> With estimated leverage of 383-to-1, Tether would be unable to honour all its tokens after losses of just 0.26%—a safety cushion that regulators would never allow at a bank.
So even if they are telling the truth, it is still on the edge.
The problem is the promise, bitcoin and other "nonstable" crypto don't promise a fixed dollar value, similar to gold if you will.
But if a crypto claims that it has a fixed currency value, then like banks (which they also say they have a fixed dollar reserve) it has to be regulated by the issuer of that currency.
I don't see any problem in regulating stable coin.
> if 0.26% of tether is withdrawn into currency the coin would collapse
If 0.26% of Tether is withdrawn, it would need to start liquidating assets. That will, most of the time, be fine. Commercial paper is exceedingly liquid.
But sometimes, the liquidation will prompt a price fall. This is a fire sale. That, in turn, prompts more redemption, as holders of Tether grow concerned about its stability. This is a bank run. If Tether has a safety buffer between the value of its assets (U.S. dollar money market securities) and its liabilities (Tethers), this will--most of the time--be fine. If the situation spirals, however, a bank run can lead to collapse.
This is your regularly scheduled reminder that no US persons are permitted to redeem Tether according to their terms of service. Further according to their terms of service only designated customers are permitted to redeem Tether, they at their sole discretion make the determination as to who is the designated customer, they are permitted to delay redemptions arbitrarily, and they are permitted to fulfill redemptions in-kind with whatever garbage backing they may have instead of dollars. [1]
Their “reserves” and ratios and backing mean basically nothing since nobody’s ever going to be permitted to redeem a meaningful quantity anyways - while at the same time being too big to fail in the crypto industry. Exchanges know this.
They are chuck-e-cheese tokens used to facilitate capital flight from mainland China, and to provide 85% of all trading volume in the crypto space. $4.9B of BTC daily trade volume vs $0.17B for USD proper. [2]
You go to an OTC desk in China, you buy Tethers with $1M USD worth of RMB, you send the Tethers out of China and cash them out either directly at Coinbase or via BTC. [1]
There's been a big market for escaping RMB capital controls since they were instituted, often via various gangs and casinos [2]
If Tether actually owned any commercial paper, they'd be the biggest player in the commercial paper space. Nobody's ever heard of them, and they don't own 30 billion dollars of it.
What they do own are paper promises from other companies that are controlled by them. Which are worthless. I own a paper promise from my dad to pay me a trillion dollars, that doesn't make me the richest man in the world. [1]
[1] Until I leverage it into minting a 'commercial-paper-backed', unredeemable, unaudited 'stable'coin.
Currently, all the holders of tether could ask for dollars, and they'd all get them, and there'd even be 0.26% of the original balance left. (Under quite some assumptions, namely that they could sell the commercial paper at the value at which they hold it in their accounts.)
However, if the value of their assets would shrink, say, by 1%, their equity would be wiped out, and they'd not have enough dollars to satisfy their liabilities. Then, if people would start demanding their dollars, the last 1%-0.26% = 0.74% of tether holders would get nothing, because there'd be nothing left.
That could trigger a good old bank run - you don't want to be among that last percent of bag holders, so better take out your dollars now while they still have some.
> Currently, all the holders of tether could ask for dollars, and they'd all get them, and there'd even be 0.26% of the original balance left.
This is the correct reading: 0.26% is the excess in total capital compared to liabilities.
Earlier in the article, they state that Tether has 5% cash+equivs, so you know that 5% of Tether could be redeemed without trouble. If there were redemptions in excess of that, they would need to sell securities.
Commercial paper is usually very short dated (definitely less than a year, average maturity appears to be only 2 months [1]), so if rates move up by a percentage point, the present value of the paper should drop less than 1%, maybe less than 0.2% (if it is very short dated). That's pretty close to their capital though!
