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Legal expert says Tether and Binance Coin are likely picks for SEC lawsuit (cryptoslate.com)
156 points by haskellandchill 3 months ago | hide | past | favorite | 229 comments



Saw a really good YT video[1] on Tether yesterday. Breaks down all the sketchiness. But the problem he mentions in the video is a problem with pretty much all stablecoins, in order to function you must have the proper reserves before generating a token, but inevatably greed kicks in and you start thinking what if you minted coins without the backing. USD pegged stablecoins are basically money printing machines in the hands of whoever runs the project.

[1]: https://www.youtube.com/watch?v=-whuXHSL1Pg


Always and everywhere banking has faced precisely this problem, which is the original reason for bank regulation and deposit insurance-type backup.

If you encounter an unregulated or irregular market participant doing anything that looks like banking, buyer beware-- on average, over time, you're not getting your money back.


I feel like cryptocurrency markets and investors are painfully “re-learning” the lessons of a hundred years ago.


It seems that reinventing finance works out about the same a rewriting a big software project. You think you'll get rid of a lot of nasty code, but then you realize all that ugliness was there for a reason and you're just rediscovering all the edge cases again the hard way.


But in doing so, you bring that latent knowledge back into the minds of living people who can rethink the solutions in the face of the modern ecosystem and clean out the cruft that truly has no modern purpose.


Do you think no one in finance has thought about financial regulations until crypto came around? I can assure you there were (and are!) many people paid quite a lot of money to “rethink the solutions in the face of the modern regulatory ecosystem and clean out the cruft that truly has no modern purpose”. One of the reasons securities regulations are “expensive” to comply with is because they’re constantly changing. Why are they constantly changing? Because we’re rethinking how, when, and whether the various regulations ought to be implemented.

The regulations implementing Federal securities laws are perhaps the most nimble, iterative, and “listen to your users” driven regulations in the US.


Certainly no one in finance ever thought about programmatic regulation of a currency. But your comment is of the type that has the premise "everything that could ever be thought of has been thought of before". Well obviously that isn't true. And it also isn't true that everything that has been thought of and not done is not doable.


Certainly? How certain are you of this?

I am not so certain.


I don't think that, no. Still, different people with different toolboxes will come up with different solutions.


I think the problem is that people think they are reinventing finance when the only thing that changed is the currency.


There exist algo stablecoins too though.


Highly underrated comment


Except that now its even worse, because we are throwing a whole lot of electricity and advanced manufactured goods (computer chips) into it, which currently has large negative impacts on the rest of civilization.


This is an interesting point, what does it mean when it is gray?


Comments get grayer as they are further downvoted.


"Extraordinary Popular Delusions and the Madness of Crowds" (1841) is still worth reading. You get to see the first versions of the classic large-scale scams. John Law's bank, the South Sea bubble, tulipomania. Scams go much further back, but mass-market scams had to wait for mass communications. Newspapers powered the first round of large-scale scams.

Most scams today are very similar to some classic scam mentioned in that book. There's not that much innovation.

Kids should be taught the classics in school - the short con, the long con, the big store, the pigeon drop, the badger game, the protection racket, the bait and switch, the Ponzi scheme... The list is not that long.


Personal finance should be a subject in schools, and scam awareness should be one of the topics covered. The long-term economic benefits would be huge.


At the most basic level, some entity is making statements about their financials (like “we have X in reserves”) and nobody can check this. If a liar can make financial statements and be believed, and nobody checks, they can do anything.

It’s odd that cryptocurrency was designed to work without trust and yet many people are so trusting.


> At the most basic level, some entity is making statements about their financials (like “we have X in reserves”) and nobody can check this

This is not a problem unique to stablecoin providers. Every company with a large number of stakeholders (e.g. public companies, bond issuers, companies that manage assets on behalf of their clients, etc.) faces the same problem.

The traditional solution to this is to have a widely-trusted third party, like a big four CPA firm, examine the company's books and operations and provide an audit. It's still possible to defraud auditors (there used to be a "big five CPA firms" before Enron blew up and brought down Arthur Andersen, and more recently Wirecard made EY look pretty bad), but it's a lot harder than defrauding people who don't get a detailed look at your operations. The reason to go with a big four accounting firm is that the firm's reputation with the public is substantially more valuable than any particular client relationship.


This is why substantial organizations have 3rd party audits and reviews.

All of this stuff has known solutions, but people don't like what the solutions would show.


> At the most basic level, some entity is making statements about their financials (like “we have X in reserves”) and nobody can check this.

USDC seems to be doing it just fine?

https://www.centre.io/usdc-transparency

> Top five accounting services firm Grant Thornton LLP issues attestations each month on the US dollar reserves that back the USDC tokens in circulation.


USDC does seem better, but the last attestation is from April and there are reports that they've been running late a while [1]. That's not as bad as the competition but still seems very bad, given that stability is what they do? Especially since they haven't explained what happened as far as I can tell.

On the other hand, it looks like USDC's market cap doubled in less than two months, so I guess that's good for them?

[1] https://news.bitcoin.com/usdc-attestations-run-late-raising-...


Attestations, but I believe no true audits.


Yup. If one can make money now by pushing off problems for the future, oversight is vital. Otherwise we guarantee problems in the future. Banks are a great example. As are investment companies; Ponzi schemes are one easy way for those to go wrong.

One non-governmental way to do that is audits. Which is why Tether's lack of serious audits is so concerning. They claimed to be cash-backed for a long time but wouldn't prove it. Once the NYAG force them to open up, it's clear they were lying.


Actually this is no longer true. As of recently, the crypto ecosystem produced Dai (https://makerdao.com/en/), which is a fully decentralized stablecoin. I think it represents one end-state of the crypto ecosystem, blockchain transactions but with decentralized systems keeping volatility near zero.


I've only skimmed the white paper, but this appears to be a "stablecoin" backed by crypto assets. Is that correct?

The white paper is complex, and the Emergency Shutdown price stability mechanism appears exposed to ETH price risk such that if ETH moves rapidly around the Emergency Shutdown, there's no guarantee that Dai holders could recoup on a 1:1 basis. Is that correct?

This seems to be not a dependable peg.


The Bank of England couldn't keep their peg, so what's the gold standard for a dependable cross-asset peg then?

DAI has been tremendously successful over multiple years and multiple bear markets and ETH price crashes; it can only do so much of course. If ETH goes to zero tomorrow, DAI holders will not be able to recoup, sure.

In fact, the real problem with DAI is that demand often exceeds supply, the latter being limited by people who want to go long ETH, so they keep having to fight DAI breaking the peg in the other direction. To solve this, they onboarded other collateral types, including the USDC stablecoin, which now unfortunately accounts for >50% of DAI collateral.


> The Bank of England couldn't keep their peg, so what's the gold standard for a dependable cross-asset peg then?

I'm not a crypto expert, but naively I would at a minimum expect uncorrelated collateral to be part of the picture. DAI runs on ETH, so collateralizing via an ETH mechanism seems like possibly not the best choice.

I would expect that the peg would depend on something that exhibits a low correlation with crypto asset prices and a very high and dependable correlation with USD, like money market funds or Treasuries.


Dai is backed by lots of different assets in the Maker Vaults. Most of them are crypto but they just added some real estate assets and the plan from day one has been to add as much diversified collateral as possible for safety and scale (Dai can't scale big enough to service the entire world on crypto backing alone).


How are non-crypto assets represented in crypto space?

It seems you would need a trusted party/oracle of some kind, which creates the same problem as centralized stablecoins anew.

Edit: indeed a sibling comment mentions they have USDC as a backing support which means they are as stable as that.


