Things Got Weird for Stablecoin Tether
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But 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.
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]
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.
> 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.
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.
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.
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.
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.
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.
I wonder what would happen in next few years if so called “decentralized” currencies really become mainstream.
A similar thing happened to Full Tilt Poker. Its payment processer stole its funds and the business collapsed.
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.
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...).
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.