This statement from the Economist is basically a lie. It's like saying people trade Forex leveraged so your cash in hand is leveraged. Tether is leveraged by 3rd parties. Tether is redeemable 1to1
Prob not but itd shake everything up. They'd have to get a lot of loans, and maybe sell out the company. For comparison, banks allowed to go as high as 10:1 so 383:1 is insane.
That is misleading. A more relevant number is the capital requirement, which is between 7% and 13% currently for US banks, if I'm not mistaken, corresponding to leverage of 8 to 14. Much more benign.
Capital requirements are for something else. We're talking about retail customers being able to withdraw their cash, in which case the reserve requirement is the correct number.
It simply is not. Retail banking customers are able to withdraw 100% of their balances and have been for almost 100 years thanks for the existence of the FDIC. Nobody has lost a single dollar to a bank run since the FDIC was instituted after the Great Depression. Even in 2008 when WaMu went under. Not one dollar.
All retail banks in the United States are backstopped by the FDIC and the FDIC is backstopped by the federal reserve. Saying otherwise is tinfoil hat thinking. Fractional reserve banking isn’t a conspiracy.
Retail banks act on behalf of the federal reserve to actively manage the money supply, in part through fractional reserve lending.
The issue for stable coins and stable coin operators, is that they’re not backstopped by an FDIC, aren’t subject to any capital requirements and aren’t subject to any risk management practices.
FDIC guarantees up to $250k and also kicks in after the bank goes under. I'm guessing it should take some time (a few years?) until the FDIC reimburses the people who lost money.
Maintaining faith in the banking sector is of paramount importance to the US, and yes, $250K is the letter but (a) people with more than $250K in a checking account know this and are suitably invested and (b) in the case of WaMu itself, it was simply sold to JPMorgan by the FDIC. They did not even have to draw on the insurance fund.
Why would you think it should take a few years? The FDIC is deposit insurance that all of the banks pay into, should a single bank go under there’s always plenty of funds available.
You're not entirely wrong, but we need to compare apples to apples:
Capital = excess of assets over liabilities => capacity to satisfy creditors medium term (solvency)
That's at least 7% to 13% of the balance sheet for banks, and currently 0.26% for Tether.
Reserves = cash (and equivalents) in the vault => capacity to pay out immediately (liquidity)
Minimum reserves required used to be 3% to 10% of deposits, if I read this correctly, but are now 0% indeed, as you point out. Actual bank reserves, however, are much larger than what is required, even when the requirement was > 0 [see 1]. Tether holds about 5% in cash or Treasury bills.
So it seems that banks fare much better on both ratios than Tether.
No, Tether is not. The equity and capital buffer requirements are somewhat more complicated to explain simply, but the end result is that a bank needs at least ~8% of cash outright to meet those requirements.
Tether has less than 1/10th the amount of cash it would be required to have were it a bank.
The reserve requirement is the amount of money that a bank is required to have sitting in its account at a Federal Reserve bank per total deposits.
That requirement has dropped to 0% because we've developed other ways of mandating that banks have enough cash. These are things like the tier 1 capital requirements, that require the bank to hold a certain amount of capital (which does not include money that depositors put in the bank! Those are assets, not capital) for its total asset composition.
Which, if it were to fail (which is exceptionally unlikely), is backed by the US Treasury and the Federal Reserve.
EDIT: Walking back to first principals, why can't the USD fail? Because you can print whatever adults in the room decide need to be printed to hold the economy up. You cannot do this with a deflationary digital asset, nor one tied to smart contracts.
> Walking back to first principals, why can't the USD fail? Because you can print whatever adults in the room decide need to be printed to hold the economy up. You cannot do this with a deflationary digital asset, nor one tied to smart contracts.
The practical implication of solving large scale bank failures with mass currency printing is hyperinflation. You would only get your money back in nominal terms, but its purchasing power would be greatly reduced. See also: Weimar Germany and Zimbabwe.
