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If USDT goes to zero, every exchange that trades it becomes immediately insolvent.

gojomo 9y ago
Only an exchange that is somehow on-the-hook to redeem USDT for actual USD at parity would have problems. An exchange could offer USDT trading but still have negligible exposure to its value itself. And then if USDT goes to zero – radically breaking the intended parity-with-USD – direct losses should be confined to USDT holders, not exchanges.
dragonwriter 9y ago
> If USDT goes to zero, every exchange that trades it becomes immediately insolvent. Nope. They'd only be insolvent if they had a legal binding commitment to redeem USDT 1:1 in dollars, and only if they didn't have sufficient other USD reserves to do so.
- ThrustVectoring 9y ago
  The exchanges get sued by the Tether bagholders, and everyone else gets spooked and attempts to exit. So not insolvent, but no active business activities and a bunch of lawsuits incoming, and might as well be insolvent.
  - dragonwriter 9y ago
    > The exchanges get sued by the Tether bagholders On what basis? Other than ones that commingle USD and USDT and/or are organizationally associated with Tether (which, I think, is mostly Bitfinex and Bitfinex), I'm not seeing where there is much basis for holding the exchange liable for the collapse in value of a traded asset.
    - PeterisP 9y ago
      The nuances are tricky, it depends on how USDT is eventually treated by courts. But, for example, if it happens to get legally treated as an unregistered security, then the exchange would be fully liable for the losses of their customers, since it was not allowed to sell unregistered securities to general public/unaccredited investors. And this argument by itself seems sufficient to press a serious prolonged case, even if the courts later decide that no, this interpretation isn't the right one. In general, being an intermediary in shady products may easily mean that you're (also) liable. "Normal" stock exchanges and stock brokers are the exception, they have specially listed immunity exceptions that apply if and only if they fulfil a bunch of conditions; otherwise people may well sue you to cover their losses just because it seems that it's easier to enforce judgments on you than a Hong Kong company.
    - ThrustVectoring 9y ago
      Fraud, for accepting "USD" deposits and hiding the fact that they silently convert your balance to USDT. And they don't have to win the lawsuit, they just need to not get it dismissed outright and scare others into leaving the exchange.
      - dragonwriter 9y ago
        > Fraud, for accepting "USD" deposits and hiding the fact that they silently convert your balance to USDT. Other than Bitfinex (with he comingling issue mentioned upthread), I understood the main use case for USDT on exchanges is to avoid even touching USD transactions in either direction; for exchanges doing this, they wouldn't be at risk here. > And they don't have to win the lawsuit, they just need to not get it dismissed outright Right, but I'm not seeing where you get a colorable cause of action that avoids that for a typical USDT-supporting exchange from a USDT value collapse.
moduspol 9y ago
Exchanges don't actually hold the things they're trading. They're just matchmakers who take a percentage when trades occur. Anything creating high volume benefits exchanges, even if that volume is everyone trying to sell their tethers for other crypto.
- mitchellberry 9y ago
  >Exchanges don't actually hold the things they're trading. Bitfinex has a few billion in publicly known cold wallets.
  - moduspol 9y ago
    Well Bitfinex is a special case relating to Tether, but I'm sure all exchanges hold some amount of money in some way to support operations. It's just misunderstanding how exchanges work to think a price drop in a thing being traded puts exchanges at risk. It would only do so if the exchange has a strange unrelated agreement (like to trade 1 USDT for 1 USD), or were holding the money they're using to run their operation in that asset. Except for maybe Bitfinex (because of the special case), no exchanges are doing that with USDT.

Only an exchange that is somehow on-the-hook to redeem USDT for actual USD at parity would have problems. An exchange could offer USDT trading but still have negligible exposure to its value itself. And then if USDT goes to zero – radically breaking the intended parity-with-USD – direct losses should be confined to USDT holders, not exchanges.

dragonwriter 9y ago

> If USDT goes to zero, every exchange that trades it becomes immediately insolvent. Nope. They'd only be insolvent if they had a legal binding commitment to redeem USDT 1:1 in dollars, and only if they didn't have sufficient other USD reserves to do so.

ThrustVectoring 9y ago
The exchanges get sued by the Tether bagholders, and everyone else gets spooked and attempts to exit. So not insolvent, but no active business activities and a bunch of lawsuits incoming, and might as well be insolvent.
- dragonwriter 9y ago
  > The exchanges get sued by the Tether bagholders On what basis? Other than ones that commingle USD and USDT and/or are organizationally associated with Tether (which, I think, is mostly Bitfinex and Bitfinex), I'm not seeing where there is much basis for holding the exchange liable for the collapse in value of a traded asset.
  - PeterisP 9y ago
    The nuances are tricky, it depends on how USDT is eventually treated by courts. But, for example, if it happens to get legally treated as an unregistered security, then the exchange would be fully liable for the losses of their customers, since it was not allowed to sell unregistered securities to general public/unaccredited investors. And this argument by itself seems sufficient to press a serious prolonged case, even if the courts later decide that no, this interpretation isn't the right one. In general, being an intermediary in shady products may easily mean that you're (also) liable. "Normal" stock exchanges and stock brokers are the exception, they have specially listed immunity exceptions that apply if and only if they fulfil a bunch of conditions; otherwise people may well sue you to cover their losses just because it seems that it's easier to enforce judgments on you than a Hong Kong company.
  - ThrustVectoring 9y ago
    Fraud, for accepting "USD" deposits and hiding the fact that they silently convert your balance to USDT. And they don't have to win the lawsuit, they just need to not get it dismissed outright and scare others into leaving the exchange.
    - dragonwriter 9y ago
      > Fraud, for accepting "USD" deposits and hiding the fact that they silently convert your balance to USDT. Other than Bitfinex (with he comingling issue mentioned upthread), I understood the main use case for USDT on exchanges is to avoid even touching USD transactions in either direction; for exchanges doing this, they wouldn't be at risk here. > And they don't have to win the lawsuit, they just need to not get it dismissed outright Right, but I'm not seeing where you get a colorable cause of action that avoids that for a typical USDT-supporting exchange from a USDT value collapse.

moduspol 9y ago

Exchanges don't actually hold the things they're trading. They're just matchmakers who take a percentage when trades occur. Anything creating high volume benefits exchanges, even if that volume is everyone trying to sell their tethers for other crypto.

mitchellberry 9y ago
>Exchanges don't actually hold the things they're trading. Bitfinex has a few billion in publicly known cold wallets.
- moduspol 9y ago
  Well Bitfinex is a special case relating to Tether, but I'm sure all exchanges hold some amount of money in some way to support operations. It's just misunderstanding how exchanges work to think a price drop in a thing being traded puts exchanges at risk. It would only do so if the exchange has a strange unrelated agreement (like to trade 1 USDT for 1 USD), or were holding the money they're using to run their operation in that asset. Except for maybe Bitfinex (because of the special case), no exchanges are doing that with USDT.