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Tether reserves backed by 2.9% cash (ft.com)
209 points by rwosync on May 14, 2021 | hide | past | favorite | 177 comments



As a comparison, USDC reserves are 100% backed by US dollars held in custody accounts, currently 9.3B.

https://www.centre.io/hubfs/pdfs/attestation/grant-thorton_c...


USDC's "custody accounts" aren't cash either:

"US Dollars held in custody accounts are the total balances in accounts held by the Company at federally insured US depository institutions and in approved investments on behalf of the USDC holders at the Report Date."


That sounds like a bank account. Are you criticizing USDC for not being as safe as paper dollars in a mattress?


Bank accounts are insured against counterparty risk by the FDIC.


Yeah, 100% agree.

The notion of counter-party risk is understood by a tiny fraction of the folks who participate in finance.


At this kind of scale, I don't think there's such a thing as plain "cash" free of any counterparty risk - even just holding it in a bank account has risk attached (and most banks probably don't want an account with that much money in it because that would pose risks to them - they have the exact same problems finding somewhere to put it). US treasuries and AAA-rated bonds and commercial paper are about the best you can do.


I remember reading about some folks who wanted to open a bank that wouldn't make any loans, but rather just take store all their deposits as excess reserves at the federal reserve. They would take a few basis points for themselves, but offer their customers a way to have truly cash deposits that earned some interest with the absolute minimum amount of counter-party risk.

The Federal Reserve didn't approve them to do that, because they were worried that it could "destabilize the financial system."


That's called a narrow bank. It's one of those stories you hear about that really make you question the incentives of these large government organizations like the fed. Makes you realize that their goal is not necessarily aligned with the average every day citizen, but rather keeping up this economic system we seem to be stuck in:

> The Fed raises three main objections. 3 The first is macroeconomic: The Fed worries that narrow banks could mess with the implementation of monetary policy, because if they succeed they will keep a lot of money at the Fed, increasing the size of its balance sheet...

> Second, it worries that narrow banks will take funding away from regular banks, making it harder for those banks to trade stocks and bonds (a business largely funded by repo), and maybe even making it harder to make loans...

> Third, the Fed worries that having too safe a bank would be bad for financial stability: In times of stress, everyone will flee from the regular banks to the super-safe narrow banks, which will have the effect of bringing down the regular banks

https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...


Source please?

The deposit rate that customers expect is higher than the rate they would get for storing liquidity with the fed so their spread is already negative. That means there already isn't anything for them to "take a few basis points for themselves" out of.

The Fed pays 10bps IOER or IORR rates https://www.federalreserve.gov/monetarypolicy/reqresbalances...

CDs are paying about 45bps eg https://www.salliemae.com/banking/certificates-of-deposit/?d...

So on a gross basis this plan already loses them 35bps before any costs they have themselves. If they actually planned to do this and the fed didn't approve the plan, it's because it's not economically viable not because it somehow posed a threat to the system.


For there to be a "deposit only" bank, there must also be a "loan only" bank.

If the money just sits there in a bank account and rots for all eternity you get unemployment and deflation.

The solution to this problem has been to loan out money so that someone else invests the money on your behalf. Inflation exists as an incentive to invest your money and since future incomes are greater (thanks to inflation) it is not very difficult for the borrower to pay the loan back plus some.

Investing doesn't make sense if you have deflation. You can just sit on the money and get rich by on the backs of others. A growing unemployment rate is unavoidable. To maintain stability you would somehow have to get rid of all the useless people or make them work for goods instead of money.


Short dated treasuries are practically indistinguishable from "cash". They're counted together on corporate balance sheets.

Also, what do you mean "cash"? Printed bills? Deposits in commercial banks' checking accounts? Would savings accounts count too (they can be frozen for some amount of days)? Deposits in Fed accounts?


You're right. These days, the word "cash" is basically meaningless for anything bigger than buying a bagful of groceries at the store.

And it's not going to get any better.

What sad times we live in.


Nothing has changed for many decades, actually. For much longer than I'm alive, for instance. There's nothing new in money classification, currently.


what defines an "approved investment" ?


> you agree Circle is free to use the funds provided for its own purposes prior to redemption subject to the terms of this Agreement.

> Circle may also invest these fiat funds in highly-liquid, AAA-rated fixed income securities.

I wrote about this here: https://omarabid.com/usd-stable-coins

Only Gemini USD is fully backed by US treasuries. Everyone else is using this money to play roulette.


Yes! And it redeems on demand! But what’s perplexed me is, the Gemini dollar (GUSD) is somehow more volatile than Dai, which uses much more complex, experimental means of stabilizing its value:

https://coinmarketcap.com/currencies/multi-collateral-dai/

https://coinmarketcap.com/currencies/gemini-dollar/


That's economics for you! Your perception doesn't not much reality. The idea that because you can redeem at face value for 1:1 and you have stronger guarantees, then it should have a less volatile price.

In reality, it comes down to market makers and market adoption/liquidity. That's why Tether could keep the beg at 1:1 despite having very little liquid cash. Liquidity will come from investors, and actually the more the better. Smaller fish like GUSD will not have that much interest from market makers.


It doesn't need interest from market makers. You want GUSD, you can buy it from Gemini at 1:1. You want to sell, they redeem at 1:1. You don't need market makers unless you want to get ripped off.


Out of curiosity, in the hypotethical future case where the custody accounts would start to "pay" negative interest, what would happen to USDC?

To me, there are only a limited set of options:

1. the peg fails

2. the custody accounts are switched to riskier assets - with or without knowledge of USDC holders. This, of course, has implications to the "stablecoin" status. One could even argue that USDC becomes a de facto fractional reserve bank at this point.


If they redeem tokens net of negative interest, it may not be pegged at 1.000 (as the cumulative negative interest is then rolled into the price of token) but it would still behave the same as competing forms of "electronic USD deposits", so one could argue the peg is not broken.