The fed has expanded money supply to react to shocks before, and there was no hyperinflation. Even if clearly at some point, given enough money-printing, inflation would result, there's no reason to assume it's some binary thing; either hyper-inflation ala zimbabwe or normal inflation. It's more likely you'd see gradual inflation, and that the amount of money printed influences how much inflation results - so assuming that any expansion of the money supply is reasonable, and not egregious.
Frankly, if banks start failing to the extent that FDIC is not only necessary on a large scale but even possibly unsustainable, I kind of doubt that a bit of inflation is going to be the worst of our worries.
It is the differences between the US and Weimar Germany / Zimbabwe that make it possible for the US to print its way out of most problems.
Other national governments didn't stuff Z$ into their armored-up national mattresses to bolster against the collapse of their local currency, and there wasn't an IMF holding debts denoted in Reichsmarks to create a demand for them internationally.
The whole comparison is specious; there were far more factors at play than "printing money". Central banks print money all the time. It's not just in response to the 2008 crisis; the money supply in 2007 wasn't what it was in 1957 either, right?
At the very least you'd need to quantify exactly how much money over what period of time might be a shock, and what kind other factors play a role. And then, yes, sure - let's not do things quantifiably similar to Zimbabwe or Weimar Germany. But I suspect there's a huge amount of room for most central banks to maneuver between status quo and hyperinflation; merely "some" printing of money isn't going to be a problem.
Indeed there are regularly stories of smaller countries without the kind of reserve status the dollar enjoys that make problematic central bank policies - and even if that has consequences (e.g. Turkey now), that's still a far cry from Weimar Germany or Zimbabwe under Mugabe.
Why do neo-goldbugs always try and present this as some sort of gotcha? As an American taxpayer I'm happy to buy into the social contract that it implies.
>Because you can print whatever adults in the room decide need to be printed to hold the economy up. You cannot do this with a deflationary digital asset, nor one tied to smart contracts.
Sounds like a feature to me. Printing money is effectively a socialized loss for everyone who's holding the currency.
A currency is a socioeconomic compact between capital and labor, intermediated by subject matter experts (ie the central bank) and government.
> Sounds like a feature to me. Printing money is effectively a socialized loss for everyone who's holding the currency.
The economy functioning is of greater benefit to the whole than the value to currency hoarders (remember, it's a currency, it's meant for exchange not for value storage and it is optimized for that role) maintaining its value. If you want to preserve wealth, own property/assets you expect people to trade their time or capital for into the future. People don't buy stonks or bonds for the ticker in their account, they buy the appreciation of the underlying or its cashflow. Most people buy real estate to live in (utility), for the appreciation of the property, or for the rental income cash flow (caveat is folks like the Chinese buying up international property to store their wealth outside of the reach of the CCP).
>>>>> The economy functioning is of greater benefit to the whole than the value of currency hoarders maintaining its value. If you want to preserve wealth, own things you expect people to trade their time or capital for into the future.
Retirees on a fixed income; immigrants, the poor, and people with no access to credit would like to have a word with you
Have the word with me. That's what cost of living adjustments (social security or other systems) & prudently investing a lifetime of retirement savings (in a safe mix of investments to support both growth and safety) and improved underwriting and funding for those folks (respectively) is for. It's not an issue with the currency, that's not what currencies are for.
If you're expecting the value of a currency to never change, you are asking a fish to climb a tree.
While I'm sure you have a point that some people are getting shafted by lack of inflation compensation, what does that imply for stablecoins vs. conventional banks and/or central banks?
That issue could occur in any system with expanding money supply, and you want a system in which the money supply expands in some sync with the economy, because otherwise it's attractive to just hoard paper (or crypto, or whatever) wealth and not invest.
In any case, isn't this primarily a political problem (or where the issue is private: a problem of a poorly phrased or one-sided contract)?
I actually dont know enough about stablecoins to opine.
They may be fraud for all i know.
My issue was with the casual dismissal of inflation as some kind of necessity for a functioning economy.
My point is that is a priviled worldview of a typical elite that has never experienced poverty or real inflation in the flesh. Dismissing it as some kind of magic drug with annoying side effects shows lack of empathy for real consequences at the bottom 5th.