> It seems you would need a trusted party/oracle of some kind, which creates the same problem as centralized stablecoins anew.

If it is multicollateral, then yes, it somewhat involves trust, but you are dependent on a lot of various people betraying trusts along with ethereum price dipping, whereas a traditional stablecoin is entirely dependent on one entity.


Divirsification of assets does help reduce risk. However, you can't eliminate that risk without holding reserves that are entirely made up of the pegged currency.


A substantial chunk of DAI is backed by USDC. USDC has never been audited, and has been curiously late with its attestations at precisely the same time the supply of USDC has massively increased.

And the value of ETH backing DAI is dependent on Tether not being fraduluent and instead being worth $1.


You think a joint collaboration by Coinbase and Circle with monthly audits has "never been audited"?

https://www.centre.io/usdc-transparency


It hasn’t, no. Those are attestations, not audits.

You won’t find the word audit on that page or in the reports.


I thoughts an attest is a form of audit. Can you explain why you think this is insufficient?

And aren't these reports going to take time to complete? Every report in the past took about a month to complete and I don't see why that's a red flag.


Former auditor here.

An attestation offers considerably less assurance than an audit.

An audit is the most comprehensive type of assurance. Often called positive assurance. A clean audit opinion means the auditor collected sufficient and appropriate evidence to form an opinion on the financial statements (or reserves in tether/usdc case).

On the other hand, an attestation or review is a form of negative assurance where auditors state that nothing has come to their attention to indicate that subject matters or financial statements contain a material misstatement. In this type of assurance, auditors do not give an opinion; they simply say that financial statements look "reasonable".

Unlike positive assurance, auditors are not required to obtain sufficient and appropriate evidence to form an opinion. Instead, they only need to review if there are any problems with financial statements or subject matters.


Thanks! How would an attestation work with a fraud. For example, suppose a company simply produced a false bank statement.

Would an attestation have no ability to verify that the statement was fraudulent? In other words we must trust the entity undergoing attestation in order to rely on the attestation, and the attestation merely certifies there is no error of math or logic in what was presented.


Good question.

With an audit, the auditors get a representation from management that they will provide the truth etc. The auditors would also get third party evidence eg. from the bank providing the audit client's account. For important things you would always get third party evidence from banks, custodians, etc or even just go and check to see if physical things exist!

With an attestation or limited/negative assurance engagement, there's no third party evidence. Instead, the auditors just rely on what they are given and whether it looks reasonable. The auditors would state in their "report" that only limited evidence was gathered and not enough to form the basis of an opinion.

Basically, limited / negative assurance is not really that useful in most circumstances.

Regarding fraud - auditors are not expected to find/uncover fraud under any type of engagement, which is a common misconception.

The biggest audit firms won't go any where near tether, and this alone, tells you quite a bit :)


Thanks, that’s what I figured. And that’s very interesting about not even audit or assurance finding fraud.

> Basically, limited / negative assurance is not really that useful in most circumstances.

So what exactly can we glean from USDC having attestations? It’s certainly a step up from Tether in that respect but I’m also not sure it tells us all that much.

Or maybe a better way of asking is: how exactly would you prove that a stablecoin was backed?


To prove a stablecoin was backed you'd probably do the following:

1) review the processes and controls which operate the business to check they were operating correctly for the period under review

2) interview the various key stakeholders to assess competence and get representations

3) perform substantive testing over the collateral balance for the whole period. Eg daily bank reconciliations. Get third party confirmations for EVERYTHING.

4) perform a contingent liabilities review and a legal review.

5) see if there are any related party transactions

6) do a going concern assessment

The key thing would be to check existence, completeness and valuation of collateral and existence and completeness of liabilities (issued tokens).

Depending on what the assets are that would entail different procedures. For tether I would want to see their whole CP portfolio to perform a thorough credit risk and systemic risk assessment. Do some modelling to understand valuation implications under various scenarios.

Is worth noting that it's not feasible to do this on a monthly basis because it's so onerous. Hence why probably they just do monthly attestations. I would expect that the legal entity which issues the tokens and holds the collateral is audited at least once a year.

Never knew my audit knowledge would ever be useful/interesting :)

Cheers


They seem to have caught up somewhat for the April report, but March was extremely delay. News article below.

I’m not an expert, but I think an attestation just examines if a statement makes sense. My accountant did one for my revenues and the percent that were in USD. I sent them a spreadsheet with my revenues from various sources and calculations showing total USD.

The accountant verified that my spreadsheet said what I said it said. However, they did not actually verify the info underying the spreadsheet beyond examining some screenshots of customer addresses I provided. They samples a handful at random.

In USDC’s case, I think the auditor would look at a bank statement and say “the bank statement on May 31st indeed says Circle has $X” and Circle says this money is theirs for backing USDC.

Stuff they wouldn’t verify:

* Was the money there before that specific minute of the day?

* Did it remain there after?

* Was the money from deposits, or was it from a loan or some other source? (Bitfinex did this with a prior attestation, mixing up Bitfinex’s money and reserve funds)

So most people would assume these attestations mean “At all times USDC had backing of basically all of their tokens by $ in a bank account, free and unencumberer” but the attestations don’t examine that claim at all. They examine a very specific moment in time, and don’t examine the source of the funds.

In an audit you might actually examine the accounts at a time not chosen by Circle.

https://news.bitcoin.com/usdc-attestations-run-late-raising-...


Centralised stable coins maybe or yes. But there are also decentralized stable coins like DAI that have smart contracts to ensure a level of backing


> decentralized stable coins like DAI that have smart contracts to ensure a level of backing

Which has been collateralized by centralized stable coins including tether, if i recall correctly..


Dai is not collateralized by tether.


Isn't the DAI better describes as semi-stable since it holds reserves in Ether and other cryptocurrencies but is pegged to the dollar. This exposes it to systemic risk in the way that stablecoins backed by reserves in their pegged currency are not. The degree of excess in their reserves does cushion against a lot of violatility, but that cushion is finite and could easily vanish in a cryptomarket crash.


AFAIK it survived ETH price crash from $1400 to $90 .


Have any details on this? I find those numbers implausible without a context or a citation.


You can just look at the market cap and price history of DAI through the last market crashes


I did, it was not clear to me what was being referenced. If there is a good example of DAI surviving such instability, a reference discussing how that happened seems like a pretty reasonable requests given the strong claims that are being made.


FYI skip to 2:10 if you don't wanna watch a skit


I started using SponsorBlock (https://sponsor.ajay.app/) a bit ago. I was skeptical that the crowdsourcing wouldn't reach enough but I find it works for most videos.

It essentially tags parts of videos and it's pretty customizable - it only highlight a certain type, have it skip automatically, etc.

I already pay for YouTube Premium and am not a fan of ads.


The whole video would have been better if he had built an argument from the ground up instead of starting with the idea that Tether is a scam and laying so many attempts at humor and irony on top of it.

Or at least it would have been clearer and more educational; I haven't seen his videos before and maybe other people watch him for entertainment.


Why would they kill the golden goose though? Think of how much money they could be making by simply holding deposits...


The amount of money a bank (or loosely equivalent crypto entity) can make holding deposits and making loans out of them is far lower than the amount it can make by printing new fiat (or crypto tokens) out of thin air and loaning them out (/selling them.)

Usually, this works fine, they make a lot of money, and everyone's happy. When there's some unexpected macroeconomic issue, which empirically happens with some regularity, they have massive problems as loans default en masse (or everyone tries to redeem their token for USD at once.)


