HN Theater @HNTheaterMonth

Found this explainer video it's quite good as someone who never heard of tether. https://youtu.be/-whuXHSL1Pg

Coffeezilla has been doing good work uncovering the mess that is Tether: https://www.youtube.com/watch?v=-whuXHSL1Pg&t=0s.

⬐ senectus1

yeah. when this one pops it'll take close to a qtr of the value of btc with it.

⬐ alisiddiq

Way more than that. It will take the market with it

What I don't understand is why major exchanges continue to give tether their customers money when it's not backed by cash?

Would an exchange not be incentivised to manage the cash themselves and significantly reduce risk for their customers and business? It seems like huge risk for what looks like a minor convenience.

Also, very good video on the history and current state of tether:

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

I highly recommend the first five Cas Piancey and Bennett Tomlin podcasts [1] and the (albit a little bit dated) Kalzumeus post [2]. I also really enjoyed the Calacanis podcast with Bitfinex'ed [3] and the Coffeezilla [4].

[1] https://cryptocriticscorner.com/

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

[3] https://www.youtube.com/watch?v=5fgv4DJ0VAI

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

This one explains the Tether scam quite nice: https://youtu.be/-whuXHSL1Pg

Edit: summary: 8 people founding the tether company, 7 of them with a criminal background. Lying and denying and then admitting after they have no other option. Yeah, seems like a nice company…

⬐ user-the-name

Tether's business at this point is basically manufacturing red flags.

It is incredible the mental gymnastics people in the cryptocurrency business go through to defend this group of crooks.

⬐ TimJRobinson

I've been in crypto for a while and never met anyone who likes Tether, it seems to be novices that use it that don't know any better. I don't know why anyone would use it over a decentralized stablecoin like DAI.

⬐ user-the-name

You know something like 90% of all trades happen in Tether, right?

⬐ WalterSear

The entire crypto market is poisoned by this. There is no hiding from it in another currency if the market loses 70% of it's liquidity.

"All this is extremely dangerous to everyone, the entire crypto community

BTC could go to 1k if we don't act fast"

• CFO of Bitfinex & Tether, previously during a Tether crisis.

⬐ WalterSear

"It is difficult to get a man to understand something when the market liquidity his salary is traded and valuated against depends upon his not understanding it."

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

Crypto currencies today are basically all decentralized Ponzi schemes inflated in value by the very centralized tether that is is printing something like $4Bn a week of new tether with no US dollar currency known to be backing it: https://youtu.be/-whuXHSL1Pg

⬐ pclmulqdq

Stablecoins have ridiculous fraud potential. The idea of a crypto that holds 100% of its value in USD is just an unstable business. There's too much cash just sitting there, and it's too tempting to debase the coin just a little bit.

Tether looks like they have been caught with their hand in the cookie jar a few too many times.

I might trust a stablecoin backed by a big bank, but nothing else.

⬐ ac29

Turning a profit on a $60B cashpile should be easy, even with current rock bottom interest rates. Even more so since Tether reserves the right to deny redemptions, or redeem them in-kind for securities (which would allow them to invest in relatively illiquid investments that might have a higher yield).

Problem: there never was $60B to begin with, and to the extent there was/is some real money, Tether has the nearly impossible task of proving its not related to money laundering, proceeds of crime, etc if they want access to regulated financial markets. But, no one with clean, legitimate cash has any reason to do business with Tether (or any other stablecoin for that matter - exchanges would be more than happy to take clean USD if people want to buy cryptocurrency).

⬐ nly

> Turning a profit on a $60B cashpile should be easy

Yeah, even 3 month US treasuries would yield $24M/year in revenue.

⬐ jonplackett

Surly everyone now knows either consciously, or deep in their heart, that Tether is a scam, but just goes along with it because it's a useful way of not paying tax when you want on sell your coins?

⬐ thebean11

There are alternatives like DAI and USDC which should be just as easy to avoid taxes with.

⬐ freeAgent

People who assume that are in for a rude awakening. The IRS has aggressively been going after records from cryptocurrency exchanges. Now maybe they’re using a DEX or something, but at some point they’re going to have to spend the crypto natively (much of which is now KYCed) or convert to real USD. People who think they’re being clever are trapped.

⬐ jonplackett

Do you mean even if people are just converting into USDT the IRS are going to be after them?

FYI I'm just going on what I know friends are doing - no skin in the game! Just see this happening and don't see any other reason why anyone would buy Tether.

⬐ xref

Yes, any exchange of coins is a taxable event. Going BTC->USDT is the same to the IRS as going TSLA->AAPL. It’s a sell and a buy on the books.

⬐ hubadu

I agree on the massive risk associated with the usage of Tether and stable coins in general. It's working until one day the music stops.

Regarding how it would affect the market, it seems all experts automatically assume that it would impact the price of cryptos negatively however:

• Could a panic exit from Tether push people to immediately buyback cryptos at any price?

