US Fed Official Calls Tether a ‘Challenge’ to Financial Stability

https://www.nasdaq.com/articles/us-fed-official-calls-tether-a-challenge-to-financial-stability-2021-06-25

197 280 5 years ago

So regulate it then, Tether is shady and isnt backed by USD at all and yet it is used all over the US.

dannyw2• 5 years ago

Tether does its best to live outside of US regulation. It has no US bank accounts, nor do any directors live in extradictable countries.

baby5• 5 years ago

If they’re holding USDs they are bound to US regulations.

xiphias2• 5 years ago

US officials should investigate them for fraud.

Their collateral is clearly worth much less than the total value of Tethers created by the company, and at this point we'are talking about tens of billions of dollars.

,, stablecoin market that is currently, pretty much unregulated'' -- This is not true for all stablecoins though, for example Circle is a regulated company, and USDC is regulated by US law.

dosenbrot• 5 years ago

They did. https://ag.ny.gov/press-release/2021/attorney-general-james-... Also: https://www.singlelunch.com/2021/05/19/the-tether-ponzi-sche...

qeternity3• 5 years ago

That’s NY state, not the US.

Things will get real when SDNY get involved.

adflux3• 5 years ago

Anyone invested in crypto should read Bennett Tomlins blog about tether https://bennettftomlin.com/2021/06/21/a-non-exhaustive-list-...

I think there's a 90 percent chance that this will blow up and a movie like the Big Short will be made about the story behind it.

Tl;Dr Tether is ran by very dubious people, don't trust anything they do or say

smackeyacky5• 5 years ago

Wow, what a motley crew of miscreants they appear to be.

adflux3• 5 years ago

Exactly, and with the press of a button they can create BILLIONS and noone bats an eye.

roenxi2• 5 years ago

Quoth Wikipedia [0]:

"Nevertheless, Tether Limited states that owners of tethers have no contractual right, other legal claims, or guarantee that tethers will be redeemed or exchanged for dollars. On 30 April 2019 Tether Limited's lawyer claimed that each tether was backed by only $0.74 in cash and cash equivalents."

It seems that it is unlikely that Tether poses any risks, on the basis that anyone who cares can find out the whole thing is shady with even the flimsiest investigation. A risk that large and obvious can't in itself be systemic, because the system will insulate itself from the risk. Everyone knows.

The systemic part is when people start being able to buy Tethers without realising it. Eg, if the banks start selling them to retirement funds or something.

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

beforeolives3• 5 years ago

So if it's a scam but everyone knows that it is, you think there is no risk?

onlyrealcuzzo3• 5 years ago

Everyone with two braincells knew something didn't check out with housing in the US by 2006.

But nobody cares if they think there's still time to get in and make money.

This is true of most bubbles.

roenxi2• 5 years ago

I think there is a risk if people are buying tethers and they don't realise that is what they are doing.

jkhdigital14• 5 years ago

You have a very good point; systems blow up from hidden or mislabeled risk, not from obvious risk that everyone is well aware of.

graeme3• 5 years ago

This is tautological. You’re essentially arguing that market participants can’t be stupid or wrong or credulous, ever.

In the South Sea Bubble people speculated on the value of a company that basically never even started business in its market and had no hope of a profit. Ponzi’s scheme was mail reply coupons, which could never have worked even in theory. The Mississipi company in France flourished despite the abject failure of the underlying Mississipi company to establish itself or a colony.

People can be very wrong. And indeed in crypto you regularly hear such stupid beliefs as “Tether is only $60 billion and crypto has a market cap or $1 trillion, so it’s just a tiny risk”*

The fact that this is a common belief suggests that you’re wrong. People may correctly think Tether is a fraud but have an extremely incorrect belief about the consequences of Tether being a fraud. Just as people understood people with no incomes couldn’t afford mortgages once teaser rates expired but did not understand how that would richochet through the system.

*The error is that unlike a company, no one would ever buy all the crypto outright, and market cap is a meaningless term. An injection of $1.5 billion from Tesla was enough to send crypto markets skyrocking. What would a subtraction of fiat 40x as large do to markets?

garyclarke27• 5 years ago

Tether is bound to collapse soon and will likely take the whole crypto market with it. There is no doubt in my mind that Tether is as scam, they blatantly lied that they had USD cash backing of 100% of Tethers, their recent amateurish pie chart reveal of assets was a farce, no doubt these bond assets were created out of thin air, just like the Billions of Tethers they regularly print whenever they feel like it.

adflux3• 5 years ago

I think they are partially backed, and kicking themselves back billions of dollars. It's trivial to do this for them, and their whole board is filled with crooks, ponzi schemers and "Criminal" lawyers. They hide behind anonymity and shady shell corporations. Their ceo hasn't been seen for years. Etc etc etc.

onlyrealcuzzo3• 5 years ago

By their own numbers, it is at most 2.9% backed by cash.

The rest of it is supposed to mostly be commercial paper.

The problem with that is, in one month, they would've needed to buy more commercial paper than was even sold.

So that part is likely false, too.

oarsinsync• 5 years ago

I remember a lot of people (including myself) saying the same thing a few years ago, and selling a bunch of BTC at ~$8000.

"The market can remain irrational longer than you can remain solvent"

It's a good thing I was simply closing positions instead of taking a short position, cuz boy oh boy was I wrong.

That was before institutional money started going into BTC. Will be interesting to see if the 'little guy' individual investor will be enabled to take large amounts of early stage profits and saddling the 'big guy' institutional investor (which is in a lot of cases, essentially just lots of 'little guys' money pooled together while the managers skim the profits off the top) with the late stage losses.