The other difference is that loaning out to unconnected parties /= selling the tokens and keeping the uncollateralized bit as profit. Banks with outstanding loans might have issues with the timing of repayments, they might more rarely make so many bad loans that their expected future income is less than they loaned out, but they haven't simply pocketed the money depositors paid in.


And it's critical to note that Tether has, in fact, refused to process any redemptions for any US client since 2018.


I’m wondering why non-US intermediaries couldn’t do it?


According to their stated policy (https://tether.to/fees/), a non-US intermediary would have to:

* Pay them a nonrefundable $150 fee.

* Wait for your account to be verified, if you're approved - they have "sole discretion to approve or not approve accounts"

* Send them a minimum of 100,000 USDT

* Pay an additional $1000.

To be clear, it's likely that all of this is a lie and they simply aren't processing redemptions for anyone. I'm not aware of any documented story from the last few years of someone successfully performing a Tether redemption. The US policy is just easier to talk about because it's explicit: they say, in black and white (https://tether.to/faqs/), that "no issuance or redeeming services will be available to these users".


There's no evidence that Tether does redemptions for anyone.


If you ask any trading desk in the space they will tell you they personally regularly do this.


What bank did the wire transfer come from?


"When there's some unexpected macroeconomic issue, which empirically happens with some regularity, they have massive problems as loans default en masse (or everyone tries to redeem their token for USD at once.)"

"Nobody knows you're swimming naked until the tide goes out ..."


Because killing the golden goose could mean a several billion dollar payday for the insiders?


That's exactly how fractional reserve banking started...


Which is backed by a governments, laws, and regulators…

If my deposit account gives up the ghost, I know the FDIC or the Fed will make me whole (or SPIC for my brokerage account). Who will do the same for Tether and other stablecoins?

Not good!


>the FDIC or SPIC

You mean they will print more money to fill your loss (dilution net effect zero)

>the Fed will make me whole

Says who?


So, I'm really unsure how to have these sorts of discussions with crypto proponents. The US government's securities (UST), as well as the US capital markets, are some of the most trusted financial assets and mechanisms in the world. Treasuries, in particular, are considered one of the safest asset classes to hold. As a crypto proponent, you might not believe that, but collectively $22 trillion of capital (and those responsible for its management, sovereign and institutional alike) believes that's the case. If the US government fails, crypto is likely to be of lesser value than say, ammo, food, and fuel.

This is in stark contrast to offshore crypto operations who refuse transparent auditing of their reserves.


The FDIC's Deposit Insurance Fund has a balance of over $119 billion as of March 31. No need for money to be printed. https://www.fdic.gov/analysis/quarterly-banking-profile/stat...


They're not "backed". It's simply not there. They're backed by the law that if you arrange a "run on the bank", YOU will go to jail.


They're not backed by an imaginary law, they are backed by an outstanding portfolio of expected loan repayments, the ability to borrow all the short term cash they need at lower rates, and ultimately you're backed by the FDIC even the people the bank loaned out to all default.


How do you go to jail if "arrange a 'run on the bank'"? There's no law against it, so far as I'm aware.

As for the backing, let me go through this in more detail (see https://www.bloomberg.com/opinion/articles/2021-06-10/maybe-... for a decent coverage of how this works). There are three categories to keep in mind here: assets (which include loans, cash, precious metals, etc.), liabilities (i.e., the value of all of your deposits), and capital (which is money to support the assets that's actually the bank's owner's).

Regulation requires liabilities to hit no more than about 90% of assets. They also require the bank to stake about 8% of its own capital to support the assets, on a risk-weighted basis. The risk weighting reflects the likelihood of assets crashing in value: a typical loan might have a 100% weight, so $100 in loans requires $8 in capital. Safer loans (e.g., residential mortgages) would require less capital. Stuff like cash or T-bills have a risk weighting of 0%. Riskier things include stocks (which tend to go down big when they go down), requiring maybe $24 per $100 of stocks, or cryptocurrencies... which require $100 of capital per $100 of cryptocurrency.

What this actually means, when you combine stuff together, is that you really do have something like $100 in safe things for every $100 in deposits a bank has.


> but inevatably greed kicks in and you start thinking what if you minted coins without the backing.

Yet another tired implication of Tether printing coins without backing, so let's break down the NYAG's announcement of Tether's fine. The fine was for:

1. Buying a bond (= lending out their backing) in a related party transaction, and

2. Not updating their customers that Tether backing had changed from 100% cash into a mix of cash+bonds.

The guy with the handle bitfinex'd was an extremely prolific screamer about fraudulently unbacked tether and folks seemed to believe him. If you still believe him, it now means you believe that NYAG Leticia James looked at Tether's books and gave them a pass on fraud in order to collect a few million dollars in a fine. Not bloody likely.


A YouTuber called Coffeezilla had an entertaining video yesterday that I think is one of the most comprehensive (and entertaining) takes on this. It's pretty damning when you look at all the evidence together.

https://www.youtube.com/watch?v=-whuXHSL1Pg

Even in the off-chance that people with a track record of lying about being backed have suddenly gone legitimate, it's a pretty big indictment of the system that it could grow to the size it did while looking incredibly like a scam.


That was the most annoying video I have ever seen. I couldn't make it past about 4 minutes because the dude simply cannot get to the point.


Very interesting video. Seems pretty clear that Tether is a scam, as people have been saying for years at this point. However, I would be surprised if Tether's downfall really has much of a significant effect on bitcoin or other cryptocurrencies. I mean, maybe for a week or two, but not for any significant length of time.


Isn't tether the #1 way for US customers to gain access to the shitcoins that are too illegitimate to be traded on US accessible exchanges? They convert Bitcoin to tether that can then be deposited at unlicensed exchanges that don't do KYC/AML?


I suppose I don't care enough about shady altcoins to care about tether. I agree that tether's downfall would be a struggle for all those altoins. Bitcoin or Ethereum on the other hand will hardly notice.


A ton of shitcoins rely on ETH and a lot of the value of ETH is derived from shitcoins.


How about Chainlink being a likely pick for an SEC lawsuit?

- Tech is a literal JSON parser designed as a Rube Goldberg machine.

- They came out with a whitepaper 2.0, even though not even 30% of what was promised in "WP" 1.0 was delivered.

- All the founders are in the USA, and the company was initially in the USA when they ICO'd, but now their company magically migrated to the Caymans, even though their operations are completely in the US, San Fran and NY.

- Literal 4chan coin, to the point, one of their execs, Mark Oblad, was some sort of staff at 4chan.

- They dump $20-60M every 2 or so days, depending on what the price is (they dump the same amount of tokens, amount in USD depends on price). Yet have nothing to show for it, apart for a Lambo for the Russian founder's Papa, plus 2 of the founders bought a whole block of NY condos apparently.

- Thousands of "Partnerships" done purely for marketing, to get 4channers/linkers to hopefully shill their products too, even though there is no actual partnering of any kind.

- Rampant insider info leaks happening from their founders, for announcements and dealings that will pump or dump the price. I'd even be able to showcase some in court myself.


There seems like a huge number of people who, at least in online discussions are skeptical of Tether's stability. And they may very possibly be correct? However, my question is why do virtually none of these people actually out money behind these views and short USDT?

It's pretty cheap and easy to take a short position in Tether. You can borrow USDT on Compound for 3.37%, convert it to USDC at Curve for 0.06%, then collect 2.32% on USDC at AAVE. If/when Tether collapses, you'll only have to cover your short at the collapsed value.

Many in comment sections like these will argue that Tether is less than 50% backed by hard assets. If you genuinely believed that to be the case, why would you not be happy to pay less than 1.5% per year to earn a 50% profit when the house of cards collapses?