• Could a flash pump of BTC while USDT/USD is unpegging be the signature of the downfall itself?

• Since stable coins are used for day trading, would their downfall make the crypto-market behave like it was before stable coins were introduced?

⬐ qeternity

> Could a sudden pump of BTC while USDT/USD is unpegging be the signature of the downfall itself?

Likely, but that is not bullish BTC. People who hold USDT at a given moment do so because they don't want to hold crypto. So you would likely see BTCUSDT panic bid (until the Tether exchanges presumably stop withdrawals) and relentless selling of BTCUSD. For those who managed to get out, they will have round tripped their USDT to USD, but BTCUSD will be a bloodbath.

⬐ gruez

>So you would likely see BTCUSDT panic bid (until the Tether exchanges presumably stop withdrawals) and relentless selling of BTCUSD. For those who managed to get out, they will have round tripped their USDT to USD, but BTCUSD will be a bloodbath.

But if they're buying BTC only to convert it back to USD again (at a non USDT exchange), wouldn't the net effect on BTC be zero?

⬐ qeternity

No, it would have the effect of all the BTC on unbanked Tether exchanges being sent to banked exchanges to be sold for fiat. So the price would be high in USDT terms and low in USD terms. This is how the "peg" breaks.

BTC/USDT only goes up because the denominator (USDT) goes to zero.

⬐ tiku

They do not need to have 100% USD at Tether. Exchanges buy UDST from Tether, that means that there is an exchange. It would be problematic if they would give it for free to the exchanges.

The exchanges won't give you free USDT either, they charge something in return.

The only way this could be a problem if they would use USDT from within Tether to buy crypto. I have not seen any evidence of this.

⬐ albntomat0

It could also be an issue if a large number of people try to redeem a large amount of Tether for USD.

Ideally, it would be easy and high trust to go from Tether to USD and back. This requires high confidence that the various backings of Tether are low risk, which we cannot establish given the minimal information Tether has provided.

⬐ tiku

Only thing is that you don't ever deal with Tether directly, the exchange needs to have that amount of USD for USDT. Same goes for BTC etc. Later the exchange needs to get USD from Tether if they need liquidity in FIAT?

⬐ qeternity

> It could also be an issue if a large number of people try to redeem a large amount of Tether for USD.

Not possible. Tether's terms of service explicitly state they have no obligation to redeem.

Tethers only hold value so long as other people believe they do...which is the definition of a fiat currency.

⬐ albntomat0

> Not possible. Tether's terms of service explicitly state they have no obligation to redeem.

Which also leads to a scenario where no one wants to hold Tether

> Tethers only hold value so long as other people believe they do...which is the definition of a fiat currency.

True, but there's an incredible difference in kind between Tether and the Euro/USD/etc

⬐ qeternity

> They do not need to have 100% USD at Tether. Exchanges buy UDST from Tether, that means that there is an exchange.

How are these two things related at all? If an exchange buys Tether with USD, then they will have 1:1 USD backing.

⬐ tehlike

Crypto. Exchanges can buy tether with crypto.

Or... Tether can print and buy crypto, these two scenarios are exactly the same.

⬐ notwedtm

Or loaned large amounts of cash to an exchange to help them avoid insolvency.

⬐ raesene9

A question is, how would you see evidence of this? Wash trading with Tether has been alleged before but, as far as I'm aware, it's not possible to definitively prove or disprove that it occurred.

So to me, that's not a strong signal either way, the operation of Tether and their dealings with exchanges are opaque, you need to take what they say on trust, as there are no external auditors.

⬐ gruez

>35 minutes

Anyone got a summary? Is there anything new in here that hasn't already been said in previous tether posts?

⬐ jkhdigital

The only part that I wasn’t aware of is that Tether produced a pie chart of their holdings, which made it immediately clear that Tether’s reserves are simply a hedge fund. But this isn’t breaking news; I just hadn’t kept up on it in a while.

⬐ Clewza313

A "hedge fund" seems unnecessarily charitable. The majority of their holding is apparently unspecified "commercial paper", which in all likely is near-worthless IOUs from linked entities like Bitfinex.

⬐ notwedtm

This is the real story.

⬐ None

None

⬐ kwere

>Anyone got a summary?

basically he dig founders schetchy curriculum, bitfinex ties and evolving (scammy) policies around mantaining 1:1 rate with $

⬐ iamben

I watched this yesterday.

It's nothing new but it is a well put together timeline and entertaining watch that covers the background of both the companies, the people behind the companies and a lot of the things they've said and done. You probably don't need the visuals if you just wanted to listen in the background.

Whilst he's very reticent to literally say it's a scam, he does heavily imply that it looks very, very shady. He admits to owning cryptocurrency but (pretty much) comes to the conclusion that if Tether implodes it would probably hurt the crypto world considerably, and for crypto to stand a better long term chance it doesn't need something as (potentially) sketchy as Tether so heavily intertwined.

