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I hate the whole cryptocurrency thing more than most people, but tether may just not be a scam, at least in the legal sense. Holding their reserves in somethin

I hate the whole cryptocurrency thing more than most people, but tether may just not be a scam, at least in the legal sense. Holding their reserves in something other than cash is the way they can make money. The community will consider it betrayal because it essentially relies on the existing system they loath. But other than that, there isn’t too much wrong with it. That may also point at a reason why they would want to keep this private, which otherwise seems suspicious. That doesn’t mean people won’t lose all or some of their money with them. Some of these holdings may not be as liquid as needed in a full-on bank run, and they, like all stablecoins, suffer from the mismatch of having no upside by definition but some downside risk.

pjc50 4y ago
> Holding their reserves in something other than cash is the way they can make money Depending on what it is, that's also a way they can lose money. If you think of Tether as an investment organisation that takes $ and hands out claims which they say are worth 1$, while making a bunch of investments, what's that in regular investment land? A money market fund. What can go wrong? https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp https://www.investopedia.com/articles/economics/09/money-mar...
- NovemberWhiskey 4y ago
  Yes; I think that's absolutely right and insightful - the right way to think about Tether is that it's an opaque (refuses to disclose asset mix; is not audited), expensive (pays no interest; charges for redemptions), unregulated (not subject to the SEC or any other regulatory body) money market fund. In the real world, literally no-one would own that.
  - pjc50 4y ago
    You can in theory hold it off-exchange and transmit it without KYC, which has to imply a certain category of use. But most of it is being used as the "float" by exchanges, I believe.
JackFr 4y ago
If Tether held less than $1 in assets for every $1 in circulation...there's a name for what that is... A bank. But if Tether is a bank, then UST isn't a 'stablecoin' it's a deposit. And Tether is engaging in what banks have done for centuries, that is increasing the money supply through credit. They are doing it in an illegal and unregulated way which most likely will result in tears and recriminations. But ultimately there is nothing new under the sun. Edit: I was wrong in what I wrote above. Tether is acting as a bank, and yes UST's are simply deposits, but all those people correcting me are right. Their assets (at least nominally) should match or exceed their libailities.
- NovemberWhiskey 4y ago
  >If Tether held less than $1 in assets for every $1 in circulation...there's a name for what that is... A bank. Please provide a current example of a bank with <$1 in assets for $1 of liabilities. I ask because if that's how you're defining a bank, that's not (I think) the usual definition.
- WinstonSmith84 4y ago
  Maybe something in between. Increasing money supply would mean minting USDT out of thin air. Maybe they do, maybe they don't - hopefully the latter. What they are likely doing is trading that USDT reserves on Bitcoin. Bitfinex is a well known market maker - and a very profitable one. That's probably why they are very much reluctant to disclose their reserves, because they don't have that in cash - unlikely. Knowing how much they own of everything would open the door to critics, and to attacks - the latter is essentially what happened for UST - attackers knew exactly how much cash they needed to depeg UST
- jcranmer 4y ago
  If Tether holds less than $1 in assets for every $1 in liabilities, it's insolvent. Even banks generally hold at least ~$1.15 in assets for every $1 in liabilities. But in general, Tether is part of what's known as the "shadow banking" industry--something that quacks like a bank but isn't regulated as if it were a bank. And shadow banking has caused the last several financial crises.
ineedasername 4y ago
That depends. If their holdings are in slightly risky "paper" to make money then it's not truly a stable coin because it relies on the market not going down, as it is doing right now. For example, if half their paper is in something roughly indexed to the Dow or similar then their backing is down roughly 5% YTD. That effectively means their actual peg is worth $0.95 on the dollar, a shakeup that could put them into a downward spiral. On the other hand if they're exclusively in something as safe as US Treasury notes, satisfied by profiting a very small % but on a large pile of money, then they're on more solid footing. The fact that they say "commercial" paper makes me doubt this somewhat. TLDR: if their 100% backing is in anything with even moderate risk, they could be doomed.
- jcranmer 4y ago
  Well, Tether periodically breaks down their assets a little more, so we know that on December 31, 2021, Tether held ~$5 billion in cryptocurrency. Given that at the same time, Tether had just ~$140 million excess assets over liabilities, we can already conclude that Tether is probably insolvent solely from the subsequent rout in cryptocurrencies. My suspicion is that a large fraction of Tether's claimed assets aren't valuable at anywhere near Tether's claimed value, and so Tether has actually been insolvent for years, and this is the main fuel for their reluctance to be precise in what their asset pool looks like.

