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Comment by raesene9 | Hacker News Reader

The challenge with Tether is that it's basically impossible to prove or disprove their financial status. They don't have audited books, so no-one knows.

So you need to decide whether they're a risk or not. To me, the idea of having what is effectively a bank with a $60b+ balance sheet that has no auditor and no regulators, seems kind of risky.

We also know, via the NYAG case, that they have in the past, said things that were not true (specifically continuing the claim to have a 1:1 USD backing after they no longer had those funds).

The other aspect of Tether is "who's using them"? There are a range of stablecoins available now, multiple of whom are better regulated and audited than Tether. So why would rational organizations place $60b+ with Tether, when the risk is higher, and it's not like this is an investment where higher risk == higher return.

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> The challenge with Tether is that it's basically impossible to prove or disprove their financial status.

It's impossible for outsiders to prove or disprove. It would be trivial for Tether to do, which begs the question of why they don't (their reserves pie chart does not qualify).

Tether claims that it's basically the only $60B+ institution in the world incapable of being audited. And given their ludicrously simple business model, it's mind boggling that they can even say this with a straight face.

Of course the real reason they can't be audited is because it would ruin their business. And thus, here we are.

As someone who has worked at a big four accounting firm hearing the clip of Tether’s CEO insisting no one would audit them was infuriating. I don’t know a single public accounting firm that wouldn’t be jumping at the opportunity to do that audit and use it to show how tech-savvy they are in an effort to drum up consulting business.

Unless, of course, while negotiating every potential engagement Tether insisted on exceedingly unreasonable audit restrictions. (That’s assuming Tether has actually tried to engage an independent auditor, and I’m not really convinced they have.) Insane restrictions on the scope of the audit and/or the scope of auditor access is the one and only reason they’d be “unable” to find an accounting firm willing and able to conduct the audit. But lack of skill? Knowledge? Willingness to engage with potentially shady clients? Those are not really things that hinder an accounting firm’s ability to engage a client.

Exactly. What Tether really mean is that nobody will give them the audit and rubber stamp that they want, which is of course different from nobody being willing to audit them.

Tether actually was forced to release a break down of their assets and they have <4% cash reserves. So yeah, now everyone knows they're insolvent: https://www.coindesk.com/tether-first-reserve-composition-re...

Indeed there were some interesting pieces in that. They would argue that the composition showed that they had the required reserves, others would argue it showed they were insolvent :)

As tether specifies the right to repay any redeemed tokens in securities, assuming the securities they hold actually keep their value, it seems like they'd be fine

From https://tether.to/legal/ "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."

Of course the $60b question is, what are all the non-cash reserves they have, and how much are they worth.

It's all broken down in the video. A very large chunk is on "commercial paper" which is unsecured loans to...?

Indeed that's the question to... it's a huge variance depending on who it's to, the terms of the loans and the interest rates received.

No Basel II capital adequacy requirements here :)

The broader historical observation is: given a large amount of money, a requirement to keep it continuously invested, and a cloak behind which to operate, what financial institution in the history of humanity has made good choices?

At best, they're choosing investments incompetently. (Chance Tether's team is equivalent to professionals at major banks?)

At worst, they're choosing investments to maximize personal gain.

Or to put it another way, what sort of company do you think is knocking on Tether's door, offering a good deal in exchange for a few billion "worth" of notes?

It ain't Coke.

Yep it definitely seems probable that there's risky behaviour at the least.

> At worst, they're choosing investments to maximize personal gain.

At worst, they don't have any investments.

It's possible, but given a choice between "flagrantly lying to the New York AG who just investigated you" vs "buying cheap debt no one else would touch and then overvaluing it, because you aren't regulated", the latter seems like a less legally perilous way of keeping things going.

Yes, that might be more likely. I was just framing things "at worst".

Deltec, the bank that Tether bought, has a desk specializing in zombie debt, so it's entirely possible they have loads of debt bought for pennies on the dollar, that they have through accounting/market shenanigans recognized at par as their "commercial paper".

I mean... technically they're completely unregulated, right?

So they don't even have to perform shenanigans.