Are stablecoins better than central banks? Again, I dont know enough about stablecoins. But surely whatever answer that is out there does not include inflation or central banks as they exist today.
The fact that some inflation is beneficial clearly is the commonly received wisdom, including by whatever experts I could find; I couldn't find any trustworthy source arguing the opposite. A casual dismissal of inflation being necessary is therefore warranted - at least unless there's some extraordinary level of evidence provided, or if my skimming of publically available opinion is somehow wrong (sure, could be!). It's the official policy of the Fed, for instance.
Additionally, note that the money supply is ever growing - faster than inflation because the economy is growing. Now, there are apparently extra factors to consider here, including concepts like the velocity of money, which mean that money supply isn't trivially linked 1-to-1 to the economy's expansion and inflation. I'm no expert on the matter, to be clear, but that's my impression trying to search even for refutations of that stance - if your impression of commonly held expert opinion is different, it'd be interesting to compare links to check whether our media bubbles differ somewhere.
We cannot rule out that stablecoins might serve us well. But just because we have imperfect information does not mean all possibilities are equally risking; the risks from conventional monetary policy (including variations such as modern monetary theory) are simply much better understood because we have examples and history to learn from. The original article makes the case that stablecoins aren't really all that novel as a financial instrument (even though their technical underpinnings might be), and the argument appears sound to me (a non expert) and the source reliable (with a reputation at risk were their analysis clearly wrong).
As such, why should we ignore risks we understand, and take on additional risks we don't understand? At issue here isn't really the fact that it's a cryptocoin, but rather how it functions in the financial market. The article explicitly calls out that the technical implementation may have benefits, and a knee-jerk ban could be overzealous.
The issue is essentially financial, not crypto related, and I don't see any clearly open questions that might argue for allowing unregulated stablecoins, let alone a refutation of the premise that stablecoins have risks.
Posing questions makes it sound like we should wait and see; but we should not wait to answer those questions given what we do know. Policy could _always_ be better informed in the future; that does not mean delay is _always_ the best choice.
I hear that poor people and those with no access to credit also do particularly well when the economy goes into depression (as would happen with massive bank failures).
>>A currency is a socioeconomic compact between capital and labor, intermediated by subject matter experts (ie the central bank) and government.
Currency is an asset with a particular use-case. Its consumers do not enter into some elaborate agreement (compact) in order to use it. They use it because it's useful.
It arose as an emergent property of market interaction, i.e. distributed processes, not centralized authorities.
EDIT, responding to below:
No, the distributed processes of the market are a collective intelligence that vastly outperforms any single entity at the task of effectively managing the money supply.
Re your sciencedaily link, you are misinterpreting that in context.
I suggest reading David Graeber's book Debt, the first 5000 years. He is the world authority on the topic.
A short summary:
Contrary to the imagined assumptions of Adam Smith, prehistoric humans operated via gift economies. This makes sense because they lived/survived in smallish tribal bands that required cooperation. This was even true of humans before our species split from our hominid ancestors. This is one reason why instincts around fairness and reciprocal empathetic behavior are so strong within us. For hunter gatherer bands they were essential to survival.
The first thing that can be called money appeared in temple complexes in the Levant, during the neolithic revolution, thousands of years before your article's discussion of trade behaviors in Europe. These were entirely about a social contract and central authority. Those that lived in the surrounding vicinity of the temple were required to bring contributions, eg a goat herder would bring goats. The temple would record their contribution, typically denominated in units of weighed grain. This recorded the temple's debt to the herder, who could later claim the grain as needed. In turn, the herder's contribution would be used to support the specialized people building and operating the temple, growing the grain, etc. In essence this was the first government and tax redistribution system.
It's a fascinating book if a bit slow due to the level of detail in places. It will disabuse you of many assumptions people have about the history of economics that are directly contradicted by archeological evidence or later, written history.