(I am long BTC)

onethought9• 5 years ago

How can you be “long BTC” - it’s a currency not a stock. You might say “I’m long USD” but then you are really saying you believe the US economy will grow, and the value of its currency will strengthen.

Given Bitcoin isn’t attached to anything… what does long mean?

paulgb5• 5 years ago

The sad thing is, people (like yourself) who were critical of tether a few years ago have already been validated on multiple counts: the Bitfinex connection (which tether denied) was proven; the claim that it is 1:1 cash backed was walked back to “asset backed”.

So it isn’t a case of crying wolf, it’s more a case of pointing out a wolf and being dismissed as FUD.

cdstyh• 5 years ago

print tether, deposit it into an exchange, buy btc, tether is now back by an asset (btc), btc now higher in price, repeat

varajelle• 5 years ago

will likely take the whole crypto market with it.

I often see this repeated on HN, but this is never explained. Why will the collapse of Thether impact the whole crypto market?

dcolkitt2• 5 years ago

If anything, it would most likely create substantial buying pressure in BTC or ETH in the short term. The whole reason people hold Tether is because they’re in an ecosystem where they can’t easily access dollars directly.

Say you’re on a crypto only exchange, like BitMEX, or on blockchain. What are your exit options? You can’t buy USD on Uniswap, only stablecoins. In this case “panic-selling” Tether means a massive rush into Bitcoin and Ethereum.

TheAlchemist2• 5 years ago

My theory is, that they are mostly not backed by real USD nor assets - it's virtually impossible that they have so much commercial paper without nobody in the business even knowing them. They are most probably lying.

If this is true, and everything points to it, then there is simply much less real USD on the exchanges than people think. People often quote the crypto market cap and that Tether only represents 5-10% of it - but most BTC were never really available anyway - they were never bought or traded on any exchange. So the total inflow of USD (or any other real money) is much less than crypto market cap - and a lot of it was eaten by miners, arbitrageurs and exchange fees.

When the music stops - and enough people try to get their real money from the exchanges, it simply won't be there.

lou1306• 5 years ago

People love using Tether to purchare BTC (and other cryptovalues).

over two-thirds of all Bitcoin — $10 billion worth of it — that was bought in the previous 24 hours, was being purchased with Tethers. [0]

Thus, it is not unreasonable to say the 1 Tether = 1 USD change indirectly affects (read: inflates) the valuation of BTC, and that a depreciation of Tether may have an impact on BTC.

[0] https://crypto-anonymous-2021.medium.com/the-bit-short-insid...

fbernier2• 5 years ago

Have you looked at market-wide charts when I Bitcoin is having a bad day? All the others are red too.

Bitcoin's price is currently artificially inflafed by all the tether printing. It'll go down with it, and so will the rest of cryptko.

fbernier2• 5 years ago

Have you looked at market-wide charts when I Bitcoin is having a bad day? All the others are red too.

Bitcoin's price is currently artificially inflafed by all the tether printing. It'll go down with it, and so will the rest of crypto.

meowface4• 5 years ago

So many people have been saying it's a scam for so long that I almost wonder if something else is going on. Like, if you polled anyone who knew what Tether is, I bet 80% or 90% would say it's a scam. It's pretty much consensus. I've never seen a single defense or counter-argument of it online. And the vague reserve disclosure didn't help.

(And, to be clear, I also think it's likely a scam.)

I'd perhaps think it's like the lead-up to 2008 where the people behind the scenes largely knew it was funny money but the general public didn't - but here it seems pretty unanimous from the lowest-level retail investor to the most sophisticated institutional investor that it's a scam.

So what's the deal? Is it gonna be the most predictable catastrophe ever? How have they existed from 2012 until today, seemingly without any issue, despite all of the universally extremely negative PR? What are the odds it's somehow not a scam?

ForHackernews• 5 years ago

I think it's an obvious scam but it's a very useful scam, so there are many people with a vested interest in maintaining the illusion.

From people who want to pump up the price of other cryptocurrencies, to offshore exchanges that want to avoid KYC requirements dealing with real banks, to ordinary users who like being able to transfer USDT... there's many people incentivized to look the other way and pretend that water isn't wet.

jasoncartwright• 5 years ago

It's anecdata, but none of the retail crypto speculators (five or six now) I've spoken to IRL have even heard of Tether.

bsanr22• 5 years ago

There is a rumor going around the meme stock circles that financial institutions were using crypto to manage their liquidity/collateral issues. I'm in no way well-versed in this, but I'll try to convey my understanding. Essentially, banks are carrying too much cash from QE and the emergency infusion due to the COVID crash last year. They don't want to pay the interest on it, but they still need it for their other operations (the conspiracy theory is "manipulating meme stocks and preparing to cover should they fail a margin call"), so they'd been buying up crypto assets, hiding that cash in something that they could pump and dump almost at will. A month-ish ago, some regulation changed where they could no longer hold crypto as an interest-free asset, and coincidentally, we saw the bottom fall out of Bitcoin and the Fed's overnight reverse repo program (where the Fed does a short term swap of US treasuries for cash) begin to expand around the same time.

Suffice it to say that everyone figures that SOMEONE big is manipulating the crypto market to their own ends. With Tether serving as the lubricant greasing the wheels of the rest of the market, it has finance's prized "too big to fail" distinction.

Edit: I found one of the posts that explained the theory. I probably misunderstood it. https://www.reddit.com/r/Superstonk/comments/nz0fsz/i_found_...

