is avoiding the fragility of fractional reserve banking."
Banks' deposits are backed with outstanding loans, and they have a guaranteed right to borrow temporary shortfalls at lower interest rates to make up the difference if people want to cash out their savings quicker than their loans can be repaid.
This isn't at all similar to an organization claiming to back an asset with dollars and actually backing it with their imagination.
Another mystery for me is why, if the backing actually existed, did Tether refuse to have that verified through independent auditing? I can think of a couple of reasons why not, but one of them is that it was not actually unencumbered, and another is that it might be inconvenient down the road for it to have been clearly established that, at one point, Tether really did have the cash.
Particularly extraordinary because if you're a crook and you need an audit you can get one for a price. All the Big Four firms signed off on accounts at (mostly Eastern European) banks which subsequently turned out to be either straight up frauds or so corrupt that it hardly matters. So Tether not only couldn't manage to get a clean audit they couldn't find a way to bribe their way past this obstacle or they weren't willing to splash the money to do so.
The desire to represent USD (ie stable value vs wildly volatile crypto) outside of the traditional banking system without the usual compliance (know your customer) and controls (anti money laundering) required of such financial instruments. Fake dollars that track real dollars.
Thanks for explaining! Is the hope then that a stablecoin is the last step before cash out or that stablecoins would be the more widely accepted for use in the "real world" than Ethereum, Bitcoin, etc? As in, stablecoin could actually be more stable if it were deemed acceptable for normal transactions (i.e. don't buy pizza with Bitcoin, buy it with stablecoin X).
The sole purpose of Tether is to sell your Bitcoin (or whatever cryptocurrency) for "dollars". The quotes are important because these "dollars" are not real dollars that you can actually do anything with; they're just a number. Imagine if you had a million dollars in your bank account but there was literally no way to use those dollars to purchase any real-world goods or services. That's what tethers are. Why would you do this? Maybe you think Bitcoin prices are going to drop and you want to "lock in" your dollar value.
When you want to actually get real dollars, you have to use your tethers to purchase Bitcoin, then transfer the bitcoin to a real exchange that does real KYC (Gemini, Coinbase, etc), then sell on that exchange for real dollars, which can then get transferred to a real bank account.
It's a market, but has generally been trading (and continues to trade) at very close to 1:1. It broke the peg last November when there were rumors then of Tether's insolvency, going to down $0.85:1 at one point.
Proper KYC, regulated, based in SF, competitive rates. Just now they quote $0.9694. Usually it's nearer $1 but I guess people are selling a bit. Commission is like 0.16%.
Using a stablecoin to buy pizza is a theoretical application which has yet to happen to the best of my knowledge. Facebook is rumoured to be working on a stablecoin currency which might bring regular use to consumers, perhaps.
If you want to sell crypto coins quickly, getting dollars is hard. You have to go through banks, or trust that the "USD" in your crypto exchange account is really there. Getting crypto tokens out of an exchange is pretty easy, but you're just jumping from one volatile asset to another.
So someone had the idea that you could create a coin that would retain its value but you could easily swap for crypto coins.
It's prominent use case is as a workaround for shady exchanges who don't want to touch USD, for regulatory reasons, so instead they use "USDT" (Tether backed USD).
Some people look to stablecoins to avoid the volatility of crypto. Unfortunately stablecoins aren't really what cryptocurrencies are about, they're supposed to be without a trusted third party, yet stablecoins has a third party issuer who can for example refuse to redeem your coins.
I personally think they're a big waste of time at best and scams at worst (like Tether).
Bitfinex's initial need for them is simple: they have a very, very lucrative business, which is allowing speculative demand and supply to meet and charging fat fees for matching them. This business requires speculators to be able to move money in and have the expectation of getting money out. Bitfinex could not credibly provide that after they lost the ability to clear USD-denominated wires when Wells Fargo cut them off (technically, declined to be an intermediary bank for their Taiwanese banks' wires) for AML/KYC compliance issues.
So they took what was then a fun little crypto side project and got people to believe it was the next best thing to a fiat onramp. This, somewhat incredibly, worked.
Then the rest of the crypto economy glommed onto the fact that this is really useful for them, because tether was much more AML/KYC friendly (in the sense that you could use it when your name was Ima Moneylaunderer) than USD-denominated rails typically are, and it fulfilled a liquidity-preserving function similar to casino chips.
The cryptocurrency community produces essentially no value via sale of services outside of the community, so the balance of payments always has to satisfy "We can only pay out as much hard currency as people have deposited." Prices only keep going up to the extent that folks don't try to withdraw the money. Tether encourages people to realize gains but keep their gains on the table.
(The community thinks that the main use case is facilitating inter-exchange liquidity/arbitrage but given sufficiently well-capitalized arbitragers tether provides no benefit over "We are capable of keeping a ledger of our activities in a database of our choice.")
Those are the main reasons why. I strongly suspect that the community, once it realized that Tether was imperiled, brought several "competing" stablecoins to market because they both a) realized the systemic utility of stablecoins and b) were attempting to avoid the entire ecosystem vanishing in a nuclear fireball as tether unwound. Who knows, maybe they'll succeed.
The solution to tether existing is for the US government to release a fiat convertible cryptocurrency pegged to $1 with all of the compliance of traditional banking. Financial institutions would use it, the government could tax it, and all of the kyc/aml could be enforced. It’s not even hard to do.
Until that happens, there’s a rational economic narrative for companies of all shapes and sizes to offer these kinds of synthetic dollar-like instruments (and it will also remain rational for regulators to be interested in these enterprises).
It’s an interesting time to observe this market (I guess crypto will be interesting for a while).
Edit: I guess it's impossible to have a nuanced discussion about cryptocurrency on HackerNews right now. For those of us who have participated in these markets from an institutional level, there are obvious reasons why these synthetic instruments exist beyond evading regulatory controls (which is why Coinbase, who is the most regulatory compliant entity in the industry has a synthetic dollar instrument). There are real technical advantages to having a synthetic instrument that go far beyond regulatory evasion, just ask anyone who operates a regulatory compliant entity in this industry.
Yah this won't work. The only reason people want crypto currency (especially of the tether type) is that it's based in a non-extradition territory, with no US government oversight and taxation. The lure of Tether is all the (fake) value with none of the taxes or the governmental stuff.
If you want to move dollars between 2 exchanges in different parts of the world, it’s a pain to do by wire.
Some exchanges only deal in crypto.
It kinda makes sense: you want to sell barfcoin but it’s only traded at an exchange in Elbonia. So deposit your barfcoins to the Elbonian exchange, trade it for a stablecoin, then move your stablecoin to a local exchange and trade for your local currency.
Tether exists at all because exchanges don't want to follow regulations around USD. A government-approved fiat convertible cryptocurrency wouldn't change that.
Tether exists because Bitcoin "exchanges" (who are really broker/dealers) are so bad at paying out USD. If I sell stocks via my US broker and tell them to wire transfer the proceeds to my bank, the money shows up the next day. Sometimes the same day. Try to find any crypto "exchange" that does that.
Seems like a best case scenario. Either all exchanges have KYC/AML problems (possibly) or a lot of banks think of crypto like my school librarian did about the internet in the 90s: it’s all bad because anyone can publish with it.
I think you are misunderstanding the point of tether. It’s not about paying out dollars, many companies have been paying out dollars from crypto long before tether existed.
The point of tether and all stablecoins is to provide liquidity to the crypto market. That is, to easily ans nimbly zero out your crypto exposure. Before stablecoins if I thought btc was going to drop a lot in the next hour, the only thing I could do would be to buy some other crypto asset and hope to god they weren’t correlated with btc. But since all crypto ia highly correlated with each other this didn’t work very well.
Tether was introduced as an uncorrelated store of value so I could quickly zero my exposure. Unfortunately, tether seems to have more exposure than it was supposed to have.
