
Tether Says Stablecoin Is Only Backed 74% by Cash, Securities - chollida1
https://www.bloomberg.com/news/articles/2019-04-30/tether-says-stablecoin-is-only-backed-74-by-cash-securities
======
tinco
It's crazy that they messed this up, Tether is basically a money printing
machine, all they had to do was be solvent.

Let me start by saying I don't hold Tether nor have I ever, nor do I think
it's a good idea.

Tether is a fundamentally a risk free money making concept, it works just like
gift certificates. The only thing Tether has to do is buy back Tether at any
price lower than they sold it for and they make profit.

And being able to buy Tether at a lower price is a fundamental market property
because of knowledge imbalance. They literally can not fail at making money,
the only thing they had to do was not lose their liquidity.

They print free money without it even being a scam, even better they are
providing a public service, and still they messed it up...

~~~
vegannet
If Tether worked as it was advertised there would be no profit opportunity.
The purported reason Tether exists is to help the crypto markets deal with the
liquidity problems because of how difficult Fiat banking is, essentially
Tethers value proposition was “we (by some miracle) have reliable banking, we
can buy and sell 1 Tether for 1 USD at any time regardless of other crypto
currencies value”. In reality Tether is a shit-show because it doesn’t provide
reliable banking (even before considering the fact that it isn’t even solvent)
and that’s why the value of Tether offers any arbitrage opportunities.

If we were in a fantasy land where Tether wasn’t fraudulent then the price
variance of Tether on exchanges would be so minuscule that there would be no
arbitrage opportunity for anyone to take advantage of. Your hypothetical
profit opportunity only exists because Tether is (ultimately) fraudulent.

Remember that Tether was pitched as a 1:1 USD backed cryptocurrency that could
be exchanged 1:1 at any time (in both directions). The mess that it is now
(only liquid on exchanges at a variable rate) is not what Tether was marketed
as.

Tether (as promised) is the equivalent of you accepting $100 USD from your
friend and giving them $100 of Monopoly money and promising them that at any
time they can trade their monopoly dollars for your real dollars... and you
won’t ever use the USD for anything, it’ll be locked away untouchable by you.
How do you profit from that? You can’t lend it, you can’t invest it, you can’t
use it as collateral, it has to be unencumbered at all times and you have to
incur the costs of managing it.

Read the original whitepaper and try and identify a profit opportunity. This
is all before considering that Tether is a fundamentally flawed concept: if
Tether could operate a reliable banking relationship, so could others, and
Tether would be pointless.

~~~
georgyo
You can invest the money, the same as banks do. It's why they don't charge you
to store money with them, especially if your balance is high.

You only need and should keep enough liquid cash needed to handle day to day
withdrawals. Everything else is fair game up invest.

See: [https://en.m.wikipedia.org/wiki/Fractional-
reserve_banking](https://en.m.wikipedia.org/wiki/Fractional-reserve_banking)

[https://en.m.wikipedia.org/wiki/Bank_run](https://en.m.wikipedia.org/wiki/Bank_run)

~~~
vegannet
I’m talking about the specific promises made by Tether. The question is not
about whether or not fractional reserve banking exists, the question is how
can Tether engage in fractional reserve banking (or any profit making
activity) without being fraudulent when they explicitly claimed to hold 100%
of their USD in cash reserves at all times?

“[...] each tetherUSD in circulation represents one US dollar held in our
reserves (i.e. a one­to­one ratio) which means the system is fully reserved
when the sum of all tethers in existence (at any point in time) is exactly
equal to the balance of USD held in our reserve.”

~~~
georgyo
For the record, I think all this crypto currency stuff is plain dumb, and that
tether is likely a fraud.

That said they don't state anything about what their reserve is. Wealthfront
has a 2.3% savings account for us normal people. If I created a stable coin
like tether is and had a billion dollars of investment; I could make 23
million dollars a year and tell people that I have a 1:1 backing without
lying.

