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Lots of smart people have been claiming since 2015 that Tether was a ponzi fraud, that it didn't really have dollars to back the Tethers. But in fact Tether di

Lots of smart people have been claiming since 2015 that Tether was a ponzi fraud, that it didn't really have dollars to back the Tethers. But in fact Tether did have the money, at a real bank, and at this point that bank was Deltec Bank & Trust Ltd. in the Bahamas. Amazing, Tether actually was fully backed by dollars in an actual bank! But then Bitfinex took $625k of Tether reserves to make up for a separate fraud or government asset seizure. Bitfinex took $625 million in real money at a real bank from Tether, and in exchange gave Tether back $625 million in fake money at a fake bank. The real mystery to me is why rational traders continue to buy Tether at $0.9926, less than 1% from parity with USD. Why wouldn't people sell?

vkou 8y ago
> But in fact Tether did have the money, at a real bank, and at this point that bank was Deltec Bank & Trust Ltd. in the Bahamas. It had... Some amount of money. At a real bank. It's not yet clear that they had all of the reserve money at a real bank.
b_tterc_p 8y ago
Not an expert here but I don’t think this is correct. They had some money in the bank. They were supposed to have more. It shouldn’t be surprising that they have some cash given that they have sold so much Tether’s. I also don’t think tether makes it easy (or possible?) to sell Tether’s back for the $1. It’s “backed”, but it is a meaningless idea. It’s all the best parts of a bank without the hard parts. And is basically fraud.
- SeanAppleby 8y ago
  At one point their T&S explicitly said that tether had no obligation to buy back tether at any price at any time. They then changed it to be more opaque.
  - jerf 8y ago
    If there's any financial idea the crypto people just do not get, it's the idea of "backing". A currency is not backed by dollars unless I can convert that currency freely back into dollars. It does not constitute "backing" to have the money nominally somewhere in existence, but not actually available. Heck, who'd like a few hundred thousand jerfcoins? Come and get 'em! They're backed by dollars, in the sense that I guarantee there exists in the world many hundreds of thousands of dollars. jerfcoins don't give you any claim to those dollars, of course, but they're backed by them just the same! ("But jerf, what are US dollars backed by?" Purchasing from the US government the right to not be arrested and thrown in jail for lack of payment on taxes. Just 11 days ago, many people completed trading in their dollars for the year for that backing, so it's definitely a transaction that can done by real people. It may not be an aesthetically pleasing form of backing, but it seems to be working.)
    - paganel 8y ago
      > But jerf, what are US dollars backed by I agree with you almost 100%, just wanted to add that no current Government/State can back the nominal monetary mass flowing through its economy with real money, no matter the amount of taxes they're collecting. The reason being that the nominal monetary mass it's pretty big (to use an euphemism) compared to the real money flowing through the real economy. For example in 2008 the CDS market alone was at some point "valued" at close to $36 trillion [1], while for comparison the US GDP back then I'd say was around $14-15 trillion (give or take a few trillion). Yeas, I know the CDS market back then was a financial abomination, and I do know that a lot of those $36 trillion were probably money counted twice or thrice or even more, but the idea remains. And that's just one market. What indeed still keeps this whole house of cards still standing, what keeps any financial system standing, is trust. And, as you very well put it, once you have the power to put people in jail (or launch inter-continental ballistic missiles) you kind of have a lot of trust by default. But there are moments when no matter how powerful you are you still manage to lose that trust, see the USSR post 1989 or the Spanish Empire during and after the rule of Philip II [2], that's when things turn nasty: > Charles V had left his son Philip with a debt of about 36 million ducats and an annual deficit of 1 million ducats. This debt caused Phillip II to default on loans in 1557, 1560, 1575, and 1596 (including debt to Poland, known as Neapolitan sums). Lenders had no power over the King and could not force him to repay his loans. These defaults were just the beginning of Spain's economic troubles as its kings would default six more times in the next 65 years.[9] Aside from reducing state revenues for overseas expeditions, the domestic policies of Philip II further burdened the Spanish kingdoms and would, in the following century, contribute to its decline, as maintained by some historians.[10] [1] https://www.bis.org/publ/qtrpdf/r_qt1806/images/graph-1.jpg https://www.bis.org/publ/qtrpdf/r_qt1806/images/graph-1.jpg [2] https://en.wikipedia.org/wiki/Philip_II_of_Spain#Economy https://en.wikipedia.org/wiki/Philip_II_of_Spain#Economy
  - Scoundreller 8y ago
    I was excited for the concept of DOWN banking: Deposit Often, Withdraw Never.
    - jandrese 8y ago
      One advantage of this is Ponzi schemes never have to fall apart. As long as people are willing to HODL forever your crows never have to come in to roost.
- panarky 8y ago
  > It’s “backed”, but it is a meaningless idea Let's assume that it's impossible to sell Tethers for dollars. I don't think that's completely true, but that's the "steel man" argument. Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency? You would know this was happening if the price of Tether dropped far below $1.00, or if the supply of Tether contracted as Tethers were destroyed on redemption. The fact that we don't see either of these things tells me that the backing isn't actually "meaningless". Rational traders with their own capital at stake don't appear to be selling.
  - treis 8y ago
    >Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency? They (or at least some) are. BTC crashed about 10% yesterday.
    - panarky 8y ago
      If people are selling Tether to buy BTC, the price of Tether should decline while the price of BTC should increase. What actually happened is the price of Tether dropped < 1% and the price of BTC reverted to where it was a week ago.
      - henryfjordan 8y ago
        My understanding is that the existence of Tether provides liquidity and confidence in BTC (especially the ability to sell quickly). If Tether takes a big confidence hit that might affect BTC strongly.