⬐ yawaworht1978

I don't even understand tether, can it be cashed out for USD at any time? Who issues them? Who creates them? Why do the people trust it at all?

⬐ Proven

Nobody cares. It's fractionally funded just like 99.999% of banks. Nothing to see here, move on.

Isn't it funny how this anti-Tether garbage is constantly submitted to HN even during the week when a Tether competitor collapsed? Pathetic!

https://www.theregister.com/2021/06/17/iron_cryptocoin_titan...

⬐ dannyw

Tether is "USD-ramp-as-a-service". In the crypto world, there are many anonymously operated exchanges, with no fiat-money banking relationships. Those exchanges tend to offer features that a lot of traders want, like providing a market for any arbitrary token (regulated exchanges tend to be slower with token listings, due to always pondering if something is a security). And yes, if your money is tainted (whether it's because you're trying to move capital out of China, or maybe you're the founder of something USG doesn't like such as Sci-Hub), then you NEED to use a non-KYC, non-AML exchange.

Non-KYC, non-AML exchanges have tended to be shady. There are so many losses over the years. Tether, on the other hand, has maintained its $1 = 1 USDT peg since its inception, except for very brief periods of time. It does what it says, and it's probably the biggest, most liquid, and most stable way to keep dollars outside of the traditional regulated financial system.

Here's the realities about Tether:

• No one has ever been scammed by Bitfinex or Ether. There is no monetary loss, ever.

• When Bitfinex got hacked a few years ago, they worked out a repayment program, and fully repaid all creditors.

• While Tether made misrepresentations after a banking fiasco, they have fully settled their case with NYAG. The USG doesn't tend to settle (in crypto cases) unless they are satisfied.

⬐ AndrewStephens

> Tether provides a means for people and exchanges to transfer units of accounting, pegged to the US dollar, between each other without a hard AML or KYC wall; as Tether is a crypto token.

That is probably why Tether was initially created but what Tether is now is a mechanism for insiders to cash out real money while leaving lots of "liquidity" in the market to keep the tasty scam going.

Retail investors (AKA suckers) buy coins from exchanges with real money. The exchanges have a net influx of real money because investors (AKA hodling rubes) will typically not want real money back when they are conducting trades, so the exchanges buy Tethers - I assume at a significant insider discount. Why not? Tethers are free to create, who cares?

Now the exchanges have some of the investors' (AKA marks) money, Tether has some money, the miners (who are actually doing real work) get some money for the relatively rare blockchain transactions. Everyone wins. All the exchanges have to do is carry enough cash so that the relatively rare customer requests for real money can be satisfied. As a quick trip to reddit will confirm, they can't even manage to do that reliably. Luckily for them nobody seems to care so long as the price remains high, which it will because the trades are mostly conducted with very cheap Tethers.

But the end result is that Bitcoin, etc are ultimately priced in Tethers - as I write, Bitcoin is currently priced at 37145 Tethers not $37145. To put it another way, the market is so distorted that bitcoin has become just a complex way for people to turn USD into Tethers. They may hodl the bitcoin for a while but that is the end result.

The situation is more complex than what I describe because there are multiple stable coins and multiple parties involved, but the end result is that real money flows from retail (AKA fools with more money than sense) to a relatively small number of groups while worthless Tethers flow the other way. And nobody seems to mind as long a numbers go up.

The next economic downturn will wipe out the whole exercise.

⬐ dannyw

OK, so if you're saying that the entire crypto world is operating on a giant fake dollar Ponzi scheme, then how can a US-regulated exchange like Coinbase (who operates another stablecoin, USDC) be listed on the NASDAQ?

You'd think no one in the entire US government apparatus would let the SEC know?

> The next economic downturn will wipe out the whole exercise.

People have been calling the demise of bitcoin since 2008.

⬐ AndrewStephens

Don't get me started on things like the Coinbase IPO and Greyscale. These are just other ways for insiders to cash out of crypto without actually removing liquidity from the very thin markets, by effectively selling shares in a pile of crypto without selling the crypto itself.

Both Coinbase and Greyscale are trading at a significant discount at the moment but that doesn't really matter for the insiders. If they cash out 80 cents of real money to 1 dollar of crypto then they are still doing well.

⬐ jMyles

> Tether provides a means for people and exchanges to transfer units of accounting, pegged to the US dollar, between each other without a hard AML or KYC wall; as Tether is a crypto token.

Pegged by fiat, not by algorithm. Surely the future for such an oracle is an algorithmic peg, as several honest projects continue to forge.

> A token that derives its utility from being shady (an unregulated way to move US dollar without KYC or AML) will obviously have shady elements to it.

I don't think this is sound logic. It's perfectly plausible for a token to be shady in the sense of opacity before inspection and yet be transparent in the sense of its logic and operations. Monero is an example of such a project.

> However, I (and the broader crypto market, going off tbe market ccapitalisation, anple liquidity, and the $1=$1USDT peg maintaining) trust Tether because of their actions and history of preserving the peg, and protecting all deposits.