If I went to a bank with a billion dollars I could likely negotiate an even
higher rate for such a savings account.

~~~
ctrl_freak
> If I went to a bank with a billion dollars I could likely negotiate an even
> higher rate for such a savings account.

I don't think that's how it works. As others have mentioned, FDIC insurance
only covers 250k per depositor per bank. Typically when entities have that
amount of cash (think Apple, Google, etc.), they put them into US government
bonds, which are effectively equivalent to deposit accounts.

Edit: this is an interesting point, though. Ignoring the insurance issue, what
would a bank do if you asked to open a deposit account with a billion dollars
(paying, say 2%/year)? My uninformed layman's speculation would be that they
would reject you because they wouldn't know what to do with that much money:
they have to somehow lend out enough of it to at least break even on the 20
million/year that they're paying you for interest, but at the same time they
have to be able to give you back your 1 billion at any time you ask for it.

~~~
georgyo
I think they would totally take it, with all sorts of special terms. Also,
they don't need to have a requirement to say they will get you all that cash
immediately to keep the tether promise.

Lastly, putting that money in bonds, index funds, and other such things scales
well. The wealthfront example I used took on a billion in deposits in a short
timeframe: [https://www.cnbc.com/2019/04/23/wealthfronts-new-high-
yield-...](https://www.cnbc.com/2019/04/23/wealthfronts-new-high-yield-
accounts-bring-in-1-billion-in-just-a-few-months.html)

To your first point, if you have another entity do that type of investments
for you and present it as a bank account with a variable interest rate; then
you can claim you have a 1:1 cash backing truthfully, even if the reality is
different. If you just stored the money in a normal bank, the reality would
stay the same.

~~~
arcticbull
It’s also a thousand million dollars. That’s between 500 and 1000 mortgages in
SF or NY. Any direct lender would love that opportunity; they’ll charge 4-5%
on a 30-yr fixed and give you half.

------
miohtama
Bitfinex money was on an account of a small Polish bank. It was confiscated by
a US government when they chased Colombian drug cartels earlier in 2018. There
was no proper segregation of client funds by their payment processor Crypto
Capital Corp. Looks like Tether was collateral damage.

Polish source: [https://zaufanatrzeciastrona.pl/post/gielda-bitfinex-
zgubila...](https://zaufanatrzeciastrona.pl/post/gielda-bitfinex-
zgubila-851-mln-usd-a-podwykonawca-wine-zwala-na-polski-rzad/) (please use
Google translator)

~~~
stcredzero
What would happen if the US Government stepped in and took over Tether? Would
it be feasible for a different foreign government to do so?

~~~
elliekelly
They would almost certainly not have the jurisdiction. They’re a BVI Corp (a
jurisdiction that tends to look the other way at corporate fraud) and I
believe operate out of Hong Kong. Lately it seems the Chinese government
practically _encourages_ companies to commit securities fraud in the US so I
can’t imagine they’d be much help either.

I suspect the likely outcome (eventually.. and if Bitfinex doesnt fold first)
is the US government seizing their domain to prevent them from continuing to
commit fraud.

Edit: missed a word

~~~
55555
> Lately it seems the Chinese government practically encourages companies to
> commit securities fraud in the US so I can’t imagine they’d be much help
> either.

The China Hustle is a good movie if anyone wants to see how these schemes
work.

------
SimonPStevens
Everyone talking about how tether should have profited from either investing
the cash, or buying and selling tethers at slightly different rates is missing
the point.

The original value propitiation of tether was... "A one to one, 100% reserved
USD backed cryptocurrency that you can buy/sell any time directly from them"

They originally promised a website where you could buy/sell tethers directly
for 1 USD. This is different from all the other stable type coins that achieve
their pegs using various chain and exchange strategies. Tethers proposition
was to maintain it's peg to USD by literally holding the cash and being the
primary point of purchase/sale. Not investing it. Not operating fractional
reserve. And not buying/selling with a spread. Every profit making strategy
goes against their original proposition.