pjc50 4y ago

> Holding their reserves in something other than cash is the way they can make money Depending on what it is, that's also a way they can lose money. If you think of Tether as an investment organisation that takes $ and hands out claims which they say are worth 1$, while making a bunch of investments, what's that in regular investment land? A money market fund. What can go wrong? https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp https://www.investopedia.com/articles/economics/09/money-mar...

NovemberWhiskey 4y ago
Yes; I think that's absolutely right and insightful - the right way to think about Tether is that it's an opaque (refuses to disclose asset mix; is not audited), expensive (pays no interest; charges for redemptions), unregulated (not subject to the SEC or any other regulatory body) money market fund. In the real world, literally no-one would own that.
- pjc50 4y ago
  You can in theory hold it off-exchange and transmit it without KYC, which has to imply a certain category of use. But most of it is being used as the "float" by exchanges, I believe.

JackFr 4y ago

If Tether held less than $1 in assets for every $1 in circulation...there's a name for what that is... A bank. But if Tether is a bank, then UST isn't a 'stablecoin' it's a deposit. And Tether is engaging in what banks have done for centuries, that is increasing the money supply through credit. They are doing it in an illegal and unregulated way which most likely will result in tears and recriminations. But ultimately there is nothing new under the sun. Edit: I was wrong in what I wrote above. Tether is acting as a bank, and yes UST's are simply deposits, but all those people correcting me are right. Their assets (at least nominally) should match or exceed their libailities.

NovemberWhiskey 4y ago
>If Tether held less than $1 in assets for every $1 in circulation...there's a name for what that is... A bank. Please provide a current example of a bank with <$1 in assets for $1 of liabilities. I ask because if that's how you're defining a bank, that's not (I think) the usual definition.
WinstonSmith84 4y ago
Maybe something in between. Increasing money supply would mean minting USDT out of thin air. Maybe they do, maybe they don't - hopefully the latter. What they are likely doing is trading that USDT reserves on Bitcoin. Bitfinex is a well known market maker - and a very profitable one. That's probably why they are very much reluctant to disclose their reserves, because they don't have that in cash - unlikely. Knowing how much they own of everything would open the door to critics, and to attacks - the latter is essentially what happened for UST - attackers knew exactly how much cash they needed to depeg UST
jcranmer 4y ago
If Tether holds less than $1 in assets for every $1 in liabilities, it's insolvent. Even banks generally hold at least ~$1.15 in assets for every $1 in liabilities. But in general, Tether is part of what's known as the "shadow banking" industry--something that quacks like a bank but isn't regulated as if it were a bank. And shadow banking has caused the last several financial crises.

ineedasername 4y ago

That depends. If their holdings are in slightly risky "paper" to make money then it's not truly a stable coin because it relies on the market not going down, as it is doing right now. For example, if half their paper is in something roughly indexed to the Dow or similar then their backing is down roughly 5% YTD. That effectively means their actual peg is worth $0.95 on the dollar, a shakeup that could put them into a downward spiral. On the other hand if they're exclusively in something as safe as US Treasury notes, satisfied by profiting a very small % but on a large pile of money, then they're on more solid footing. The fact that they say "commercial" paper makes me doubt this somewhat. TLDR: if their 100% backing is in anything with even moderate risk, they could be doomed.

jcranmer 4y ago
Well, Tether periodically breaks down their assets a little more, so we know that on December 31, 2021, Tether held ~$5 billion in cryptocurrency. Given that at the same time, Tether had just ~$140 million excess assets over liabilities, we can already conclude that Tether is probably insolvent solely from the subsequent rout in cryptocurrencies. My suspicion is that a large fraction of Tether's claimed assets aren't valuable at anywhere near Tether's claimed value, and so Tether has actually been insolvent for years, and this is the main fuel for their reluctance to be precise in what their asset pool looks like.