It has everything to do with Tether because that's the main use case of Tether - if an exchange won't or can't meet the KYC/AML requirements, they can't pay out USD, but they can pay out Tether. For people and exchanges who can use USD, Tether has limited use; there are some scenarios but the bulk of Tether demand is for exchanges and crypto deals where business can't be done in USD.
Depends where the exchange is located. The iffy ones seem to legally have the exchange in some tax haven, an office some place else, actual staff at undisclosed locations and ignore kyc. If you have to have a fiat bank account then you can't really do that or at least have problems like Bitfinex have had. Bitfinex/tether have the reputation of accepting iffy/laundered funds.
Although I agree with the author's position that an awful lot of sketchy things are happening, and I'm sure happy I don't own any of this so-called stable coin, this line bothers me:
> If everyone redeemed their Tethers today, it is not clear how Tether would come up with the money
This is true of banks, too. In fact, if everyone took out all of their money from all of the banks, there isn't enough real money in existence to cover it.
With Tether, it is at least plausible that the money still exists and is simply frozen due to some terrible business decisions. With banks, the money doesn't exist.
I'm sure this isn't news to anyone on HN. The pros and cons of Fractional Reserve Banking are well known. But it seems unfair to hold Tether up to a higher standard than even our most established banks.
UPDATE: This is one of those can of worms things. A lot of you are making similar arguments, and rather than answer one by one, let me just say:
1) Comparing a run on Tether to a run on ALL of the banks was a poor comparison on my part.
2) Y'all might be right that it wasn't UNFAIR of the author to make the claim above. Tether did make that promise to their customers.
3) Y'all have way more faith in fiat currencies and fractional reserve banking than I do.
It is different though. The FDIC would force the bank into receivership and return the insured money to account holders. That doesn’t exist for tether.
No. The money would come from the federal deposit insurance program, which is funded by the banks, not the government. The money would also be recovered over time, when the bank’s loans become due and other assets are liquidated.
In general the money would come long before the FDIC get involved, because the role of the Fed (and other country equivalents) is ensuring that commercial banks can always borrow enough money to meet short term withdrawal requests if their loans aren't defaulting. Lending at n+x% because it can always borrow at currency at n% is a modern bank's business model.
Needless to say this is quite different from having a business model where you don't have any right to borrow money and claim to be backing it 1:1 with actual dollars, but it turns out that the bulk of the not-necessarily matching amount of actual dollars you have is lent out to some other shady operation...
> The FDIC would force the bank into receivership and return the insured money to account holders.
Fair point. If a run-on-the-bank only occured at a single bank, that would work. And that's probably a more fair comparison to my example of everyone taking out their money at all the banks.
But for clarity, my statement was that the money to cover everyone's deposits at all the banks simply doesn't exist. The FDIC can only cover so much insured money before they just plain run out.
And if the FDIC didn't have enough money, the government would start printing it like crazy and the US would start looking more like Venezuela in a very short period of time.
Bank collapses happen during times of deflation. In that environment, printing money like crazy just returns the financial system to normal, low levels of inflation.
Small amounts of inflation are a good thing. Deflation in a currency is almost always bad, and this is why limited-issue crypo like bitcoin will never replace real currencies.
The paper currency doesn't exist. Why would you think the _money_ doesn't exist? As long as the banks aren't in fact fraudulent, the assets are there. I guess it's easy to trust in fraudulent banking if you have an unassailable belief that fake banks are the norm, but they're not. That's what people have spent thousands of years figuring out how to avoid.
Fair enough. We'll just print our way out of the problem.
Except, that has obvious problems too.
Consider the "Fractional" in Fractional Reserve Banking. If a bank only needs to have 10% of deposits on reserve (and I believe it's quite a bit lower than that in most countries), and there was a run on a bank, governments would need to print 9x more money than the bank has on deposit.
What does that do to the value of money? Depends on the size of the bank.
But what if it happened to ALL the banks? What if we collectively lost confidence in our banks, and demanded our deposits back?
If our solution is to print our way out of it, then congratulations you've dropped the value of all currency by 90%. It now takes $100 to buy what used to only cost $10.
Look, I'm not arguing whether this is good or bad. There's a lot of benefits to fiat currencies and fractional reserve banking.
But let's not pretend the risk doesn't exist, either.
But what set of circumstances would lead to this specific sequence of events? "Every bank customer wants to withdraw all of their money into cash on the same day." ???
I don't mean this as snark but that's a hypothetical that seems far less plausible than a lot of other world-ending scenarios, so I'm curious why you so much stock in its risk profile.
I was about to write a really snarky response here, because it seems intuitive to me that if the government prints more currency that means it's increasing the supply of money, until I realized you might be right. So long as the issued currency is being used specifically the represent money that already exists on a ledger, it's perfectly fine.
My bad?
My one question though is... what's the mechanism for this to happen? My understanding is that when a government issues currency, they are in effect lending it out. They don't just print it out and say "This $1 is the same as the $1 in your account." The Central Bank of whatever country we're talking about has to lend that money out, either to the government itself or to the other banks.
And if THAT's the case, then doesn't every $1 of currency issued increase the total supply of money by $1?
What am I missing? (Not being argumentative, I'm honestly asking.)
In 2008 the German government guaranteed ALL bank accounts, WITHOUT a limit.
> As German leaders and bankers worked feverishly to rescue a lender considered too big to fail, the government announced Sunday that it would guarantee all private savings accounts in Germany - worth about €500 billion - in an effort to reinforce increasingly shaky confidence in the financial system.
The mechanism is supply and demand. People and companies borrow money at the current interest rate (because both they and the banks believe they will be productive enough in future to pay it back) in excess of the current money supply, so the money supply rises to match it. As the money from an individual loan gets repaid, the loan disappears from the banks' balance sheet, and the bank earns only from the interest. Obviously over time, the amount of money being loaned into the system grows with the number of creditworthy people wanting to borrow.
This system obviously isn't perfect in practice, but it's a lot better than the "however much we can get away with" approach to money creation used by Bitfinex and the government of Venezuela because the newly created money goes directly into their own pockets.
> As the money from an individual loan gets repaid, the loan disappears from the banks' balance sheet, and the bank earns only from the interest.
It disappears? How does that work?
When the bank credits my account with, say, a $500,000 mortgage, they consider that an asset. Because now I owe them $500k+interest, even though they didn't actually take that $500k out of any account. They created it when they loaned it to me.
You're saying the bank "destroys" the money as it gets paid back, and only keeps the interest?
I apologize if I'm misconstruing your explanation.
Yes. A mortgage ceases to be an asset when it is repaid, on account of not actually existing any more, with the bank only keeping the interest as profit (and similarly, loans the bank might have to take out to cover its reserve shortfall in the event of lending beyond its current deposits cease to become liabilities when the bank repays them). The result, for better and for worse, is that the quantity of money in an economy is linked to the supply of and demand for credit.
The problem is that it's the point behind the construct called "stablecoin". It's called stable because in theory one coin should be worth one dollar and all(most?) companies behind such coins claim that all issued coins are backed by real dollars.
> With Tether, it is at least plausible that the money still exists and is simply frozen due to some terrible business decisions. With banks, the money doesn't exist.
You're missing a small detail: the money backing the Tether, if it exists, is held in a bank account.
Out of the two groups both trying to redeem their money Tether would at least be able to pay the overwhelming majority.
The banks even with Federal government assistance and emergency measures would struggle to pay a third. It would simply make laws to prevent withdrawals as has happened the world over.
It was signed with a scribble, without even a name underneath, and provides no details. The bank is based in the Bahamas and stopped responding to press questions about their relationship with Tether as well.
Whether it's crypto or a traditional bank, what matter's most is that it's set up in a legitimate way with transparent layers of responsibility and trust. A good example is how TrueUSD "stablecoin" provide's monthly statements with a reputable western auditor who is backing each report's findings.
Tether should have been doing this since day 1. At a minimum.
Yes, you're right they should respect privacy. But in this case Tether initiated it by claiming they had a relationship with the bank and clearly asked them for a letter stating such a fact. But still the bank "declined to confirm the information in the letter to reporters".