You may speak for your trust endorsement, but I think you go too far by translating price and liquidity into community trust. It's a calculation based on the small number of plausible available options.

If you tell a starving person that you'll feed her for life if she performs a tapdancing number on an abandoned minefield, she may conclude that the risk is worth it for her. It doesn't mean that she trusts landmines.

> While Tether made misrepresentations after a banking fiasco, they have fully settled their case with NYAG. The USG doesn't tend to settle unless they are satisfied.

A settlement from the office of the NY Attorney General - which it itself not exactly a paragon of truth or justice in the first place - is not an endorsement from the NY or US governments as you seem to imply.

And if it were, this is hardly the authority to which you'd want appeal to if indeed blockchain tech is to be as transformative to society in the long-term as its enthusiasts (yours truly included) hope.

⬐ dannyw

> You may speak for your trust endorsement, but I think you go too far by translating price and liquidity into community trust. It's a calculation based on the small number of plausible available options.

You are very welcome to place a short on the USDT if you believe that view. The only cost of doing so is the interest, which is a few percentage a year. Your reward is 100% if you are right.

The market doesn't believe Tether is a fraud. The volume of Tether was $53 billion in the past 24 hours.

⬐ jMyles

Where can you short Tether anyway? Kraken?

⬐ readams

Ponzi schemes always seem great until the final collapse.

⬐ dannyw

Do you really think the New York Attorney General would have settled with a "ponzi scheme" with a $62 billion market cap?

The USA isn't shy about pursuing crypto operators.

It's also hard to call a 0% interest, zero return token, a ponzi scheme.

⬐ beforeolives

> It's also hard to call a 0% interest, zero return token, a ponzi scheme.

Much easier if we mention that only 3-4% of the entire Tether supply is backed by actual dollars.

⬐ dannyw

The same way your bank account is <3-4% backed by dollars, and the rest in the form of Treasury notes, bonds, credit, and loans. Just like Tether.

Welcome to fractional reserve banking. It's been this way, with every single account, for decades now.

⬐ beforeolives

No, it's not the same at all. Tether is not a bank. Banks are audited and bank deposits are insured. Banks can't print money unilaterally. Tether doesn't have the same regulations apply to it.

⬐ freeAgent

The NYAG isn’t the only US law enforcement agency and the NYAG investigation only covered through 2019 when ISDT was much smaller.

⬐ kwere

i wouldnt trust a benevolent (offshore) dictator with my money but if it suits your needs, go ahead

⬐ dannyw

It's all about your risk profile. For someone looking to move capital out of China, Tether is safer than the Chinese Yuan in a bank account.

For people dealing with all the anonymously operated, no-KYC exchanges, Tether in your address is far safer than whatever balances you have on those exchanges.

The 'dark' economy is huge, and a lot of capital live in fear of seizure. It shouldn't be a surprise how big Tether's market cap is.

It's basically "USD-ramp-as-a-service", with the only fee being Tether doesn't pay interest, so obviously the operators get whatever interest there is on the float. And this service is VERY valuable, whether you are launching an exchange in a jurisdiction that prevents exchanges (e.g. China), or want to bring about traditionally regulated financial instruments (e.g. derivative swaps) into a relatively unregulated field.

⬐ raverbashing

Is tether even a true blockchain or is it just 'INSERT INTO ledger' with extra steps?

⬐ gruez

AFAIK they're tokens on the omni (bitcoin) or ethereum network. So yes, it's on a "true" blockchain.

⬐ qeternity

> No one has ever been scammed by Bitfinex or Ether. There is no monetary loss, ever.

Yet. Like all frauds, they succeed until they don't. People thought they made money in Enron, Madoff, etc until it unraveled and there was nothing.

> When Bitfinex got hacked a few years ago, they worked out a repayment program, and fully repaid all creditors.

Tether is so monumentally different. In fact, Bitfinex repaid creditors with tokens, the value of which are denominated in USDT and almost certainly have been inflated through Tether issuance. So basically Bitfinex repaid a hack with massive fraud.

> While Tether made misrepresentations after a banking fiasco

When your core business is trust and transparency, this isn't an "oh well" type of issue.

> The USG doesn't tend to settle unless they are satisfied.

Categorically untrue. Also, the NYAG is not the USG in the slightest. If I were Tether, I would be a lot more concerned about the SDNY USAG than I would be about the NYAG.

⬐ dannyw

> When your core business is trust and transparency, this isn't an "oh well" type of issue.

As a user, the core business prop of BFX/Tether is that they keep my money, and maintain my ability to use the platform without KYC.

If I want a super-duper legit stablecoin, I'd use USDC. Tether is about bringing stability to the chaos of non-KYC, anonymously-operated exchanges, like the 100x leverage ByBit, or the various smaller no-banking, Tether-only exchanges. And they've done that.