What would happen if the bank accounts paid interest and the trust wanted to share some of that interest with holders? I think the answer would either be some complicated stock-split-like mechanism, or just have, say, USDC-fixed as the “true” coin and USDC quoted at a floating value to the former such that e.g. 1 USDC-fixed = 1.01 USDC, and creations/redemptions of USDC-fixed happen at $1.01 to capture a compounded interest of 1%


You can check how EURS deals with this, for better or worse https://eurs.stasis.net/transparency/


You missed the "USDC hasn't published audits since Jan 2021" https://amp.reddit.com/r/CryptoCurrency/comments/mycfm9/usdc... now February is the last report. They just reported February a few days ago.


Those aren't audits, either, they are attestations, which are very different.


What's weird is that a couple of weeks ago Coinbase launched trading in Tether on Coinbase Pro. You would think this exposes them to much risk. I've been scratching my head about why they did it.


I think Kraken added Tether recently as well. Just seems like a terrible idea all around.


One very interesting sentence in that document is the "100'000 USDC token blacklisted"

If you ever thought govt-backed cryptos and centralized tokens like USDC were a good idea, ask yourself this:

Could a stack of greenbacks ever be "blacklisted" (I mean, people have certainly tried with various "tricks")?

One of the nice property of money as we've known it so far was fungibility.

With govt-backed (e-dollar) and/or centralized cryptos (USDC), much like the woolly mammoth the whole notion will soon be extinct.

Decentralized ZKP-powered coins FTW.


> Could a stack of greenbacks ever be "blacklisted"

Yes. Bill counters at banks capture serial numbers and associate them with your account when you make a cash deposit. Each night the serials are sent to a MCP database where they are checked against a hotlist entered by law enforcement across the country. The bank won't reject the bills on the spot, but depositing too many of the wrong ones will earn you a visit.


True, but you can still spend them at the grocery store.

Tracing cash bills is a complicated affair beyond a couple of transactional hops.


The kidnapper/murderer Ferdi Elsas was found via bills spent at the grocery store.


The US issued currency during WWII with that explicit plan-- notes counterstamped "HAWAII" in huge letters, or with different colour seals.

If Hawaii fell, or a large stash of notes intended for overseas use were diverted, they could easily demonetize them.

The reason it's not done on a more precise level is probably a UX issue-- you can easily remember "The $10 notes with yellow seals are void" but roadcasting and getting understanding of thousands of "$10 note Series 2024 serial number QL34567846A is void" is infeasible.


> Could a stack of greenbacks ever be "blacklisted"?

Copying from an older comment of mine (https://news.ycombinator.com/item?id=26812598):

I saw something like this happen when I was younger (this was pre-web, in the 80s or 90s, so I unfortunately haven't been able to find any online references to it): there was a big bank heist, and the stolen banknotes were new notes which hadn't been put into circulation yet. The ranges of their serial numbers were widely distributed by the press, and for instance cashiers at supermarkets were supposed to verify whether the serial numbers of the banknotes they received matched any of these ranges (since the banknotes hadn't been put into circulation, they were treated similar to counterfeit money: they officially didn't have any value). The country's currency has changed since then (it was the hyperinflation times), so that whole banknote series is no longer valid nowadays.


> Could a stack of greenbacks ever be "blacklisted"

Deposit a whole stack from a bank robbery and find out.


If you wanted to operate a fully legitimate tethered cryptocurrency, you have to do two things. Firstly you have to make public the basket of holdings backing the currency and secondly you have to bake in an arbitrage mechachanism to ensure the price of the basket and the price of teh currency don't drift too much.

The way this works for the most obvious analogous product I can think of in the financial markets (index ETFs like SPY https://www.ssga.com/us/en/institutional/etfs/funds/spdr-sp-... for instance) is known as the ETF creation and redemption mechanism. For any given ETF there is a pool of participating brokers who are entitled to create or redeem units in the etf with the ETF administrator. So if the price of the ETF gets too high relative to the assets then these brokers can buy the assets in the market and hand them in to the ETF admin who will add those assets to the ETF and give them in return the new units that are created as a result. This has the effect of raising the prices of the constituents and reducing the price of the ETF units (when the broker then sells those new units), bringing the prices back into equilibrium.

Conversely if the ETF units are too cheap, the broker can buy the units in the market and redeem them for the correct proportion of underlying assets (ie exactly the reverse process) bringing the price into balance the opposite way.

It's incredibly important for this mechanism (and the public record of assets in the basket it relies on) to be built in to the process if the price is to be truly tethered. Otherwise the tether is just an illusion and in the ETF world, ETFs which didn't have this type of mechanism went completely haywire and became defunct.


Like Diem?

"In September 2019, Facebook announced that the reserve basket would be made up of: 50% United States dollar, 18% Euro, 14% Japanese yen, 11% Pound sterling and 7% Singapore dollar." [0]

Diem has, at this stage, halted tethering like this. They have since retreated physically (to the US) and ideologically (backing 100% by USD instead of a basket).

It is my understanding that they intended to operate Diem as you mentioned in your second point.

The primary issue with doing this is that, if its successful, and you have indeed created a more stable currency system (which is the intention of tethering/stablecoins in the first place), you will eventually be the mass currency, which will kill demand for nation state currencies (at least the ones not in the basket) outside of taxes.

This is why the Diem plan was shot down by global (banking) regulators, and also why stablecoins/tethering have never really operated outside of the digital realm (and to be frank, have merely serviced the pump and dump that is crypto today).

I 100% agree that the public record of these currencies has to be very clear and built into the process. Tether has repeatedly been misleading (weren't they originally 1:1 USD:Tether?) and even still, with these reports its hard to tell how the money is truly organized.

0: https://en.wikipedia.org/wiki/Diem_(digital_currency)#Curren...


> It's incredibly important for this mechanism (and the public record of assets in the basket it relies on) to be built in to the process if the price is to be truly tethered. Otherwise the tether is just an illusion and in the ETF world, ETFs which didn't have this type of mechanism went completely haywire and became defunct.