I'm someone who's highly skeptical of Tether, but has no interest in shorting it. Here's a few reasons why:

1) I'm pretty confident Tether will collapse, but I have no idea when that will actually happen. The old saying is that "The market can remain irrational longer then you can remain solvent"

2) I'm not an expert in cryptocurrency shorting, but the scenario you stated involved shorting Tether against other cryptocurrencies. Since Tether is heavily integrated with the rest of the crypto market, if Tether falls, it will likely heavily impact the rest of the market. It may be possible to make money off of that, but it would also be possible to lose money if you time things incorrectly.

3) It's not all about the money. I'm making plenty of money at my day job, and feel confident in my existing investments. I don't need to spend my time gambling in the crypto market.


You can short tether against USD for like less than two pennies per year at FTX, so this is a pretty good deal if you want the exposure for a decade or so, and you don't need exposure to other cryptocurrencies.


USD, or USDC? If it's real USD, I'd love to know how.


Real dollars yes. You deposit money at FTX and then you short the tether quarterly futures: https://ftx.com/trade/USDT-0924

I think most people would be more worried about counterparty risk with FTX than with Circle though.


By real dollars I mean dollars in an FDIC or SIPC-insured account, unless I'm mistaken this just appears to be an IOU from FTX.


As far as I know these products are not legal to offer in the US, so you won't find them offered by a US brokerage. The insurance funds you mention only insure a tiny amount per account anyway.


SIPC covers up to the first $500k per account. Not much to a hedge fund, but a lot to a small fry like me.

It's not so much as the insurance coverage, anyway, so much of the vote of confidence that an insurer is willing to cover them.


> I'm pretty confident Tether will collapse, but I have no idea when that will actually happen.

The trouble with this is that it’s not a very meaningful epistemological claim unless you can put some ballpark timeline on your prediction. Will it happen before the Sun is a red giant?


This may work if you could trust the venue that you place the short position with, however if Tether collaborates with the main venues, that won't work, if they can spike the price and wipe out your position. There are suggestions that this occurs, example below.

