So Tether is doing something akin to fractional reserve banking? From what I understand, this shouldn’t cause a problem unless there is a massive run (everyone trying to convert their USDT into dollars at the same time).
Since most of the USDT is owned by big exchanges who need it to provide liquidity and have no interest in crashing the crypto market, I don’t think this is likely to happen.
These events ultimately lead to the creation of the Federal Reserve for banks to participate in a semi-cooperative system that didn't devolve into save-yourself during times of crises.
The story here is that "unless there is a massive run" is actually a fairly common event.
The big crypto exchanges are currently acting as a sort of unofficial federal reserve. None of the big players has an interest in seeing USDT collapse and will step in to bail it out at the first signs of trouble.
I'm not saying that Tether the company is not shady. They should definitely be more transparent about what assets they are holding and their collateralization, but I think the risks of total collapse are largely overblown.
> None of the big players has an interest in seeing USDT collapse and will step in to bail it out at the first signs of trouble.
As an exchange, if you keep some reserves in USDT and you think it might collapse soon, you might have an interest in dumping your positions before it completely loses value. Maybe exchanges would benefit from responding to such a situation collectively as you suggest, but I think it's likelier that they will just protect their own interests as individual entities.
Totally agree that it’s “unofficial”, which makes it a when-not-if scenario.
At some point, total collapse of Tether’s pseudo-dollar will happen when the revenue generating exchanges feel they are support bad-money with good. All it takes is one player signaling a lack of support, and others stop supporting as well.
It’s a human psychological problem that’s a old as time. Think crypto can win over human rational to preserve self-interest? (side note: manipulation of self-interest is the goal of “weak hands” / “diamond hands”)
A big issue with this type of support is that the risks are correlated. Sure there are multiple big supporters of Tether right now, but if the sky starts falling and one of them decides to rush for the exit the others will likely make the same decision around the same time.
No they are not. That rationale is a coping strategy at best and deliberately misleading at worst.
Tether is NOT a bank. They are not regulated and have no guarantee that depositors will be paid back. They promise a 1-1 backing and instead of people holding them to their promise their supporters desperately try to compare it to moderns banks.
No. Tether is not a bank. It is not doing fractional reserve banking. It is committing fraud. It’s that simple.
This, a million times this. Speaking as HN's resident web3 apologist, it's amazing how people keep trying to defend cryptocurrencies based on some anti-finance-system ideology, but throw it all out of the window when it comes to Tether.
Tether is not a bank. Not in the US, not in the Cayman Islands, not anywhere. Everyone holding or trading Tether could be using a test network, and the monetary value of the token should be the same.
Tether has the veneer of bank equity from the balance sheet "attestations" it publishes, but I think a better analogy would be that tether issues casino chips for the decentralized casino that encompasses the tether-based offshore exchanges and defi universe.
There isn't any real visibility into the balance sheet, but I'd guess most of the "collateral" boils down to margin loans issued at the exchanges, and since the house has the edge on those platforms, their ship stays afloat.
The problem is that 'unless there is a massive run' is nearly assured over a long enough time horizon. The fact that the major players know that they are reasonably safe unless there's a run is the thing that will cause a run in a panic. Also, if some well-capitalized hedge fund figures out how to attack it, they might also light the match on a run if there's money to be made in killing it.
These are very good points - in the long run the probability of a massive run is 100%, and the risks of it happening sooner rather than later are higher because of the incentive of attacking the peg intentionally. This can be said about a lot of financial products.
I think that at this point, these risks are priced in by the market (Tether is selling at a discount from USDC). If you disagree with the market, it is your speculation, and also an opportunity to get rich if you are right. For example, the FTX exchange offers Tether put options as well as the ability of shorting Tether, and there are many other similar products.
They claim to be doing FRB, but it looks like what they actually are is insolvent.
A FRB is a bank where deposits exceed liquid liabilities (cash), but do not exceed liquid plus illiquid liabilities (cash + investments).
When deposits exceed liquid and illiquid liabilities you can't operate as an FRB. Because you are insolvent.
But this is all irrelevant, because Tether isn't a bank. Your bank promises that you can withdraw your deposit. Tether does no such thing - it provides withdrawals as a courtesy. If Tether doesn't feel like letting you withdraw, it's not going to let you withdraw.
I assume that the USDT holding of the big exchanges are on behalf of their customers. I those customer begin asking to convert their USDT to USD, that could be a massive run.
I'm not a crypto participant, but my understanding is that technically Tether doesn't promise redemption in USD, just backing by USD. That still seems like it could precipitate a crash, but IDK if such a crash would be best described as a run or not.
Tether does offer redemption, but the minimum amount you can redeem is 100,000 USDT, and there is a fee that ranges from 0.1% to 1% depending on the size of the redemption:
So if a well-capitalized arbitrageur can buy a million USDT at a price less than 0.999, they can redeem them for a profit, as long as Tether keeps honoring redemptions.
Since most of the USDT is owned by big exchanges who need it to provide liquidity and have no interest in crashing the crypto market, I don’t think this is likely to happen.