When you place copper (Tether) next to burning trash (balances held on anonymously operated exchanges), the former looks like gold. Sure, it's not as good as actual gold, but that doesn't mean it's a scam.

Bitfinex and Tether has weathered and survived a variety of doomsday scenarios, from Crypto Capital, US seizure of bank accounts, the Bitfinex hack, and the NYAG investigation.

I think you're expecting Bitfinex or Tether to be Coinbase. They're not. If you look between the lines, and look at how Tether is used, the whole point is that you can have safe USD without any AML or KYC.

And since 2014, Bitfinex and Tether has fulfilled that promise despite so many obstacles. For someone trying to move capital out of China for example, Tether considerably is safer than Yuan in an onshore bank account. For people prosecuted by the USA, like the founder of Sci-Hub, Tether is safer than any USD bank account.

⬐ qeternity

> If I want a super-duper legit stablecoin, I'd use USDC

They are morphing into Tether. Look at recent legal structure change, attestations, reserves breakdown, etc.

But your core premise (Tether as a dollar substitute for the unbankable) is predicated on there being two states of the universe (USD in risky places vs. Tether) which isn't true and ignores the key issue: all of those Tethers may not hold any value. In the real world, Tether is not the only alternative, nor is USDC. For instance, the Sci-Hub founder can hold any other major currency or frankly any non USD asset.

The crypto world constantly create false equivalencies to justify their casino. Fiat sucks long term? Yeah, by design...money velocity is a good thing, you shouldn't be holding cash, and few people do. This is why there are trillion dollar markets for other productive assets, like equities.

⬐ dannyw

The Sci-Hub founder can hold any other major crypto, sure, but it's volatile. How do you propose she allow international donations? Via a SWIFT bank account? Via cash in the mail to a postal address?

The easiest and most liquid mechanism is for people like her to accept crypto donations (e.g. Bitcoin), and convert it to non-KYC stablecoins like USDT so the purchasing power is preserved.

It's not hard to explain the 60B market cap when you combine "non-KYC" and "stablecoin", and if you believe it's not backed by anything, you can open a short on USDT right now, using DeFi like Compound. Your upside is 100%, your downside is the cost of borrowing (about a few percentage a year).

The market believes $1 = 1 USDT, with a volume of $53 billion in the past 24 hours.

⬐ qeternity

> The Sci-Hub founder can hold any other major crypto, sure, but it's volatile.

Why do you guys do this? It's so painful speaking with crypto die-hards. I said she could hold any other major currency, which of course implies fiat. How about EUR? How about CHF? How about GBP? I don't know enough about her but hell she could hold RUB...still less volatile than crypto.

> How do you propose she allow international donations?

That's her problem. This goes with the territory of running an illegal website, no matter how idealistic you find her cause. But basically once again, crypto's primary use-case (as you've outlined) is skirting laws. That's fine, it's a real use-case. But just quit pretending that crypto is the future of money.

> It's not hard to explain the 60B market cap when you combine "non-KYC" and "stablecoin", and if you believe it's not backed by anything, you can open a short on USDT right now, using DeFi like Compound. Your upside is 100%, your downside is the cost of borrowing (about a few percentage a year).

I agree, it's very easy to explain. That's what this video is all about. As for shorting USDT, that's about the dumbest thing you could do, and your DeFi example is absolutely naive. I want to be short USDTUSD...I can't do that in DeFi. I can be short Tether against something else whose value at the moment is determined by circulating Tethers. If you think DAI survives a Tether implosion, you're dreaming. And if it did, I still need a fiat offramp and if you think Coinbase is a good counterparty in that scenario, well then I am beginning to understand you a little bit. In my career as a hedge fund trader, I don't think I've come across a worse trade than shorting USDT.

> The market believes $1 = 1 USDT, with a volume of $53 billion in the past 24 hours.

Yes, and? If the market didn't believe this, then there wouldn't be a story here.

⬐ raesene9

The challenge with Tether is that it's basically impossible to prove or disprove their financial status. They don't have audited books, so no-one knows.

So you need to decide whether they're a risk or not. To me, the idea of having what is effectively a bank with a $60b+ balance sheet that has no auditor and no regulators, seems kind of risky.

We also know, via the NYAG case, that they have in the past, said things that were not true (specifically continuing the claim to have a 1:1 USD backing after they no longer had those funds).

The other aspect of Tether is "who's using them"? There are a range of stablecoins available now, multiple of whom are better regulated and audited than Tether. So why would rational organizations place $60b+ with Tether, when the risk is higher, and it's not like this is an investment where higher risk == higher return.

⬐ overtonwhy

Tether actually was forced to release a break down of their assets and they have <4% cash reserves. So yeah, now everyone knows they're insolvent: https://www.coindesk.com/tether-first-reserve-composition-re...

⬐ fuzzybear3965

All assets liquidated today, what do you think the true value of a Tether is? $.70 USD?

The answer is not clear to me, but it seems like this is an important value.