This is what's so surprising to me. Markets are efficient and rational, right? (;-))

Well, we just learned a great deal. And no matter how you optimistic or pessimistically you value the ~95% of assets backing USDT that aren't cash, we should all agree on one thing: you won't value them 1:1 to the dollar. So why hasn't the peg moved?

The only explanations I can think of: this risk was priced in, which seems a stretch... or that USDT:USD has never been priced based on fundamentals.


...or that USDT:USD has never been priced based on fundamentals.

It's simple and easy to do this when one entity has control of both the currency minting and the market pricing mechanism.

In other words, USDT would be an ideal mechanism for perpetrating widespread fraud in the crypto marketplace, one that would likely never be tolerated in "regulated" markets.

Note that USDT is underpinning the entire crypto marketplace --- the majority of bitcoin and other crypto trades involve USDT.


> or that USDT:USD has never been priced based on fundamentals.

Ding Ding Ding! We have a winner!


The arb without transparency can work as well, as long as you keep enough collateral. At some point the peg becomes a self perpetuating prophecy. Carefully executed, it can last forever.

It could be what Tether does: they lost banking access early on and since then all new USDT seem to "appear" rather than being given to people wiring them dollars on the clear banking system, presumably from arb bots trading crypto vs USDT on the big exchanges to maintain the peg.

As long as they don't lose what the bots bought and the value of that basket is above cost basis (or fully hedged) it's unsinkable.


> Chief Technical Officer Paolo Ardoino

Can't say this news comes out as a surprise. I'm actually surprised by the fact that there are any reserves at all.

What is really interesting about Bitfinex / Tether is to research the history of the people who started these entities, especially their history prior to Bitcoin's existence.

Here's a taste:

https://nicolaborzi.medium.com/the-lawless-rollercoaster-of-...

As much as I'm a proponent of crypto, some folks very early on intuitively realized that the friction-less nature of the new technology made it the perfect vessel for running scams:

https://steemkr.com/bitcoin/@binyamin/bitfinex-s-founder-see...


On a tangent - ever since cryptocurrencies gained popularity, every known crook and MLM scam-artist here in Europe shifted their focus to some coin service.

Some of these are of course difficult to soit, as they tend to use numerous different names and identities, and have been in the scamming "game" for decades.

The takeaway from all of this is that one should absolutely do a quick research on founders and key figures when dealing with businesses that focus on crypto. People don't tend to change overnight, and especially not those that have been scamming people for decades before.


There's not much point in doing research like that, given that the vast majority of cryptocurrency businesses are scams, whether or not the founders are known or unknown scammers.

Just assume it's a scam from the off, it will save you a lot of work and money.


From your first link:

"On November 5, 2018, as an executive of Tether Mr Devasini lent 900 million dollars to Bitfinex and as an executive of Bitfinex, Mr Devasini signed the receipt to Tether."

That sounds totally legit and normal.


> That sounds totally legit and normal.

lol, maybe he has a twin brother :D



Also I didn't know what commercial paper is but it is apparently a very short term loan up to 270 days: https://corporatefinanceinstitute.com/resources/knowledge/cr...


I think it's the money exchanges like Binance "owe" them for the free Tether they receive. This is accounting shenanigans because the money is nowhere (i.e. when they mint Tether and send them to an exchange the commercial paper account gets credited mechanically). It's not physical reserves, but reserves in the accounting sense.


And the collateral is probably bitcoin in Binance's cold wallets. So ultimately it is backed by crypto. Which also gives the answer to how it is kept stable (at least in the short term) because the paper is denominated in dollars and they'd have to pay back real cash if the value of the Tether slid.


It’s basically helping corporate entities with Cashflow. Tends to just be rolled forward so despite short term it is effectively part of their permanent funding structure


I run ScamStableCrypto.

I create a billion ScamStableCoins and claim they are worth $1 each.

I give a billion ScamStableCoins to ScamCryptoExchange. ScamCryptoExchange is run by me. ScamCryptoExchange writes an IOU for one billion US dollars and gives it ScamStableCrypto (my right hand gives something to my left hand).

I, as ScamStableCrypto, write down in my balance book that I have a billion dollars of Commercial Paper.

I announce that ScamStableCoin is fully backed.


Shifting all my savings to ScamStableCoin this evening! To the moon!


Wait? Are you saying that ScamStableCoin is a "scam"?

I think you just don't really understand the ScamStableCoin market. I know lots of people making money with ScamStableCoin.


I simply don't understand why all this complicated stable coin stuff is even necessary. Why can't exchanges use USD instead of USDT, USDC, BUSD or whatever? There are trading pairs for other currencies like EUR, GBP, AUD, BRL, RUB. Why can't we have USD trading pairs?


Real fiat currencies come with much heavier regulation if you want to get money in and out of the traditional banking system.

Also, if you want to move money between exchanges or banks you'd have to use the regular transfer methods like ACH, SWIFT, SEPA, which oftentimes are not as fast and cheap as sending USDT between exchanges. That makes it much harder to exploit arbitrage opportunities and drives up the spread overall, for example.


> Real fiat currencies come with much heavier regulation if you want to get money in and out of the traditional banking system.

This is the biggest reason, really: the moment you touch USD you have to comply with know your customer laws, review OFAC sanctions lists, etc. And this doesn't just apply to US-based companies, if you are sending money through the US financial system or handling dollars, this applies.


To echo this a bit: exchanges were cut off from using USD.

I'd recommend reading https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/ (Tether: The Story So Far; by Patrick McKenzie aka patio11)

Basically, the US requires money-transmitting entities to know who they're working with (https://en.wikipedia.org/wiki/Know_your_customer). When you open a bank account, the bank has to validate your ID. Even if you're opening it online, they have systems that ask you questions to validate your ID.

If you're trying to create a non-tracked/anonymous system, you ultimately lose access to the US banking system (and probably the banking systems of a lot of other rich countries).