The reason this was the proposition was to supposedly make it easier for
crypto traders. At the time everyone was having problems cashing out their
cryoto. Tether was basically promising that they could fix the USD exchange
problem by holding all the cash and not being an exchange.

Now they never actually delivered any of that. The website never reliably
appeared and now tethers are traded on an exchange like any other crypto coin.
And I suspect they did actually make a stack of profit by printing tether and
selling them on exchanges. But that makes it a scam because they weren't
following their own rules that they laid down at the start.

~~~
askmike
> Now they never actually delivered any of that.

Yes they did, they delivered exactly this for years, ever since US banks shut
them down. A whole ecosystem was built on top of this which to this day seems
to run smooth (poloniex, bittrex, binance).

> And I suspect they did actually make a stack of profit by printing tether
> and selling them on exchanges. But that makes it a scam because they weren't
> following their own rules that they laid down at the start.

The only thing that has come to light after numerous of subpoenas and
investigations is the Crypto Capital mess. Your claim is very much
unsubstantiated. Yes, Bitfinex&Tether did some things against their original
promises, but clearly to keep the system running. And clearly with the
intention to resolve everything once they got their money from CC back (I'm
not saying that was ever going to work).

~~~
SimonPStevens
No, they didn't. Their original proposition was that you could buy and sell
tether from them at exactly 1 USD.

What happened was that website for doing that was only ever available for very
short periods and instead tether was traded on exchanges. Poloniex/bitfinex
etc are exchanges, not the promised single source of tether. Exchange trading
with a market set price and a bid/offer spread is not the same as a direct
purchase website from the creator. It means the price moves. The original
promise was for a fixed price set buy the sole supplier.

~~~
askmike
> Their original proposition was that you could buy and sell tether from them
> at exactly 1 USD.

That depends on who "you" is, as far as I know this was possible for retail
until a few years back. But I wouldn't say it was "promised" at all (or are
you referring to the whietpaper?). It's still possible for trading firms right
this very moment. Active OTC markets for tether right now as well.

Note that even though it's possible for some to redeem a Tethers 1:1, that
doesn't mean the price is always exactly worth 1 USD. Just like how USD stored
in Coinbase is not worth exactly the same as USD stored in Bitstamp. Of course
you can transfer them between each other, but that takes days - after which
certain price spreads caused by temporary offer/demand discrepancies have
ceased to exist.

Also, thanks for the downvote!

~~~
SimonPStevens
(BTW, not me doing the downvoting)

I don't think that only allowing the purchase of tether to retail really meets
their original plan.

The whole point was meant to be that anyone could take their coins and go to
tether and get exactly 1 USD for each one. It was designed to solve the
problems people were having cashing out from exchanges. The idea was that you
sold your bitcoin on poleniex or wherever for USDT the then took that to the
tether website and got your USD. Safe in the knowledge that your USDT would be
exchanged exactly 1-1, with no bid/offer spread or moving price. The reason
this was needed was because most exchanges were really struggling to get their
banks to allow the USD processing.

In reality, you could never really do that. And now exchanges have been able
to get the USD payments working, so the USDT<->USD exchange market has picked
up the slack and now serves the purpose that the tether website never
realised. Although it's now not quite 1-1, there is a market and a spread and
prices move.