https://twitter.com/Bitfinexed/status/1405037796172222466?s=...

``` PSA: Do not attempt to short Tether. If you obtain a large enough position in Tether, the exchange will leak your position to Bitfinex shareholders who will coordinate to liquidate your short position.

This happened on Kraken. Tether went over $400 per tether, twice. ```


>https://twitter.com/Bitfinexed/status/1405037796172222466?s=...

If someone was short and got wrecked by this, I'd expect them to raise a big fuss about this, but that's not happening (maybe it is, but they didn't link to it). Kraken is also one of the more regulated exchanges out there which puts more doubt on it. All in all, the only thing I'm seeing is witnessing an event and making up an explanation for it that fits their narrative, while offering zero evidence to support it.


Why would the price suddenly spike to 1000$ otherwise? What’s a sane reason for this occurring?


Kraken is notorious for trades occurring at non-representative prices across a variety of assets. This happens any time someone places a large limit order and there's not enough liquidity at "reasonable prices" to fill it.


Yes, and it's pretty clear that happens in order to make a bigger killing with an opposite side margin trade.

There's not that many rich people fat-fingering huge orders all the time..


Kraken does apparently offer spot margin (but not to people living in my country), so it's possible for someone to be liquidated in such a situation. The accusations are pretty wild compared to the evidence on hand though.


Open interest on futures isn't public info?


I mean, who says people aren't doing that? I know one fund that is short tether.

The downside is that you have to trust USDC at the same time and if tether breaks, there is n o guarentee taht USDC holds its peg

so you can lose the following ways

1) be wrong and tether is fully backed

2) be right but way too early

3) be right but the peg only breaks by a couple of pennies so you really make peanuts for the risk you put on

4) be right but USDC also breaks and you end up losing

5) be right but6 tether falling sinks crypto so there is not real crypto position you can hold in this case that makes you money.

6) Counterpary/exchange risk, you have to close out your tether position or remove it from the exchange, in the case that new broker that Tether is worthless, every exchange would suddenly lock out withdrawals and go down like they do each time there is a crash, which means you may end up losing even if you were right.

I mean there are so many ways to be right and lose on this trade:) Its not something too many hedge funds would dare put on.

The upside to being right just isn't anywhere near enough to be in this trade in a fully leveraged way and this is crypto and everyone accepts its manipulated in some way so its hard to rationalize leveraging this trade up to make any meaningful return


A lot of us who are skeptical of Tether think it poses systematic risk to the whole crypto ecosystem, so selling it short for other crypto would defeat the purpose. Is it possible to convert the USDC to actual USD while maintaining the USDT borrow, or is it required as collateral?

Instead of shorting USDT directly, I'm short a public market company which I believe will drop if Tether blows up (it's a pretty junky company, so it's already a profitable trade). If I could convert that to a direct USDT short without crypto exposure, I'd do it.


These defi lending platforms generally require you to overcollaterlize your loan because they can't sue you or send you to collections or whatever. You could deposit a bunch of USDC, withdraw a bunch of USDT, send that to coinbase or whatever and sell it for real dollars, but you'll have slightly fewer dollars than you started with.


The USDC is not frozen as collateral?

The way I understand it, I could borrow $10 USDT collateralized by (say) $11 of USDC, but then I couldn't convert that $11 of USDC to $11 USD until I bought back the $10 USDT and returned the loan.


That's correct. I'm just saying you could sell the 10 tether for dollars and put those in your bank account while you wait for the tether collapse.


Ahh, I see what you mean. That way if USDC collapses, I would lose just the amount it was over-collateralized by. If USDT completely collapses but USDC does not, I would gain the amount I was short USDT.

This is more interesting. Thanks for explaining it.


> It's pretty cheap and easy to take a short position in Tether. You can borrow USDT on Compound for 3.37%, convert it to USDC at Curve for 0.06%, then collect 2.32% on USDC at AAVE. If/when Tether collapses, you'll only have to cover your short at the collapsed value.

Read what you just wrote and then ask yourself if figuring out / validating / executing that is actually "easy" to the average person. As a casual observer, and crypto owner, that is definitely not easy for me.


Average person isn't shorting Tether, those shorting Tether should have a deep understanding of why it has the potential of collapsing and to have that understanding, you also need to understand these different financial products properly.


Of course. And that's one reason why the average person observing tether seems scammy doesn't immediately try to short it.


Hmmm for someone reading hacker news, participating in this thread and claiming that they hold crypto this shouldlnt be hard to understand by doing 10 minutes of research. Instead you decided to use that time for commenting and complaining


> Hmmm for someone reading hacker news, participating in this thread and claiming that they hold crypto this shouldlnt be hard to understand by doing 10 minutes of research

I would strongly advise against anyone trying to learn and devise a shorting strategy in 10 minutes

> Instead you decided to use that time for commenting and complaining

... ditto?


Because if Tether is defying gravity now, there's no way to be sure it won't defy gravity even harder before it collapses.

With a short, you can't just be right in the end, you have to find a way to not blow up if things get more irrational in the meantime.


Tether is particularly easy to short because it's pegged to a dollar. That means there's no significant risk it'll become more valuable than a dollar.



I would like to hear more details on this - the linked twitter thread is a bit bare ...

Isn't there an enormous risk in manipulating the price as high as $400/tether just to liquidate (someone elses) short position ? Who else, then, has the opportunity to sell at the temporarily inflated price ?

Again, some more details would be very interesting ...


Yeah, in reality it's not what happened. Exchanges don't instantly margin-call positions, they have to use time-outs and do it slowly (or there simply isn't going to be the liquidity).

So it's pretty easy to get the price of tether on a single exchange to momentarily hit $400, just blow through the order book. However no one is getting margin-called just yet, so the trick is to sustain that price, which means buying tether at $400 a piece. Unless you've got hundreds of millions of dollars to blow, it's simply not possible. And something as obvious as that, manual circuit breakers are going to be getting hit before they let margin calls cascade.


One of the lessons of the 2008 financial bubble is that financial systems are complex, often arcane, and prone to unexpected failure modes. Or more colloquially, the devil is in the details.

I used to write financial trading software, so I am reasonably familiar with the topic. But there's no way in hell that I as an individual would use 3 different unknown services to make bets in an unregulated and likely manipulated market. There are all sort of risks there.

If I were managing $100m it would be a different story. I could have analysts carefully looking at the financial risks and a lawyer or two gaming out the legal concerns. If all that looked good, then I might go for a short, because believe it's a fraud. But there's no way a typical individual investor should be making bets like that.


"It's pretty cheap and easy to take a short position in Tether. You can borrow USDT on Compound for 3.37%, convert it to USDC at Curve for 0.06%, then collect 2.32% on USDC at AAVE. If/when Tether collapses, you'll only have to cover your short at the collapsed value."

I am genuinely interested in exactly that short trade and your list of counterparties, above, is the reason I have never pulled the trigger on this.

A handful of new, interesting and untested entities all need to function properly at a time of market panic for that trade to complete as expected.

EDIT:

Somewhat off-topic, but given the actual real-world economic pain that chiacoin has caused me, I am much more interested in the prospect of an IPO of (chia parent) which could then be shorted (or optioned) properly through normal channels.

I daydream of being on the right side of that trade with every batch of triple-priced SAS drives we have purchased in the last 4-6 weeks ...


A slightly different strategy with less counterparty risk

- Borrow USDT with USDC as collateral

- Sell USDT for USD, put it in your regular bank account (you'll end up with slightly less cash than you had originally, since your loan needs to be over-collateralized)

Outcomes:

- USDT collapses, USDC does not: best outcome, buy USDT for pennies and use it to get your USDC back

- Both collapse: pay back your loan only if USDC > USDT

- Only USDC collapses: just don't pay back your loan. you lose whatever "extra" collateral you paid


Those are the kinds of financial engineering shenanigans we can look forward to in the brave new world of crypto. Just faster and on a larger scale than before.


Massive counterparty risk. Tether is likely backed mostly by loans to exchanges like Binance and FTX (and of course Bitfinex.) When and if Tether collapses the exchanges will very possibly be rendered insolvent and you’ll be in line with all the other creditors trying to make a recovery.

I don’t know enough about fully decentralized protocols to know what the risks are there.


The risks are that tether brings down whatever currency your short is denominated in. For DeFi, it will be either another token or cryptocurrency.


The liquidity on most crypto exchanges comes from USDT. If Tether goes down, I don't believe exchanges are going to let me liquidate my positions. At least not before insiders can do that.


> It's pretty cheap and easy to take a short position in Tether.

Proceeds to describe a Byzantine crypto solution, which neglects the inherent risk of each counter-party and interaction along the way.


I've a 'teather fudster' for a number of years and that's why I'd be hesitant to open a short right now. Finex have kept the wheel spinning for a remarkably long time, there's no point spending money to wait while its just wobbling given how quickly a short can be opened, once it hits 0.85c or so though then that would indicate to me that its all about to be over very quickly.


Because the market can remain irrational longer than you can remain solvent. Just look at the state of Meme stocks now.


but stablecoins are basically guaranteed to never exceed $1, so your downside is essentially limited to the interest you pay.


