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Tether claims to be backed by USD but could easily be a money printing press injecting fake value into the crypto markets. According to their own data, they hav

Tether claims to be backed by USD but could easily be a money printing press injecting fake value into the crypto markets. According to their own data, they have created $1.6B worth of tethers: https://wallet.tether.to/transparency https://wallet.tether.to/transparency

paulmd 9y ago
Don't worry though, they have $900k of assets backing up that $1.6B of Tethers! No problemo! 1800x leverage is a walk in the park right guys? /s
- dannyw 9y ago
  The USD backing Tethers could be used to buy Tethers! Instant capitalisation!
  - qubex 9y ago
    That’s comfortingly close to fractional reserve banking (which unfashionably I’m a big fan of).
    - Kelbit 9y ago
      Except in a real fractional reserve system, the central bank usually sets reserve and/or capital requirements.
      - qubex 9y ago
        Yep, but that’s a legal requirement tacked on by governments, not an actual theoretical requirement.
        notahacker 9y ago
        Sure, but assuming Tether are lying about their instrument being fully backed it doesn't meet any of the theoretical requirements either. Fractional reserve relies on banks being strongly incentivised not to issue too many bank notes because they earn profits only on repaid loans issued to creditworthy borrowers, not from the act of printing the bank note to sell for currency. Even in the absence of regulation, centralised clearing and interbank loan markets and a central bank as lender of last resort, fractional reserve depends on bank notes circulating and retaining value because enough people actually need them to meet debt repayment obligations, not on sufficient numbers of people believing that it's fully backed by the financial asset they actually want in their portfolio. (Also, the history of bank runs suggests the legal requirement might have been a rather good idea)
        qubex 9y ago
        I’m a macroeconomist, a disbeliever in current cryptocurrencies (because they do not allow fractional reserve banking because they have finite supply) and I absolutely agree with you. I was being facetious further up, I thought that was clear (but apparently it wasn’t).
        notahacker 9y ago
        Fair enough. Difficult to tell sarcasm from true believing from shilling on crypto threads these days :-)
      - beefield 9y ago
        Well, in theory you could run fractional reserve bank by letting your deposit customers decide whether they want or not be making deposits to you at any deposit rate you are offering. This would work if you disclosed your balance sheet and your customers were smart enough to make proper capital adequacy calculations on that. In the real world, however, I am not sure if disclosing the balance sheet matters, expected outcome (deposit holders losing their money) is pretty much the same.
        DenisM 9y ago
        Tragedy of the commons? I want all of my money lent out, but I also want the bank to have a reserve in case I need it, which means none of your money lent out. The only way out of this is for customers to bargain collectively for the proper reserve ratio.
        fjsolwmv 9y ago
        It just needs to hold each account in a separate trust with a specified policy.
        beefield 9y ago
        Nowadays the bank regulation is a bit more complicated than simple reserve requirements, and the capital held in "safe" assets (central bank deposits, government issued loans etc) is not there in the case if you need it (most of the time when you "need" your money, bank actually does not pay it out, but just changed whom it ows the money i.e. makes an account transfer), but it is there for the losses bank may make in their credit portfolio. A simple example: Bank has 90 deposits and 10 equity. That is used to finance 80 mortgages and 20 deposits in central banks. Now, if the deposit customers have full understanding what kind of mortgages the bank has issued, they can estimate how likely it is that more than 10 of the mortgages fail, bank goes bankrupt and the deposit holder does not get paid full. You see quickly that there is many ways how a bank kan reduce the risk in its credit portfolio. If the bank decides to lend only 10 and store 90 in central bank deposits, the risk of the bank losing more than 10 is quite small. but of course, you get more money from mortgages than from central bank, so you want to lend as much as you can to mortgages to maximize revenue. But then you need to pay also more to the (rational) deposit holders because of increased risk. You see also very quickly that even if the deposit holders had full understanding of the balance sheet, the calculations would be so difficult that wihtout regulation, most would inves their savings to banks that are riskier than what they think -> and lose their money.
      - stephen_g 9y ago
        Not to mention that in modern monetary systems, the central bank can always inject liquidity (new reserves) into the system if required (QE, etc.), and the Government also often insures people's bank deposits up to some limit. The Government can also choose to bail out the bank if required. There is literally no comparison. If Tether runs out of US dollars, they have no options, and people holding Tether have no recourse...