> Tether, which has faced questions about whether it actually backs its popular namesake digital coins with dollars as it claims, released a letter attributed to Deltec Thursday that said the company has an account with the bank. Deltec spokeswoman Melanie Hutcheson, reached by phone Friday, declined to confirm or deny whether that’s true.
> But it seems unfair to hold Tether up to a higher standard than even our most established banks.
You mean standards held on banks that are insured/backstopped by the government, have mass-adoption amongst the vast majority of the population, are regulated, and have disclosure requirements through securities regulators?
But banks don't claim otherwise. If bitfinex was upfront about only having a fractional reserve the story would be completely different.
If you buy a beefsteak and you later realize that it was chicken would you say "well other shops do sell chicken and people are fine with that so why would I hold this butcher to a different standard?"
This is true of banks, too. In fact, if everyone took out all of their money from all of the banks, there isn't enough real money in existence to cover it.
True, but we're not talking about "all banks," we're talking about one "bank." There's more than enough money to handle a bank run on a single bank. More importantly, while banks don't have 1:1 cash to deposits, they do have 1:1 assets to deposits, so economically their depositors can be made whole eventually.
With Tether, the issue is that there is substantial evidence that they lied about the amount of actual currency backing their deposits. If that's the case, then many/all of their depositors are SOL without any possibility of being made whole.
Real banks have other assets to cover their liabilities. Sure some of these assets are not liquid. Banks cannot ask people to pay off their mortgage instantaneously so if too many people try to redeem deposits all at the same time, the bank might have to ask some people to wait. But the banks always have enough assets so that in the longer term they can pay everyone.
Plus in times of crises the central bank might step in and allow commercial banks to swap their illiquid assets for cash thus providing the needed liquidity.
Most of the banks assets are not liquid, such as the loans they have lent out. Banks quite often have problems that they give credit out too easily, which leads to the situation where their assets aren't worth much. They often also give loans to the stakeholders of the bank which makes it a bit sketchy.
Banks don't continue to represent assets on the balance sheet once they come to believe that those assets are without value. Or rather, if we find out they are doing this, they are subject to lawsuits like this one.
But tether isn’t claiming to be a bank account. A bank account is an unsecured loan, tether claimed to be taking secured loans.
With a bank, you are lending cash to them when you make a deposit. You are taking a risk that the bank’s credit won’t be good, and you will lose your money, so you should require interest to compensate for that. Deposit insurance changes this only a little. But it’s not like there are zero assets backing the accounts: there are still enough to cover expected liquidity needs. The credit risk mentioned early is that his expectation will fall short of reality.
But owning tether wasn’t supposed to invoke any credit risk at all. It was a secured loan: if you bought a tether, you had sole claim on a dollar in a bank account.
By the way, banks buy and sell secured loans all the time. Mortgages are a particularly common example in retail banking. Although usually, secured lending is used to convert a low liquidity asset, like a house, into a liquid one, like cash. Tether makes no sense economically because it converts one liquid asset into another.
Doesn't it convert a liquid asset into a much less liquid one, given that tether is far less widely accepted than USD? If I have a million dollars in greenbacks, I can use them for almost any transaction I like. If I have a million tethers, I'm not sure I can do much with them except exchange them for other similarly-illiquid "tokens" via a few variously-reputable exchanges.
"With a bank, you are lending cash to them when you make a deposit. You are taking a risk that the bank’s credit won’t be good, and you will lose your money, so you should require interest to compensate for that."
Hmm...I did not think I was taking that risk. As far as I knew, up to I think $250K, the money I have in a bank (actually a credit union) is backed by the full faith and credit of the United States, whatever that is worth today.
What you’re talking about is FDIC insured accounts. But those only apply to savings and checking accounts (and only up to 250k like you said). Brokerage accounts where I think most Americans keep the vast bulk of their money are not insured.
The vast majority of Americans do not have a brokerage account at all, and if you need a reference, it's easy to find.
According to a document[1] I found on the DOL website, in 2013, 17 million of 123 million households had a brokerage account. This number is also in decline, I read in other sources.
I also don't understand what brokerage accounts have to do with retail banks.
Well, why would you keep any money over 1k in a savings/checking account?
Savings accounts nowadays don’t serve any purpose (you definately shouldn’t be saving money in them) besides being FDIC insured. Checking accounts should only hold temporary money in order to finance short-term liquidity constraints (paying off credit cards, etc).
All extra money should be put in a brokerage account: risk-free treasuries, money markets, equities, etc.
But maybe average people don’t have any extra money at all? Or maybe they use savings accounts? I don’t know, but either is sad and irrational.
Savings accounts seem pretty useless, only because the interest rates are currently ridiculously low. My credit union currently pays 0.3%.
But here's an interesting question: since the Fed pays banks 2.4% interest on excess reserves, why can't someone start a "bank" that simply takes depositors' cash and passes through the interest from the Fed from reserving it all? The answer, I believe, is that while people have been/are trying, the Fed doesn't want that - the interest is supposed to subsidize conventional banks and not be given away to the general public.
> This is true of banks, too. In fact, if everyone took out all of their money from all of the banks, there isn't enough real money in existence to cover it.
True and not true. There can be enough money, it's just paper. It can be printed. It only makes sense to print enough to cover what's in actual circulation. If not there there would be tons of warehouse & vaults just sitting and holding tons of cash.
On the other hand with Tether, they can't print money. So they could never come up with enough money.
New York AG: Tether lost $800m and then funded it from their crypto exchange.
Bitfinex: Poland seized half a billion, Portugal nearly all the rest.
Is it really beyond Bloomberg to actually go and ask the Polish or Portuguese government this rather than play he said, she said?
There's so many Dunning-Kruger comments/opinion pieces on the matter and years of HN threads about tether that it's all a bit tiring.
Bitfinex doesn't serve US customers, people have been calling it's imminent implosion from day one, there's now All-American stable-coin alternatives that surely want their business, ulterior motives could be anywhere.
A bit off topic, but Kraken has a history of really bad technical problems with their platform. Culmination as far as I'm concerned, was when it went dead for days after a botched upgrade. So, given that you're criticizing a product for unreliability, there's some irony in that you finish by directing people to Kraken.
Not really following here, which product was I criticising? Bloomberg? I generally expect a better standard even though it is classed opinion. They've had an entire working day to parse the basic assertions by both parties.
As for Kraken, is it preferable they didn't take their time fixing the issue and instead let people deposit money into a bug-ridden neon-flashing hacker target? Caution should probably be appreciated in these matters, the alternative path isn't pretty.
A large part of the contention is that Bitfinex, unlicensed to operate at all in NY, has NY-based employees, and customers, even after its "No US customers". That was the initial driver for the NY OAG to go after them.
Someone getting a loan and falsifying all the documents is the one facing prosecution, not the bank. All seems to be a bit upside down here, given the prevalence of mortgage fraud and who ends up in court.
As for remote employees living in NY I guess that probably does constitute operating there, then again I'm no lawyer with a knack for arguing semantics. Does this count for someone living in an Brooklyn airbnb for a month and working from their laptop?
Not quite that simple. If you're not licensed as a business to trade in a state, and you accept a customer in that state, then you're on the hook (yes, if customer falsifies documents, then that's on them). Tether/Bitfinex didn't always forbid NY customers, and didn't always forbid US customers, and the OAG's allegation is that they continue to knowingly serve NY customers (the US prohibition is a business decision, not a regulator).
KYC/AML says that you must make a good faith effort to verify documentation/ID, etc. The contention is more that they're doing so "under the radar". Just like "friends of Bitfinex" - employees/friends who have agreed to use their personal bank accounts to enable wire transfers on Bitfinex's behalf (I mean, WTF...).
He’s the role model of how to get dialectics right without succumbing to bothsiderism.
