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Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

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Re: Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

#211

Post by keymone »

bhouston wrote: post #200
keymone wrote: post #144

Earlier quoted context omitted.

> they may not be able to pay cash for all withdrawals because that cash would be tied up in loans How is that “assets”? Loan can be defaulted on and where bank has $X in the books it’s actually $0. The non-bankrupt case for tether looks like this: people realize tether isn’t worth $1, but they still need to get rid of it and so they sell for $.74c, that’s the risk they took buying tether in the first place.

The idea is fractional reserve banking is that the loans are at least good enough in aggregate in normal course to cover its liabilities. Of course there are black swan events ( https://www.investopedia.com/terms/b/blackswan.asp ) that are so far out of expected that banks fail anyways, or the banks are incompetent and make things like sub-prime mortgages ( https://en.wikipedia.org/wiki/Subprime_mortgage_crisis ) tha…

Yes, I understand that, I just don’t see this bitfinex situation much different from what is generally accepted as normal in banking sector.

Re: Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

#212

Post by b_tterc_p »

gridlockd wrote: post #208
b_tterc_p wrote: post #197

Earlier quoted context omitted.

> If Bob eventually pays back and the bank doesn't make any further loans, the bank will have 1$ (my dollar) and a couple of cents of interest. This is wrong. The bank will have $1.90 + interest. You have to pay back your entire loan. Yes, bob might default, but averaged out, the risk calculations set the interest rate high enough to cover that profitably. The fractional reserve part of the banking system is a tempor…

> This is wrong. The bank will have $1.90 + interest. Dude, check your damn math! The bank owes me a dollar . At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (unless Bob takes up a ridiculously high APR and term just to…

> Dude, check your damn math! The bank owes me a dollar. At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (that would be a ridiculously high APR).

Assume that “the bank” in question represents all banks. And so depositing in any bank counts as depositing in “the bank” because this is illustrative.

You give a dollar. The bank loans out 90 cents to bob. Bob buys something (I skipped over this) from Joe. Joe puts 90 cents in the bank. Bob pays back 90 cents he earned using the purchase from Joe. The bank now has $1.90.

You’re right that the system would collapse if it stopped. But so would, say, the entirety of the national economy stop if we decided to just stop making loans. We like loans because loans enable growth. So you can, idk, buy better GPUs to mine poopcoins

Re: Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

#213

Post by gridlockd »

b_tterc_p wrote: post #199
arcticbull wrote: post #149

Earlier quoted context omitted.

It’s so frustrating that the crypto folks are basically the antivaxxers of finance. They refuse to understand how it works and yet are sure they’ve got a better plan because the status quo is a scam. At least unlike antivaxxers it’s only their own welfare at risk.

This is what I was thinking but I didn’t have a way to phrase it. Many people are convinced that fractional reserve banking is terrible without understanding the basics of how it work, writing it off as too complicated for people to comprehend and therefore bad... but their solution is a system which is orders of magnitude more complicated and, in all likelihood, will still result in fractional reserve banking entiti…

I never said that Crypto was any good or that fractional reserve was bad. It obviously works for the banks (until it doesn't), it seems to work for Tether as well.

I'm just pointing out the parallels, which are far more striking than the differences. People here point out that fractional reserves is backed by loans and securities of (supposedly) equal value, or that it's all regulated and insured, but it wasn't always like that, it's not a strict requirement for the system to work.

Re: Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

#214

Post by dwild »

vegannet wrote: post #98
tinco wrote: post #59

It's crazy that they messed this up, Tether is basically a money printing machine, all they had to do was be solvent. Let me start by saying I don't hold Tether nor have I ever, nor do I think it's a good idea. Tether is a fundamentally a risk free money making concept, it works just like gift certificates. The only thing Tether has to do is buy back Tether at any price lower than they sold it for and they make profi…

If Tether worked as it was advertised there would be no profit opportunity. The purported reason Tether exists is to help the crypto markets deal with the liquidity problems because of how difficult Fiat banking is, essentially Tethers value proposition was “we (by some miracle) have reliable banking, we can buy and sell 1 Tether for 1 USD at any time regardless of other crypto currencies value”. In reality Tether is…

> If Tether worked as it was advertised there would be no profit opportunity.

Everyone gave multiple good profit opportunity already, but what about having a transaction fees? They still have a cost related to operating this business, you put that cost toward a transaction fee and you put a small profit on top.

That's how credit card works, though their fees apply much more often than it would for a stablecoin, where most transations aren't from the coin to fiat money.

> you accepting $100 USD from your friend and giving them $100 of Monopoly money

That's pretty much the definition of a bank. Banks does it for free ALL the time and has actual physical locations on top of that and has to operate locally too.

Re: Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

#215

Post by askmike »

SimonPStevens wrote: post #209
askmike wrote: post #190

Earlier quoted context omitted.

> Their original proposition was that you could buy and sell tether from them at exactly 1 USD. That depends on who "you" is, as far as I know this was possible for retail until a few years back. But I wouldn't say it was "promised" at all (or are you referring to the whietpaper?). It's still possible for trading firms right this very moment. Active OTC markets for tether right now as well. Note that even though it's…

(BTW, not me doing the downvoting) I don't think that only allowing the purchase of tether to retail really meets their original plan. The whole point was meant to be that anyone could take their coins and go to tether and get exactly 1 USD for each one. It was designed to solve the problems people were having cashing out from exchanges. The idea was that you sold your bitcoin on poleniex or wherever for USDT the the…

I think we're kind of on the same line.

