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Failing to understand how you could peg Tether to the USD and have people believe you. I was under the impression that pegging to a currency is something only a

Failing to understand how you could peg Tether to the USD and have people believe you. I was under the impression that pegging to a currency is something only a very big player, with close to unlimited resources can achieve, see People's Bank of China, Swiss Bank etc. Among others, you have to defend the currency against speculators and that requires a lot of capital. Even the Bank of England failed to maintain the peg to the German Deutschmark some years ago. Can someone with more knowledge in the FX market area explain this better?

StavrosK 9y ago
You can peg tether to the usd simply by offering to always exchange one tether for one usd and vice versa, no?
- tehlike 9y ago
  The problem is, sonfar they issued north of 800m with no proof of reserves, and no professional audit to support their claims.
  - samsonradu 9y ago
    That s the thing I don’t get, how do they “issue” tether? Because if one says they peg it to the dollar then it must follow the dollar’s inflation. Otherwise somebody is at a loss because there s more tether value than usd or viceversa, even if they were fully transparent and fair. Edit Unless of course tether is not a store of value in any way and just a fancy name for a dollar.
    - tehlike 9y ago
      The way it works is, i go to exchange a, and tell them hey i have this cryptocurrency and i have enough cash to back it up. People can withdraw money from me using these. If you do not verify my claims, you think this is a great idea, because now you can transact with usd(t). Formally these exchanges only used cross-coin exchanges. Now this is not a problem as long as you have _enough_ money to support withdrawals on an ongoing basis. Nobody knows you dont have enough cash to support all issued tokens, because seemingly, everything works nicely. With the recent hype, money keeps flowing. Until a mass withdrawal happens.
      - samsonradu 9y ago
        But why do I want tether in the first place? Why bother switching back and forth at all? I don’t see why would I want to hold tether. Can I buy a can of coke with it directly? What if the coke seller is a bit skeptical of tether and asks for 1.2 tether instead of one usd, just to play safe. Isn t this pressure applied to the exchange rate?
        tehlike 9y ago
        You mean, instead of USD? Because most exchanges cannot and does not support withdrawals - they are virtual.
        samsonradu 9y ago
        But every tether "issued" is basically a dollar printed out of thin air if we're to trust Tether that it has the same value isn't it? > Because most exchanges cannot and does not support withdrawals - they are virtual. Can you elaborate? I'm not familiar with these exchanges, really curious. You mean exchanges accept cash for coins and don't allow withdrawals? :)
        antonvs 9y ago
        He means they don't support withdrawals of fiat currencies like USD or EUR. Many crypto exchanges only support withdrawal of crypto currencies. To allow deposit or withdrawal of fiat, exchanges tend to have to comply with international banking regulations, which requires a great deal of paperwork. As a result, only a few exchanges offer this - examples are Coinbase, Bitstamp, Bitfinex, Kraken. Before Tether existed, you couldn't buy or sell dollars or Euros on a pure crypto exchange. That's a big limitation. Among other things, Tether allows you to trade in USD on these crypto-only exchanges. Basically, one problem Tethers solve is allowing exchanges to operate more completely without regulatory oversight. As such, the limitations in their transparency may be acceptable to many users, who know that they're not operating in a regulated market and are willing to accept some risk for doing that.
- eximius 9y ago
  They do, with the caveat that they are not legally required to do so and there are documented cases of them declining to do so for large orders.
tedunangst 9y ago
The claim is that they are in fact holding an equivalent amount of USD for all Tether. It's an IOU. (No comment on whether this is true.) Bank of England couldn't maintain the peg because they weren't holding DM for literally all pounds in existence.
antonvs 9y ago
> Failing to understand how you could peg Tether to the USD and have people believe you. In principle, it's simple: people pay you USD for Tether, you charge them a small percentage fee, put the remaining USD in a reserve account, and issue the buyer a corresponding amount of Tether. You do the reverse to buy Tether back from people. For the trust issue, you get a reputable company to audit your reserves and Tether/USD transactions. If you do this, no defense of anything is needed - if someone wants to sell Tether, they can always come back to the company that issues it and exchange their Tether for some of the dollars in the reserve account at an exchange rate of 1:1 minus fees. In practice however, the auditing and transparency for Tether is not sufficient to be sure that this is what's actually happening. So the "having people believe you" part is definitely an issue right now. > Even the Bank of England failed to maintain the peg to the German Deutschmark some years ago. That's not the same kind of peg, at all. A Tether is just supposed to be a proxy for a USD. The pound and Deutschmark were two otherwise completely independent currencies, so the idea of pegging one to the other was dubious to start with. Here's a brief article which covers some of the issues with that peg: https://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp https://www.investopedia.com/ask/answers/08/george-soros-ban...
- samsonradu 9y ago
  > Tether is just supposed to be a proxy for USD. That would make sense indeed, so for every tether coin issued they’d normally have to pull a dollar out of circulation. Otherwise they re printing money isn’t it? Even if true, saying that they back it up is not enough.
  - samsonradu 9y ago
    Too late to edit. Now that I think of it this would make sense for the FED to actually use the blockchain tech to manage its currency supply. Instead of the printing press they issue cryptodollars which supposedly are better than paper because they can be easily and fastly moved around or whatever. But not for a 3rd party to just say: This is a dollar, but called differently, trust us, we issued it.