This article is a perfect example: he dismisses the nihilist’s “everything is a fraud” perspective while still heaping some rightful schadenfreude on these shenanigans. Then, he turns it around (again) by mentioning how this situation is partially caused by Tether’s inability to find partners in traditional payment providers.
Throughout his work, he never succumbs to either blind love or hatred for anybody or any group (government, media, Musk, Crypto enthusiasts, banks, that Pharma bro). When they are universally hated, he will invariably highlight how creative or entertainingly brazen their exploits were, while still managing not to excuse them. Where others see individual moral failings and call for pitchforks, he looks at the structural issues in law or society that enables them.
Summary of Tether's risk, in the author's own comedic gold:
Saying “our stablecoin is backed one-for-one by U.S. dollars in a bank” is not quite the same as saying “our stablecoin is backed by an equal notional amount of three-year dollar-denominated loans to our affiliated crypto exchange, much of whose cash is currently frozen.”
One thing that has been confusing me about the recent news: $850M is more than "crook" levels of money: It is well into the realm of state-actor or kingpin levels. When that kind of money goes missing, I would expect whole armies of unsavory characters get dispatched for
asset recovery. Coincidentally, everyone in those armies is named either Guido or Rocko.
So the idea that Poland or Portugal or any other state-actor beginning with the letter "P" might have seized the funds at least provides us with a rationale for how the money remains unrecovered.
This is a good contextualization of the news we read yesterday, especially since it brings out some of the humor in it. (All of which is schadenfreude, but still.)
Can we agree that the most priceless phrase in all this is "a (believed to be) Panamanian entity"? Not a bank, but an entity. A Panamanian one. Which already sounds shady enough, but then we're not even sure that's what it is. It gives me LOLs.
The craziest thing to me is a lot of people have been claiming Tether was a fraud for years, but according to this it may not have actually had any issues until ~6 months ago.
So they decided to prop up Bitfinex with Tether funds long after they were first accused of fraud, even having that spotlight already shining on them.
If they wanted credibility they should have completely separated those two businesses, but I suspect Bitfinex makes more money than Tether, and perhaps they wanted the Tether funds as a sort of insurance policy for Bitfinex liquidity.
It seems so weird. If they had the backing at a reputable bank all along, what was with the constant song-and-dance show around not providing a simple external audit proving that point.
It may be baffling that Tether hasn't collapsed yet. But consider the drawn-out drama of the Mt Gox collapse.
It took weeks for Mt Gox to unwind. In the time leading up to the finale, many people (who should have known better) insisted that the exchange was secure and fully capitalized. For example, this guy:
When incredible spreads started appearing between Gox and competitors, the gullible asked "How can I arbitrage this?" rather than "Where are the exits?"
Then they became irate at their inability to withdraw the funds they deposited to make a quick buck.
There were others who simply refused to believe the facts staring them in the face.
I expect the same to happen here. Settle in, this is going to take awhile to unwind.
The sad reality appears to be that Tether was fully backed dollar-for-dollar by USD in a reputable bank, but that the associated cryptoexchange owned and operated by the same people got robbed by a government entity and left them insolvent.
I blame the Tether guys for not declaring the exchange bankrupt at that point and keeping the Tethers entirely walled off.
Tether will have, in part, been brought down by a government agency (assuming that the whole Crypto Capital thing isn’t entirely a scam/front/honeypot).
If customers lose funds in this, it traces back to whoever has the Crypto Capital money.
It’s not at all surprising that the government would ultimately be responsible for bringing down Tether, since it’s clearly illegal to operate per AML/KYC/FinCen regulations.
In the end the entity that confiscated the billion dollars could offer restitution in exchange for an IRS audit. I would guess many would gracefully decline.
> The sad reality appears to be that Tether was fully backed dollar-for-dollar by USD in a reputable bank, but that the associated cryptoexchange owned and operated by the same people got robbed by a government entity and left them insolvent.
Crypto Capital provided no evidence that the funds have been seized by governments.
https://en.m.wikipedia.org/wiki/Mt._Gox
Mt. Gox reported 65 mln dollars missing when declared bankruptcy. 8 years later Tether / Bitfinex reports 650 million dollars missing.
I wonder what would happen in next few years if so called “decentralized” currencies really become mainstream.
214 comments
[ 3.1 ms ] story [ 264 ms ] threadBut in fact Tether did have the money, at a real bank, and at this point that bank was Deltec Bank & Trust Ltd. in the Bahamas.
Amazing, Tether actually was fully backed by dollars in an actual bank!
But then Bitfinex took $625k of Tether reserves to make up for a separate fraud or government asset seizure.
Bitfinex took $625 million in real money at a real bank from Tether, and in exchange gave Tether back $625 million in fake money at a fake bank.
The real mystery to me is why rational traders continue to buy Tether at $0.9926, less than 1% from parity with USD. Why wouldn't people sell?
It had... Some amount of money. At a real bank. It's not yet clear that they had all of the reserve money at a real bank.
I also don’t think tether makes it easy (or possible?) to sell Tether’s back for the $1. It’s “backed”, but it is a meaningless idea. It’s all the best parts of a bank without the hard parts. And is basically fraud.
Heck, who'd like a few hundred thousand jerfcoins? Come and get 'em! They're backed by dollars, in the sense that I guarantee there exists in the world many hundreds of thousands of dollars. jerfcoins don't give you any claim to those dollars, of course, but they're backed by them just the same!
("But jerf, what are US dollars backed by?" Purchasing from the US government the right to not be arrested and thrown in jail for lack of payment on taxes. Just 11 days ago, many people completed trading in their dollars for the year for that backing, so it's definitely a transaction that can done by real people. It may not be an aesthetically pleasing form of backing, but it seems to be working.)
I agree with you almost 100%, just wanted to add that no current Government/State can back the nominal monetary mass flowing through its economy with real money, no matter the amount of taxes they're collecting. The reason being that the nominal monetary mass it's pretty big (to use an euphemism) compared to the real money flowing through the real economy.
For example in 2008 the CDS market alone was at some point "valued" at close to $36 trillion [1], while for comparison the US GDP back then I'd say was around $14-15 trillion (give or take a few trillion). Yeas, I know the CDS market back then was a financial abomination, and I do know that a lot of those $36 trillion were probably money counted twice or thrice or even more, but the idea remains. And that's just one market.
What indeed still keeps this whole house of cards still standing, what keeps any financial system standing, is trust. And, as you very well put it, once you have the power to put people in jail (or launch inter-continental ballistic missiles) you kind of have a lot of trust by default. But there are moments when no matter how powerful you are you still manage to lose that trust, see the USSR post 1989 or the Spanish Empire during and after the rule of Philip II [2], that's when things turn nasty:
> Charles V had left his son Philip with a debt of about 36 million ducats and an annual deficit of 1 million ducats. This debt caused Phillip II to default on loans in 1557, 1560, 1575, and 1596 (including debt to Poland, known as Neapolitan sums). Lenders had no power over the King and could not force him to repay his loans. These defaults were just the beginning of Spain's economic troubles as its kings would default six more times in the next 65 years.[9] Aside from reducing state revenues for overseas expeditions, the domestic policies of Philip II further burdened the Spanish kingdoms and would, in the following century, contribute to its decline, as maintained by some historians.[10]
[1] https://www.bis.org/publ/qtrpdf/r_qt1806/images/graph-1.jpg
[2] https://en.wikipedia.org/wiki/Philip_II_of_Spain#Economy
No matter how many times we go through the refutation, zombie ideas like this just never die.
Money is purely a social construct. It only has value because people collectively find it useful. There is no backing.
The argument that state-issued currencies have value because they're the only currency you can use to pay taxes back to the state is true in some sense, but the value is still essentially arbitrary and the trust is still required. (e.g., if I owe money come April 15th, I have to trust my bank, Visa, and TurboTax, probably, even before it gets to the IRS).
It'll be interesting to see how the cryptos work out. I'm optimistic that bitcoin will still be valuable in decades to come due to scarcity and fame. Bit like Van Goghs and that kind of stuff.