Also, aren't some of those assets (like treasury bills) interest-accruing? That would seem to offset some of the losses incurred by a short-term, high-volume liquidation event.

⬐ albntomat0

In my understanding, part of the issue is that we can't value or risk assess the backing ourselves. This is due to the lack of transparency on whose commercial paper Tether is holding, etc.

⬐ fuzzybear3965

For sure. I don't hold or trust Tether. But, the existential risk to the (crypto) economy at large seems pretty small, in my opinion.

The unregulated, debased Tether seems less risky than holding regulated, backed-by-real-property mortgage-backed securities in 2007.

It seems much a-do about not much, to me. But, I guess people need something to worry about.

⬐ ethbr0

I think this might be a misreading of 2007/8.

Bad mortgage backed securities were the root risk.

The unregulated leverage piled on top of those MBSs (credit default swaps) ballooned the consequences of that risk.

But what really caused the global meltdown was (1) pervasiveness of exposure & (2) consequently, institutional uncertainty and withdrawal of liquidity.

When the MBSs failed, the CDSs multiplied the dollar impact. Which would have been that, except that these assets underpined large portions of institution's balance sheets. And critically, unknown large portions.

The "music stopping" was the breaking of institutional trust in the solvency of their counterparties, and hence evaporation of liquidity.

The sheer opaqueness of the crypto exchanges might actually be an advantage here, as unlike traditional exchanges and the banking system, they're not used to keeping an eye on their counterparties' balances.

⬐ albntomat0

Maybe? I don't think it'd be existential threat, but could be a massive shock/crash, in my opinion.

I'll guess we'll have to wait and see!

⬐ michaelt

> But, the existential risk to the (crypto) economy at large seems pretty small

I believe the fear is:

1. The price of BTC is high because a lot of people are buying it.

2. A lot of those people buying it are paying with Tether's funny money which there is somehow $60 billion of.

3. If that $60 billion ceased to exist, the price of BTC would fall.

4. $60 billion is a lot of money, so the price of BTC would fall a lot.

⬐ espadrine

> All assets liquidated today, what do you think the true value of a Tether is? $.70 USD?

Given that only 3% of each dollar is backed by fiat, they can only guarantee $0.03 on each dollar requested.

In the case of a bank run, the commercial paper etc. would be considered valueless, and unlike a real bank, their deposits are not insured.

So the value of a Tether would theoretically fall to $0.03.

In practice however, it is plausible that it would result in them blocking redemption and fleeing the country to avoid jail, so the value would be much closer to $0.

⬐ jkhdigital

The commercial paper is not “valueless” as long as there is an active market for it. The key question, of course, is who issued the paper. Given Tether’s difficulties obtaining banking services, you have to wonder what capital markets they have access to.

⬐ ethbr0

> In the case of a bank run, the commercial paper etc. would be considered valueless

It would not be considered valueless.

It would be valued at the current market price it could be quickly cleared at.

That price is substantially less than face value, but probably more than $0. And of course depends on who wrote the note and the terms.

⬐ espadrine

> It would be valued at the current market price it could be quickly cleared at.

To clarify: there are two markets, one is redemption of USDT through the Tether company, the other is independent transaction of USDT vs. payment typically through exchanges.

During asset liquidation, Tether’s assets would not be sold for the users’ redemption, but for the company’s creditors and shareholders. As soon as the suspicion of liquidation is there, there would be a bank run while redemptions still work.

In the case of a bank run, the price of USDT would be dictated by the exchange market exclusively. As a massive number of people sell through redemption, it is clear to the holders that when the cash dries out, redemptions will close. So they will theoretically be ready to sell through the exchange at 3%, because that is the expected value of the return across all USDT holdings.

⬐ ethbr0

Can't we excise non-redemptions from this picture? As redemptions are (ultimately) the only way USDT is converted back to USD (regardless of how many times the USDT was traded, or at what price).

That said, at the time of a redemption, isn't Tether legally required to sell or transfer assets to service the redemption (as long as they are able, subject to the timelines and qualifiers promised in their agreements)?

Which is where I'm saying that if Tether holds $0.03 USD + 5 short term notes for every 1 USDT, they are obligated to turn over (or sell) those 5 notes (and $0.03) when a redemption is requested.

While Tether may not be a bank, their users aren't just users: they're holders of Tether credit, subject to the terms that govern it.

⬐ espadrine

> While Tether may not be a bank, their users aren't just users: they're holders of Tether credit

Contractually, they are not considered creditors. Furthermore, liability for any loss is explicitly put on the user. (Whether the contract is valid can be litigated though.)

> isn't Tether legally required to sell or transfer assets to service the redemption

Sadly not… From the contract: “Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all.”

In fact, US citizens are already disallowed from redeeming tokens, and have been for years.

⬐ ethbr0

The prohibition on US citizens redeeming tokens probably stems from the SEC's declaration that duck typing will be applied to cryptocurrencies trying to avoid classification as securities.

