
Things Got Weird for Stablecoin Tether - jnordwick
https://www.bloomberg.com/opinion/articles/2019-04-26/things-got-weird-for-stablecoin-tether
======
panarky
Lots of smart people have been claiming since 2015 that Tether was a ponzi
fraud, that it didn't really have dollars to back the Tethers.

 _But in fact Tether did have the money, at a real bank, and at this point
that bank was Deltec Bank & Trust Ltd. in the Bahamas._

Amazing, Tether actually was fully backed by dollars in an actual bank!

But then Bitfinex took $625k of Tether reserves to make up for a separate
fraud or government asset seizure.

 _Bitfinex took $625 million in real money at a real bank from Tether, and in
exchange gave Tether back $625 million in fake money at a fake bank._

The real mystery to me is why rational traders continue to buy Tether at
$0.9926, less than 1% from parity with USD. Why wouldn't people sell?

~~~
repomies68
People trust banks, even when the fiat in banks isn't fully backed. Usually
the reserve ration is backed to something like 10%.

To my understanding tether is just like a bank, except the accounts are kept
on Blockchain instead of private database. So, it is rational to use them if
you think they habe enough reserves to keep them liquid. Full backing is not
needed, as it isn't needed with banks as well.

~~~
Scoundreller
Banks generally have full backing, verified by frequent auditing, it just may
not be all cash or cash-like assets.

But then again, not all of bank’s liabilities are cash either. E.g.: CDs.

Things get hairy when their long-term assets go down in value and/or there’s a
sudden demand for withdrawals triggering a mismatch between short-term
liabilities and long-term assets.

We have strikingly little audits from this stablecoin. Do assets match
liabilities or not? For a bank, they always will or else they get shutdown
before losses become too great.

~~~
btilly
Actually they don't quite get shut down. At least not in the USA. Instead they
get taken over by a more stable bank, which receives some money to make the
transaction make sense. People with deposits in the bank do not lose their
money.

This is how FDIC insurance actually works in practice.

However there is a systemic risk if the entire system cannot absorb the bad
banks. According to multiple people involved, in 2008 we came within a few
hours of the whole banking system having to be shut down with no idea how much
chaos that would cause. This is why TARP got passed.

~~~
Scoundreller
I get that. When people say “they lost their house”, they still know where it
is, it’s just not theirs anymore.

When your bank is forcibly taken over by the government and the assets
forcibly sold to someone else with nothing going to the owners of the bank,
most would say the bank was shutdown.

In 2008, since TARP recipients didn’t wipe out their shareholders and sell
shares to new owners (perhaps .gov), I would say they had plenty of time left
before needing a bailout.

The gov should have created an express bankruptcy protection process instead
of bailing out shareholders and boards that took too much risk.

~~~
btilly
The problem wasn't that the banks were unsound. Most of them were sound. But
each bank didn't know which others were solvent, and that fact was about to
shut down the ATM and credit card systems.

Once the government stepped in, everyone was sure that normal operations were
safe, and chaos was averted.

In fact, as [https://www.americanbanker.com/opinion/tarp-was-not-a-
bailou...](https://www.americanbanker.com/opinion/tarp-was-not-a-bailout-and-
the-governments-profit-was-huge) points out, the government actually made a
$30 billion profit on TARP in the end. (It can be debated how much of that
profit was a result of other Treasury actions, like quantitative easing.)

~~~
Scoundreller
A __$15b __return on $400b invested in 2008 /2009 over ?5? years is a terrible
return. And it conveniently ignores management costs.

That was "close down your hedge fund(s) and change your name" embarrassing
level of return.

Your link's source for its $30.7b profit figure is unsupported by its linked
treasury.gov press release

------
nickelcitymario
Although I agree with the author's position that an awful lot of sketchy
things are happening, and I'm sure happy I don't own any of this so-called
stable coin, this line bothers me:

> If everyone redeemed their Tethers today, it is not clear how Tether would
> come up with the money

This is true of banks, too. In fact, if everyone took out all of their money
from all of the banks, there isn't enough real money in existence to cover it.

With Tether, it is at least plausible that the money still exists and is
simply frozen due to some terrible business decisions. With banks, the money
doesn't exist.

I'm sure this isn't news to anyone on HN. The pros and cons of Fractional
Reserve Banking are well known. But it seems unfair to hold Tether up to a
higher standard than even our most established banks.

UPDATE: This is one of those can of worms things. A lot of you are making
similar arguments, and rather than answer one by one, let me just say:

1) Comparing a run on Tether to a run on ALL of the banks was a poor
comparison on my part.

2) Y'all might be right that it wasn't UNFAIR of the author to make the claim
above. Tether did make that promise to their customers.

3) Y'all have way more faith in fiat currencies and fractional reserve banking
than I do.

Cheers.

~~~
phdp
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.

~~~
nickelcitymario
> 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.

~~~
joshfraser
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.

~~~
bluquark
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.

------
apo
It may be baffling that Tether hasn't collapsed yet. But consider the drawn-
out drama of the Mt Gox collapse.