I know, I know... I present it mostly for you to consider as you may.

tarsinge2• 5 years ago

The reality doesn't matter, what does is what people agree on. As long as people are willing to exchange them for $1 it can continue indefinitely. The incentive is clear: why would people invested in crypto actively nuke their investment? As long as their investment grow, reality and rationality really doesn't matter. I think it's a good lesson because that behavior is not unique to crypto.

wavepruner• 5 years ago

I think you're living in a media bubble.

There are a plenty of rebuttals to the Tether criticism, but on sites like Hacker News no one bothers anymore. It's not worth dealing with the vitriol and downvotes to even try.

That being said I also have concerns about Tether, but I think they are way overblown.

foobarbazetc• 5 years ago

It's just a Ponzi scheme where everyone is invested in the scheme because they hold crypto of some kind.

Then one day someone will wake up, decide they don't want that kind of exposure, and the whole thing collapses.

Daishiman• 5 years ago

The same way the Albanian government collapsed due to a Ponzi scheme: everyone knew it was a ponzi scheme, but everyone thought they were smarter than most and would get out on the right side of the trade.

BelenusMordred• 5 years ago

I read this comment about 5 years ago on HN.

parsimoniousplb• 5 years ago

In case someone is interested in shorting Tether, thanks to DeFi this can now be done without explicit exposure to a crypto exchange or dangerous BTC shorts. For the uninitiated, I think this is also a good example for the kind of craziness that is possible now:

Deposit a "good" stable coin (for what counts as good in this space, which is USDC) on Aave or Compound and borrow Tether against it (75% and 80% loan-to-value respectively). You can now either send it to an exchange (e.g. Kraken) and swap USDT to real USD, or go to curve.fi and swap USDT for more USDC and deposit back to Aave or Compound. Repeat until either 4x/5x leverage (theoretical max) or your personal risk tolerance is reached. Remember to service the position by depositing more USDC occasionally (otherwise will be liquidated with penalty). As of this writing, variable interest rate is ~3.5%, fixed interest rate is 11%.

Scenarios:

- USDT goes to zero, buy as many as needed for scrap, pay back the loan, free the original stablecoins, sell for real USD and make between 1.75x to 4x/5x, depending on which route you chose above.

- Both USDT and USDC go to zero, you lose between 25 to 100%, depending on the route you chose above.

- There's a USDT shortage (real or somehow engineered) and it goes way above $1 causing your position to be force-liquidated, causing you lose between 25 to 100%, depending on the route you chose above.

- Only USDC falls below peg (temporarily or permanently) and you get force-liquidated (25 to 100% loss)

- You forget to service the debt or a spike in the variable interest rate causes you to get force-liquidated (5% penalty)

- Tether never goes to zero and you keep paying 3.5% interest (variable)

- Smart contract hack / Ethereum shuts down, you lose up to 100%

- Unkown scenarios

While there's no explicit exposure to a crypto exchange, there's still the implicit exposure to Coinbase/Circle via USDC. DAI offers no escape here, since its 50% collateralised by USDC (the other 50% crypto would likely be in serious turmoil in case USDT collapses potentially losing its peg as well).

In spite of this, I think this is a considerably better way to profit from a Tether collapse then the much more dangerous route of shorting BTC futures, or shorting via an unregulated crypto exchange where there's no guarantee that they'll pay or even be operational in such an event.

HorizonXP• 5 years ago

I like this strategy, but would seriously not recommend it to anyone that isn’t willing to lose everything they put in. This isn’t a spot play where you still have the underlying crypto asset.

I know apes will ape, but seriously, don’t.

zamadatix• 5 years ago

I have no doubt Tether has something wrong going on in the background but:

Tether is bound to collapse soon

I've literally been hearing soon™ for years on this one. I think I was sent from a post here in 2018 to http://www.untether.space/ because it was going to collapse any day at the time.

economusty• 5 years ago

It's as much of a scam as any bank is sans the fdic insurance. As long as most tether holders don't redeem at once then the shell game can go on forever, just like Bank of America. Tether should convert to a bank and get fdic insured.

kikowi• 5 years ago

“It's not what you don't know that kills you, it's what you know for sure that ain't true." (Mark Twain)

dalbasal5• 5 years ago

Is it possible to regulate a stablecoin to a zero-risk point?

Many central banks themselves failed to perpetuate fixed exchange systems. How is it different at a smaller scale?

That a stablecoin could blow up is, IMO, unavoidable. The important question is what's at risk. What happens if USDT fails to maintain parity? Is USD affected? Seems far fetched, in this sense, considering current scale.

Regulation might make it more likely that these will be "attacked" with a Soros/GBP strategy. Explicit rules mean more certainty about what Tether's "central bank" will do in extreme circumstances, and how much liquidity that have to target.

I wish regulators had more of a "fail gracefully" approach than a "never fail" one.

smackeyacky5• 5 years ago

If you look back at the LTCM collapse it should be obvious that it is impossible to make anything risk free, no matter how clever you are.

Your other question is a good one. Nobody knew that the collapse of LTCM would cause a market wide collapse at the time, so the question is how big are the hedging risks that financial firms dabbling in Bitcoin will be multiplied by the collapse of tether.

That is, if it is being used as a hedge, what kinds of financial instruments have the quants cooked up based on tether, then how much worst case exposure are we talking about? It might be nothing, but who knows until the tide goes out.

dalbasal5• 5 years ago

In this case though, people own tether... not an investment in a hedge fund. Hedge funds returns a supposed to have risk. With a stablecoin, someone is promising to buy an unlimited number of coins for a set price.

If the market says USDT = $0.95, and that someone's market activities fail to achieve USDT = $1... something gives fast.

tonfa• 5 years ago

Zero risk likely doesn't exist, especially not without the backing of a lender of last resort.