I'd say that it's not just "heavier regulation". That makes it sound like it's just hoops to jump through or delays in the processing. A big part of it is that banks/money transmitters/fintech need to know who their customers are in a lot of countries. It's not just random stuff like, "they need to fill out these forms, file these reports each week, etc." If you're trying to run an anonymous exchange and possibly profit off money laundering, anonymously transmitting payments for prohibited activities, etc. you don't want a system that requires you to know your customers. You just want to be, "it's crypto - things come in, things go out and it's all anonymous!"

There are companies like Coinbase which are licensed in the US, but Coinbase probably isn't where you'd want to go if you were looking to launder money. If you're looking to launder money, you don't want to go with a company that has been working with regulators. It would be relatively easy for Coinbase to give you USD, but Coinbase also knows who you are and would comply with warrants.

If you're a crypto company that doesn't want to comply with authorities, know your customers, etc. then it might be hard for you to give someone USD. However, it's really easy to give someone USDT - you just put it in your ledger. I can keep a sheet of paper and say "I owe X 100 MyDollars" and say "Every my dollar is backed by a USD in some form". Even if I'm 100% telling the truth, it doesn't mean that I can give you the USD I have in my pocked if you give me a MyDollar. Maybe you don't live near me so I can't give it to you. If I'm cut off from the banking system, I can't just send it to you electronically.

I think the point of "they're fully backed" is the idea that someone who does have access to the banking system will give you 1 USD (or close to it) for 1 USDT even if Bitfinex can't. One could imagine a market where someone would give you $0.90 for 1 USDT and then that person would go to Bitfinex and get the actual USD that backed it (assuming it was actually fully backed). The idea being that Bitfinex might not be able to give you an ACH or wire transfer of your USD, but if you showed up at a bank in Country X with a suitcase, you could get cash.

I'd recommend the post from patio11 more than this comment. I guess the tl;dr is that it's not just heavier regulation, but that the US and many other governments don't allow anonymous money transfers. Banks and fintech need to know their customers so places like Bitfinex get cut off from the system. USDT is an attempt to offer people a way to turn something into a dollar-like thing without having access to the banking system.


What a huge mess...


Stablecoins have value outside of just trading pairs on exchanges. The main value I find in them is that they allow you to reason about fiat(or really any other currency) on chain in a far simpler manner.

For example, suppose there's a smart contract based lending marketplace on the network. In most cases, real world users(lendees) will want said loan to be in the context of their local currency. As a lender you will want to provide said loan but you only have non-local currency assets.

Stablecoins allow you to represent the value of said loan on the network in a way that smart contracts can easily understand. Additionally, the lending marketplace could automatically handle the conversion between whatever X asset the lender has and the fiat stablecoin the lendee wants and vice-versa.

The main value add outside of convenience is that the current value of the loan is the same in the context of the local currency both at the day of signing and on the repayment date. Without working in the local currency, people could find themselves with a 50% more or less valuable loan the day after they sign it or the day before they repay it given current market volatility. Stablecoins and wrapped currencies bypass that issue.

This basic concept applies to any service marketplace where one side wants to use one currency and the other wants to use another. For fiat the solution is called a stablecoin but for incompatible cryptocurrencies the solution is called a "wrapped" currency.

Like others have mentioned there are regulatory advantages however they also greatly simplify a lot of things on the network for both sides of a transaction in various service marketplaces.


Many (most?) centralized exchanges do have such pairs, but we also would like to be able to have fully decentralized exchanges, and we also would like to have smart contracts that operate on dollars: stable coins aren't just some narrow solution for exchanges.


Sounds like fantasy. Whatever they wrote you the IOU for also comes out of your book, so your balance is $0. Doesn’t work like that.


Tether released a statement of assets. They said nothing at all about liabilities.


No idea if this is worth the paper it is written on but Stuart Hoegner posted this on Twitter:

https://tether.to/wp-content/uploads/2021/04/tether-assuranc...


>"Our opinion is limited solely to the CRR and the corresponding consolidated total assets and consolidated total liabilities as of 31 March 2021"

IOW, "They have the total amount of CP, loans, and bonds they say they have. Whether or not the issuers of those IOUs is Bitfinex or some shell company connected to the owners of Tether we have no opinion on"


Tether has repeatedly lied about their reserves. There is zero reason to take any claim they make at face value.


Yes, that is the scenario I am describing. I have a billion dollars of liabilities in the ScamStableCoins I issued and a billion dollar in "Assets" from the IOU I wrote myself.

THus I am perfectly fully backed.


Yeah, technically correct I guess. Is there any realistic scenario where this would fly? This would be plain and clear fraud and not something allowed to go on for two years after multiple audits.


The NYAG said they were liars who had comitted multiple acts of fraud and fined them.

There have been precisely 0 (zero, none) completed audits of Tether's holdings


What audits? The point is that there hasn’t been anything like an actual audit.


This is likely very similar to how USDT works.

So the answer to your question is it would happen in crypto where there is no regulator and people trust ‘audits’ which verify nothing.


Sounds like a plan, I'm in!


Whitepaper?


I'll publish soon. I think my real invovation for ScamStableCoin is that I won't actually ever let anyone convert ScamStableCoin to USD. That way my lack of actual cash will never be exposed.


The pitch is clearly a lie, but I'm also not too worried about them counting commercial paper and t-bills as "cash."


Commercial paper definitely shouldn't be classed as cash. They can have quite a lot of risk attached to them.

The biggest problem with this whole thing is that Tether is essentially acting as a unregulated and unaudited bank. It has a whole bunch of depositors that have the right to demand their funds within 72 hours, meanwhile many of their assets cannot be converted into cash within that period.

Tether is highly susceptible to a bank run and isn't eligible for federal deposit insurance.


Where did you get “72 hours” from?

That got me curious about what their rules actually are. From their terms of service [1]:

> 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.

Also, US citizens aren’t allowed to use their service at all.

This seems sort of like an unregulated ETF that keeps all profits from investments for themselves. Easy money if you get it. If they don’t get too greedy it seems like they could keep it going indefinitely?