As others have mentioned, the likely reason they never have is that they would
hit exactly the same challenge all the exchanges did with their bank and the
KYC rules.

~~~
askmike
I think we're kind of on the same line.

> It was designed to solve the problems people were having cashing out from
> exchanges.

Tether technically predates the legal trouble between Wells Fargo and
Bitfinex, but imo Tether as we know it got to it's current size specifically
to allow American residents to get their non crypto money out of Bitfinex
after no American bank wanted to work with Bitfinex.

> The idea was that you sold your bitcoin on poleniex or wherever for USDT the
> then took that to the tether website and got your USD. Safe in the knowledge
> that your USDT would be exchanged exactly 1-1, with no bid/offer spread or
> moving price.

Whose idea was this? Most big exchanges that trade tether don't support any
fiat. Only recently most added support for competing stablecoins and Binance
is playing with fiat. But it was never the idea from the beginning.

> In reality, you could never really do that.

I really don't agree that the plan was all along that everyone could do that.
Tether would simply face exactly the same problems as Bitfinex. Instead Tether
allows you to trade on many different exchanges and big traders can directly
convert tether into dollar. But definitely not everyone, in the beginning
retailers could create a tether account but that's about it.

> As others have mentioned, the likely reason they never have is that they
> would hit exactly the same challenge all the exchanges did with their bank
> and the KYC rules.

Yes exactly, as such it was never (or since the Wells Fargo suit) supposed to
work like this. I'm not sure why you think this was the plan or design?

\----

To sum up:

\- We both agree it's hard for every day traders to convert tether into USD.
They have to use public crypto markets to achieve this. Though I don't agree
this is against any design or plan (ever since Wells Fargo anyway).

\- This has worked fine for years since the biggest traders are able to
convert tether into USD (and the other way around). The second they can't
you'll see price divergence (a lot bigger than what we see right now - since
firms will be trading out of millions in tether exposure).

\- The risks of Tether are well documented, most retail is aware of the
danger.

------
eindiran
Honestly, 74% is a much higher number than I was expecting.

~~~
mikeyouse
Conveniently enough, it works out that they're about $740 million short of
their obligations. That's _a lot_ of money.

~~~
astrodust
Maybe Deutsche Bank will step up and loan them some money since clearly
nothing shady is going on.

------
jpatokal
Yet the Tether price of BTC is only 6% below the USD price:

[http://www.untether.space/](http://www.untether.space/)

~~~
dheera
Question -- why does this matter to me? As long as the market agrees to trade
it for around 1.00 USD, +/\- a few %, which seems to generally be happening,
it shouldn't matter to me whether it's backed or not. It's just an abstract
notion that the market has agreed to trade at a certain price.

(It's not like I would hold onto USDT for a long time anyway -- it's only
there to facilitate short-term needs. If I wanted to hold USD I'd just change
it for USD and hold that instead.)

~~~
joshe
Because if there is a "run on the bank", someone will end up short. Either the
first people out will get 100% of their money and last 26% will get zero, or
everyone will get 74% of their money.

This very fact will actually cause a run on the bank in any sort of crisis.
You don't need to actually believe that tether is a complete sham and has no
money to decide to withdraw. You just need to worry that 74% of people might
get worried. Because if they all withdraw, you will get none of your money.

The point of FDIC insurance (aka lender of last resort) is that when you hear
that Wells Fargo is in trouble you don't worry about your checking account
going to zero. This used to happen quite a bit as late as during the great
depression in the early 1930s. Being 100% backed by liquid assets was supposed
to serve that function, it's not a nice to have, it's the whole point.

~~~
perl4ever
"Because if there is a "run on the bank", someone will end up short. Either
the first people out will get 100% of their money and last 26% will get zero,
or everyone will get 74% of their money."

I'm not clear on whether they have discovered fractional reserve banking or
whether they are insolvent. There's a big difference. If they are insolvent,
I'd tend to assume tethers not trading at a discount just means people are
idiots. But if not, not.

~~~
bb88
I think the difference is that in the end a Bank is backed and regulated by
the US Government.

Tether is not. So it is solvent or insolvent.

~~~
ShorsHammer
Do you think the US government could cover every single cent if all the
depositors wanted their money out now?

Not even physical cash, just a transfer to an overseas account. The money
simply isn't there and the scales are enormous. US banks only can pay back
3-10% of cash deposits. The FDIC only has enough to cover a tiny proportion of
bank liabilities.