It took weeks for Mt Gox to unwind. In the time leading up to the finale, many
people (who should have known better) insisted that the exchange was secure
and fully capitalized. For example, this guy:

[https://www.youtube.com/watch?v=UP1YsMlrfF0](https://www.youtube.com/watch?v=UP1YsMlrfF0)

When incredible spreads started appearing between Gox and competitors, the
gullible asked "How can I arbitrage this?" rather than "Where are the exits?"

Then they became irate at their inability to withdraw the funds they deposited
to make a quick buck.

There were others who simply refused to believe the facts staring them in the
face.

I expect the same to happen here. Settle in, this is going to take awhile to
unwind.

------
rlt
The craziest thing to me is a lot of people have been claiming Tether was a
fraud for _years_ , but according to this it may not have actually had any
issues until ~6 months ago.

So they decided to prop up Bitfinex with Tether funds long after they were
first accused of fraud, even having that spotlight already shining on them.

If they wanted credibility they should have completely separated those two
businesses, but I suspect Bitfinex makes more money than Tether, and perhaps
they wanted the Tether funds as a sort of insurance policy for Bitfinex
liquidity.

~~~
hjk05
It seems so weird. If they had the backing at a reputable bank all along, what
was with the constant song-and-dance show around not providing a simple
external audit proving that point.

------
chejazi
Summary of Tether's risk, in the author's own comedic gold:

 _Saying “our stablecoin is backed one-for-one by U.S. dollars in a bank” is
not quite the same as saying “our stablecoin is backed by an equal notional
amount of three-year dollar-denominated loans to our affiliated crypto
exchange, much of whose cash is currently frozen.”_

------
jpmattia
One thing that has been confusing me about the recent news: $850M is more than
"crook" levels of money: It is well into the realm of state-actor or kingpin
levels. When that kind of money goes missing, I would expect whole armies of
unsavory characters get dispatched for asset recovery. Coincidentally,
everyone in those armies is named either Guido or Rocko.

So the idea that Poland or Portugal or any other state-actor beginning with
the letter "P" might have seized the funds at least provides us with a
rationale for how the money remains unrecovered.

------
rdiddly
This is a good contextualization of the news we read yesterday, especially
since it brings out some of the humor in it. (All of which is _schadenfreude_
, but still.)

Can we agree that the most priceless phrase in all this is _" a (believed to
be) Panamanian entity"?_ Not a bank, but an entity. A Panamanian one. Which
already sounds shady enough, but then we're not even sure that's what it is.
It gives me LOLs.

------
zaroth
The sad reality appears to be that Tether was fully backed dollar-for-dollar
by USD in a reputable bank, but that the associated cryptoexchange owned and
operated by the same people got robbed by a government entity and left them
insolvent.

I blame the Tether guys for not declaring the exchange bankrupt at that point
and keeping the Tethers entirely walled off.

Tether will have, in part, been brought down by a government agency (assuming
that the whole Crypto Capital thing isn’t entirely a scam/front/honeypot).

If customers lose funds in this, it traces back to whoever has the Crypto
Capital money.

It’s not at all surprising that the government would ultimately be responsible
for bringing down Tether, since it’s clearly illegal to operate per
AML/KYC/FinCen regulations.

In the end the entity that confiscated the billion dollars could offer
restitution in exchange for an IRS audit. I would guess many would gracefully
decline.

~~~
vkou
> The sad reality appears to be that Tether was fully backed dollar-for-dollar
> by USD in a reputable bank, but that the associated cryptoexchange owned and
> operated by the same people got robbed by a government entity and left them
> insolvent.

Crypto Capital provided no evidence that the funds have been seized by
governments.

~~~
A2017U1
Bloomberg have the responsibility to confirm it regardless, that's the job of
a journalist rather than blindly parroting whatever a company tells you.

They are still publishing articles not mentioning the fact despite Polish
media confirming it. Low effort journalism.

------
dpflan
Can someone explain the need for and uses for a stablecoin in the world of
cryptocurrency?

~~~
roywiggins
If you want to sell crypto coins quickly, getting dollars is hard. You have to
go through banks, or trust that the "USD" in your crypto exchange account is
really there. Getting crypto tokens out of an exchange is pretty easy, but
you're just jumping from one volatile asset to another.

So someone had the idea that you could create a coin that would retain its
value but you could easily swap for crypto coins.

~~~
dpflan
Thanks for explaining!

------
vlindos
[https://en.m.wikipedia.org/wiki/Mt._Gox](https://en.m.wikipedia.org/wiki/Mt._Gox)
Mt. Gox reported 65 mln dollars missing when declared bankruptcy. 8 years
later Tether / Bitfinex reports 650 million dollars missing.

I wonder what would happen in next few years if so called “decentralized”
currencies really become mainstream.

------
granaldo
Strange how USDT only loses peg temporarily when the news broke. Why is
everyone still holding USDT?
[https://www.coingecko.com/en/coins/tether](https://www.coingecko.com/en/coins/tether)

------
0898
Tether's payment processor has seemingly swiped the funds.

A similar thing happened to Full Tilt Poker. Its payment processer stole its
funds and the business collapsed.

------
jcdavis
Matt Levine is a national treasure

~~~
IfOnlyYouKnew
He’s the role model of how to get dialectics right without succumbing to
bothsiderism.