    - hinkley 9y ago
      Fractional reserve guarantees that the max multiplier between money in motion and money at rest is never more than 10x. If I’m supreme ruler of the world and I replace all currency with Hinkley Bucks, 100 of them in total, and I put them in the bank, they loan 90 to a guy who builds a house. The builder and all their suppliers and employees put that 90 in the bank, and the bank loans 81 to a guy starting a grocery store chain. Then those guys and the farmers bank that money and the bank loans out 72 bucks. On and on until the balance in everyone’s savings accounts adds up to 1000 bucks. And yet somehow the bank has all one hundred bucks in its vault. Because the rest is loans. If you increase the reserve to 11% then 100 bucks “disappear” from this economy. Going from 10 to 11% is a 10% increase in the reserve, and it [tanks] GDP. If you go the other way you dangerously increase the money supply very quickly. I can’t even conceive of how much more volatile 1/1800 is compared to 1/10.
      - hinkley 9y ago
        Continuing on: If you have no reserve, then the only limits are how many people want 100 bucks (so upper bound $700B) and how fast can you file the paperwork to make it happen. What’s the friction in the system. My fear is that their 1/1800 is that friction, and not a safety feature at all.
        deleted 9y ago
        [deleted]
      - fyi1183 9y ago
        The 10x thing is a common misconception generated by the fact that 10 is a nice round number that works well for this type of just-so story. The Wikipedia article on reserve requirements has a handy table by country, from which you can see that the required ratio is actually less than 10 in most of the developed world. In fact, several countries have no reserve requirements at all! Following your logic, those countries should be even more volatile than whatever is going on in crypto currency land. I think we can safely conclude your logic is flawed. Mind you, I still think the whole tether business is extremely fishy. I'm just annoyed by the spread of monetary just-so stories that pretend to apply to the real world. Reserve requirements are a red herring in modern monetary systems, because central banks will always guarantee liquidity by acting as a lender of last resort.
    - ufo 9y ago
      I think in times like this it is important to separate fractional reserve (only a portion of a bank's assets are cash reserves) and plain fraud (Tether Inc. are insolvent and don't hold all the assets they claim to)
    - stephen_g 9y ago
      It’s worth noting that ‘fractional reserve’ isn’t really how banks work anymore. That model implies that banks require reserves to lend money, but they actually don’t (except in the countries that have a reserve requirement, for compliance reasons). The central bank does need to ensure that enough reserves exist in the system to have enough liquidity for banks to transfer money between them, but the banks tend to hold as little as possible, as in most places they don’t get any return on them, so they lend them to other banks (banks cannot lend reserves to individuals) or exchange them for bonds. If they need more to fulfil transfer requirements, they can just borrow them from other banks or the ‘lender of last resort’ - the central bank itself. The interesting implication of this is that the central bank doesn’t really have direct control of the size of the money supply (as is implied by the ‘money multiplier’ myth). That is determined endogenously by the amount of lending the banks do (plus other sector’s - Government spending and current account surplus/deficit - contributions). This Bank of England (UK central bank) paper explains how the banks originate money - https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
      - qubex 9y ago
        Yes, I'm a macroeconomist, I dabble in these matters all day every day (actually not really, I run the family company nowadays, but anyway, this stuff is my bread and butter, supposedly)... I know that current western systems are better characterised as being endogenous money systems rather than fractional reserve (though the two are not mutually exclusive, as if the reserve ratio is not mandatory but flexible then banks can be doing fractional reserve while the central bank simultaneously does not have any control over the size of the money supply... which isn't that bizarre either because as one progresses up the hierarchy of money supplies (M0, M1, M2, M3...) one pretty quickly gets far from anything central banks can legiferate about and into the domain of “assets agents are willing to accept as valuable and as suitable for exchange”, such as cigarettes, art, or prime real estate. I'd argue that the endogenous money model most definitely isn't applicable to any cryptocurrency currently out there because maximum amounts are fixed, and thus (eventually) would be come unresponsive to market needs (and more technically, their derivative, the ‘speed’ with which money is introduced or removed, does not depend on the needs of the underlying economy and instead on technical aspects of the size of the mining network & cetera). Sorry I didn't answer earlier I didn't see your comment.