You'd also get pressure from workers who don't want to be paid in tokens that lose 2.5% of their value each year. Who can say with a straight face that they will accept a default 2.5% pay cut each year built in to their wages, no questions asked? That would verge on crazy.
If fiat isn't backed by some sort of government compulsion it is difficult to justify why savers or workers would deal in it. It isn't stable enough - it's value declines too quickly. The people who benefit are borrowers, the big banks and to some degree employers - powerful players, but not enough to force fiat in a battle where government isn't involved. The uniform acceptance of fiat is strong evidence that compulsion is involved.
Getting no raises is a pay cut, yes. But most workers spend their wages in the same year, inflation is not a problem here.
Contract A: I'll give you 1,000 warm meals in the first year, 980 warm meals in the second year and 960.4 in the third year, progressing according to meals = 1000 ^ (year - 1). There is an understanding that I'll maybe give you a raise every year or maybe not depending on market conditions.
Contract B: I'll give you 1,000 warm meals a year. We'll renegotiate next year. If market conditions have changed I might offer you less.
Now, in principle these two contracts are not that different and market conditions should force the employer to pay market wages. But if you offered a worker the choice between the two options they'd pick B. The structure of contract A is clearly not in the workers interest because it involves a lot of bureaucratic foolishness just to get offered a steady real income. It can only encourage shenanigans.
If I were on Contract A (which, since I'm payed in fiat when I work, I am) then I have to semi-regularly run figures against a diverse array of facts to figure out if I'm making or losing against my starting salary and I have to fight my employer for a wage raise if inflation is 4% but they offer a 2% increase. In addition there is opaqueness about what inflation really is; the government agencies do their best to measure it but it isn't a perfectly distributed phenomenon. I don't think I can accurately estimate what wage increase would be maintaining a fair wage when I am working. I don't have enough information about, eg, inflation by postcode or asset class vs my consumption.
I don't accept that that compensation structure is good for me as an employee. And more broadly the incentives for workers is to be paid in something that looks almost exactly like currency but does not inflate away year on year.
Since inflation affects everything at once, it can be ignored when calculating wages vs profits. It's all about the distribution of money, not some esoteric "value" derived from macroeconomic variables. For wage-sensitive jobs, the minimum wage is usually raised every year (or couple of years), so that should correct for employees without leverage over their wages.
Inflation affects different economic actors differently, but at "regular" levels of about 2% a year, it's too low to matter for the majority of people.
Yeah, the employer is fine. This is about the people earning the wages.
> Talking about spherical cows here. > Since inflation affects everything at once
Are we dealing in spherical cows here or not? That is a friction-less spherical cow if ever I've seen one.
The agreement on inflation is to use the best-guess, which is the government number, but the as-experienced effect of monetary creation would varies enormously depending on where and how people are engaging with the economy.
> at "regular" levels of about 2% a year, it's too low to matter
The ordinary people I've dealt with care a lot about small amounts of money because they don't have much to spare. 2% p.a. represents a significant risk to them. And, critically, if a wage earner had a choice they wouldn't choose to be subjected to it.
Inflation mostly affects people that can save significant amounts of money for longer periods of time, not wage earners.
The alternative to getting payed in fiat is some other value storage thing that is even harder to turn into rent and groceries. Unless it's actual groceries and corporate housing, or token for corporate shops, which is even more regressive.
If somebody doesn't have savings, then they are spending everything they earn. A 2% real change in wages would require them to reduce their real consumption by 2%.
> Inflation mostly affects people that can save significant amounts of money for longer periods of time, not wage earners.
It changes the situation from one where wage earners will maintain their lifestyle if nothing obviously changes to one where wage earners will be worse off if nothing changes.
There is a practical difference between these two. If there was a choice, by far a majority of people would rather not live under that second regime. Similar (in a very minor way) to standing around on railway tracks; in theory there is no problem because when you see a train they could move - but still a normal person would not choose to stand there at all. Use of fiat and the associated inflation creates risk of costs for wage earners.
A system wouldn't stably settle on that sort of outcome without government backing the token with some serious clout. The uniformity of fiat for labor is very suggestive that it isn't a social construct. Society isn't that uniform.
I also agree that it was preferable to be payed in non-deflationary tokens, but I fail to see any real-world examples of that.
You're missing a very important point: US dollars are special because they are the only thing accepted to pay US taxes.
No matter how valuable of a thing you own - gold, euros, a truck full of mona lisas, shares in TSLA ... it will not be accepted as payment for US taxes.
Understanding where the value of money comes from and what it is actually used for and what the nexus is between financial entities and physical force ... it all starts with understanding what it means that the government will not accept anything from you, no matter how valuable, for payment of taxes other than the currency it issues.
The government starts accepting any asset for tax payments. You can now sign over fractional ownership in your factory, or your rental real estate, or your Mona Lisa to pay your tax bill.
Are dollars now worthless, because they're not required to pay taxes? Do you abandon your bank accounts because the dollars have no value?
Certainly not! It's too inefficient for the grocery store to appraise your Mona Lisa and negotiate a 1e-8 share of it. Dollars are still useful, and they still have value even if they don't have a monopoly on tax payments.
The answer is that the state has changed. The backing of the currency collapsed, and it turns out that currencies collapse hours, if not minutes, after that news gets out. In the modern era, probably minutes.
There's an irony to cryptocurrency advocates claiming money doesn't have backing, which is that the only reason you can claim that is precisely that you're so casually used to fiat currency being rock solid, to the point that you literally can't imagine it collapsing, that it leads you to misunderstand the nature of currency.
People say this all the time, but regardless of whether or not the CDS market was or wasn't a shitshow at the time, comparing the outstanding notional to GDP is meaningless.
At the time, the CDS market worked like most derivatives markets: you face a small set of players and you are constantly offsetting existing transactions and subjecting them to netting rules on a master isda.
So like, let's say Foocorp has 100m bonds out there. I want to buy protection on 1m of this (basically, I want to buy default insurance). You agree to sell this to me. Ok, there's 1m in CDS contracts' notional value outstanding.
Now, our views, other risks, whatever changes. Maybe I sell the bonds, and holding this CDS is too risky for me now because it's just a naked short of bonds I'm not long. Maybe you buy a bunch of these bonds, and now you're not only facing the default risk of the bonds but paying the default insurance to me.
So you decide to buy another CDS offsetting your existing one. I'm also trying to flatten out here so I sell a CDS offsetting my existing one. Now (mutatis mutandis) we're both at 0 CDS risk. We each have entered into 2 swaps, they're directly cancelling.
But the total notional? Now it's 2m. Contracts expire, so the number doesn't strictly go up, but given how the products are bought and sold, it mostly does. It would be like looking at the stock market not in terms of the market cap of all the companies, but as the dollar value of all the trades made in a certain time period. It's not that this number is meaningless, it's just that it does nothing to explain how much is "at risk".
Of course in reality this is all much more complicated, but the basic principle holds.
Anyway, I know this isn't your main point.
The wage garnishment and forcible (note the word) asset siezures are themselves backed by men with guns. If they tried to just go around and sieze assets politely, while never threatening a fly, it wouldn't take long before people figured out there's no particular reason to let them have it.
Let's assume that it's impossible to sell Tethers for dollars. I don't think that's completely true, but that's the "steel man" argument.
Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency?
You would know this was happening if the price of Tether dropped far below $1.00, or if the supply of Tether contracted as Tethers were destroyed on redemption.
The fact that we don't see either of these things tells me that the backing isn't actually "meaningless". Rational traders with their own capital at stake don't appear to be selling.
They (or at least some) are. BTC crashed about 10% yesterday.
What actually happened is the price of Tether dropped < 1% and the price of BTC reverted to where it was a week ago.
It appears to be defying gravity while the backer is accused of fraud and doesn't have funds to back it.
These exchanges are unregulated and unaudited, the movements in price are inexplicable, and the simplest explanation is fraud.