They can just buy $1 par debt at $0.01 from Bob's Used Cars and value / declare it at $1. It's a super shady move, and would shake confidence if known, but would seem legally defensible. ("We valued it at a fair price. It turned out we were wrong and overvalued it. Oops.")

They could probably declare it at >$1 if they really wanted to, but why do hard fraud instead of easy fraud?

Well if you take that view, then they don't need the $0.01 paper in the first place. If they are indeed totally unregulated, then they can just commit fraud without risk.

That's where the NY AG's case comes in, I think.

They are unregulated, but they're now required to publish a breakdown of their assets.

Before, they could have said "We have billions and billions in assets." Now, they're required to enumerate and value their assets, to the extent required to publish the breakdown, as part of a legal agreement.

So I guess before it could have been riskless fraud. Now, it's more risky fraud. And overvaluing assets seems like an easy way to keep the wheels turning without obviously pissing off a state AG.

The latter would imply they had any cash to buy debt in the first place. One of the most common, and most credible theories is that they issue Tether to exchanges in exchange for short term debt obligations. There's never any actual money changing hands.

All assets liquidated today, what do you think the true value of a Tether is? $.70 USD?

The answer is not clear to me, but it seems like this is an important value.

Also, aren't some of those assets (like treasury bills) interest-accruing? That would seem to offset some of the losses incurred by a short-term, high-volume liquidation event.

In my understanding, part of the issue is that we can't value or risk assess the backing ourselves. This is due to the lack of transparency on whose commercial paper Tether is holding, etc.

For sure. I don't hold or trust Tether. But, the existential risk to the (crypto) economy at large seems pretty small, in my opinion.

The unregulated, debased Tether seems less risky than holding regulated, backed-by-real-property mortgage-backed securities in 2007.

It seems much a-do about not much, to me. But, I guess people need something to worry about.

Maybe? I don't think it'd be existential threat, but could be a massive shock/crash, in my opinion.

I'll guess we'll have to wait and see!

I think this might be a misreading of 2007/8.

Bad mortgage backed securities were the root risk.

The unregulated leverage piled on top of those MBSs (credit default swaps) ballooned the consequences of that risk.

But what really caused the global meltdown was (1) pervasiveness of exposure & (2) consequently, institutional uncertainty and withdrawal of liquidity.

When the MBSs failed, the CDSs multiplied the dollar impact. Which would have been that, except that these assets underpined large portions of institution's balance sheets. And critically, unknown large portions.

The "music stopping" was the breaking of institutional trust in the solvency of their counterparties, and hence evaporation of liquidity.

The sheer opaqueness of the crypto exchanges might actually be an advantage here, as unlike traditional exchanges and the banking system, they're not used to keeping an eye on their counterparties' balances.

> But, the existential risk to the (crypto) economy at large seems pretty small

I believe the fear is:

1. The price of BTC is high because a lot of people are buying it.

2. A lot of those people buying it are paying with Tether's funny money which there is somehow $60 billion of.

3. If that $60 billion ceased to exist, the price of BTC would fall.

4. $60 billion is a lot of money, so the price of BTC would fall a lot.

That's the key point of course, you don't know and neither do I. Nor does anyone else outside of Tether.

Tether is the No.1 most traded coin (by a decent margin) which makes it a very large part of the ecosystem.

Now if their assets are all high quality low risk treasuries, it's likely all fine.

If however their asset are loans to people who used those loans to buy other crypto currencies, things get a lot more risky.

A large shock to the ecosystem, like Tether going bust, would seem like it would have a large impact on the overall space. We've seen in the last month that something a simple as a tweet can send the market up or down by multiple percent...

Wow, I just checked this and you're right. Tether volume is roughly the volume of BTC + ETH. Wonder why Tether and not DAI. Just not enough DAI available? DAI seems more risky to big traders?

> All assets liquidated today, what do you think the true value of a Tether is? $.70 USD?

Given that only 3% of each dollar is backed by fiat, they can only guarantee $0.03 on each dollar requested.

In the case of a bank run, the commercial paper etc. would be considered valueless, and unlike a real bank, their deposits are not insured.

So the value of a Tether would theoretically fall to $0.03.

In practice however, it is plausible that it would result in them blocking redemption and fleeing the country to avoid jail, so the value would be much closer to $0.