In practice many stable coins are similar to money market funds or eurodollar banking, so mechanisms and risks are somewhat well known.

dalbasal5• 5 years ago

My point was the even with such a backing (central banking), currencies have failed to maintain a fixed exchange rate. That's why more currencies free float today.

I guess i'm basically asking how stablecoins could be immune to something the GBP isn't/wasn't imune to.

..Could be some part I'm missing. Don't know much about stablecoins.

RandomLensman• 5 years ago

Sounds it is more like a money market fund and not an exchange rate regime. Yes, the latter are difficult to maintain but central banks have a large arsenal to act and some are in fact pretty stable and uncontested (those policy tools are not available to Tether).

In the end,money market funds are highly regulated.

dalbasal5• 5 years ago

I meant fixed exchange regimes, which are less common now among major currencies. With a floating exchange rate, there are lots of tools central banks have. Stablecoins can't do this, agreed. In a fixed exchange, there's only buying and selling the currency you are maintaining... the stablecoin, so to speak.

anon900113• 5 years ago

I fail to see the problem.

If USDT is worth $1 because everyone agrees it is, everything works fine. It's been that way for a long time and will likely continue.

If there's a run on the bank because people believe it's not worth $1, everyone tries to sell their USDT, then it is no longer worth a dollar. That's the risk of holding USDT. Everyone who takes 5 minutes to research it understands that USDT is kind of shady but has a long record of maintaining peg anyway.

This is true of every partially-backed stablecoin, of which there are many.

We have a recent example of one failing: https://news.ycombinator.com/item?id=27539368

In that case, IRON was only 75% backed, and now the price is $0.75.

There are other products, like DAI, which keeps reserves of ETH equal to 150% of the value of DAI. Occasionally liquidity becomes thin and DAI loses peg by a few cents, but it quickly returns as liquidations happen and the ETH is sold off to return DAI to peg. Synthetix does something similar with sUSD.

Gemini has GUSD, Coinbase has USDC, Binance has BUSD, all of which claim to be fully backed by USD and have audits to bolster that claim.

Here's a whole list of them, each offering various models of trust, decentralization, audits, etc: https://www.coingecko.com/en/categories/usd-stablecoin

If USDT implodes, it could cause a liquidity crisis, but it will lead to investors demanding more proof of funds before using a stablecoin, and long-term strengthen the crypto economy. If USDT fails and creates a liquidity crisis that tanks the rest of the crypto market, I'll be shopping for bargains.

dannyw2• 5 years ago

The issue is if Tether continues to grow, as it has been, it may become too big to fail.

That is, Tether loses its peg, $X dollars go missing, and firms start to fail like dominos, even outside the crypto sphere.

Tether is far from that level but theres nothing stopping its growth.

The solution isnt to ban tether, but rather launch central bank stablecoins. Put the official USD as a ERC20 token.

anon900113• 5 years ago

The issue is if Tether continues to grow, as it has been, it may become too big to fail.

If this happens, we need to let it fail. I'd be furious to see the fed bail out USDT to make sure the crypto market stays "stable".

That is, Tether loses its peg, $X dollars go missing, and firms start to fail like dominos, even outside the crypto sphere.

If firms fall because they bet too hard on USDT, they deserve to fall. Tether has not offered sufficient evidence that they are fully backed, so that risk needs to be accounted for by the firms that use USDT.

Tether is far from that level but theres nothing stopping its growth.

Hopefully what's stopping that growth are better stablecoins with alternative risk profiles that are more favorable to investors.

The solution isnt to ban tether, but rather launch central bank stablecoins. Put the official USD as a ERC20 token.

That's still just trading one set of risks for another, which is fine. Having multiple stablecoin options is good.

augstein• 5 years ago

At current prices, Tethers market cap is only about 10% of Bitcoins and about 5% of the whole crypto market cap.

rossmohax• 5 years ago

How creators of fully backed stablecoins earn money?

bonzini• 5 years ago

Exchange fees, I guess.

anon900113• 5 years ago

They're all wildly different. You have to investigate each one specifically.

I'd guess most of the centrally managed ones make their money investing the deposited USD to earn a safe rate of return as profit.

The defi ones that take colleteral, like DAI, make money by charging a borrow rate on the DAI that's minted and another fee if your account is liquidated.

meowster• 5 years ago

Another possibility: Sell a coin for $1.01, promise to buy back at $0.99.

meirelles• 5 years ago

Out of all stablecoins, I've found DAI the most interesting one, it's a beautiful engineer solution to tackle a problem. Backed by volatile assets, profits and interests (%). Every participant has a clear incentive/risk, trustless and transparent.

anon900113• 5 years ago

I totally agree and I don't think it's crazy to consider it more safe than centralized stablecoins run by companies.

If there's a bank account, it's possible the entity managing that account could become insolvent or that someone could run off with the funds.

If your collateral is locked in a smart contract that's properly secured, it's possible to create a situation where it's technically impossible for anyone unauthorized to lose the collateral, either by embezzlement or by losing it with poor managmeent.

I'm honestly not sure whether it's more likely that DAI has a contract bug or USDT/USDC/GUSD/BUSD/TUSD/etc becomes insolvent due to some external factors.

If we had a global credit crisis and banking institutions were failing, I'd feel a lot more comfortable holding DAI than one of the stablecoins that relies on the traditional system.

matthewdgreen• 5 years ago

But DAI is currently about 50% backed by USDC, which means it's effectively turning into an asset-backed stablecoin.

baby5• 5 years ago

Aren’t banks only required to hold 2% in cash of their clients’ balance? It seems like this scam is not new.

onethought9• 5 years ago

They have government backing to issue new money (in the form of debt). That’s quite different when you remove the government backing.

notahacker2• 5 years ago

Banks hold repayable loans which earn them profit instead of printing what they want and lying about backing...