> It was designed to solve the problems people were having cashing out from exchanges.

Tether technically predates the legal trouble between Wells Fargo and Bitfinex, but imo Tether as we know it got to it's current size specifically to allow American residents to get their non crypto money out of Bitfinex after no American bank wanted to work with Bitfinex.

> The idea was that you sold your bitcoin on poleniex or wherever for USDT the then took that to the tether website and got your USD. Safe in the knowledge that your USDT would be exchanged exactly 1-1, with no bid/offer spread or moving price.

Whose idea was this? Most big exchanges that trade tether don't support any fiat. Only recently most added support for competing stablecoins and Binance is playing with fiat. But it was never the idea from the beginning.

> In reality, you could never really do that.

I really don't agree that the plan was all along that everyone could do that. Tether would simply face exactly the same problems as Bitfinex. Instead Tether allows you to trade on many different exchanges and big traders can directly convert tether into dollar. But definitely not everyone, in the beginning retailers could create a tether account but that's about it.

> As others have mentioned, the likely reason they never have is that they would hit exactly the same challenge all the exchanges did with their bank and the KYC rules.

Yes exactly, as such it was never (or since the Wells Fargo suit) supposed to work like this. I'm not sure why you think this was the plan or design?

----

To sum up:

- We both agree it's hard for every day traders to convert tether into USD. They have to use public crypto markets to achieve this. Though I don't agree this is against any design or plan (ever since Wells Fargo anyway).

- This has worked fine for years since the biggest traders are able to convert tether into USD (and the other way around). The second they can't you'll see price divergence (a lot bigger than what we see right now - since firms will be trading out of millions in tether exposure).

- The risks of Tether are well documented, most retail is aware of the danger.

Re: Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

#216

Post by gridlockd »

b_tterc_p wrote: post #212
gridlockd wrote: post #208

Earlier quoted context omitted.

> This is wrong. The bank will have $1.90 + interest. Dude, check your damn math! The bank owes me a dollar . At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (unless Bob takes up a ridiculously high APR and term just to…

> Dude, check your damn math! The bank owes me a dollar. At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (that would be a ridiculously high APR). Assume that “the bank” in question represents all banks. And so depositin…

> Assume that “the bank” in question represents all banks.

"The bank" can't simultaneously be "all banks". Sure, if we consider "all banks" then $1 paid into the system can "magically" turn into $1.90 (and far more) without even considering interest. That's my original point! Money is being created by fractional reserve banking.

https://en.wikipedia.org/wiki/Money_multiplier

Re: Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

#217

Post by [deleted] »

arcticbull wrote: post #149
village-idiot wrote: post #108

Earlier quoted context omitted.

I think you messed that up a bit. You give the bank $1. The bank then goes ahead and loans $0.90 to Bob, who then uses it to invest in a business or a home. That $1 still exists, just most of its backed by the debt that Bob has to the bank. I don’t believe bob would take that $0.9 that the bank loaned him and put it back into the same bank.

It’s so frustrating that the crypto folks are basically the antivaxxers of finance. They refuse to understand how it works and yet are sure they’ve got a better plan because the status quo is a scam. At least unlike antivaxxers it’s only their own welfare at risk.

[deleted]

Re: Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

#218

Post by tcgv »

Thorrez wrote: post #117
vegannet wrote: post #104

Earlier quoted context omitted.

I’m not clear how that applies to Tether: “[...] each tetherUSD in circulation represents one US dollar held in our reserves (i.e. a one­to­one ratio) which means the system is fully reserved when the sum of all tethers in existence (at any point in time) is exactly equal to the balance of USD held in our reserve.” Where does the 5% come from?

5% isn't possible, but you can make over 2% on treasury bills currently. The risk of the US government defaulting on loans can be essentially ignored.

Exactly. And even if the US government were to default on loans Theter would be the least of your concerns since the USD and consequently the global economy would be in a pretty bad shape.

Re: Tether Says Stablecoin Is Only Backed 74% by Cash, Securities

#219

Post by b_tterc_p »

gridlockd wrote: post #216
b_tterc_p wrote: post #212

Earlier quoted context omitted.

> Dude, check your damn math! The bank owes me a dollar. At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (that would be a ridiculously high APR). Assume that “the bank” in question represents all banks. And so depositin…

> Assume that “the bank” in question represents all banks. "The bank" can't simultaneously be "all banks". Sure, if we consider "all banks" then $1 paid into the system can "magically" turn into $1.90 (and far more) without even considering interest. That's my original point! Money is being created by fractional reserve banking. https://en.wikipedia.org/wiki/Money_multiplier

It doesn’t matter which bank the loan is deposited into. That doesn’t affect what’s happening here. I’m saying one bank because it’s easier to understand. If you really want to be pedantic, sure, maybe bank 1 has $1 + interest and bank 2 has $0.90. That’s also possible

But it’s important to get that money is not blindly created. It’s done because value is created at a faster rate than physical dollars. You can view banks as a service that invests your dollars. You give them money to loan out and receive some of the interest in compensation. You yourself can create “new money” by making a loan yourself. The new money is just the result of value creation.

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