> In the case of a bank run, the commercial paper etc. would be considered valueless

It would not be considered valueless.

It would be valued at the current market price it could be quickly cleared at.

That price is substantially less than face value, but probably more than $0. And of course depends on who wrote the note and the terms.

> It would be valued at the current market price it could be quickly cleared at.

To clarify: there are two markets, one is redemption of USDT through the Tether company, the other is independent transaction of USDT vs. payment typically through exchanges.

During asset liquidation, Tether’s assets would not be sold for the users’ redemption, but for the company’s creditors and shareholders. As soon as the suspicion of liquidation is there, there would be a bank run while redemptions still work.

In the case of a bank run, the price of USDT would be dictated by the exchange market exclusively. As a massive number of people sell through redemption, it is clear to the holders that when the cash dries out, redemptions will close. So they will theoretically be ready to sell through the exchange at 3%, because that is the expected value of the return across all USDT holdings.

Can't we excise non-redemptions from this picture? As redemptions are (ultimately) the only way USDT is converted back to USD (regardless of how many times the USDT was traded, or at what price).

That said, at the time of a redemption, isn't Tether legally required to sell or transfer assets to service the redemption (as long as they are able, subject to the timelines and qualifiers promised in their agreements)?

Which is where I'm saying that if Tether holds $0.03 USD + 5 short term notes for every 1 USDT, they are obligated to turn over (or sell) those 5 notes (and $0.03) when a redemption is requested.

While Tether may not be a bank, their users aren't just users: they're holders of Tether credit, subject to the terms that govern it.

> While Tether may not be a bank, their users aren't just users: they're holders of Tether credit

Contractually, they are not considered creditors. Furthermore, liability for any loss is explicitly put on the user. (Whether the contract is valid can be litigated though.)

> isn't Tether legally required to sell or transfer assets to service the redemption

Sadly not… From the contract: “Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all.”

In fact, US citizens are already disallowed from redeeming tokens, and have been for years.

The prohibition on US citizens redeeming tokens probably stems from the SEC's declaration that duck typing will be applied to cryptocurrencies trying to avoid classification as securities.

The commercial paper is not “valueless” as long as there is an active market for it. The key question, of course, is who issued the paper. Given Tether’s difficulties obtaining banking services, you have to wonder what capital markets they have access to.

> All assets liquidated today, what do you think the true value of a Tether is? $.70 USD?

I guess you're assuming that their assets are truthfully reported, would be sold off, then evenly distributed?

Not worried that someone might run off with the money or something?

USDC has been growing at a faster pace. Tether has attraction because it was there first. This reminds me when Bitfinex was the exchange that moves Bitcoin price. Now, it's just another exchange. It'll take time but it'll eventually happen.

> https://coinmarketcap.com/currencies/usd-coin/

USD Coin has indeed increased in use, although given the supposed liquidity of these two assets, you could wonder why the move doesn't happen far faster than it has...

Also there's a very interesting difference between USDC and Tether in terms of volume.

based on https://nomics.com/ Tether has a market cap of $62.85B and a 24 hour volume of $70.19B

USDC has a market cap of $23.90B and a 24h volume of $1.84B

So, for some reason, the velocity of Tethers is about 14 times higher than USDC, which seems unusual given they're nominally the same class of asset operating in similar markets.

That seems potentially easy to explain given that some of the bigger (higher volume) exchanges support USDT and not USDC.

I know that was the case in the past, but is it still the case? from a 10 minute look, the 4 largest exchanges by volume (Binance, Coinbase, Huobi, and Kraken) all seem to list USDC

Hmm yeah maybe not, even Bitfinex trades USDC, and anyway they're a much smaller percentage of volume than I thought (jesus binance is huge).

Wonder if it's just network effect then? Big traders use the USDT markets because they're more liquid -> the USDT markets become even more liquid and the cycle continues.

The different volumes could reflect that folks have started to lose trust in Tether vs USDC, and so Tether is used as a big liquidity pool to move between different positions, but no one's endeavoring to hold big Tether positions for longer than necessary. Whereas USDC might be the preferred parking place when folks actually want to spend some time out of market without fully leaving the casino.

I don't know if that's actually true.

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