LatteLazy2• 5 years ago

In a word, no.

Banks are required to more in assets than they have in client liability, and to write down the value of those assets based on risk. So they have >100% coverage.

pjc50• 5 years ago

This is a mangled version of Basel 3 requirements: https://voxeu.org/article/how-much-equity-capital-should-uk-...

Very little of this is "cash" in the physical sense, it's more about how much the bank can absorb losses through selling various tiers of asset as well as through its own share capital.

plebianRube• 5 years ago

It is presently 0% as of March 2020

https://www.investopedia.com/terms/r/requiredreserves.asp

quickthrower22• 5 years ago

It could cause shockwaves beyond crypto. You’d see Coinbase, Tesla and MSTR stocks hit and maybe the meme stocks because they are kind of like speculative cryptos. Then maybe anything else crypto related like Twitter, PayPal, NVidia, etc. Then as we are in an everything bubble other stocks and sectors fall and confidence is in a negative spiral.

paulgb5• 5 years ago

TWTR because Jack likes Bitcoin, or is there another connection? They don’t have Bitcoin on their books, right?

numair7• 5 years ago

Gemini has GUSD, Coinbase has USDC, Binance has BUSD, all of which claim to be fully backed by USD and have audits to bolster that claim.

Congratulations! You’ve just fallen into the rabbit hole of trying to find actual auditors’ reports that back up your statement.

Please note that “attestations” don’t count, and that cash held in bank accounts aren’t proof of reserves that are specifically used for 1-to-1 parity unless backed by certified auditors’ statements that this pool is not also being used for, say, I don’t know, a merchant bank operating on top of crypto, or something..

anon900113• 5 years ago

I don't know how you can say attestations by CPAs and LLPs don't count.

These offerings are pretty transparent. If you choose to use a stablecoin that's not backed by on-chain collateral, you're accepting the attestations are true and putting trust in the reputation of the companies.

Personally, I'd rather be able to verify the collateral on-chain, which is why I think fully collateral-backed on-chain stablecoins like DAI make a lot of sense.

ansible• 5 years ago

Can't you also pull tricks like moving a bunch of cash into one account, getting the balance printed out, moving that cash into another account, getting that balance printed out, rinse, repeat?

Where a full-on legit audit would take a snapshot of all the finances including debts, AR and AP.

fallingknife2• 5 years ago

Here are the actual monthly auditors reports for USDC https://www.centre.io/usdc-transparency

Havoc• 5 years ago

If USDT is worth $1 because everyone agrees it is, everything works fine.

Until that agreement starts to wobble

dalbasal5• 5 years ago

> I fail to see the problem...

Financialisation problems. Rosengren seems to be worried, for example, that a liquidation of backing assets triggers something ugly. IE, USDT drops in value>> Reserves liquidated defending USDT price>> Assets in reserve plummet in price, perhaps triggering more stuff elsewhere.

..Meanwhile to that, crypto markets are disrupted.

I think it makes sense for a financial regulator to start raising a brow. Also, how fast is USDT growing? At some scale does stablecone presents a different flavour of risk.

throw0101a• 5 years ago

Everyone who takes 5 minutes to research it understands that USDT is kind of shady but has a long record of maintaining peg anyway.

The problem arises when large numbers of people do not research it and jump on the meme blindly. Depending on the number of people involved, this could have knock-on effects (see also people flipping houses in the US with reseting mortgages pre-2008).

jkhdigital14• 5 years ago

Yes, and people ought to consider what it means for there to be a “liquidity crisis” in crypto—in traditional markets, it means everyone calls in their short-term financing and hoards cash. What is the crypto equivalent of cash? Bitcoin.

jstgord• 5 years ago

Perhaps it should be backed by equivalent reserves of Gold .. like the actual USD was, once upon a time ?

anon900113• 5 years ago

There are a few tokenized gold options, if you'd like to be able to send/receive gold on-chain while having it physically stored in a vault.

wcoenen• 5 years ago

I have more confidence that USDC (a stablecoin created by Coinbase and Circle) is fully backed.

However, I'm not sure "fully backed" means what most people think it means. If for every 1 USDC there is 1 USD on a bank account, that doesn't mean there are stacks of USD sitting in a vault somewhere. It only means that the bank has a liability towards the account holder on their books, and hopefully that same bank has a reasonable balance of their assets and liabilities.

jkhdigital14• 5 years ago

Reasonable balance of capital to assets, you mean. Bank capital is what makes account holders whole when the value of the bank’s assets takes an unexpected hit.

danaos• 5 years ago

"The Markets Can Remain Irrational Longer Than You Can Remain Solvent"

https://twitter.com/BennettTomlin/status/1375900452798234634

https://bennettftomlin.com/2021/03/27/before-bitfinex-and-te...

Traster• 5 years ago

I don’t know think people are really engaging with the substance of what is being said here. What he’s saying is that stable coins are backed by funds in money markets. If there is a run on them it’s likely to crash the markets where the backing is because the tethers will have to liquidate fast. This is distinct from the fraud that’s alleged.

qeternity3• 5 years ago

Unlike a money market, Tether has no obligation to redeem (per their own TOS) and to date nobody has ever provided proof that Tethers have been redeemed.