Therin lies the rub. With options, you're making a double bet :first that it is overvalued, and second that you got the timing right.

If you're wrong on either, you lose money. You don't get the really huge blowout risk due to the stable nature, but the other two still apply.




But still invalidates your claim

>stablecoins are basically guaranteed to never exceed $1

Why it happened is debatable, but not that it happened.


Even if the narrative is nonsense, would a short not have got ruined by that spike regardless of cause?


Because they will do everything to liquidate you, at one point price of tether briefly hit 1000$ on kraken.


as a "outsider" that makes no sense to me. tether is supposed to be a stable coin ... how the fuck was it $1000


It looks like it was a very brief spike and immediately went back to its peg, but I have no idea how it happened. https://twitter.com/Bitfinexed/status/1405037796172222466?s=...


Generally spikes like that happen because of fat-finger mistakes that blow through the order book, and typically return to normal within seconds.


There was a short spike of CHFPLN on Forex few years ago: exchange rate went from less than 4.00 PLN to 5.50 PLN, because of Swiss central bank decision to not stabilize it anymore. Some people made a lot of money (or so they thought). Few days later the broker declared that spike "a technical glitch" and they cancelled all the trades.

The moral of the story is: your exchange will always find a way to screw you.


When tether collapses it can take the whole crypto economy with it, including Compound. If you want to short it you have to do so in an indirect way, e.g. by shorting MSTR or COIN.


There are some very good reasons not to short tether which are listed at the below link. The source of this is bitfinexed has been railing against tether since 2017 and has been a thorn in Bitfinex/Tether's sides for a long time.

https://twitter.com/Bitfinexed/status/1405037796172222466

It seems there is a fair bit of collusion with some of the 2nd/3rd tier exchanges and Tether. If there is strong short interest it seems that they are willing to pop the price temporarily to wipe out the shorts. If Tether/Bitfinex has $62B and a printing machine it is pretty easy for them to wipe out the other side of a trade they are against.

My above understanding is just thinking about it in terms of what I have read and what I know of short selling equities. If you can take a put position (option) against tether I suspect that could work. Even if your bet was right, you would just have to be concerned the counter-parties survive the fall and that there is liquidity left in the market to close out the trade. Considering how much funny things went on in the GFC in regulated markets I suspect there is a good chance that in the unregulated crypto markets that even the correct trade would quite likely not be honoured if a full meltdown happened.

I was researching this a bit in the last couple of weeks. My current view is that I see Tether/Bifinex as a fraud which is bigger than Madoff and more serious since it is growing and the currency is (at the moment) a key part of the crypto markets infrastructure. Since tether provides the daily liquidity it also plays a levered role beyond what something like the Madoff fraud would have done to the wider markets.


The value of tether is a function of how close the supply is to the underlying assets. The only thing that matters at the moment is that you can redeem for dollars now, not whether you can do so in ten years.

The fact that the next billion can be safely redeemed doesn't mean the token isn't a scam.


You can't short tether, because if you succeed, it's likely that the entire crypto ecosystem will implode, and there's a serious chance you won't get paid.


Because you cannot bet against irrational things. Would rather throw money into things with higher conviction, lower risks, albeit with much lower potential returns.


Shorting tether is a horrible idea. Tether manipulates the market and will spike the price to collapse your short.


I'd rather prefer it died already so the crypto ecosystem can purge itself off it, but I can't make a bet as to when that will happen. It'll be a bloodshed in the short term but it'll recover in time.

We did just fine without it at the beginning, we can do just fine without it now.


If you genuinely believe God will reward you for murdering heretics in a Saint War, why don't more people do it?

I am skeptical of USDT, but maybe I'd like to keep my savings out of speculation, especially shorting that leaves you with nothing if your bet turns out false (a long mistake at least let you keep the valueless assets lol).

There s no binary choice between speculating for USDT or against USDT, you can say this entire thing stinks and you're better not speculating at all.


If you believe Tether is engaged in essentially a criminal conspiracy, you might well have some concerns about engaging in financial transactions which intend to profit from that criminal conspiracy.

If Tether does collapse, and you manage to engineer a solution so that at the end of that event you are holding some of the resulting money... whose money is that you've got hold of? The victims of the crime?


Besides what others have already said, there's also the risk that if Tether collapses and becomes so worthless that it's not being traded anymore, you cannot exit the short position, as Matt Levine once mentioned on his newsletter (https://www.bloomberg.com/opinion/articles/2018-04-11/-go-to...).


Because the market can remain irrational for far longer than I can remain solvent.


I guess nobody has that kind of money to risk it.


If you spend 10 mins looking into tether online, it’s easy to see it’s a totally fucking scam. It’s unbelievable.


I like how it's always people who spent 10 minutes looking who say it's a total scam.

What percentage of tether doomsayers here have ever traded a significant amount of tether? Don't get me wrong, I also don't trust tether and think there's an unacceptable amount of sketchiness there, but simply looking at who's at each side of the debate should show you that it's not as slam dunk as you think it is.


I can trade in and profit off of snake oil, and there are lots of snake oil salespeople around the world - but it’s still snake oil at the end of the day.


> What percentage of tether doomsayers here have ever traded a significant amount of tether?

"But what percentage of people who say that dioxins are dangerous have ever jumped into a big swimming pool full of dioxins?!"

I mean, if you think tether is a scam, you are probably going to refrain from going anywhere near it.


What percentage of lead paint critics have actually tried licking lead paint? My kids love it, so it can't be that bad


Tether and Bitfinex are entirely banned in New York State and I really don't think it will be too long until other states follow suit and likely the SEC too.


I have spent 10 min looking into it, and I'm suspicious. But could you maybe elaborate?


Their Wiki page[0] is quite damning:

    Tether is a controversial[1] cryptocurrency with tokens issued by Tether Limited, which in turn is controlled by the owners of Bitfinex.[2][3] Tether Limited formerly falsely[4] claimed that each token was backed by one United States dollar, but on 14 March 2019 changed the backing to include loans to affiliate companies.[5][6] The Bitfinex exchange was the subject of a lawsuit by the New York Attorney General of using Tether's funds to cover up $850 million in funds missing since mid-2018.[7][8] The investigation found that iFinex — the operator of Bitfinex and Tether — made false statements about the backing of the Tether and about the movement of hundreds of millions of dollars between the two companies to cover up the truth about massive losses by Bitfinex. According to the New York Attorney General, "Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie".[4] 

[0]: https://en.wikipedia.org/wiki/Tether_(cryptocurrency)


This article was an entertaining read https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/


It really is quite obvious- the funny thing is the USD/Federal Reserve has been running the same scam for decades (expanding the money supply with no backing) and it's just as obvious


I didn't realize Tether owns eleven aircraft supercarriers and collects tax revenue from 330 million people. Pretty impressive for a company that operates out of a backroom somewhere in the Bahamas.


That's on par for Tether, which has 13 employees managing ~$65B in funds, meaning everybody including the janitor manages a portfolio of $5B. The poor schmucks at Goldman Sachs can only manage around $18M per person.


That doesn't legitimize it in my eyes, it's still a scam. Ancient Rome was also the leading regional superpower in its day, that doesn't make it OK for them to debase their currency by filling the silver coinage with lead.


I always enjoy this argument that approximately goes "don't worry, if the dollar goes tits up, Uncle Sam will just bomb people until it's alright again."


This is getting downvoted, but if I'm wrong, then please do explain to me what is this argument supposed to mean? I mean the one that's usually very explicitly phrased as "the value of the dollar is backed by the US military", which gets said all the time when people compare the value proposition of fiat currency to cryptocurrencies.

I've always understood this to mean "if people stop accepting the USD, the military will make them do so by force". But by all means, do tell me of what other ways aircraft carriers can be used to support the value of the dollar.

I'm not even saying that this is factually incorrect (though I don't know if it is). I'm just pointing out the perversity of this argument. It gets brought up surrounding the current inflation debate all the time too. I don't like the casual-ness with which people can say what amounts to, essentially, "don't worry, we can always resort to deadly violence if we need to."


More like “if the dollar goes tits up, Uncle Sam has enough assets in the real world to maintain infrastructure and law and order.”


US government services will always only accept USD, which means the dollar is tied back to real-world value. taxes, services, etc.


[flagged]


Could you please not create accounts to post in the flamewar style to HN? We're trying for a slightly different internet here.

https://news.ycombinator.com/newsguidelines.html


Glorified toilet scrubber to the masses, agent of corruption to the enlightened. I see through you and your ilk.


I'm not so sure about your second point but I rather agree with the first. That's pretty good!


[flagged]


Please don't respond to a bad comment by breaking the site guidelines yourself. That only makes this place even worse.

https://news.ycombinator.com/newsguidelines.html


Fair.


Unfortunately, it's true.


Well you're right, retail banks and central banks do operate fractional reserves. The problem is that Tether/Bitfinex claim every single Tether is backed by a dollar but they are lying. If they want to operate a fractional reserve, why not register as a bank legally?


The money supply has to expand because our economy expands. If an economy keeps producing more things more efficiently, you need your money supply to also expand, or you will have deflation and the economy will grind to a halt.