[1] https://tether.to/legal/


It's a pyramid scheme, Works until people start to pull out their money collectively


Not quite a pyramid scheme.

The basic scheme is:

* Issue crypto pegged to the dollar

* Hold interest-generating reserves

* Collect interest

I externalize risk, but it's a relatively low risk. That's different from a pyramid scheme.

Low risk isn't the same as unimportant risk. The whole point of crypto is to mitigate very similar sorts of systemic risks. Cash works pretty well most of the time.


Sounds really close to a bank, without being one.


You're right. A lot of crypto schemes are very close to classical, preregulation banks.

Early banks issued IOUs for deposits. At some point, traders started swapping bank IOUs in lieu of moving gold, since slips of papers were easier-to-handle and equivalent.

At some point after that, bankers noticed they could lend out the gold for a profit.

Fast-forward a few hundred years, and the central bank issues IOUs in the form of dollar bills, and no one else is legally permitted to mint currency. As of a half-century ago, those are no longer backed by gold. Banks, in turn, handle deposits as bits on a computer (which are even more convenient than paper), backed by worthless slips of US-issued paper. Only the US doesn't even bother printing much of the paper anymore, since it's "deposits at the fed."

I wonder if we're heading for a similar path? Government bans the use of non-sanctioned cryptocurrency, like it once did with bank-issued bank notes, and issues it's own cryptocurrency? It kinda makes sense, since it wants to be able to adjust money supply in the public (or political) good.


Won't most things break if people start pulling out their money collectively? Ie. National economies, companies, etc


It's more like a bank without deposit insurance.


Insolvency is different from illiquidity.


You are assuming the paper backing the coin is proper


T-bills are OK, but it's entirely unclear what the "commercial paper" consists of. Amy Castor notes that if Tether gives USDT for free to large customers like Binance etc, that loan would be a form of commercial paper.

https://amycastor.com/2021/05/13/tethers-first-breakdown-of-...

And quite a few exchanges are offering crazy interest rates (up to 10%) for USDT deposits, which strongly implies they're getting some for free:

https://cryptoprijzen.com/en/crypto-interest/compare-tether-...


> And quite a few exchanges are offering crazy interest rates (up to 10%) for USDT deposits, which strongly implies they're getting some for free

I'd think the 10% is due to the high risk of default. (Someone else receives it, but usually only gives a crypto collateral, there's a fairly high chance of default since if the lender gets wiped there's a high chance the collateral won't be sufficient and it might snowball from there as all the lending platform try to liquidate at the same time)

It's comparable to investing in junk bonds (but since it's call "savings/interests" most users won't realize the default risk.


>The pitch is clearly a lie, but I'm also not too worried about them counting commercial paper and t-bills as "cash."

The pitch being a lie is EXACTLY the problem. Tether is supposed to be nothing more than the gateway between crypto and the rest of the financial system. There is no reason for them to hold anything other than deposits at insured institutions. There is no reason for them to be making loans. There is no reason for them to be paying above market interest rates to holders,


Anything that can prop crypto prices is a valid reason and anything that threatens the price is a damn lie.


What if the commercial paper was IOUs from cryto-exchanges that were issued in return for un-backed Tether. The IOU then being treated as backing.

What if "crypto-exchanges" just means Bitfinex and no-one else.

You notice that they carefully said the secured loans were against non-partner entities. They said nothing of the sort about the commercial paper.


And then when things go downhill and you want to redeem your USDT, they'll hand you a bunch of IOUs from Binance. Good luck redeeming those.


Also what's the paper and who issued? AAA or dogshit wrapped in catshit?


The giveaway is that they don’t even disclose what this commercial paper is or who the issuers are. Given their history of fraud the most likely explanation is they are shell companies run by the same people and the money doesn’t exist.


I do wonder to what extent Tether has a symbiotic relationship with large exchanges, and what the loans are denominated in.

It's easy to imagine how issuing loans denominated in USDT would be attractive to Tether. And that debt can be converted into an asset on Tether's balance sheet. And voila the tether is backed.


Agreed re T-bills, with CP surely it depends on the issuer?

Not the elephant in the room either way, I agree.


Well that obviously depends on what the commercial paper is. The treasuries are going to be liquid under most conditions, but who knows with paper.


Why print money when a private company can just create its own?

Just imagine what's going to happen when there's a bank run on Tether.


Just imagine what's going to happen when there's a bank run on Tether.

Tether FAQ: "Unfortunately, Tether has decided to stop serving U.S. individual and corporate customers altogether. As of January 1, 2018, no issuance or redeeming services will be available to these users."[1]

If there's a significant net outflow from Tether to USD, there's a good chance the whole thing comes apart.

Remember, with Tether, there is no potential upside. If you're not using it for something within days, don't keep any money in it.

[1] https://tether.to/faqs/


Can't have a bankrun if you don't allow withdrawls. Tether will not actually redeem your USDT for USD.


This just seems like Mt. Gox 2.0 waiting to happen.


It’s an interesting thought isn’t it.

Many of us in the haze of an enlightenment narrative in the 90s thought the web would empower through a decentralised model, and while it’s done that of course, it has also created powerful new sources of centralised power, monopolies, and walled gardens, that have challenged (and often won against) existing legal, societal, and political structures and norms.

It starts feeling a bit Neal Stephenson or Max Barry if you imagine a world in which monetary policy underpinning Western (and other) economies is further removed from existing political (especially democratic) levers.

Weber’s argument that states draw their legitimacy from a monopoly on the legitimate use of force is largely supported in Western economies by a monopoly on the legitimate exchange of value as well.

What does international trade, yet alone your annual tax return, look like in a world in which “govcoin” is just one (and a lower preferred one at that) of many currencies used day-to-day?


> What does international trade, yet alone your annual tax return, look like in a world in which “govcoin” is just one (and a lower preferred one at that) of many currencies used day-to-day?