StavrosK 9y ago

You can peg tether to the usd simply by offering to always exchange one tether for one usd and vice versa, no?

tehlike 9y ago
The problem is, sonfar they issued north of 800m with no proof of reserves, and no professional audit to support their claims.
- samsonradu 9y ago
  That s the thing I don’t get, how do they “issue” tether? Because if one says they peg it to the dollar then it must follow the dollar’s inflation. Otherwise somebody is at a loss because there s more tether value than usd or viceversa, even if they were fully transparent and fair. Edit Unless of course tether is not a store of value in any way and just a fancy name for a dollar.
  - tehlike 9y ago
    The way it works is, i go to exchange a, and tell them hey i have this cryptocurrency and i have enough cash to back it up. People can withdraw money from me using these. If you do not verify my claims, you think this is a great idea, because now you can transact with usd(t). Formally these exchanges only used cross-coin exchanges. Now this is not a problem as long as you have _enough_ money to support withdrawals on an ongoing basis. Nobody knows you dont have enough cash to support all issued tokens, because seemingly, everything works nicely. With the recent hype, money keeps flowing. Until a mass withdrawal happens.
    - samsonradu 9y ago
      But why do I want tether in the first place? Why bother switching back and forth at all? I don’t see why would I want to hold tether. Can I buy a can of coke with it directly? What if the coke seller is a bit skeptical of tether and asks for 1.2 tether instead of one usd, just to play safe. Isn t this pressure applied to the exchange rate?
      - tehlike 9y ago
        You mean, instead of USD? Because most exchanges cannot and does not support withdrawals - they are virtual.
        samsonradu 9y ago
        But every tether "issued" is basically a dollar printed out of thin air if we're to trust Tether that it has the same value isn't it? > Because most exchanges cannot and does not support withdrawals - they are virtual. Can you elaborate? I'm not familiar with these exchanges, really curious. You mean exchanges accept cash for coins and don't allow withdrawals? :)
        antonvs 9y ago
        He means they don't support withdrawals of fiat currencies like USD or EUR. Many crypto exchanges only support withdrawal of crypto currencies. To allow deposit or withdrawal of fiat, exchanges tend to have to comply with international banking regulations, which requires a great deal of paperwork. As a result, only a few exchanges offer this - examples are Coinbase, Bitstamp, Bitfinex, Kraken. Before Tether existed, you couldn't buy or sell dollars or Euros on a pure crypto exchange. That's a big limitation. Among other things, Tether allows you to trade in USD on these crypto-only exchanges. Basically, one problem Tethers solve is allowing exchanges to operate more completely without regulatory oversight. As such, the limitations in their transparency may be acceptable to many users, who know that they're not operating in a regulated market and are willing to accept some risk for doing that.
eximius 9y ago
They do, with the caveat that they are not legally required to do so and there are documented cases of them declining to do so for large orders.

tedunangst 9y ago

The claim is that they are in fact holding an equivalent amount of USD for all Tether. It's an IOU. (No comment on whether this is true.) Bank of England couldn't maintain the peg because they weren't holding DM for literally all pounds in existence.

antonvs 9y ago

> Failing to understand how you could peg Tether to the USD and have people believe you. In principle, it's simple: people pay you USD for Tether, you charge them a small percentage fee, put the remaining USD in a reserve account, and issue the buyer a corresponding amount of Tether. You do the reverse to buy Tether back from people. For the trust issue, you get a reputable company to audit your reserves and Tether/USD transactions. If you do this, no defense of anything is needed - if someone wants to sell Tether, they can always come back to the company that issues it and exchange their Tether for some of the dollars in the reserve account at an exchange rate of 1:1 minus fees. In practice however, the auditing and transparency for Tether is not sufficient to be sure that this is what's actually happening. So the "having people believe you" part is definitely an issue right now. > Even the Bank of England failed to maintain the peg to the German Deutschmark some years ago. That's not the same kind of peg, at all. A Tether is just supposed to be a proxy for a USD. The pound and Deutschmark were two otherwise completely independent currencies, so the idea of pegging one to the other was dubious to start with. Here's a brief article which covers some of the issues with that peg: https://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp https://www.investopedia.com/ask/answers/08/george-soros-ban...

samsonradu 9y ago
> Tether is just supposed to be a proxy for USD. That would make sense indeed, so for every tether coin issued they’d normally have to pull a dollar out of circulation. Otherwise they re printing money isn’t it? Even if true, saying that they back it up is not enough.
- samsonradu 9y ago
  Too late to edit. Now that I think of it this would make sense for the FED to actually use the blockchain tech to manage its currency supply. Instead of the printing press they issue cryptodollars which supposedly are better than paper because they can be easily and fastly moved around or whatever. But not for a 3rd party to just say: This is a dollar, but called differently, trust us, we issued it.