This article is a perfect example: he dismisses the nihilist’s “everything is
a fraud” perspective while still heaping some rightful schadenfreude on these
shenanigans. Then, he turns it around (again) by mentioning how this situation
is partially caused by Tether’s inability to find partners in traditional
payment providers.

Throughout his work, he never succumbs to either blind love or hatred for
anybody or any group (government, media, Musk, Crypto enthusiasts, banks, that
Pharma bro). When they are universally hated, he will invariably highlight how
creative or entertainingly brazen their exploits were, while still managing
not to excuse them. Where others see individual moral failings and call for
pitchforks, he looks at the structural issues in law or society that enables
them.

------
cryptoslug
LOL at communication logs between Merlin and Oz.

------
ShorsHammer
New York AG: Tether lost $800m and then funded it from their crypto exchange.

Bitfinex: Poland seized half a billion, Portugal nearly all the rest.

Is it really beyond Bloomberg to actually go and ask the Polish or Portuguese
government this rather than play he said, she said?

There's so many Dunning-Kruger comments/opinion pieces on the matter and years
of HN threads about tether that it's all a bit tiring.

Bitfinex doesn't serve US customers, people have been calling it's imminent
implosion from day one, there's now All-American stable-coin alternatives that
surely want their business, ulterior motives could be anywhere.

For anyone with yet another confident assertion of it's demise, please jump in
and short it against USD right here:
[https://trade.kraken.com/markets/kraken/usdt/usd/1h](https://trade.kraken.com/markets/kraken/usdt/usd/1h)

Put your money where your mouth is :)

~~~
FireBeyond
> Bitfinex doesn't serve US customers

A large part of the contention is that Bitfinex, unlicensed to operate at all
in NY, has NY-based employees, and customers, even after its "No US
customers". That was the initial driver for the NY OAG to go after them.

~~~
ShorsHammer
Someone getting a loan and falsifying all the documents is the one facing
prosecution, not the bank. All seems to be a bit upside down here, given the
prevalence of mortgage fraud and who ends up in court.

As for remote employees living in NY I guess that probably does constitute
operating there, then again I'm no lawyer with a knack for arguing semantics.
Does this count for someone living in an Brooklyn airbnb for a month and
working from their laptop?

~~~
FireBeyond
Not quite that simple. If you're not licensed as a business to trade in a
state, and you accept a customer in that state, then you're on the hook (yes,
if customer falsifies documents, then that's on them). Tether/Bitfinex didn't
always forbid NY customers, and didn't always forbid US customers, and the
OAG's allegation is that they continue to knowingly serve NY customers (the US
prohibition is a business decision, not a regulator).

KYC/AML says that you must make a good faith effort to verify
documentation/ID, etc. The contention is more that they're doing so "under the
radar". Just like "friends of Bitfinex" \- employees/friends who have agreed
to use their personal bank accounts to enable wire transfers on Bitfinex's
behalf (I mean, WTF...).

------
josh2600
The solution to tether existing is for the US government to release a fiat
convertible cryptocurrency pegged to $1 with all of the compliance of
traditional banking. Financial institutions would use it, the government could
tax it, and all of the kyc/aml could be enforced. It’s not even hard to do.

Until that happens, there’s a rational economic narrative for companies of all
shapes and sizes to offer these kinds of synthetic dollar-like instruments
(and it will also remain rational for regulators to be interested in these
enterprises).

It’s an interesting time to observe this market (I guess crypto will be
interesting for a while).

Edit: I guess it's impossible to have a nuanced discussion about
cryptocurrency on HackerNews right now. For those of us who have participated
in these markets from an institutional level, there are obvious reasons why
these synthetic instruments exist beyond evading regulatory controls (which is
why Coinbase, who is the most regulatory compliant entity in the industry has
a synthetic dollar instrument). There are real technical advantages to having
a synthetic instrument that go far beyond regulatory evasion, just ask anyone
who operates a regulatory compliant entity in this industry.

~~~
Blackthorn
Tether exists at all because exchanges don't want to follow regulations around
USD. A government-approved fiat convertible cryptocurrency wouldn't change
that.

~~~
Animats
Tether exists because Bitcoin "exchanges" (who are really broker/dealers) are
so bad at paying out USD. If I sell stocks via my US broker and tell them to
wire transfer the proceeds to my bank, the money shows up the next day.
Sometimes the same day. Try to find any crypto "exchange" that does that.

~~~
Scoundreller
exchanges would love to be able to do that, but can’t if they get cutoff from
the banking system at every turn.

~~~
FireBeyond
In many cases they're being cut off because their standards for KYC/AML are
lax to non-existent, or they don't have money transmitter licenses.

~~~
Scoundreller
Seems like a best case scenario. Either all exchanges have KYC/AML problems
(possibly) or a lot of banks think of crypto like my school librarian did
about the internet in the 90s: it’s all bad because anyone can publish with
it.