The price is accurate in that I can sell Tether and buy Bitcoin or Ethereum or Ripple, etc. at the market price.
The fact that a counterparty is willing to buy Tether, in large quantities, in exchange for Bitcoin, tells me that the market price is accurate.
https://modernconsensus.com/cryptocurrencies/tether/bitforex...
But if there were widespread problems selling Tether to buy Bitcoin, and withdrawing Bitcoin from the exchange, then we'd hear about it and there'd be a run on the exchange.
You can directly do this and the market is pricing it at 5% discount. Anyone can short it or buy tethers at a discount. It's been down to 85c in the past.
https://trade.kraken.com/markets/kraken/usdt/usd/1h
This is the equivalent of arguing "if roulette was a negative sum game, economically rational actors would cash in their chips". There's plenty of reason to believe that the USDT market doesn't even closely approximate economic rationality, and no reason to believe that there are ordinary investors with large sums of cash tied up in USDT who have superior insight into the level of backing Bitfinex actually have than the people questioning them.
The "why aren't more rational people shorting it?" argument makes slightly more sense, but then if you shorted Madoff when his fraud was first highlighted, you'd have been bankrupted in the ensuing 8 years...
I imagine it would be hard to get the borrow just now or I'd probably go for it.
I think that's a good observation but maybe it's just folks who already own Tether are inclined to belive in it... still, maybe not all that rational?
They are. Take a look at the BTC spread between USD and USDT exchanges. (almost $300 atm) [1]
https://www.cryptocompare.com/coins/btc/markets/USD
We'll see what happens this time.
Unless there is reason to believe otherwise that I'm not aware of, shouldn't we assume that this is just Tether buying up the supply to keep the peg? Isn't that how a stablecoin is supposed to work?
Buying up the supply with what?
Skeptics claim Tether isn't backed by actual dollars, so it's impossible to convert Tether for dollars.
But if Tether is buying up the supply, what are the sellers of Tether receiving in return? If they're getting dollars, then doesn't that refute the skeptics' claims?
You can also be insolvent (assets << liabilities), in which you must be fractional too.
No, since Tether and Bitfinex are the same company. While it's the opposite direction of the recent NY AG issue, if Bitfinex company or client account funds were raided to buy Tether for price support purposes, that doesn't require Tether to be backed by any dedicated reserves.
After taking $700m out of whatever funds were backing Tether to paper over the loss of Bitfinex funds, raiding Bitfinex funds to prop up Tether wouldn't be out of character, though obviously that kind of back and forth shell game would be unsustainable in the long term.
Right, despite previous protests to the contrary, the court filing noted (and I'm surprised that the article didn't, though it hinted at that) that the "arm's length" loan document was signed by the same two corporate officers, on both sides of the contract.
> Tether Tokens are 100% backed by by Tether’s Reserves.
But...
> “Reserves” means traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities;
and...
> Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves.
So even if they agree to redeem your Tether Tokens (which they do not promise to do), you might get some other kind of "security" rather than actual cash. If that happened to be another crypto token, for example, and if you then have trouble exchanging that token for cash (or its value is busy crashing)... well, too bad.
Tether could be intervening in the markets and propping it up with reserves, similar to how banks prop up a stock for a while after IPO.
Or it could be that Tether market is still irrational. Everyone in the crypto space really wants a stablecoin that trades for a dollar. The number of people who trade and desire to have such a coin could outnumber the more rational market participants who say it's worthless.
If Tether has full reserves, it makes sense for them to maintain the peg: buy Tethers at a 1%+ discount and cancel them ad nauseum.
I’m sure some desperate holders would even take a 10% haircut right now.
This is no different than a corporation’s treasury buying back its own stock and cancelling it.
To my understanding tether is just like a bank, except the accounts are kept on Blockchain instead of private database. So, it is rational to use them if you think they habe enough reserves to keep them liquid. Full backing is not needed, as it isn't needed with banks as well.
But then again, not all of bank’s liabilities are cash either. E.g.: CDs.
Things get hairy when their long-term assets go down in value and/or there’s a sudden demand for withdrawals triggering a mismatch between short-term liabilities and long-term assets.
We have strikingly little audits from this stablecoin. Do assets match liabilities or not? For a bank, they always will or else they get shutdown before losses become too great.
In my opinion having assets like house loans is pretty far away from being "backed". If enough customers want their money out, bank can go bust. If they have lent the money to wrong people, they also can go bust. Banks go bust now and then.
It takes a lot for a bank to go bust when they can do that with their assets if they go through their reserves.
The value of their loans may be good enough to sell shares to investors instead of selling to another bank.
The trick is to loan out to lots of different people so any one group being “wrong” is made up with profits.
We’re seeing none of that with this stablecoin. They’ve put a huge chunk of money into a ???bank(s) in a ??? country, at best.
What’s your definition of “backed”? Banks will gladly keep your fiat in an insured safety deposit box, but they’re going to charge you for the privilege. And the government will just inflate away your attempt at deflation.
Banks can fuck up and go bust. It doesn't happen often but it happens.
This is how FDIC insurance actually works in practice.
However there is a systemic risk if the entire system cannot absorb the bad banks. According to multiple people involved, in 2008 we came within a few hours of the whole banking system having to be shut down with no idea how much chaos that would cause. This is why TARP got passed.
When your bank is forcibly taken over by the government and the assets forcibly sold to someone else with nothing going to the owners of the bank, most would say the bank was shutdown.
In 2008, since TARP recipients didn’t wipe out their shareholders and sell shares to new owners (perhaps .gov), I would say they had plenty of time left before needing a bailout.
The gov should have created an express bankruptcy protection process instead of bailing out shareholders and boards that took too much risk.
Once the government stepped in, everyone was sure that normal operations were safe, and chaos was averted.
In fact, as https://www.americanbanker.com/opinion/tarp-was-not-a-bailou... points out, the government actually made a $30 billion profit on TARP in the end. (It can be debated how much of that profit was a result of other Treasury actions, like quantitative easing.)
That was "close down your hedge fund(s) and change your name" embarrassing level of return.
Your link's source for its $30.7b profit figure is unsupported by its linked treasury.gov press release
Only by people that don't understand fractional reserve lending. For example, the exchanges are loaning BTC for the purpose of shorting. This is exactly fractional reserve lending, just like the banks.
If you have 10 drachmas in your bank account that says you have 10 drachmas, there are a lot of different* ways that it can suddenly become partially/fully unavailable to you that wouldn't happen with your self-hosted BTC wallet.
Not if your wallet is held at an exchange, which is why that keyword appears in my comment.
You are of course free to equate that to "your self-hosted BTC wallet", but I doubt it will gain much traction as a definition.
This isn't at all similar to an organization claiming to back an asset with dollars and actually backing it with their imagination.
The CEO of bitfinex is super stingy, and if something can't be done with minimum wage workers, it probably won't be done at all.
When you want to actually get real dollars, you have to use your tethers to purchase Bitcoin, then transfer the bitcoin to a real exchange that does real KYC (Gemini, Coinbase, etc), then sell on that exchange for real dollars, which can then get transferred to a real bank account.
So someone had the idea that you could create a coin that would retain its value but you could easily swap for crypto coins.
Some people look to stablecoins to avoid the volatility of crypto. Unfortunately stablecoins aren't really what cryptocurrencies are about, they're supposed to be without a trusted third party, yet stablecoins has a third party issuer who can for example refuse to redeem your coins.
I personally think they're a big waste of time at best and scams at worst (like Tether).
So they took what was then a fun little crypto side project and got people to believe it was the next best thing to a fiat onramp. This, somewhat incredibly, worked.
Then the rest of the crypto economy glommed onto the fact that this is really useful for them, because tether was much more AML/KYC friendly (in the sense that you could use it when your name was Ima Moneylaunderer) than USD-denominated rails typically are, and it fulfilled a liquidity-preserving function similar to casino chips.