It seems very disingenuous for people in this thread to say "well if everyone
cashed out tethers" and then handwave away the alternative of "well if
everyone cashed out USD". These scenarios playing out would have Tether
actually being able to pay a reasonable percentage of creditors.

~~~
pbhjpbhj
The USA gov can just print the money to pay off the backed cash. Everyone gets
their money. It may not be worth much if everyone actually demanded they could
hold the dollar amount of their accounts in their hands in paper money -
indeed, I imagine, you'd cause severe privations on the government funds in
order to produce the money.

~~~
perl4ever
"It may not be worth much if everyone actually demanded they could hold the
dollar amount of their accounts in their hands in paper money"

If literally nobody (hypothetically) is willing to own actual land, factories,
and so on, then it's the tangible assets that are worthless, not the money. It
would be the ultimate in deflation.

------
granaldo
This is going to sound absurd, why is the cryptocurrency market not reacting
negatively? In fact prices are green and well
[https://www.coingecko.com/en](https://www.coingecko.com/en)

Market is uninformed and do not know better...

~~~
gpresot
There is some premium on the BTCUSDT pair, compared to BTC/USD pair. You can
still, for a relatively small premium buy BTC with your USDT and change them
back to fiat USD. And it seems that plenty of traders are ready to accept that
premium and accept the risk of holding tether. This effectively solves any
liquidity issues that Tether might have. And as other have noticed, 74%
coverage is a lot more than many were fearing, particularly compared to other
Tether news of the last 12 months. Also, this 74% would imply that if Tether
had access to those 850 millions that went missing (leaving out the issue of
wether Tether may or may not be responsible for the missing), then the
coverage would be full and had been full during the peak of the crypto bull-
run in 2017 (which was speculated to be supported by printing tether without
any fiat backing).

~~~
xref
Remember it’s simply Bitfinex saying they have 74% reserves, just like they
used to say they had 100% reserves. There has still never been an audit.
Nobody has seen their books. They don’t recognize the jurisdiction of the NY
AG.

Bitfinex is the only one who can give a number, and a company in that position
usually places themselves in the most generous light, and they still only
claimed 74%.

~~~
gpresot
They claimed this 74% in filings to the NY Supreme Court, so, while I agree it
is not as strong as an auditors' report, it is also a bit stronger than a PR
release or a Twitter burst.

~~~
PhantomGremlin
_the NY Supreme Court_

Before you get too excited about that phrase, the courts in New York State
have funny names. The words "Supreme Court" have a much different meaning than
they do in any other state.

[https://en.wikipedia.org/wiki/New_York_Supreme_Court](https://en.wikipedia.org/wiki/New_York_Supreme_Court)

------
DebtDeflation
"Short term securities". Personal IOUs from the 3 guys who run Bitfinex?

~~~
darawk
No. The short term securities would be things like treasuries. The loan to
Bitfinex represents the 26% shortfall in the reserves.

~~~
village-idiot
Normally it would, if the guys behind Tether were trustworthy

~~~
darawk
It does whether or not they're trustworthy. You may think the loan will not
get repaid...but it's in their interest to repay it. They're making plenty of
money at Bitfinex. The idea that they're going to run some elaborate ponzi
scheme to steal money, when they're making several hundred thousand dollars
per day in fees is kind of silly.

~~~
mikeyouse
Their account is over _$700 million_ short right now.. Several hundred
thousand per day isn't exactly going to move that dial.

~~~
darawk
It's a loan. The way loans work is that you make payments on them over time.
$300,000/day generates ~100mm/year in revenue. That's enough to repay the loan
in 7 years. However, the loan is actually for $625 million, so a bit shorter
than that. But you get the point.

~~~
village-idiot
7 years wouldn’t exactly be a short term security, and a bespoke loan from one
guy to himself isn’t something easily sold enough to be called “cash like”.

~~~
darawk
> 7 years wouldn’t exactly be a short term security

Nobody said that it was. They have 74% of the reserves in cash and short term
securities. The _other_ 26% is this loan. That is, it is not a short term
security.

------
darawk
Once again, people here are ranting about Tether, while the market price is
re-converging to parity. I wonder who's right, the people yelling in the
comments section, or the people with skin in the game? What's been established
here is that Tether is 74% collateralized by cash and short term securities.
The other 26% is in the form of a loan to Bitfinex. Bitfinex is a cash-
generation machine, and should not have any trouble making payments on that
loan. Your local bank has a much, much lower reserve ratio than this.