That's already a reality for many companies doing international trade. Especially global special-purpose device producers from smaller countries. It's annoying with paperwork and dealing with "what price was actually paid at the time", but it's not new. They contract a team from X, do work in Y, source materials from Z, V, W, then pay local accounting and tax in their govcoin equivalent - which happens to be the local currency.

For day-to-day multiple local currencies check out the history of the Brazilian Real.


Good examples.

What do you think it means for the stability of nation states, either domestically or on an international scale, in such a world though?

It’s the increasing practicality of doing this (buy your breakfast in StarbucksCoin, your lunch in McCoin, and your groceries in WalCoin) that makes it more possible as a reality.

But how does a government have credibility and get taken seriously domestically if the currency they control is increasingly irrelevant day to day? How does the US continue to maintain leverage over energy costs? Etc.


I lived in Cambodia, which has this situation: the government currency is the Riel, roughly 4000R per 1USD, but everyone uses USD for anything over 1USD. Essentially, Riel notes are used as coins - if something is $4.50, you pay $5USD and get back 2000R in notes as change.

> But how does a government have credibility and get taken seriously domestically if the currency they control is increasingly irrelevant day to day?

The monopoly use of force is still a thing that demands respect.


Countries still can tell you what usage is legal and what isn't. We've tried StarbucksCoin already and people weren't happy: https://en.wikipedia.org/wiki/Company_store

We've also tried restricted foreign currency shops: https://en.wikipedia.org/wiki/Pewex


Its unbelievable that someone stoles a $20,000 car and do 15 behind bars, yet here we have folks that embazzled $850,000,000 and AG will sit down with them to kibdly negotiate a plea deal and penalize them 4% of what they stole.

I mean seriously what the hell happened to Lady Justice??


Always been that way. The richer you are the more likely you'll get off. The more abstract a crime the lighter the sentence. Throw them both together.


It has always been this way, read about some of the things the ancient Romans or renaissance Brits/French got up to when you feel like it.


Stealing a car is an act of aggression against an individual.

Crimes are not simply about the monetary damages.


But wouldn't you argue that a guy who stole a car and was peacefully caught with no damage to car, people or property, caused less damage than what $850,000,000 stolen from gullible investors did? I mean - wouldn't that turn off victims from ever entering any stock market, be it NASDAQ or even their 401k found, causing more damage to the US financial ecosystem?


Out of interest what violent crime would you consider comparable to "$850,000,000 stolen from gullible investors"?

What should the prison sentence be for that in your eyes? and what would a violent crime that gets a similar sentence be?


"Crime" is more about class than people are willing to admit.


its the age old thing, if you owe the bank $100k you have a problem, if you owe the bank $100million then the bank has the problem.


The same of what happens in a regular bank run, cash conversions are delayed.

That being said, the comparison is not totally fair.

In the regular fiat banking system a bank run, the withdrawal of most deposits, destroys a bank because it fails to meet the reserves ratios mandated by the system.

In the case of Tether there no such requirement and the reserves are liquid enough to meet the withdrawal requests in about a month - at least 2 workdays days for cash-like reserves liquidations, 2 workdays days to wire to cash to exchanges. Non-cash-like reserves might take longer but 2 weeks should be enough. Since Tether reserves aren't that being on each asset class and overall market probably won't trigger their own reservers depreciation.

That being said the actual exchange rate on the exchanges will this happen will drop because people will panic sell and not wait for Tether company to meet their sell orders at 1USD.


The whole modern banking system is run in the same way. Private banks create money as loans, but they are backstopped by the Fed and there's the FDIC insurance up to a certain amount. Tether might also create money but there's big additional risk because it doesn't have access to the Fed.


Presumably, USDT would lose value. What then?


The entire cryptocurrency market would collapse and cryptocurrency would become usable again.


I anxiously await the next bear market crunch to flush out all the garbage that has gotten sucked in. It feels like 2017 all over again.


Coinbase will be very happy with the influx of USDC users.


This just seems fundamentally something you don't want an unregulated entity doing.


And they keep creating around half a billion USDT per day ...


The market cap of Tether seems to be on an exponential curve.

I wonder for how long can they keep it going like that.


For some reason I am reminded of a short anecdote from Good Soldier Svejk - https://en.wikipedia.org/wiki/The_Good_Soldier_%C5%A0vejk

Before WW1 in Austro-Hungary a small game of cards takes place in a bar.

The stakes are tiny a few krona at the beginning.

By the end of the night people have mortgaged their properties, their belongings, their wives and have written IOUs for trillions of krona.

It ends with one of the players reporting to the police for illegal gambling hoping to collect a finder's fee on the total amount of IOUs...



1. Print fake money

2. Buy crypto with them and create a huge hype

3. Sell crypto for real money

4. Profit

5. Receive your Nobel prize in Economics


A bit like the stock markets right now.


Not really.

Stocks are overvalued, but are backed by real-world items with an actual value.

A stock's value is bounded below by its breakup value. So if people lost interest in IBM, at some point the stock would be worth buying just for its property and IP.

But there's nothing preventing any cryptocoin from going to zero, except sentiment.


the market does not seem to care. we are indeed living in a post-truth era.


How do we tell “the market” from the half a billion fake dollars being pumped into the exchanges each day and the fake volume being traded between exchanges that hold significant amounts of USDT they know have no value when hell comes down but they need to respect until that point to keep the delusion going long enough to make more on new crypto than they are already under water?

I have a sense that a healthy maker analysis would show that the market does indeed care, but there’s to much fraud in the mix for it to be clear unless you dig out the details.


Give it time. Almost no one knows what Tether is. It's also a really technical, and thus niche, topic, not a lot of people understand the scam. Eventually a regulator body will finally do something about it.


>Give it time.

Yes. Bernie Madoff's scam lasted at least 16 years (1992-2008) and some suspect it could have started as far back as the 1970s.


The market creates the "truth".


This fact has now been priced in so if crypto prices don’t move I guess it clearly doesn’t matter.


That's true, but I guess in that case only in the short term


Least surprising thing ever.