As to your second point, we have ample historical evidence of how that goes wrong.
"The study challenges this notion by introducing the concept that money was a bottom-up convention rather than a top-down regulation. Bronze Age money in Western Eurasia emerges in a socio-political context in which public institutions either did not exist (as was the case in Europe) or were uninterested in enforcing any kind of monetary policy (as in Mesopotamia). In fact, money was widespread and used on a daily basis at all levels of the population."
So it clearly argues that money originated as a bottom-up phenomena without centralized authorities. You may dispute that theory, but it's not a misreading of the link's argument.
>>Those that lived in the surrounding vicinity of the temple were required to bring contributions, eg a goat herder would bring goats. The temple would record their contribution, typically denominated in units of weighed grain.
To call that money is quite tenuous. This kind of system would have been useless with any kind of long-term trade, e.g. the trade in lazuli, tin or flint, which has been occurring since even before agriculture.
If we want to use a definition of money so expansive as to include some temple credit system, then we could look to the theories of Nick Szabo, who originated the concept of smart contracts and the blockchain.
Szabo notes that proto-money has originated independently in numerous regions, like the kula trading ring in pre-colonial Melanesia, where two independent forms of proto-money enabled long-term trade: necklaces circulated clockwise, from one island to another in the kula ring of islands, while armshells circulated counter-clockwise.
In pre-colonial America, wampun, which are shells of the clam venus mercanaria, were used as proto-money, and in fact adopted by the colonists to great enough extent that the term "shelling out", denoting spending money, originates from it.
Szabo hypothesizes that the standardized collectibles seen in various early sites of homo sapien settlement dating from the paleolithic, like the ostrich-eggshell beads from the Kenya Rift Valley dated at 40,000 B.P and the mammoth ivory bead necklace from Sungir, Russai dated to 28,000 B.P, were in fact the earliest forms of money, and that the trade-based trustless coordination that this proto-money enabled raised the carrying capacity of the environment, and enabled humans to out-compete neanderthals.
The centralized authorities protect the economy against some failure-modes that a distributed process is vulnerable to (currency scarcities, tampering, panics, large-scale theft). They introduce other problems. Whether one thinks they introduce more problems than they fix is pretty much the defining factor on where one stands regarding the utility of fiat currencies.
I understand the point you're making, but I'd like to add that even if you accept that potentially stablecoins might avoid some problems a (politically tainted) central bank has, the issue isn't merely one of accepting that possibility, it's also one of lack of evidence and novelty.
Having a bunch of private actors potentially run a huge experiment in which the economic fallout will not be born by them if it goes sideways is entirely unreasonable. I mean, that's kind of the whole problem with banks and their dodgy behavior, and this is no better; if anything it's even more risky since it's even less well understood and there's even less oversight, and fewer ways even a democratically elected government could intervene should the need and popular mandate arise.
I'm all for running that experiment, but then with proper oversight, accountability, transparency, disaster planning, etc - and as much as possible without the conflict of interest caused by having those running the system own large stakes of it too; that's just asking for shady business.
>>Having a bunch of private actors potentially run a huge experiment in which the economic fallout will not be born by them if it goes sideways is entirely unreasonable
The experiment is entirely opt in, with no one being affected that does not choose to be.
Of course its not; no more than the 2008 financial crisis was entirely opt in. Individuals do not have the opportunity to fully control all aspects of the financial system they're exposed to.
Individuals fully control whether they interact with the financial system at all, and if they do, which parts they are exposed to.
The risk posed by any financial asset is not distributed uniformly across the economy. Its impact on any party is proportional to their direct and indirect exposure to that asset, which is something that they control and have to take responsibility for.
But this means that all users of USD are providing an insurance pool for the banks for free. Doesn't quite seem fair.
There are some decentralized stablecoins (stablecoins backed by crypto assets + market rules that ensure they keep the peg) that have explicit insurance pools + rewards for being part of that insurance pool. For example, Liquity [0] allows users to deposit the stablecoin and earn rewards + favorable liquidation positions (a 10% discount) in return for being the first layer that purchases liquidations.