~~~
spookthesunset
> while the market price is re-converging to parity

Given the "market price" of most crypto is based in USDT not USD it kinda
makes you wonder how legit any of the "market price" figures really are? Plus
given there is absolutely no auditing for any of the exchanges in the market,
for all you know "market price" could be determined by nothing more that
scripts that just SQL INSERT fake transactions in their database (assuming
they are using SQL.... which given this is crypto is suspect.... I wouldn't be
surprised to learn many of these people are using things like mongo to handle
their financial transactions)

> Your local bank has a much, much lower reserve ratio than this.

My local bank is also audited and heavily regulated. I sleep every night
without ever worrying that my bank is suddenly going to lose all my money.

Also, given that bitcoin's ethos is all about being anti-fed and "no printing
money" it is rather funny to hear somebody defend tether being anything less
than 100% backed by some "real" asset.

~~~
r32a_
"My local bank is also audited and heavily regulated. I sleep every night
without ever worrying that my bank is suddenly going to lose all my money."

2008.... those "heavy regulations" and "audits" meant nothing.

~~~
tedunangst
How many deposit accounts evaporated in 2008?

~~~
easymodex
I don't know the right number but I do know of at least 2 acquaintances who
lost all their families life savings. The legal process to get the money back
is actually still ongoing but during that time we changed our national
currency to euros and those life savings are worth about 10% of what they were
back then.

Thing is, with crypto you invest (usually) what you can afford to lose and you
accept the risk. With banks most people think it's safe and risk-free so then
the impact of losing it all is so much harder, it ruins lives.

~~~
village-idiot
You're describing a different process.

People lost their life savings because they purchased assets that went down,
or they lost their jobs in the general economic downturn. Nobody lost their
life savings because their bank suffered a run and their deposits were lost.

To extend the metaphor, this is the difference in getting wiped out in the
2017-2018 crypto crash, and getting wiped out by Mt. Gox.

~~~
easymodex
Im not describing a different process, they had their money in a savings
account on a bank that went under, they have been liquidating it's assets
since the 2008 crisis to repay people and it's still not done.

~~~
village-idiot
Which bank?

------
pontifier
I looked into tethers withdrawal process, and the barriers to withdrawal are
high enough that a run on tether is quite unlikely.

It really only makes sense if you hold over a million tether, and even then
you'd probably be better off selling on a USD exchange and converting for
withdrawal there.

It's a nice racket they have there.

~~~
carrja99
I was surprised to see the site let's you create an account now... for the
longest time you couldn't and the only way to buy / sell tether was second
hand on exchanges for as long as I could remember.

That said, either tether.to account creation seemingly functional, I wonder
how difficult they have made the process?

------
smoovb
There are licensed and regulated stable coins on the rise ( like USDC, PAX ),
that will play by all the rules, have better protections, be audit-able and
have the ability to be revoked in cases of crime.

In a free market there is also a place for a non-US company to offer a product
like Tether. Why this is at all the business of the AG of NY is the real
question here. Who benefits from these AG actions?

~~~
pavlov
> _" Why this is at all the business of the AG of NY is the real question
> here."_

Because investors based in New York are being swindled by Bitfinex/Tether?

From the AG's site:

"In November 2018, the Attorney General issued subpoenas to Bitfinex and
Tether, which are owned and operated by the same small group of individuals,
and claim not to do business in New York. As alleged in court papers filed by
the Attorney General’s office, the Bitfinex trading platform allows New
Yorkers to purchase and trade virtual currencies, including the so-called
“tether” stablecoin, a virtual currency the companies long claimed was “backed
1-to-1” by U.S. dollars held in cash reserve." [https://ag.ny.gov/press-
release/attorney-general-james-annou...](https://ag.ny.gov/press-
release/attorney-general-james-announces-court-order-against-crypto-currency-
company-under)

You can't escape financial regulations by claiming that you don't do business
in jurisdiction X while simultaneously taking investment money from people in
that jurisdiction.