⬐ _Nat_

> All assets liquidated today, what do you think the true value of a Tether is? $.70 USD?

I guess you're assuming that their assets are truthfully reported, would be sold off, then evenly distributed?

Not worried that someone might run off with the money or something?

⬐ raesene9

That's the key point of course, you don't know and neither do I. Nor does anyone else outside of Tether.

Tether is the No.1 most traded coin (by a decent margin) which makes it a very large part of the ecosystem.

Now if their assets are all high quality low risk treasuries, it's likely all fine.

If however their asset are loans to people who used those loans to buy other crypto currencies, things get a lot more risky.

A large shock to the ecosystem, like Tether going bust, would seem like it would have a large impact on the overall space. We've seen in the last month that something a simple as a tweet can send the market up or down by multiple percent...

⬐ thebean11

Wow, I just checked this and you're right. Tether volume is roughly the volume of BTC + ETH. Wonder why Tether and not DAI. Just not enough DAI available? DAI seems more risky to big traders?

⬐ raesene9

Indeed there were some interesting pieces in that. They would argue that the composition showed that they had the required reserves, others would argue it showed they were insolvent :)

As tether specifies the right to repay any redeemed tokens in securities, assuming the securities they hold actually keep their value, it seems like they'd be fine

From https://tether.to/legal/ "Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves."

Of course the $60b question is, what are all the non-cash reserves they have, and how much are they worth.

⬐ notwedtm

It's all broken down in the video. A very large chunk is on "commercial paper" which is unsecured loans to...?

⬐ raesene9

Indeed that's the question to... it's a huge variance depending on who it's to, the terms of the loans and the interest rates received.

No Basel II capital adequacy requirements here :)

⬐ ethbr0

The broader historical observation is: given a large amount of money, a requirement to keep it continuously invested, and a cloak behind which to operate, what financial institution in the history of humanity has made good choices?

At best, they're choosing investments incompetently. (Chance Tether's team is equivalent to professionals at major banks?)

At worst, they're choosing investments to maximize personal gain.

Or to put it another way, what sort of company do you think is knocking on Tether's door, offering a good deal in exchange for a few billion "worth" of notes?

It ain't Coke.

⬐ raesene9

Yep it definitely seems probable that there's risky behaviour at the least.

⬐ qeternity

> At worst, they're choosing investments to maximize personal gain.

At worst, they don't have any investments.

⬐ ethbr0

It's possible, but given a choice between "flagrantly lying to the New York AG who just investigated you" vs "buying cheap debt no one else would touch and then overvaluing it, because you aren't regulated", the latter seems like a less legally perilous way of keeping things going.

⬐ ac29

The latter would imply they had any cash to buy debt in the first place. One of the most common, and most credible theories is that they issue Tether to exchanges in exchange for short term debt obligations. There's never any actual money changing hands.

⬐ qeternity

Yes, that might be more likely. I was just framing things "at worst".

Deltec, the bank that Tether bought, has a desk specializing in zombie debt, so it's entirely possible they have loads of debt bought for pennies on the dollar, that they have through accounting/market shenanigans recognized at par as their "commercial paper".

⬐ ethbr0

I mean... technically they're completely unregulated, right?

So they don't even have to perform shenanigans.

They can just buy $1 par debt at $0.01 from Bob's Used Cars and value / declare it at $1. It's a super shady move, and would shake confidence if known, but would seem legally defensible. ("We valued it at a fair price. It turned out we were wrong and overvalued it. Oops.")

They could probably declare it at >$1 if they really wanted to, but why do hard fraud instead of easy fraud?

⬐ qeternity

Well if you take that view, then they don't need the $0.01 paper in the first place. If they are indeed totally unregulated, then they can just commit fraud without risk.

⬐ ethbr0

That's where the NY AG's case comes in, I think.

They are unregulated, but they're now required to publish a breakdown of their assets.

Before, they could have said "We have billions and billions in assets." Now, they're required to enumerate and value their assets, to the extent required to publish the breakdown, as part of a legal agreement.

So I guess before it could have been riskless fraud. Now, it's more risky fraud. And overvaluing assets seems like an easy way to keep the wheels turning without obviously pissing off a state AG.

⬐ csomar

USDC has been growing at a faster pace. Tether has attraction because it was there first. This reminds me when Bitfinex was the exchange that moves Bitcoin price. Now, it's just another exchange. It'll take time but it'll eventually happen.

> https://coinmarketcap.com/currencies/usd-coin/

⬐ raesene9

USD Coin has indeed increased in use, although given the supposed liquidity of these two assets, you could wonder why the move doesn't happen far faster than it has...

Also there's a very interesting difference between USDC and Tether in terms of volume.

based on https://nomics.com/ Tether has a market cap of $62.85B and a 24 hour volume of $70.19B

USDC has a market cap of $23.90B and a 24h volume of $1.84B

So, for some reason, the velocity of Tethers is about 14 times higher than USDC, which seems unusual given they're nominally the same class of asset operating in similar markets.