The cryptocurrency community produces essentially no value via sale of services outside of the community, so the balance of payments always has to satisfy "We can only pay out as much hard currency as people have deposited." Prices only keep going up to the extent that folks don't try to withdraw the money. Tether encourages people to realize gains but keep their gains on the table.
(The community thinks that the main use case is facilitating inter-exchange liquidity/arbitrage but given sufficiently well-capitalized arbitragers tether provides no benefit over "We are capable of keeping a ledger of our activities in a database of our choice.")
Those are the main reasons why. I strongly suspect that the community, once it realized that Tether was imperiled, brought several "competing" stablecoins to market because they both a) realized the systemic utility of stablecoins and b) were attempting to avoid the entire ecosystem vanishing in a nuclear fireball as tether unwound. Who knows, maybe they'll succeed.
Until that happens, there’s a rational economic narrative for companies of all shapes and sizes to offer these kinds of synthetic dollar-like instruments (and it will also remain rational for regulators to be interested in these enterprises).
It’s an interesting time to observe this market (I guess crypto will be interesting for a while).
Edit: I guess it's impossible to have a nuanced discussion about cryptocurrency on HackerNews right now. For those of us who have participated in these markets from an institutional level, there are obvious reasons why these synthetic instruments exist beyond evading regulatory controls (which is why Coinbase, who is the most regulatory compliant entity in the industry has a synthetic dollar instrument). There are real technical advantages to having a synthetic instrument that go far beyond regulatory evasion, just ask anyone who operates a regulatory compliant entity in this industry.
Some exchanges only deal in crypto.
It kinda makes sense: you want to sell barfcoin but it’s only traded at an exchange in Elbonia. So deposit your barfcoins to the Elbonian exchange, trade it for a stablecoin, then move your stablecoin to a local exchange and trade for your local currency.
—— quote ——
What's the use case for that? If that was acceptable to any user, wouldn't they just use regular electronic money?
—— end quote ——
And somehow you failed to answer either question
The point of tether and all stablecoins is to provide liquidity to the crypto market. That is, to easily ans nimbly zero out your crypto exposure. Before stablecoins if I thought btc was going to drop a lot in the next hour, the only thing I could do would be to buy some other crypto asset and hope to god they weren’t correlated with btc. But since all crypto ia highly correlated with each other this didn’t work very well.
Tether was introduced as an uncorrelated store of value so I could quickly zero my exposure. Unfortunately, tether seems to have more exposure than it was supposed to have.
If by interesting you mean comedy godl, then sure.
> If everyone redeemed their Tethers today, it is not clear how Tether would come up with the money
This is true of banks, too. In fact, if everyone took out all of their money from all of the banks, there isn't enough real money in existence to cover it.
With Tether, it is at least plausible that the money still exists and is simply frozen due to some terrible business decisions. With banks, the money doesn't exist.
I'm sure this isn't news to anyone on HN. The pros and cons of Fractional Reserve Banking are well known. But it seems unfair to hold Tether up to a higher standard than even our most established banks.
UPDATE: This is one of those can of worms things. A lot of you are making similar arguments, and rather than answer one by one, let me just say:
1) Comparing a run on Tether to a run on ALL of the banks was a poor comparison on my part.
2) Y'all might be right that it wasn't UNFAIR of the author to make the claim above. Tether did make that promise to their customers.
3) Y'all have way more faith in fiat currencies and fractional reserve banking than I do.
Cheers.
Needless to say this is quite different from having a business model where you don't have any right to borrow money and claim to be backing it 1:1 with actual dollars, but it turns out that the bulk of the not-necessarily matching amount of actual dollars you have is lent out to some other shady operation...
Fair point. If a run-on-the-bank only occured at a single bank, that would work. And that's probably a more fair comparison to my example of everyone taking out their money at all the banks.
But for clarity, my statement was that the money to cover everyone's deposits at all the banks simply doesn't exist. The FDIC can only cover so much insured money before they just plain run out.
Banks are stable in 2019 because national governments back their stability.
Except, that has obvious problems too.
Consider the "Fractional" in Fractional Reserve Banking. If a bank only needs to have 10% of deposits on reserve (and I believe it's quite a bit lower than that in most countries), and there was a run on a bank, governments would need to print 9x more money than the bank has on deposit.
What does that do to the value of money? Depends on the size of the bank.
But what if it happened to ALL the banks? What if we collectively lost confidence in our banks, and demanded our deposits back?
If our solution is to print our way out of it, then congratulations you've dropped the value of all currency by 90%. It now takes $100 to buy what used to only cost $10.
Look, I'm not arguing whether this is good or bad. There's a lot of benefits to fiat currencies and fractional reserve banking.
But let's not pretend the risk doesn't exist, either.
I don't mean this as snark but that's a hypothetical that seems far less plausible than a lot of other world-ending scenarios, so I'm curious why you so much stock in its risk profile.
Referring to what you said here:
> But what if it happened to ALL the banks?
Japan 1927 Argentina 2001 Myanmar 2002
Is it frequent? No, but it's not entirely without precedent either.
If I have $10,000 in a bank account and you have $10,000 in dollar bills, we have the same amount of money.
Fiat currency is so useful because money and currency are not the same thing. It’s like the difference between water and buckets.
My bad?
My one question though is... what's the mechanism for this to happen? My understanding is that when a government issues currency, they are in effect lending it out. They don't just print it out and say "This $1 is the same as the $1 in your account." The Central Bank of whatever country we're talking about has to lend that money out, either to the government itself or to the other banks.
And if THAT's the case, then doesn't every $1 of currency issued increase the total supply of money by $1?
What am I missing? (Not being argumentative, I'm honestly asking.)
> As German leaders and bankers worked feverishly to rescue a lender considered too big to fail, the government announced Sunday that it would guarantee all private savings accounts in Germany - worth about €500 billion - in an effort to reinforce increasingly shaky confidence in the financial system.
https://www.nytimes.com/2008/10/05/business/worldbusiness/05...
This system obviously isn't perfect in practice, but it's a lot better than the "however much we can get away with" approach to money creation used by Bitfinex and the government of Venezuela because the newly created money goes directly into their own pockets.
It disappears? How does that work?
When the bank credits my account with, say, a $500,000 mortgage, they consider that an asset. Because now I owe them $500k+interest, even though they didn't actually take that $500k out of any account. They created it when they loaned it to me.
You're saying the bank "destroys" the money as it gets paid back, and only keeps the interest?
I apologize if I'm misconstruing your explanation.
Thank you, notahacker :-)
You're missing a small detail: the money backing the Tether, if it exists, is held in a bank account.
The banks even with Federal government assistance and emergency measures would struggle to pay a third. It would simply make laws to prevent withdrawals as has happened the world over.
I'm not sure it is. Tether states on their homepage:
> Every tether is always 100% backed by our reserves
So in this case, they're being held to a standard they have set for themselves.
This was the only public "proof" Tether provided: https://cdn-images-1.medium.com/max/1250/1*CMifyYT4dLVdDDPRS...
It was signed with a scribble, without even a name underneath, and provides no details. The bank is based in the Bahamas and stopped responding to press questions about their relationship with Tether as well.
Whether it's crypto or a traditional bank, what matter's most is that it's set up in a legitimate way with transparent layers of responsibility and trust. A good example is how TrueUSD "stablecoin" provide's monthly statements with a reputable western auditor who is backing each report's findings.
Tether should have been doing this since day 1. At a minimum.
Would you expect a bank to answer questions about who it does business with?
> Tether, which has faced questions about whether it actually backs its popular namesake digital coins with dollars as it claims, released a letter attributed to Deltec Thursday that said the company has an account with the bank. Deltec spokeswoman Melanie Hutcheson, reached by phone Friday, declined to confirm or deny whether that’s true.
https://www.bloomberg.com/news/articles/2018-11-02/bank-tied...
That combined with the wording of the letter and the squiggle signature just makes this whole thing sketchy.