------
mrb
"A Tether USD is backed by 74 cents" is a fun quote seen on twitter

------
village-idiot
It’s highly unlikely that those undefined securities will be something easily
liquidated to cover costs. This is the company that “loaned” 900m to Bitfinex,
a company run by the same personnel as Tether.

------
Havoc
Surprised Tether is willing to open it's mouth on this subject.

Glass houses...stones...

~~~
Animats
They have to. They're under investigation by the New York State Attorney
General.[1] That sort of thing usually doesn't end well.

[1] [https://ag.ny.gov/press-release/attorney-general-james-
annou...](https://ag.ny.gov/press-release/attorney-general-james-announces-
court-order-against-crypto-currency-company-under)

~~~
driverdan
They don't have to. The NYS AG doesn't have standing.

~~~
ndury
You'd be surprised how far the power of the NYAG goes... Crypto Capital LTD.
is registered in Panama and legally they have no a rather poor
political/diplomatic relationship but you never know what goes on behind the
scenes.

I believe the NYAG wants Crypto Capital LTD, not bitfinex/tether per se.

------
api
I was expecting something more like 1%.

------
carrja99
And yet it's still 1:1 on coin market cap and everyone is all "what me worry?"

~~~
tim333
More surprisingly the market cap on coinmarketcap is at $2850m, up from $2845m
a week or so ago when the news hit. You'd imagine at least some people would
be cashing in Tethers for other assets (BTC, USD) and so the number of Tethers
out there would drop. It shows daily trading volume of $12,308,023,802 USD yet
the market cap doesn't budge significantly. Something seems not to add up.

By the way I just tried selling 1000 tether short on Kraken. Dunno if anyone
else is trying to trade this thing?

~~~
village-idiot
Tether is basically a one way ratchet to keep money in the crypto system. You
can trade Tether for USD on various exchanges but actually selling Tether back
to Tether itself, which would reduce the market cap, is restricted heavily.
The result is that if you trade Tether to someone else on Kraken for USD or
BTC, the Tether market cap remains unchanged, which I suspect was the point.

~~~
tim333
Maybe though I figure they must be buying back to keep the price above 99c. My
hypothesis is they are burning through the cash but not showing it as if they
showed the cash going 2bn, 1.5bn... there'd be a bank run of people trying to
get out before it was gone.

~~~
village-idiot
I'm not really sure how Tether is maintaining their $1 peg on the open
exchanges, it seems to me that they shouldn't be. But explaining why the
market cap hasn't gone down is very easy, it's very hard to actually destroy
Tether.

------
mrharrison
Weird so many negative comments, this is astronomically better than what banks
have in reserve.
[https://www.google.com/search?q=how+much+cash+must+a+bank+ha...](https://www.google.com/search?q=how+much+cash+must+a+bank+have+on+hand&oq=how+much+cash+must+&aqs=chrome.0.0j69i57j0.7864j0j7&sourceid=chrome&ie=UTF-8)

~~~
village-idiot
You're stretching the definition of reserve too far.

Banks are fractionally _liquid_ , but they're actually fully backed by non-
cash assets, such as mortgages, business loans, and bonds. The reserve
requirements and risk levels are tightly regulated and they pay insurance
(FDIC) to protect against the risk of sudden withdrawal demands or market
downturns. In practice this has been working for a very long time, with runs
on banks and FDIC involvement being quite rare.