⬐ thebean11

That seems potentially easy to explain given that some of the bigger (higher volume) exchanges support USDT and not USDC.

⬐ raesene9

I know that was the case in the past, but is it still the case? from a 10 minute look, the 4 largest exchanges by volume (Binance, Coinbase, Huobi, and Kraken) all seem to list USDC

⬐ thebean11

Hmm yeah maybe not, even Bitfinex trades USDC, and anyway they're a much smaller percentage of volume than I thought (jesus binance is huge).

Wonder if it's just network effect then? Big traders use the USDT markets because they're more liquid -> the USDT markets become even more liquid and the cycle continues.

⬐ qeternity

> The challenge with Tether is that it's basically impossible to prove or disprove their financial status.

It's impossible for outsiders to prove or disprove. It would be trivial for Tether to do, which begs the question of why they don't (their reserves pie chart does not qualify).

Tether claims that it's basically the only $60B+ institution in the world incapable of being audited. And given their ludicrously simple business model, it's mind boggling that they can even say this with a straight face.

Of course the real reason they can't be audited is because it would ruin their business. And thus, here we are.

⬐ elliekelly

As someone who has worked at a big four accounting firm hearing the clip of Tether’s CEO insisting no one would audit them was infuriating. I don’t know a single public accounting firm that wouldn’t be jumping at the opportunity to do that audit and use it to show how tech-savvy they are in an effort to drum up consulting business.

Unless, of course, while negotiating every potential engagement Tether insisted on exceedingly unreasonable audit restrictions. (That’s assuming Tether has actually tried to engage an independent auditor, and I’m not really convinced they have.) Insane restrictions on the scope of the audit and/or the scope of auditor access is the one and only reason they’d be “unable” to find an accounting firm willing and able to conduct the audit. But lack of skill? Knowledge? Willingness to engage with potentially shady clients? Those are not really things that hinder an accounting firm’s ability to engage a client.

⬐ qeternity

Exactly. What Tether really mean is that nobody will give them the audit and rubber stamp that they want, which is of course different from nobody being willing to audit them.

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

⬐ Tenobrus

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.

⬐ graeme

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.

⬐ sushid

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

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

⬐ graeme

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

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

⬐ sushid

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.

⬐ graeme

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-...

⬐ rojeee

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.

⬐ graeme

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.

⬐ rojeee

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 :)

⬐ graeme

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?

⬐ rojeee

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

⬐ runako

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.

⬐ Sargos

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).

⬐ shkkmo

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.

⬐ riffraff

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.

⬐ whimsicalism

> 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.

⬐ miracle2k

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.

⬐ runako

> 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.

⬐ ostenning

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

⬐ shkkmo

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.

⬐ coolspot

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

⬐ shkkmo

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

⬐ ostenning

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

⬐ shkkmo

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.

⬐ tootahe45

> 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..

⬐ whimsicalism

Dai is not collateralized by tether.

⬐ vadansky

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

⬐ beforeolives

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.

⬐ derimagia

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.

⬐ digianarchist

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

⬐ missedthecue

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

⬐ pjlegato

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.)

⬐ SpicyLemonZest

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

⬐ skybrian

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

⬐ wmf

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

⬐ anonymoushn

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

⬐ wmf

What bank did the wire transfer come from?

⬐ SpicyLemonZest

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".

⬐ rsync

"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 ..."

⬐ notahacker

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.

⬐ jbverschoor

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

⬐ toomuchtodo

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!

⬐ jbverschoor

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.

⬐ jcranmer

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.

⬐ notahacker

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.

⬐ hammock

>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?

⬐ tfehring

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...

⬐ toomuchtodo

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.

⬐ jpmattia

> 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.

⬐ unyttigfjelltol

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.

⬐ skybrian

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.

⬐ ska

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.

⬐ ikt

> 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.

⬐ nieve

Attestations, but I believe no true audits.

⬐ skybrian

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-...

⬐ jmharvey

> 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.

⬐ wpietri

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.

⬐ elliekelly

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

⬐ Animats

"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.

⬐ duskwuff

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.

⬐ eloff

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.

⬐ CyberDildonics

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

⬐ HeadsUpHigh

There exist algo stablecoins too though.

⬐ jbverschoor

Highly underrated comment

⬐ ArkanExplorer

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.

⬐ anunnymouse

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

⬐ haskellandchill

I believe it means people downvoted it. Only users with high point totals can downvote.

⬐ clintonb

Comments get grayer as they are further downvoted.

⬐ gradys

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.

⬐ elliekelly

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.

⬐ gradys

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

⬐ billytetrud

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.

⬐ vkou

Certainly? How certain are you of this?

I am not so certain.

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.

⬐ billytetrud

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.

⬐ overtonwhy

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?

⬐ billytetrud

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.

⬐ overtonwhy

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

⬐ mdoms

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.

⬐ threevox

This really should be higher - really well-made video on something incredibly important