If you produce things more efficiently they should cost less, the money supply shouldn't expand to make sure their cost stays the same or more. Nobody can be entrusted with the authority to "expand the money supply" and not abuse it to the point of collapse. Case in point:

https://fred.stlouisfed.org/series/M1


The difference is the fed is up front USD is unbacked, whereas tether lies about USDT's backing. In the financial system it's often not a problem to sell something as long as you're up front about what it is.


It's also just as obvious that everyone will agree for the foreseeable future that USD can be used to buy things, do things.

Given that people already disagree about the status of Tether, it's not nearly as obvious.


False equivalence much?


And that caused downward spirals when it started, centuries ago. Paper money is tempting people to print since it started, however societies have learned how to do it for a net positive, will USDT manage the same?


Who the hell even holds Tether? Don't people get it and then convert into a different crypto pretty quickly? If all remaining Tether got "burned" after they got shut down, wouldn't it's impact on crypto markets be rather trivial?

I don't see why there is so much focus on it. Either they have funds to back up the printing or they don't (yes, they didn't for a period of time in 2018, but settled that lawsuit). If they still don't, and Tether goes away, I would think it would only lower Bitcoin/crypto volume and volatility as there is one less funding source. But, anyone that bought Tether to buy Bitcoin has already done so, and that Tether is sitting with someone else like an exchange, lender, or liquidity pool.

If they truly are a fraudulent weak-link in the ecosystem, than I am all for figuring this out so we can move on.


There are 62.5 billion Tether in circulation. I can’t tel; you who holds it, but they certainly aren’t all “converted into a different type of crypto”. Various market participants hold every single one of those Tethers.

Tesla made waves for injecting 1.5 billion into Bitcoin. The Tether injection is 42x that.

So the strong probability is that the crypto market has been raised by a flood of fake money and the actual dollar demand for Bitcoin et al is rather low.

As for backing, it is surely not present. It would be trivial to audit Tether’s assets but they have dodged it for years and been caught in lies.

As Dan Davies said about the Iraq War lies, “ There is, as I have mentioned in the past, no fancy Latin term for the fallacy of "giving known liars the benefit of the doubt", but it is in my view a much greater source of avoidable error in the world. Audit is meant to protect us from this, which is why audit is so important.”

https://blog.danieldavies.com/2004_05_23_d-squareddigest_arc...


Right, I agree that lots of people are holding Tether, mostly exchanges, market makers, and liquidity pools if I had to guess, but unclear. If that Tether was proved worthless, anyone who used Tether to buy crypto still gets to keep their crypto. It is ONLY people holding Tether that are hurt, but the negative news could have waterfall impact on ecosystem.

As for the triviality of auditing, I don't think it's that simple, but point taken.


Well, you could make a stablecoin that was trivial to audit - you merely need to demonstrate that, at the moment of the audit, the number of tokens in circulation equals the amount in your backing funds account with a reputable bank. And that the auditor can see the history of cash in your account and coins in circulation match up.

Of course, if you don't want to be easy to audit, you can introduce a bunch of complexity - play a shell game shifting money around, intermingle the clients' money with the company's money, operate independent lines of business and intermingle those too, and so on...


Excellent point - does one exist (an easily audited stablecoin)?


It would be a removal of $62.5 billion from the ecosystem. That’s a massive loss of demand. Everyone else still has their bitcoin but if it turns out the majority of the orders were with fraudulent funds, what does that do to BTC value?

Why wouldn’t auditing be trivial? It’s just checking the level of funds in account and whether they’re present over time. All major companies do audits, it’s a simple, common procedure.


> Why wouldn’t auditing be trivial? It’s just checking the level of funds in account and whether they’re present over time.

Except that we know for a fact that Tether is not mostly backed by bank deposits. They hold a bunch of different types of assets, some (most?) of which is probably debt with varying levels of collateral. Assessing debt risk is doable but mote complicated than just checking a balance number.


See the note above about not trusting the claims of proven liars.

For years Tether said they were backed 1:1 by dollars, but blocked audits. The audits would have been simple. It turns out Tethers were not backed 1:1.

It would also be simple to audit their dollar deposits now, but they haven’t done that either. And no one in the commercial paper market has heard of them.

So, if they were bonafide, there are claims it would be simple to audit. They have not audited them.


Their "commercial paper" is most likely loans to exchanges and "whales" which is against crypto as collateral. It is a "shadow market" for loans against crypto that they're calling "commercial paper" to sound all official and grown up.

Which makes Tether effectively backed by crypto.

As the price of crypto/bitcoin rises that collateral is worth more and those loanees can come back and borrow more Tether.

Tether then gets used as fuel for arbitrage bots which pumps up the price of crypto (which is literally just monetary inflation, you have more and more Tether chasing after roughly the same amount of crypto so you wind up with inflation).

This also explains how the peg is maintained since if the loan is dollar-denominated then nobody who has borrowed $250,000 in Tether wants to see Tether drop to $.90 USD and have to pay back 250,000 Tether plus $25,000 in actual USD (while on the other side everyone wants to buy Tether once it goes over $1.00 since you can flip it and arbitrage it).

I'll let you do the math though on what happens if crypto were to say drop by 90% or so...


Well, clearly the incentives for Tether are against auditing as any details they could announce (given what we already know) would just generate mote negative coverage amd uncertainty.


How does that follow? If they had proof of their reserves it would dispel the rumours and increase confidence.


If tether breaks, it will not just create negative sentiment, but cause a liquidity crunch since the major providers of liquidity are presumably the one that also hold a lot of tether. This combo could easily crater prices as more and more sellers compete for buyers by dropping prices.


>Who the hell even holds Tether? Don't people get it and then convert into a different crypto pretty quickly?

Most crypto trading actually takes place outside of the US. Imagine I want to predict the whole crypto market goes down, I want to short it. Ideally I'd like to short it relative to the USD, the world's reserve currency. But, as a random unregulated firm trading on an unregulated exchange, getting USD or something close to it is super painful from a compliance perspective, so ideally I'd prefer something that follows the price of the USD but is outside the scope of US regulators. Tether fulfils this shared need of non-US market participants, so they have incentive to keep acting as if it were real even though they know it's a scam. Tether then gets to extract a fee for this service by printing USDT.


Thanks for the context, it makes sense. The way I see it, a Tether collapse would simply remove some volatility and volume from other crypto markets, but it's possible that if this is putting huge sell pressure with shorting today, that crypto has a nice rebound after the dust settles.

Thoughts?


People do hold it sadly.

It provides fiat-pegged stability with crypto-level defi liquidity. So people choose to hold it for use in defi products.

It's a blight on the blockchain world.


Got it - that makes sense... they would certainly be hurt by this and likely have to liquidate crypto holdings to recover.


Converting to a different crypto just means that whoever you traded with is now holding the Tether you paid them. In the absence of a practical redemption mechanism, someone will always end up holding the bag.


Yes, correct, thanks for the comment.

I guess I see the people who are buying Tether (exchanging bitcoin for Tether for example) are market makers or lenders and appreciate the liquidity that Tether offers, who would certainly be crushed by Tether collapsing. Overall though it shouldn't affect the demand for other blockchains... but negative news / narratives can do a lot of damage


How does a loss of demand/liquidity not have a direct effect on blockchain token prices?


One thing I think is interesting is what if tether fraudulently printed notes to push up the price of BTC, and now they either have made enough money to back what they printed or the price of BTC is now anchored to these inflated prices so their actions no longer matter as much


It is the most held stablecoin for accounts outside of the United States.


"most held stablecoin" doesn't really answer the question, though. Why hold stablecoins at all? If you hold actual USD in a bank account, you're trusting your bank. If you hold USDT you're trusting that Tether Ltd stays solvent. I understand there's not always so much trust in banks, but trusting this shady Tether Ltd company feels absolutely bonkers. Even buying Bitcoin feels safer!


People hold stablecoins so they can use the practical equivalent of a United States dollar "on chain." Ask your local bank to let you deposit your savings account into Aave or Yearn and you're going to be shown the door. In order to use the smart contracts on the blockchain you first need to bridge your "real world" funds to the chain by using a service like Coinbase. Coinbase will take your USD and give you Ether or a stablecoin like USDC in exchange. You can use either of those assets on chain in smart contracts.

To answer your question as directly as possible, people hold stablecoins because they want to use USD in smart contracts.


This is an interesting point from SEC's perspective... how can they manage that? Would the solution be to simply ban it's use in the United States (both Tether and Bitfinex)?


Yes because the United States only has jurisdiction for United States residents. However the United States is the most influential country for financial regulations so we will see some knock on effects.


What's incomprehensible to me about the Tether saga is: the idea of a stablecoin pegged to USD is so incredibly useful as a bridge between financial systems... why go through all the trouble and risk of doing it fraudulently when you could... just not be crooked?