Even the most religious zealot nun who has taken a blood oath of poverty would become corrupted in that situation and the money would trickle away.


Honest question: if I deposit ten billion dollars in my bank account at a regulated US bank, what happens to it? Is the bank not going to buy T-bills with it, or even commercial paper? What are the rules around this for regulated banks?


An alternative interesting approach is an algorithmic stable coin like https://havenprotocol.org/ which also includes Monero style privacy!


After some research, it is possible to short Tether for roughly 15% borrowing fee per year.

Who is with me ?


Careful, your loan will become "comercial paper" and back more tethers.


When you encounter a pump and dump the worst thing you can do is go long. The next worst thing you can do is go short.


Does it really matter when banks have a reserve requirement of 0% since 2 years?


I believe the U.S. minimum requirement is currently at 10%, but you do remember how bad it all came crashing down 13 years ago, right?

So yes, it does matter if we let financial institutions disregard risk in the pursuit of profit, when they are gambling with other people’s money.

In the case of Tether though, it’s not a traditional bank that issues interest yielding loans based on the lender’s credit profile.

Rather, the suspicion has been that they are simply issuing USDT coins to buy up crypto, which causes the latter to increase in value, but the money to buy these assets were never there in the first place, and that is why today, they can only show a fraction of the cash they claim to have received.


https://www.federalreserve.gov/monetarypolicy/reservereq.htm

"As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."

I experienced time very differently the past year. I thought it was two years already. But I'm sure there was another announcement similar to that earlier.


The OP just told you it's 0%, and he's right. Reserve requirements have been abolished for the past 2 years, and even before that, banks could easily conjure reserves when they needed. That was the whole point of the QE programs run by the Fed.

Edit: another poster linked the actual Fed announcement and it is actually 1 year since the reserve requirement has been lifted.


I like how QE is becoming a catch all for "expansionary monetary policy I don't like."

Changing reserve requirements is part of conventional monetary policy, it is not QE.


Banks aren't at all like a supposedly pegged cryptocurrency. Secondly banks don't have a 0% reserve requirement against all types of RWA. They have specifically low reserve requirements against certain types of assets but if you look at the balance sheet of a bank you'll see that their capital reserves are not zero. The Fed removed the reserve requirement on eligible deposits and moved to the "ample reserves" system where they pay interest on reserves that depositary institutions lodge with them but which a specific reserve requirement against liabilities is not needed.

Banks are still required to have reserves against risk-weighted assets (remember that deposits are a liability) and to cover liquidity and macroprudential risk. Here's the fed policy note https://www.federalreserve.gov/monetarypolicy/reservereq.htm and here's an explanation of the "ample reserves" system https://www.federalreserve.gov/econres/notes/feds-notes/impl...


Sibling comments express justified disbelief at this question, but just in case: in our modern monetary system, reserve requirements aren't the "last resort" against bank runs. The central bank will jump in and provide the required liquidity to prevent a bank run as a last resort, and (since it is the entity which ultimately runs the monetary system) the central bank is by definition always able to do so. For a bank to fail in the modern system, it has to fail its capital requirements, which is a very different story (the keyword you'd be looking for here is the Basel regulations).

Tether cannot fall back to a central bank, so the cases are completely incomparable.


I believe, in your analogy Tether _is_ the central bank. They don’t need a fall back, they print the money.


Well, they don't print the USD. But you're right, perhaps a better analogy for what people mean is a central bank trying to maintain a currency peg. Which also often ends badly...


Yes because it's an unregulated offshore private company? In the physical world it's like giving money to someone in exchange for a piece of paper with "1 my token", freshly out of the printer. It's worse than banks.


Tether is acting like a bank, that's the problem. A completely un-auditable bank with a history of shady behavior.

If a bank has 0% reserves, the books say 0% reserves. Tether has no books.


Are you really comparing tether to a bank?


The two are incomparable.


How are they any different? They both do fractional reserve banking. If anything, Tether is more robust because they aren't controlled by central banks.


A random individual in the street can do fractional banking too, and by that reasoning is more robust than a bank. Why would you specifically trust Tether with your money?


I would trust a random individual more than a bank. There is a chance that the random individual might be honest... On the other hand, I know for sure that banks are running a pyramid scheme.


Email me, I'll send you my account number. Trust me.


We used to have private banks 100 years ago, and people would lose their money on a run on the bank. Central banks were created to have a shared liquidity pool so you are all safe in your deposits. Not just a private company that issues money and can run away with it all


Uh, this chart looks surprisingly good. Does it matter it tether is partially backed by "cash equivalents" such as t-bills? If those aren't good for cash, believe me, tether is the least of your worries.

I'm more interested in the other 25%. Does anyone know what it is?


The level of detail they have given for "Commercial Paper" means that it is worthless.

Commercial paper makes up about 50% of Tether's balance book.


Is it? Commercial paper is short term (<9mo), and tether is a long term project. So, unless the composition of tether's backing has changed substantially in the last few years (and I remember them stating years ago that it was mostly these "cash equivalents"), then I'm not really worried because it sounds like their borrowers* have been paying them back.


It feels like people don't understand Tether. Tether was originally created to be an intermediary between exchanges and anyone that wanted to move large amounts of USD without paying price spreads to buy / sell on either end.

Tethers are essentially IOUs pegged to USD. While the Tether organization may have originally waited for the Tether purchaser to transfer the money into their accounts before issuing the Tether, by 2018 at the latest, this has to have changed when Tether was forced to cease dealing with US citizens. If not from the start, their model of trust must have allowed their large clients (the exchanges, etc.) to hold onto the USD and instead issue "Commerical Paper" to back the Tethers issued.

Tether obviously isn't going to reveal the exact arrangements here, and from the outset, their claims of having bank accounts with billions of dollars was suspect... but this revelation has been nothing new, and if anything, things look positive now. Tether doesn't appear to just be printing Tether with absolutely no backing.


Wow, that is some serious rationalization right there.

Am I the only one remembering them claiming to be fully backed by USD in some bank accounts?