Imho, it’s far more likely that Tether has very few assets backing their issuance and that a crypto implosion could spark contagion in other markets.

yawaworht19783• 5 years ago

This is the point that is so hard to grasp for me. The exchanges offer tether, maybe they do not even pay tether for this. Is this correct? Nobody is buying tether from tether, but via third party exchanges? They "redeem" on exchanges?

Tepix• 5 years ago

Ow that there are more trustworthy alternatives, people ought to get their money out of USDT. The writing has been on the wall for too long.

Mountain_Skies• 5 years ago

If the existence of a cryptocurrency/stablecoin can be a realistic threat to the stability of the financial system, that's a huge admission that the financial system is pretty much already an unstable mess.

asah2• 5 years ago

Tether is 60B in a crypto market of $1-2+T, and there's plenty of other stablecoins to replace it.

So Tether's founders are shady? Bitcoin was founded by a shadowy figure and nobody knows if his early tokens will reappear on the market someday, making him a bazillionaire and the rest of us take a 20% haircut (vs the float, not the total).

qeternity3• 5 years ago

Tether is 60B in a crypto market of $1-2+T, and there's plenty of other stablecoins to replace it.

That’s not how this works. Tether represents the vast majority of trading volume. If it turns out that it’s worthless, it will be catastrophic.

Also you’re conflating market cap with hard assets. Apple is a $2T company but if you tried to sell $60B of AAPL in a short period of time, it would collapse.

paulgb5• 5 years ago

Case in point, Archegos was a $10B hedge fund but $194B of market cap loss was attributed to their collapse https://www.bloomberg.com/news/articles/2021-04-09/rattled-a...

asah2• 5 years ago

Stand corrected: https://coinmarketcap.com/

"The total crypto market volume over the last 24 hours is $85.97B, which makes a 6.53% decrease. The total volume in DeFi is currently $5.78B, 6.73% of the total crypto market 24-hour volume. The volume of all stable coins is now $69.59B, which is 80.95% of the total crypto market 24-hour volume."

The other large stablecoins are trading <$2B/day vs tether, so indeed you're correct.

As for Apple, sure it would slam the market temporarily, but why wouldn't it quickly recover?

np_tedious2• 5 years ago

Being that the fed buys twice the entire tether market cap in bonds ($120B) every month, their "systemic risk" talk does seem a bit overblown.

I fully recognize the tether collateral situation is shady and could blow up. It also could remain shady and not blow up for a very very long time. It'd be a big deal for crypto but I'm not convinced it would be for the wider world.

I hate sounding like the maximalist who calls everything FUD, but it's really hard not to here

CuriousCosmic2• 5 years ago

The bigger concern is trading volume. I made another comment in chain about this but the short of it is that while Tether only makes up a 20th of the entire market cap, it makes up almost all of the trading volume on exchanges nowadays. If Tether catastrophically fails it'll pull the entire market with it and that'll have serious consequences now that there is institutional involvement in the cryptocurrency market.

The broader goal here whenever this is brought up is to push people away from Tether towards other less problematic stablecoins.

This isn't FUD, it's a call to action for communities and exchanges to start minimising their exposure to the risks that the current Tether situation poses.

LarryEt3• 5 years ago

This Fed speak for we need to regulate Tether IMO. Of course they don't really believe Tether is a systemic risk.

CuriousCosmic2• 5 years ago

The issue is that Tether makes up not just a significant portion of but almost all of the trading volume of the entire cryptocurrency market. If something happens and Tether goes tits up the entire market goes with it since effectively all of the volume on nearly every exchange (excluding a few US exchanges) is done in USDT trading pairs.

Eventually the market will sort itself out but that initial bloodbath could cause serious financial issues and the recovery could take years.

https://crypto-anonymous-2021.medium.com/the-bit-short-insid...

yawaworht19783• 5 years ago

I never understood, can you cash out your tether at any time to fiat? I still do not understand why it even exist? Is it a tool to get around trading in USD? Why is it so popular? This speaks massively against cryptocurrencies itself, seems like they need an artificial crutch. Sounds like people use them knowing it's a dodgy tool, but they all hope to not be the bag holders once it collapses. This never ends well.

And finally, how does tether profit from it? Directly via fees or some other constellation?

But hey, people have invested in shit coins, ICOs which were held by even more intransparent companies.

Makes me wonder how the marketing for such things is propagated.

genewitch• 5 years ago

tether and other "stablecoins" exist so exchanges can exchange without doing the individual cryptos, basically. If i want to trade dogecoin for btc, there's probably some stablecoin in the mix somewhere.

This is how it was explained to me, and it doesn't make much sense - except that "moving" a lot of BTC between exchanges might affect the price, and depending on which exchange is on tthe receiving end they could take a loss on the "conversion" - whereas the dollar is much slower moving, and moving a hundred million "dollar" valued things is unlikely to devalue the dollar to any significant amount.

I've never paid in or cashed out actual currency into crypto and i've never used an exchange, so i may be 100% off base and i hope i am corrected.

herbst2• 5 years ago

can you cash out your tether at any time to fiat?

Yes, if you kyc on a proper exchange, or live in a country with nice banking rules you can. It takes about 12 hours usually for me. Faster than most international bank transfers, usually also way less fees.

I can only speak for myself, but tether is a kinda safe way to store value short time in a fluctuating market. Usd is suboptimal for me as it looses value compared to my local currency, however on big crashes crypto loses value faster, while USDT stays at USD value. Hope that makes sense :)

I have no trust or knowledge about tether, it's just a tool for me.

uptown• 5 years ago

If USD is suboptimal how is USDT better? You said yourself that it’s value is tied to USD. Wouldn’t it suffer from the same fluctuations?

mightybyte4• 5 years ago

I still do not understand why it even exist?

