Hacker News Reader

> But it seems unfair to hold Tether up to a higher standard than even our most established banks.

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.

When they failed to provide an audit and establish a relationship with a reliable bank, this statement became pointless.

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.

> stopped responding to press questions about their relationship with Tether as well

Would you expect a bank to answer questions about who it does business with?

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.

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.

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.

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.

Wouldn't this just be the gov giving free money to the banks so they can pay?

They pay for insurance in case this happens.

No.. this only happens if the bank is bust.

Governments have a long history of bailing out banks and other corps without zeroing their shareholders first.

Yes but these guarantees are only accessable in receivership.

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.

Thank you. I shoulda just said "Venezuela", because it's the perfect modern example.

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.

Venezuela has more significant issues than "printing money like crazy"

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 USA can print as many dollar bills as needed, right? But Tether cannot.

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.

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?"

> 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?

This is a strength of a so-called “fiat” currency, which is that if we suddenly need more of it, we can just create it.

Banks are stable in 2019 because national governments back their stability.

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.

The fact that it has happened before?

When did a bank run on "all the banks" happen?

Referring to what you said here:

> But what if it happened to ALL the banks?

Unless I'm mistaken (and I've been mistaken a lot today):

Japan 1927 Argentina 2001 Myanmar 2002

Is it frequent? No, but it's not entirely without precedent either.

It does nothing to the value of money because it doesn’t affect the amount of money, only its form.

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.

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.

https://www.nytimes.com/2008/10/05/business/worldbusiness/05...

How does this address the question of whether printing more currency increases the supply of money?

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.

Wow, I have truly been schooled today.

Thank you, notahacker :-)

> 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.

...good point.

>But it seems unfair to hold Tether up to a higher standard than even our most established banks.

As others have pointed out, this is a standard Tether set for themselves so how is that 'unfair' at all?

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.

You are right. Tethers are not liquid in any real sense, and should actually pay a pretty hefty interest.

"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.

Are you a banker?

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.

[1]https://www.dol.gov/sites/default/files/ebsa/researchers/ana...

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.

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.

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.

> 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.

Central banks can print money, banks can't. Banks can only do fractional reserve. Sometimes banks go bust, sometimes central bank might save them.

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.

> Sure some of these assets are not liquid.

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.

Well, banks can become insolvent, like any business can fail. That doesn't mean it's their normal operating mode.

> With banks, the money doesn't exist.

The money doesn’t, but the other assets on the balance sheet do.

Yes but if everyone tries to take their all their money out of a single regular bank, the FDIC will cover it.

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.