I certainly remember it too. I even mentioned it in the comment you replied to!


>Tether doesn't appear to just be printing Tether with absolutely no backing.

Is there a difference between just printing them for the exchange you also own and just printing them for the exchange you also own in exchange for an IOU from that exchange that you call Commercial Paper?


I expect better from FT. Tether is very similar to prime money market funds, in both structure and portfolio composition. I guess the Fidelity's of the world aren't keen on competition.

https://www.nytimes.com/2008/09/20/business/20moneys.html

https://www.nytimes.com/2020/03/19/business/coronavirus-mone...


That's a bit of a mischaracterization. The 75% that they're describing as "Cash & Cash Equivalents" might be similar to money market funds in composition, but we can't know whether it is or not because they don't give any details about the commercial paper. They don't even make the claim that it's asset-backed. Because they aren't saying anything about that, and they're not audited, they could very well be making riskier bets.

But more importantly, there's the 25% of their funds that bears absolutely no resemblance to anything a money market fund would do. The quote the FT article publishes from Martin Walker looks pretty reasonable to me:

> It is pretty clear looking at the makeup of the reserves — a tiny proportion of the reserves are cash on account at banks — that Tether is operating like a bank but with none of the normal disclosure.

> They are creating a dollar substitute and basically running a banking and payments business but without the oversight that anyone else doing a similar kind of business would have.


> They are creating a dollar substitute and basically running a banking and payments business but without the oversight that anyone else doing a similar kind of business would have.

You could take that word-for-word from the debate that raged after Treasury bailed out the prime funds in 2008.


Money market funds arguably act like a banking business, but are subject to regulation of their marketing material that obliges them to explain that they're not, and they certainly don't operate like a payments business.

Money market deposit accounts are a different story, and are highly regulated (and secured).

That being said, even if your comparison was accurate "hey, look at this similar business that caused harm and chaos during the last financial crisis" isn't exactly a glowing endorsement, is it?


This is an opinion piece and the headline & article are clickbait IMHO.

From Tether's chart, they literally have 2.9% in cash. So I guess the headline technically checks out.

But Tether reported over 75% held in cash equivalents, the same type of liquid assets Apple reports when reporters say Apple is sitting on billions in 'cash'

I think maybe more interesting, Tether reports only 1.64% slice of pie has some crypto holdings. Which seems kind of interesting given the theories about some shady btc/usd/tether pumping cycle scam might be happening behind the scenes.

https://tether.to/wp-content/uploads/2021/05/tether-march-31...


It’s not that long ago that Tether was claiming that all reserves were cash deposits.

Now something like 75% of the reserves are loans to ... well, who knows? My guess is other crypto-companies, but it’s impossible to tell.

(It’s also very weird to lump together “bonds” and “gold” in the same pot - these are completely different asset classes.)

If one were of a cynical turn of mind (and who wouldn’t be, given Tether’s history?) one might suspect that the commercial paper consisted of loans of freshly printed USDT to crypto companies & trading platforms who are using it to trade cryptocurrencies (because you can’t really use USDT for anything else at this scale). One might also suspect similar things about other entries in this breakdown.

Tether is a wildcat bank.


I mean, this was exactly what Tether was made for. Moving large amounts of USD frictionlessly between exchanges without causing taxable events or losing money to spreads.

The top purchasers of USDT would be exchanges and "whales" (ranging from the extremely large crypto traders to the odd investment firms / hedge funds).

It wouldn't be surprising at all if the entities purchasing USDT are ultimately holding onto their USD but using the Tether issued to them and paying what essentially becomes just a transaction fee. As long as everyone can prove to Tether that they are good for what they purchase, the IOU trading scheme doesn't necessarily have to end in bloodshed / collapse either.


Yeah I have no idea what the truth is. They aren't regulated it seems. But my point was this isn't a news report, it's labeled opinion. And reporting only on what Tether released I think the headline is clickbait and article lacks context of what marketable securities means.


The difference betweeen what Tether says and what Apple says is that Apple actually have to follow regulated practices in reporting their cash. All that Tether is saying is that they have about half their reserves in commercial paper with no details of what the risk profile of that is at all. And given that they don't need to report this to anyone, and they'd get to keep all the profits from riskier bets, it seems quite likely not to follow regulatory standards- which they actively claim to get around by saying they don't operate in the US (despite being a tether for USD)


Also, Tether promises that at any time you can redeem a tether for USD (well, it doesn't really promise that either). Apple does no such thing.


Doesn't matter what tether says because they are not audited. I could write "100% cash!" on a napkin and it would have the same credibility.


Not exactly, Tether has more credibility than your napkin given that they’re successfully maintaining the USDT peg despite huge volumes (for now)


Following that logic, any obvious ponzi / pyramid scheme is credible and trustworthy until it demonstrably collapses?

You say tether is "maintaining" the peg but that information comes... from them. They are not audited. They are unregulated. You don't even know who is behind it. You won't see that they are not even close to solvent until a bank run occurs. It is easy to suspend disbelief as long as nobody requests their fiat from tether in cash in large volumes. In those huge volumes, no fiat is changing hands, so they can very easily run with no cash at hand as long as people believe they have the money.

When I looked at it in more detail a few years ago, they even claimed you are not entitled to the fiat in exchange to the usdt you buy, is that still true? Is there even any way to get any fiat from them directly? Sure, you can convert your usdt to fiat using an exchange by buying another cryptocurrency first - in this chain everyone "believes" tether has the money to back it up and that's why it works. It could work even if tether had absolutely no usd because there is no reason to touch that usd.


> Following that logic, any obvious ponzi / pyramid scheme is credible and trustworthy until it demonstrably collapses?

Credible and trustworthy? Of course not! Slightly more credible than a napkin with “100% cash” written on it? Of course.

> You say tether is "maintaining" the peg but that information comes... from them

That information comes from the exchanges where tether is traded.

>You won't see that they are not even close to solvent until a bank run occurs

Nobody is disputing this




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