Not exactly sure what the equivalent would be in the traditional finance world, but I could imagine some sort of higher interest savings account that isn't FDIC insured, and takes losses first.
Most people clamoring for regs around stablecoins haven't gotten a chance to wrap their minds around this yet… nor have most of them considered the $ demom "cash and cash equivalents" that are on banks balance sheets not domiciled in the US, who have even smaller cash flows than some centralized stablecoin issuers folks love to pick on…
I don't believe there has ever been non-inflationary money before in the whole history of humankind.
Add the saying goes, "bad money drives out good." In this case it probably means that crypto coins will mostly be held as an asset while national currencies are used for most transactions. Looking around, that certainly appears to be what is happening.
This is unfortunately no longer true. The Fed set the required reserve ratio to 0% last March. They still incentivize holding cash reserves by paying interest to banks roughly equal to what they could get by holding something like commercial paper, effectively giving banks free money since there isn't actually any risk, but they technically no longer require banks to hold any cash at all.
Of course, the Fed allows this because demand deposit accounts at banks are insured by the FDIC, so people will get their money back even if the bank doesn't have it.
Yes, because the areas where we ignore and accept it are highly regulated and insured as a result of hundreds of years of learnings at this point. People react negatively when they see it outside of that context because it is something we have repeatedly seen fail and cause instability. This isn't hard to understand.
Yes, that is a valid distinction to make, if the arguments/concerns around Tether were merely "hey, let's make sure regular banking regulation extends to this organization as well, to make sure it's all going in tip-top shape".
But that's not why people bring up the figures. They're acting like it's inherently shady to have less than 100% (or 3, or whatever) cash reserves for something that ostensibly "has your money on demand", and such a scheme is inherently unsustainable, even though this is exactly what banks do.[1]
Be careful not to equate "one technical distinction that makes sense" with "the the things the hive mind is actually outraged about".
(Sorry, would have responded sooner but I got a "you're posting too fast, slow down" error.)
[1] Fortunately, this article is focusing on the point about just extending regulation, but every other time this comes up, the figure is supposed to provoke outrage about "how can they not have our cash ready to go?"
> They're acting like it's inherently shady to have less than 100% (or 3, or whatever) cash reserves for something that ostensibly "has your money on demand", and such a scheme is inherently unsustainable, even though this is exactly what banks do.[1]
This is not correct.
Just because banks are fractional reserve, doesn't mean that they don't have enough assets to cover their deposits.
It means that they don't have liquid assets to cover their deposits.
If a bank ever fails to have enough assets to cover its deposits, it immediately become insolvent, and is taken away from its owners.
Tether does not have enough liquid + illiquid[1] assets to cover their deposits. If they did, they wouldn't keep dodging audits. They aren't running a fractional reserve bank, they are simply running a fraud.
The reason we let banks get away with this is because they are routinely audited, and are insured against insolvency. Tether is neither.
[1] The nature of their fraud is that they are grossly overvaluing their illiquid assets. Because they have never undergone an audit, they can get away with this - they can claim that their illiquid assets are worth <whatever value they want>, with no third party oversight.
> [1] The nature of their fraud is that they are grossly overvaluing their illiquid assets. Because they have never undergone an audit, they can get away with this - they can claim that their illiquid assets are worth <whatever value they want>, with no third party oversight.
Indeed, the attestations (not audits!) that they have the money backing it even explicitly have the note on them that the assets are marked at cost of purchase, instead of mark-to-market.
I think it is fair for people to say it is inherently shady when the original plan for these tokens was to be 1:1 dollar backed. Moving the goal posts in this situation IS shady, and why people are now calling for regulation.
People aren't railing against fractional reserves, they're railing against something that was advertised as having full reserve turning fractional with a few sentences on a website.
So even if they are telling the truth, it is still on the edge.