Imagine you're a restaurant (or any other business) and you want to allow your customers to pay with digital transactions on a blockchain. If your customers pay you in Bitcoin, you are taking on a huge amount of risk due to Bitcoin's price fluctuations. I just looked up the price of Bitcoin and it has dropped 6% in the last 24 hours. If you sell a $100 steak dinner for Bitcoin in the morning and it drops 6% by the time you're converting it to dollars at the end of the day, you've just lost 6%. You have to pay your expenses (labor, food, etc) in USD no matter what but you're holding a currency that is now worth 6% fewer dollars than what the customer paid. The reason I picked the restaurant business for my example is because restaurants have really thin margins. A 6% loss due to currency fluctuation is a huge problem for a restaurant.

That is why people have created stablecoins that are constructed in a way such that their value is pegged to some kind of external asset (like the USD). This allows business to accept payment via a blockchain without being exposed to the price risk of volatile cryptocurrencies.

yawaworht19783• 5 years ago

I get it now, but someone, somewhere has to take a loss, right? If tether is sold for dollars, and someone traded 10btc today, but btc loses 10percent of value overnight, that someone can cash out for the price of yesterday, that's great. But who takes the 10percent hit?

xienze• 5 years ago

I still do not understand why it even exist? Is it a tool to get around trading in USD? Why is it so popular?

You can’t keep USD in a crypto wallet, only tokens that operate under various protocols, ERC20 being the most popular. ~Most people don’t keep their tokens or USD on an exchange on a long term basis (probably not a bad idea given past events), so they need a way to keep USD in a crypto wallet they manage themselves. So you get tokenized forms of USD, so-called stablecoins, to fill this need.

lifeisstillgood• 5 years ago

Am I missing something about how much crypto is out there? I get that bitcoin is worth 50k each etc and so on, but the net amount of actual real world money that has gone from IRL into crypto I have assumed to be quite small (ie it's either money laundering going in and out just leaving fees behind, or it was coin bought for a dollar each and now the owner thinks it is worth a Tesla, but the amount of actual value transferred so far is one dollar)

So, forgive me, if there is not much actual wealth been put in, if it collapses why is it a risk?

kaycebasques• 5 years ago

At first I thought that quoting the total market cap of all cryptocurrency markets (or the big ones at least) would answer your question. But after reading again I think that you're asking a different question and I'm not sure if total market cap explains it, or whether it's even possible to calculate.

For a toy example, suppose there's only 200 coins of XCoin. Person A buys 100 coins for $1 each ($100 total). Person B buys the remaining 100 coins for $100 each ($10000 total). The total amount of USD put into the system is $10100 but the market cap is $20000.

To get the value you're looking for I think you would need to get the cost basis of the last transaction for every coin in existence.

imtringued3• 5 years ago

So, forgive me, if there is not much actual wealth been put in, if it collapses why is it a risk?

There is zero wealth put into Bitcoin. When you buy Bitcoin, someone else sells their Bitcoin and gets your money. The money enters and leaves instantly.

The USD works a little bit different. New USD are created when you borrow. Loans create future buyers, therefore USD has value in the sense that people need it to repay their debts. People will willingly exchange real goods for USD to pay the loan. The wealth used to pay the loans doesn't exist in the banking system. It exists in the real world. So loans encourage real wealth generation to some degree and the presence of real wealth makes USD a very convenient medium of payment as people willingly exchange real wealth for USD.

ac295• 5 years ago

Coinbase had $1.8B in revenue, and $800M in expenses during Q1 of this year according to their most recent 10-Q. That is certainly not a small amount of real world money.

Krasnol• 5 years ago

The title is:

US Fed Official Calls Tether a ‘Challenge’ to Financial Stability

The URL is the same. So...why did you change it?

blunte• 5 years ago

How many of the people closely involved in these market-moving Fed statements are trading crypto futures with insider information? It's probably virtually impossible to know, and it's almost certainly occurring.

Because of this conflict of interest, plus natural human/animal greed, I always wonder if the message is really important or if it was just to create a wealth opportunity for the insiders. Most statements by any influential financial source create a temporary change in markets which tend to return to their previous state, so one could assume that these messages could serve a little hit and run opportunities without lasting (negative) impacts.

But there is also the fear of loss of control. Governments and dictators like to have (or appear to have) control over money. So inevitably, third party, non-governmental competitors such as stablecoins are a threat to the powers that be. Thus, they have a potential bias which could color or even form their public statements and actions.

kvh2• 5 years ago

The article isn't saying what people think it's saying, but tether fud makes good clickbait I guess. Tether has indeed misrepresented its balance sheet at times, but the reality is it's a highly over-capitalized bank -- whereas most banks have liquidity ratios of ~10% (less than that pre-2008) no one is questioning tether is >50%.

A common misconception is that banks use "fractional reserve" lending, in reality private banks create money out of thin air when making loans, constrained only by regulated capitalization requirements (and the obligation to take the write-off on their own balance sheet should the loan default) [1].

Another common misconception is that unregulated banks lead to financial instability and panic. The theoretical and historical evidence for this is pretty weak [2] -- people are much more vigilant with their money when banks are unregulated, and much more aware of the inherent risks of financial systems.

(If all of our regulations worked so well, why are our financial crises worse than ever? cf 2008)

[1] https://www.bankofengland.co.uk/knowledgebank/how-is-money-c... [2] https://www.jstor.org/stable/1814673

jcranmer3• 5 years ago

Tether has indeed misrepresented its balance sheet at times, but the reality is it's a highly over-capitalized bank -- whereas most banks have liquidity ratios of ~10% (less than that pre-2008) no one is questioning tether is >50%.