You mean standards held on banks that are insured/backstopped by the government, have mass-adoption amongst the vast majority of the population, are regulated, and have disclosure requirements through securities regulators?
As others have pointed out, this is a standard Tether set for themselves so how is that 'unfair' at all?
If you buy a beefsteak and you later realize that it was chicken would you say "well other shops do sell chicken and people are fine with that so why would I hold this butcher to a different standard?"
The money doesn’t, but the other assets on the balance sheet do.
True, but we're not talking about "all banks," we're talking about one "bank." There's more than enough money to handle a bank run on a single bank. More importantly, while banks don't have 1:1 cash to deposits, they do have 1:1 assets to deposits, so economically their depositors can be made whole eventually.
With Tether, the issue is that there is substantial evidence that they lied about the amount of actual currency backing their deposits. If that's the case, then many/all of their depositors are SOL without any possibility of being made whole.
Plus in times of crises the central bank might step in and allow commercial banks to swap their illiquid assets for cash thus providing the needed liquidity.
Most of the banks assets are not liquid, such as the loans they have lent out. Banks quite often have problems that they give credit out too easily, which leads to the situation where their assets aren't worth much. They often also give loans to the stakeholders of the bank which makes it a bit sketchy.
With a bank, you are lending cash to them when you make a deposit. You are taking a risk that the bank’s credit won’t be good, and you will lose your money, so you should require interest to compensate for that. Deposit insurance changes this only a little. But it’s not like there are zero assets backing the accounts: there are still enough to cover expected liquidity needs. The credit risk mentioned early is that his expectation will fall short of reality.
But owning tether wasn’t supposed to invoke any credit risk at all. It was a secured loan: if you bought a tether, you had sole claim on a dollar in a bank account.
By the way, banks buy and sell secured loans all the time. Mortgages are a particularly common example in retail banking. Although usually, secured lending is used to convert a low liquidity asset, like a house, into a liquid one, like cash. Tether makes no sense economically because it converts one liquid asset into another.
Hmm...I did not think I was taking that risk. As far as I knew, up to I think $250K, the money I have in a bank (actually a credit union) is backed by the full faith and credit of the United States, whatever that is worth today.
Are you a banker?
According to a document[1] I found on the DOL website, in 2013, 17 million of 123 million households had a brokerage account. This number is also in decline, I read in other sources.
I also don't understand what brokerage accounts have to do with retail banks.
[1]https://www.dol.gov/sites/default/files/ebsa/researchers/ana...
Savings accounts nowadays don’t serve any purpose (you definately shouldn’t be saving money in them) besides being FDIC insured. Checking accounts should only hold temporary money in order to finance short-term liquidity constraints (paying off credit cards, etc).
All extra money should be put in a brokerage account: risk-free treasuries, money markets, equities, etc.
But maybe average people don’t have any extra money at all? Or maybe they use savings accounts? I don’t know, but either is sad and irrational.
But here's an interesting question: since the Fed pays banks 2.4% interest on excess reserves, why can't someone start a "bank" that simply takes depositors' cash and passes through the interest from the Fed from reserving it all? The answer, I believe, is that while people have been/are trying, the Fed doesn't want that - the interest is supposed to subsidize conventional banks and not be given away to the general public.
True and not true. There can be enough money, it's just paper. It can be printed. It only makes sense to print enough to cover what's in actual circulation. If not there there would be tons of warehouse & vaults just sitting and holding tons of cash.
On the other hand with Tether, they can't print money. So they could never come up with enough money.
Bitfinex: Poland seized half a billion, Portugal nearly all the rest.
Is it really beyond Bloomberg to actually go and ask the Polish or Portuguese government this rather than play he said, she said?
There's so many Dunning-Kruger comments/opinion pieces on the matter and years of HN threads about tether that it's all a bit tiring.
Bitfinex doesn't serve US customers, people have been calling it's imminent implosion from day one, there's now All-American stable-coin alternatives that surely want their business, ulterior motives could be anywhere.
For anyone with yet another confident assertion of it's demise, please jump in and short it against USD right here: https://trade.kraken.com/markets/kraken/usdt/usd/1h
Put your money where your mouth is :)
As for Kraken, is it preferable they didn't take their time fixing the issue and instead let people deposit money into a bug-ridden neon-flashing hacker target? Caution should probably be appreciated in these matters, the alternative path isn't pretty.
A large part of the contention is that Bitfinex, unlicensed to operate at all in NY, has NY-based employees, and customers, even after its "No US customers". That was the initial driver for the NY OAG to go after them.
As for remote employees living in NY I guess that probably does constitute operating there, then again I'm no lawyer with a knack for arguing semantics. Does this count for someone living in an Brooklyn airbnb for a month and working from their laptop?
KYC/AML says that you must make a good faith effort to verify documentation/ID, etc. The contention is more that they're doing so "under the radar". Just like "friends of Bitfinex" - employees/friends who have agreed to use their personal bank accounts to enable wire transfers on Bitfinex's behalf (I mean, WTF...).
This article is a perfect example: he dismisses the nihilist’s “everything is a fraud” perspective while still heaping some rightful schadenfreude on these shenanigans. Then, he turns it around (again) by mentioning how this situation is partially caused by Tether’s inability to find partners in traditional payment providers.
Throughout his work, he never succumbs to either blind love or hatred for anybody or any group (government, media, Musk, Crypto enthusiasts, banks, that Pharma bro). When they are universally hated, he will invariably highlight how creative or entertainingly brazen their exploits were, while still managing not to excuse them. Where others see individual moral failings and call for pitchforks, he looks at the structural issues in law or society that enables them.
Saying “our stablecoin is backed one-for-one by U.S. dollars in a bank” is not quite the same as saying “our stablecoin is backed by an equal notional amount of three-year dollar-denominated loans to our affiliated crypto exchange, much of whose cash is currently frozen.”
So the idea that Poland or Portugal or any other state-actor beginning with the letter "P" might have seized the funds at least provides us with a rationale for how the money remains unrecovered.
Can we agree that the most priceless phrase in all this is "a (believed to be) Panamanian entity"? Not a bank, but an entity. A Panamanian one. Which already sounds shady enough, but then we're not even sure that's what it is. It gives me LOLs.
So they decided to prop up Bitfinex with Tether funds long after they were first accused of fraud, even having that spotlight already shining on them.
If they wanted credibility they should have completely separated those two businesses, but I suspect Bitfinex makes more money than Tether, and perhaps they wanted the Tether funds as a sort of insurance policy for Bitfinex liquidity.
It took weeks for Mt Gox to unwind. In the time leading up to the finale, many people (who should have known better) insisted that the exchange was secure and fully capitalized. For example, this guy:
https://www.youtube.com/watch?v=UP1YsMlrfF0
When incredible spreads started appearing between Gox and competitors, the gullible asked "How can I arbitrage this?" rather than "Where are the exits?"
Then they became irate at their inability to withdraw the funds they deposited to make a quick buck.
There were others who simply refused to believe the facts staring them in the face.
I expect the same to happen here. Settle in, this is going to take awhile to unwind.
A similar thing happened to Full Tilt Poker. Its payment processer stole its funds and the business collapsed.
I blame the Tether guys for not declaring the exchange bankrupt at that point and keeping the Tethers entirely walled off.
Tether will have, in part, been brought down by a government agency (assuming that the whole Crypto Capital thing isn’t entirely a scam/front/honeypot).
If customers lose funds in this, it traces back to whoever has the Crypto Capital money.
It’s not at all surprising that the government would ultimately be responsible for bringing down Tether, since it’s clearly illegal to operate per AML/KYC/FinCen regulations.
In the end the entity that confiscated the billion dollars could offer restitution in exchange for an IRS audit. I would guess many would gracefully decline.
Crypto Capital provided no evidence that the funds have been seized by governments.
They are still publishing articles not mentioning the fact despite Polish media confirming it. Low effort journalism.
I wonder what would happen in next few years if so called “decentralized” currencies really become mainstream.