The basic idea seems sound: people want to transfer around cryptocurrencies (or speculate on them, fine), but actually selling them for USD is somewhat hard and peppered with regulatory issues. So swoop in with a partial solution: a stablecoin worth exactly 1$ USD that you can transfer quickly around using the blockchain, but doesn't have any price volatility so is a safe store of value until you can move out and redeem for USD through a slower, regulated offramp (of which there are fewer).

That seems like the hard part? They solved all the hard problems, and it's so useful that it should be possible to get rich just by charging small transaction fees, success just requires doing all that plus not being crooked and lying about the 1:1 backing.


Interacting between the crypto space and the U.S. financial system is hard. USDC does it by being a well-regulated in the U.S. and internationally financial institution, but that's certainly not easy.

Just one example (from [1]):

> At the time, Bitfinex (theoretically a Hong Kong entity but whose location, like a Bond villain, changes moment-to-moment to fit the needs of the scene) was banking in Taiwan at Hwaitai Commercial Bank, KGI Bank, First Commercial Bank, and Taishin Bank.

> Taiwanese banks do not have direct access to the U.S. financial system; they engage via correspondent banking relationships. These banks corresponded through Wells Fargo. Wells, in the wake of publicity about the Bitfinex hack, told the banks they would no longer clear USD wires to or from Bitfinex.

[1] https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/


People want to transfer around cryptocurrencies, because their price is high and they can speculate on them and mine them.

If the price was lower, then the mining activity would be reduced as would the interest in speculation.

The interest in tether is thus directly associated with the price of bitcoin.

It makes sense then to use the power of controlling Tether and Bitfinex to pump up the value of bitcoin, in the hope (I guess) that the value becomes self-sustaining.

But, basically, we have been duped at a civilizational level and this whole crypto pyramid needs to come crashing down for the good of electricity, chip shortages, limiting ransomware and criminality, and wasting technical talent.

Crypto is basically the Uber of money laundering and ponzi schemes.


Ok so I know this answer! They lost money through exchange hacks and bad banking relationships so they could never rely on 1:1 backing and fees, they had to make it up through bitcoin price increase which they contributed in pumping and then backing with commercial paper from their sister exchange.


Looking up the definitions of security, financial asset, debt instrument, bank deposits, and thinking about really what tether is and the statements they make about 'backing' I come to the conclusion that tether is an unregistered security. The fact that Tether may state they have no obligation to exchange tethers for dollars on demand can be discounted by their own statements about Tether's reserves giving value to the tether tokens and the general perception by the public on what tethers are and represents.

A tether token is a financial asset. It represents a loan to Tether in return for the promise of getting a dollar back when a customer wants to withdrawal dollars from Tether. It is like a bank deposit, which is also a financial asset (a liability of the bank), not dollars themselves. Stablecoins allow anyone to trade their 'account or claim' at the Tether Bank by transferring the entire account to someone for dollars or something valuable like bitcoin on the secondary market. Tether doesn't have to satisfy demand deposit withdrawals as much as a bank because you can trade your account to someone else who accepts tether. People only accept it because you can get dollars out in the secondary market. Tether's value comes from ownership claims and confidence in Tether to be the exchanger of last resort and honor claims on dollars for tethers. Tethers are fungible (they are all 1 dollar or represent the same claim) and they can be traded, therefore it is a security. Thinking about claims and trading and what are financial assets is more useful than Howey test.

Imo the Howey test is overused to explain securities with crypto context. People just rattle off 1,2, 3, 4, talking points (the questions) without really explaining fundamentals or connecting it. In terms of Howey, Tether the company is taking your investment dollars (loan) and investing it, they are in the business of making profits (they just don't share profits), but they are expected to repay the loan of dollars you gave them, and this repayment depends on the work of others (Tether investing wisely). Tether the company is in a common enterprise with anyone that holds tethers (loans them money).


Binance isn't even allowed in the US. What would a SEC lawsuit even mean?


Binance _is_ allowed in the US. They have a special US facing website.


Binance.us isn't Binance, and doesn't offer most of their services (does it even have BUSD?). It's a completely separate company actually based in the US and run by different people who basically pay Binance to use the name. They definitely do not run or are responsible for BUSD.


I find it a little strange that 100% of the comments (as of this moment, with 154 comments) are not about the main thrust of the article: Whether the SEC has Tether and BCB in their sites for a lawsuit.

For those who are looking for the usual HN summary: The tldr is that BCB is likely to incur SEC lawsuit mainly because of an ICO back in 2017, and the "legal expert" did not actually give a probability of Tether incurring an SEC lawsuit.


Good point, it kind of is Hacker News style not to read the article and just go off on interesting tangents in the comments. Thanks for the summary!


Is there a mechanism for Tether to collapse on its own or does the collapse have to necessarily come from regulation? If the SEC do nothing about this, can Tether keep printing forever?


If everyone holding tether attempted to redeem their tether coins for USD in rapid succession it would implode. Of course, if tether were telling the truth it would be an operational headache but otherwise a non-issue.

There’s also a certain point where they can no longer “print” coins that are believably backed. If tether is to be believed (and, for the record, I’m of the opinion they shouldn’t be) then they’re already responsible for an absurd portion of the commercial paper market.


Maybe they invented their holdings of commercial paper as well.

Pretending to be fully backed by USD didn't work out, so now they pretend to hold equivalent assets.


I think only exchanges can redeem USDT from the Tether treasury or company or weather is called.


The collapse would come from a loss of trust from USDT holders who would then try to dump their positions (basically a bank run) for less than their pegged values.

SEC action could be a cause for such a loss of trust, but you can imagine many others, such as leaks (of damning information) from insiders, other exchanges unlisting USDT, and so on.


Maybe a bank run on Tether for some other reason than the SEC? It would require a lot of people to lose trust in Tether at the same time, which surprisingly still doesn't look likely. But it might happen.


Are US folks allowed to buy BNB from Binance directly?


As of a little while ago, yes: https://www.binance.us/


It may shock certain commenters here to learn about something called 'fractional reserve banking'.


I'm sure plenty here are aware. This looks like a game because it is, they're pretending not to see their collective bias because they know it's being weaponized to make crypto illegal, as a means to protect their entrenched investments in the current corrupt system.


Honestly I am concerned for my friends I see dumping their savings into crypto because people are confusing them with technology they don't understand. It's a massive fraud and people are going to get hurt. That's my concern, if there was a crypto asset I believed in I'd invest but none of them match my world view. I do want a new economy, but I don't think crypto is the way to do it. For me book keeping is secondary to the cultural change necessary to have a better economical system.


yes, this is power at work


MONEY IS SCAM!


Reading the comments here, I'm curious why there are no disclosures found in this tread. It seem most of anti-bitcoin proponents are happy to hold a double standard due to their gleeful investment in the Fed's corrupt management of the USD.

Is it really any surprise those which aren't overly invested in the current house-of-cards are willing turn to what might amount to the wild-west of financial investments? Get off the self-righteous horse and drop that Pravda. All of your hands are dirty from the current propped up system, and your feigned ignorance of it's glaring mismanagement shows there's little to no value in the arguments here against using crypto.

Side note: this lot have clearly lost control of the narrative, that means it's about time for taking a back-log of medicine. Oh gnashing of teeth.


I like that he calls them "coin". Because they definitely aren't cryptocurrency and have almost nothing to do with cryptocurrency. They're all just off-chain market inventions created by financial people because they refuse to understand what cryptocurrency is and want something more like their normal, easily manipulated, financial markets and derivatives.


Or, maybe it's because cryptocurrency isn't actually useful for the things people claim it's useful for...


It's not even created by financial people. If you watch the coffeezilla video that some other people in this thread linked to, you'll see that the people behind Tether have backgrounds in various types of fraud.

Also, this affects the entire cryptocurrency market. If you own any cryptocurrency, you're exposed to risk from Tether's collapse even if you hold no Tether yourself.


>backgrounds in various types of fraud.

Right. Financial people.


I would much rather live in a world where I can choose for myself whether or not using crypto like Tether or Binance Coin is too risky. It has been said that crypto is essentially regulatory arbitrage. It's like a UFO landing on Wall Street, yes it's obviously finance but it is different enough that the government doesn't know how to deal with it. This has clearly led to new financial and cryptoeconomic innovations, as well as clear scams and crashes.

Nonetheless I would rather make the decision for myself. Financial regulations are already looser for the rich in the United States than the poor. There are many more shackles on what you can do with your money as a retail trader than a institutional trader. At least one benefit that crypto has over traditional finance is that all participants have the same opportunities. For the most part it is open source code for nodes that anyone can run themselves.

Finally I'd like to add that the nature of crypto means that when the United States removes its regulatory ambiguity, or if USG decides to crackdown on the whole endeavor, there will most likely still be some country like El Salvador where it is still legal and accepted. So to me it seems that the future of crypto is still bright despite what may be seen as increasing regulatory pressure from the elephant in the room.




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