Tether is only 74% backed "by cash and cash-like securities", which means that
they are _insolvent_ , with their assets column being worth less than their
debits column. This is massively worse than any consumer bank; a bank might
not be able to cover all their liabilities at once, but Tether can't meet all
their liabilities _at all_.

~~~
mrharrison
Uh, I think you are the one now stretching. Tether can meet 74% of their
liabilities all at once. Where a bank can only meet 3% or 10% of their
liabilities all at once. Tether is way more liquid than a bank.

~~~
village-idiot
Liquid and solvent are different things.

Tether is more liquid, if you trust that the 74% are actually in "cash
equivalent securities" and not loaned to themselves (again), but they're
absolutely insolvent.

------
georgeecollins
I am sure the "and securities" is rock solid.

Just kidding! Suckers.

~~~
gridlockd
Keep in mind that for the longest time there have been strong doubts about
Tether being backed by any significant amount of money whatsoever. Yet the
price hovered around 1$. The risk of default for holding a Tether was priced
at less than a cent.

------
idlewords
Stableishcoin!

~~~
paulcole
Stablecoin? I can think of at least 2 things wrong with that name!

~~~
eridius
Stableishcoinish?

------
Grustaf
“Water is wet”

------
keymone
So are all of the banks in the world? It’s called fractional reserve.

Don’t like to defend tether in these posts, there’s clearly shady shit going
on, but it’s been FUD’ed against for years now and yet USDT has kept within
few percent of USD. I still don’t buy the argument that bitfinex is printing
money to prop up BTC.

~~~
Traster
Right but I think the obvious point is that if you Google Tether you get

"Every tether is always 100% backed by our reserves, which include traditional
currency and cash equivalents and, from time to time, may include other assets
..."

The entire selling point is that they aren't a fractional reserve bank.

------
chatmasta
My bank only needs to keep 10% of its deposits backed by cash, securities. [0]

[0]
[https://en.wikipedia.org/wiki/Reserve_requirement#United_Sta...](https://en.wikipedia.org/wiki/Reserve_requirement#United_States)

~~~
bhouston
You are misunderstanding fractional reserve banking. Fractional reserve
banking means that the bank only has to keep enough cash on hand to meet their
expected reasonable obligations.

Banks still need their books to balance. That means that their liabilities can
not exceed their assets. A bank can be solvent on paper but if there was a
rush to withdraw by their customers, they may not be able to pay cash for all
withdrawals because that cash would be tied up in loans.

In the Tether case it isn't that they loaned out the money they took in,
rather their liabilities exceed their assets. Thus Tether is bankrupt on
paper. And if everyone tried to withdraw their assets, they would also not be
able to pay everyone back.

Thus banks may be illiquid with a balance sheet that ultimately balances (e.g.
not bankrupt), but tether is both bankrupt and likely also illiquid because of
the 850M loan fiasco.

I swear tether is like Wiley Coyote who has run off a cliff but hasn't yet
looked down. I question my sanity a little bit because I do not understand why
tether isn't completely disreputable at this point, I must be missing
something.

~~~
keymone
> they may not be able to pay cash for all withdrawals because that cash would
> be tied up in loans

How is that “assets”? Loan can be defaulted on and where bank has $X in the
books it’s actually $0.

The non-bankrupt case for tether looks like this: people realize tether isn’t
worth $1, but they still need to get rid of it and so they sell for $.74c,
that’s the risk they took buying tether in the first place.

~~~
bhouston
The idea is fractional reserve banking is that the loans are at least good
enough in aggregate in normal course to cover its liabilities. Of course there
are black swan events
([https://www.investopedia.com/terms/b/blackswan.asp](https://www.investopedia.com/terms/b/blackswan.asp))
that are so far out of expected that banks fail anyways, or the banks are
incompetent and make things like sub-prime mortgages
([https://en.wikipedia.org/wiki/Subprime_mortgage_crisis](https://en.wikipedia.org/wiki/Subprime_mortgage_crisis))
that tend to fail all at a once.

~~~
keymone
Yes, I understand that, I just don’t see this bitfinex situation much
different from what is generally accepted as normal in banking sector.