paulmd 9y ago

Don't worry though, they have $900k of assets backing up that $1.6B of Tethers! No problemo! 1800x leverage is a walk in the park right guys? /s

dannyw 9y ago
The USD backing Tethers could be used to buy Tethers! Instant capitalisation!
- qubex 9y ago
  That’s comfortingly close to fractional reserve banking (which unfashionably I’m a big fan of).
  - Kelbit 9y ago
    Except in a real fractional reserve system, the central bank usually sets reserve and/or capital requirements.
    - qubex 9y ago
      Yep, but that’s a legal requirement tacked on by governments, not an actual theoretical requirement.
      - notahacker 9y ago
        Sure, but assuming Tether are lying about their instrument being fully backed it doesn't meet any of the theoretical requirements either. Fractional reserve relies on banks being strongly incentivised not to issue too many bank notes because they earn profits only on repaid loans issued to creditworthy borrowers, not from the act of printing the bank note to sell for currency. Even in the absence of regulation, centralised clearing and interbank loan markets and a central bank as lender of last resort, fractional reserve depends on bank notes circulating and retaining value because enough people actually need them to meet debt repayment obligations, not on sufficient numbers of people believing that it's fully backed by the financial asset they actually want in their portfolio. (Also, the history of bank runs suggests the legal requirement might have been a rather good idea)
        qubex 9y ago
        I’m a macroeconomist, a disbeliever in current cryptocurrencies (because they do not allow fractional reserve banking because they have finite supply) and I absolutely agree with you. I was being facetious further up, I thought that was clear (but apparently it wasn’t).
        notahacker 9y ago
        Fair enough. Difficult to tell sarcasm from true believing from shilling on crypto threads these days :-)
    - beefield 9y ago
      Well, in theory you could run fractional reserve bank by letting your deposit customers decide whether they want or not be making deposits to you at any deposit rate you are offering. This would work if you disclosed your balance sheet and your customers were smart enough to make proper capital adequacy calculations on that. In the real world, however, I am not sure if disclosing the balance sheet matters, expected outcome (deposit holders losing their money) is pretty much the same.
      - DenisM 9y ago
        Tragedy of the commons? I want all of my money lent out, but I also want the bank to have a reserve in case I need it, which means none of your money lent out. The only way out of this is for customers to bargain collectively for the proper reserve ratio.
        fjsolwmv 9y ago
        It just needs to hold each account in a separate trust with a specified policy.
        beefield 9y ago
        Nowadays the bank regulation is a bit more complicated than simple reserve requirements, and the capital held in "safe" assets (central bank deposits, government issued loans etc) is not there in the case if you need it (most of the time when you "need" your money, bank actually does not pay it out, but just changed whom it ows the money i.e. makes an account transfer), but it is there for the losses bank may make in their credit portfolio. A simple example: Bank has 90 deposits and 10 equity. That is used to finance 80 mortgages and 20 deposits in central banks. Now, if the deposit customers have full understanding what kind of mortgages the bank has issued, they can estimate how likely it is that more than 10 of the mortgages fail, bank goes bankrupt and the deposit holder does not get paid full. You see quickly that there is many ways how a bank kan reduce the risk in its credit portfolio. If the bank decides to lend only 10 and store 90 in central bank deposits, the risk of the bank losing more than 10 is quite small. but of course, you get more money from mortgages than from central bank, so you want to lend as much as you can to mortgages to maximize revenue. But then you need to pay also more to the (rational) deposit holders because of increased risk. You see also very quickly that even if the deposit holders had full understanding of the balance sheet, the calculations would be so difficult that wihtout regulation, most would inves their savings to banks that are riskier than what they think -> and lose their money.
    - stephen_g 9y ago
      Not to mention that in modern monetary systems, the central bank can always inject liquidity (new reserves) into the system if required (QE, etc.), and the Government also often insures people's bank deposits up to some limit. The Government can also choose to bail out the bank if required. There is literally no comparison. If Tether runs out of US dollars, they have no options, and people holding Tether have no recourse...