Tether has an capital ratio of about 0.36%. Banks have a minimum capital ratio of about 3% (both of these are looking only at cash/cash-equivalent, not full risk-adjusted capital ratio).

(Cite: https://www.bloomberg.com/opinion/articles/2021-06-16/don-t-...).

kvh2• 5 years ago

I like Matt, but that's a misleading comparison. You can't compare banks with non-banks, since, again, banks have the special regulated right to _create money out of thin air_ and put it on their balance sheet (or if you prefer the fractional reserve metaphor, they can double count your deposit -- lending it out while pretending they still have it for you).

Here's a way to reality check the difference: if 90% of Tether holders redeem their deposits tomorrow, 100% of them will get their money back and Tether Ltd will remain 100% solvent and liquid. If 90% of JPMC depositors redeem tomorrow only 10% of them will get their money back and JPMC will be insolvent.

Where would you rather have your money?

paulgb5• 5 years ago

If all of our regulations worked so well, why are our financial crises worse than ever? cf 2008

2008 did not compare to the Great Depression. I think we’re still (as a species) learning how to regulate banking well, but it does feel like we’ve learned some things.

unabridged• 5 years ago

Why would the people running Tether not just park the money in a US Treasury ladder and collect the millions in interest each year? No hassle, no loss of sleep. Why play games? Why risk blowing up your cash cow and going to jail?

loeg• 5 years ago

Their product largely revolves around not following US banking KYC and AML laws. They are locked out of US treasuries.

rawtxapp• 5 years ago

The reason why Tether exists in the first place is that crypto businesses were cut off from traditional banking for a very long time and even today it's very hard for them to get bank accounts and operate easily.

mightybyte4• 5 years ago

As I see it, the federal reserve official's statement really boils down to the fact that if Tether (or any other widely adopted stablecoin) is conventionally accepted to have the value of $1 USD, and the people running Tether can print them, then those people can effectively print USD. And THAT, from the Fed's perspective, is a risk to financial stability.

If I was the Fed I would seriously consider creating my own TheRealUSD stablecoin. Create a token that you have mint/burn control over, and create a portal that allows people to exchange USD for the stablecoin and the stablecoin for USD. No doubt a number of the crypto-libertarians out there will not trust that thing and might object to using it. But from the other perspective which would you trust more? A USD stablecoin run by some random collection of tech people? Or a USD stablecoin run by the Fed?

LarryEt3• 5 years ago

What would the point of a FED created USD stablecoin be over USD?

People act like you have to take gold bars to the grocery store to make exchanges as opposed to just using your bank card and electronically settling up in USD.

mightybyte4• 5 years ago

The point would be to provide a more legitimate USD stablecoin in a space that seems to be attracting a growing user base (blockchains). I imagine a significant share of the market would choose the Fed-provided stablecoin over any of the non-Fed competitors. If you're using US Dollars in the first place you're already inherently trusting the Fed, so it shouldn't be a much bigger leap to also use their blockchain-based version. This would reduce the degree to which Tether and others are "a challenge to financial stability" because it puts mint/burn powers of the dominant USD stablecoin squarely back in the control of the Fed.

streamofdigits• 5 years ago

The very polarization of opinion as seen in the comments here is an indication of the intrinsic instability of the crypto construct (at least as it now stands). This polarization is only possible in a "I say, you say" type competition that has no reference to any independent reality that can anchor things

Groups of people can hype themselves into anything. with the advent of digital networks we are literally hit by recurrent storms on digital teacups. unless things get tied back to physical reality those metastable collective mental states can flip back as inexplicably as they have formed.

While a good part of the existing financial system is also based on little else than belief there are some critical parts that aren't: the use of its tools (cash, bank money, credit systems etc) to support real economic interactions. you can't simply switch that system off at will because it is a way for society to keep account of its function. think also of the enforcement of contracts and obligations (eg taxation) - ultimately with the use of physical power.

In other words, for the bitcoin nation its a case of: get real or go to zero.

beforeolives3• 5 years ago

I've read some of the cryptocurrency subreddits recently and it has been absolutely fascinating. The degree of group cognitive dissonance is something else.

RhysU• 5 years ago

If a transparently run Tether competitor has such clear value why do I never hear of competitors?

xur173• 5 years ago

Like USDC or GUSD?

joncrane• 5 years ago

Perhaps because it's not as profitable as many other business models?

tiku• 5 years ago

There is no direct need for Tether to have that money in stock, as long as the exchanges don't try to (all at once) exchange USDT for US Dollars.

And why would they? People keep giving them real hard cash in exchange for the exchanges USDT's.

kneel• 5 years ago

Tether isn't backed by dollars? Dollars aren't backed by anything anymore, not even the US military.

The secret to this is to kick the can down the road far enough that you don't have to deal with the consequences. The US can print money long enough for the beneficiaries of cantillon effect to enjoy a rich lifestyle then let future generations deal with the consequences.

They'll tell you it's going to drive growth, and that inflation will be transitory but it won't be enough to stave of the decimation of the working class. To hell with them

rdtwo• 5 years ago

So common thought is that a tether collapse will tank Bitcoin but won’t it also cause a sudden flood to safety (BTC/ETH) if the money is hot or at least somewhat so it seems like the owner couldn’t just Cash out

coolspot2• 5 years ago

“Safety” is USDC (by Coinbase) or DAI, not BTC/ETH

fukd• 5 years ago

Bitcoin transcations are 1/600th slow at best and super expensive compared to the system that banks offer where i live.

US Fed Official Calls Tether a ‘Challenge’ to Financial Stability

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