  - hinkley 9y ago
    Fractional reserve guarantees that the max multiplier between money in motion and money at rest is never more than 10x. If I’m supreme ruler of the world and I replace all currency with Hinkley Bucks, 100 of them in total, and I put them in the bank, they loan 90 to a guy who builds a house. The builder and all their suppliers and employees put that 90 in the bank, and the bank loans 81 to a guy starting a grocery store chain. Then those guys and the farmers bank that money and the bank loans out 72 bucks. On and on until the balance in everyone’s savings accounts adds up to 1000 bucks. And yet somehow the bank has all one hundred bucks in its vault. Because the rest is loans. If you increase the reserve to 11% then 100 bucks “disappear” from this economy. Going from 10 to 11% is a 10% increase in the reserve, and it [tanks] GDP. If you go the other way you dangerously increase the money supply very quickly. I can’t even conceive of how much more volatile 1/1800 is compared to 1/10.
    - hinkley 9y ago
      Continuing on: If you have no reserve, then the only limits are how many people want 100 bucks (so upper bound $700B) and how fast can you file the paperwork to make it happen. What’s the friction in the system. My fear is that their 1/1800 is that friction, and not a safety feature at all.
      - deleted 9y ago
        [deleted]
    - fyi1183 9y ago
      The 10x thing is a common misconception generated by the fact that 10 is a nice round number that works well for this type of just-so story. The Wikipedia article on reserve requirements has a handy table by country, from which you can see that the required ratio is actually less than 10 in most of the developed world. In fact, several countries have no reserve requirements at all! Following your logic, those countries should be even more volatile than whatever is going on in crypto currency land. I think we can safely conclude your logic is flawed. Mind you, I still think the whole tether business is extremely fishy. I'm just annoyed by the spread of monetary just-so stories that pretend to apply to the real world. Reserve requirements are a red herring in modern monetary systems, because central banks will always guarantee liquidity by acting as a lender of last resort.
  - ufo 9y ago
    I think in times like this it is important to separate fractional reserve (only a portion of a bank's assets are cash reserves) and plain fraud (Tether Inc. are insolvent and don't hold all the assets they claim to)
  - stephen_g 9y ago
    It’s worth noting that ‘fractional reserve’ isn’t really how banks work anymore. That model implies that banks require reserves to lend money, but they actually don’t (except in the countries that have a reserve requirement, for compliance reasons). The central bank does need to ensure that enough reserves exist in the system to have enough liquidity for banks to transfer money between them, but the banks tend to hold as little as possible, as in most places they don’t get any return on them, so they lend them to other banks (banks cannot lend reserves to individuals) or exchange them for bonds. If they need more to fulfil transfer requirements, they can just borrow them from other banks or the ‘lender of last resort’ - the central bank itself. The interesting implication of this is that the central bank doesn’t really have direct control of the size of the money supply (as is implied by the ‘money multiplier’ myth). That is determined endogenously by the amount of lending the banks do (plus other sector’s - Government spending and current account surplus/deficit - contributions). This Bank of England (UK central bank) paper explains how the banks originate money - https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
    - qubex 9y ago
      Yes, I'm a macroeconomist, I dabble in these matters all day every day (actually not really, I run the family company nowadays, but anyway, this stuff is my bread and butter, supposedly)... I know that current western systems are better characterised as being endogenous money systems rather than fractional reserve (though the two are not mutually exclusive, as if the reserve ratio is not mandatory but flexible then banks can be doing fractional reserve while the central bank simultaneously does not have any control over the size of the money supply... which isn't that bizarre either because as one progresses up the hierarchy of money supplies (M0, M1, M2, M3...) one pretty quickly gets far from anything central banks can legiferate about and into the domain of “assets agents are willing to accept as valuable and as suitable for exchange”, such as cigarettes, art, or prime real estate. I'd argue that the endogenous money model most definitely isn't applicable to any cryptocurrency currently out there because maximum amounts are fixed, and thus (eventually) would be come unresponsive to market needs (and more technically, their derivative, the ‘speed’ with which money is introduced or removed, does not depend on the needs of the underlying economy and instead on technical aspects of the size of the mining network & cetera). Sorry I didn't answer earlier I didn't see your comment.