      - grey-area 8y ago
        Are you sure the price of tether is accurate? Are you really sure? It appears to be defying gravity while the backer is accused of fraud and doesn't have funds to back it. These exchanges are unregulated and unaudited, the movements in price are inexplicable, and the simplest explanation is fraud.
- deleted 8y ago
  [deleted]
eunoia 8y ago
> The real mystery to me is why rational traders continue to buy Tether at $0.9926, less than 1% from parity with USD. Why wouldn't people sell? They are. Take a look at the BTC spread between USD and USDT exchanges. (almost $300 atm) [1] https://www.cryptocompare.com/coins/btc/markets/USD https://www.cryptocompare.com/coins/btc/markets/USD
- Canada 8y ago
  Well, every previous incident, those who bet against tether lost. Those who went long on tether picked up a nice quick profit and laughed at the fools on the wrong side of the trade. We'll see what happens this time.
paulgb 8y ago
> The real mystery to me is why rational traders continue to buy Tether at $0.9926 Unless there is reason to believe otherwise that I'm not aware of, shouldn't we assume that this is just Tether buying up the supply to keep the peg? Isn't that how a stablecoin is supposed to work?
- panarky 8y ago
  > this is just Tether buying up the supply to keep the peg Buying up the supply with what? Skeptics claim Tether isn't backed by actual dollars, so it's impossible to convert Tether for dollars. But if Tether is buying up the supply, what are the sellers of Tether receiving in return? If they're getting dollars, then doesn't that refute the skeptics' claims?
  - paulgb 8y ago
    Skeptics generally claim it's not backed 1:1, not that they have zero dollars left. They can afford to buy up the demand until at some point they can't.
    - jandrese 8y ago
      Otherwise known as a Ponzi scheme.
      - jerguismi 8y ago
        More like fractional reserve banking.
        Scoundreller 8y ago
        You can be solvent (assets = liabilities) with fractional cash reserves. You can also be insolvent (assets << liabilities), in which you must be fractional too.
        8y ago
iambvk 8y ago
If they are not actually backed by dollar numbers, but with volatile assets (like real estate, stock, metals, or bitcoin, etc.), their holdings are not correct.
- jfk13 8y ago
  Some gems from their Legal pages: > Tether Tokens are 100% backed by by Tether’s Reserves. But... > “Reserves” means traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities; and... > Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. So even if they agree to redeem your Tether Tokens (which they do not promise to do), you might get some other kind of "security" rather than actual cash. If that happened to be another crypto token, for example, and if you then have trouble exchanging that token for cash (or its value is busy crashing)... well, too bad.
  - tim333 8y ago
    So Tether holders may get redemption in Bitfinex IOUs shortly?
    - vkou 8y ago
      Well, they did just re-invent fractional reserve banking, except without FDIC insurance, or any audit controls.
dclusin 8y ago
> Why wouldn't people sell? Tether could be intervening in the markets and propping it up with reserves, similar to how banks prop up a stock for a while after IPO. Or it could be that Tether market is still irrational. Everyone in the crypto space really wants a stablecoin that trades for a dollar. The number of people who trade and desire to have such a coin could outnumber the more rational market participants who say it's worthless.
- Scoundreller 8y ago
  Exactly. That’s how pegs are maintained. If Tether has full reserves, it makes sense for them to maintain the peg: buy Tethers at a 1%+ discount and cancel them ad nauseum. I’m sure some desperate holders would even take a 10% haircut right now. This is no different than a corporation’s treasury buying back its own stock and cancelling it.
  - repomies68 8y ago
    Full reserves aren't required to maintain the peg, fractional reserves can work as well. However with fractional reserves there is a risk that the backer might lose money.
repomies68 8y ago
People trust banks, even when the fiat in banks isn't fully backed. Usually the reserve ration is backed to something like 10%. To my understanding tether is just like a bank, except the accounts are kept on Blockchain instead of private database. So, it is rational to use them if you think they habe enough reserves to keep them liquid. Full backing is not needed, as it isn't needed with banks as well.
- Scoundreller 8y ago
  Banks generally have full backing, verified by frequent auditing, it just may not be all cash or cash-like assets. But then again, not all of bank’s liabilities are cash either. E.g.: CDs. Things get hairy when their long-term assets go down in value and/or there’s a sudden demand for withdrawals triggering a mismatch between short-term liabilities and long-term assets. We have strikingly little audits from this stablecoin. Do assets match liabilities or not? For a bank, they always will or else they get shutdown before losses become too great.
  - jerguismi 8y ago
    Yeah they are loans, like apartment loans. The loan might be for something like 20 years and might default. In my opinion having assets like house loans is pretty far away from being "backed". If enough customers want their money out, bank can go bust. If they have lent the money to wrong people, they also can go bust. Banks go bust now and then.
    - Scoundreller 8y ago
      The bank can sell the loan off to another bank if it needs cash now. It could be at a loss, or it could be at a profit depending on how interest rates chgd since issue. It takes a lot for a bank to go bust when they can do that with their assets if they go through their reserves. The value of their loans may be good enough to sell shares to investors instead of selling to another bank. The trick is to loan out to lots of different people so any one group being “wrong” is made up with profits. We’re seeing none of that with this stablecoin. They’ve put a huge chunk of money into a ???bank(s) in a ??? country, at best. What’s your definition of “backed”? Banks will gladly keep your fiat in an insured safety deposit box, but they’re going to charge you for the privilege. And the government will just inflate away your attempt at deflation.
mannykannot 8y ago
Another mystery for me is why, if the backing actually existed, did Tether refuse to have that verified through independent auditing? I can think of a couple of reasons why not, but one of them is that it was not actually unencumbered, and another is that it might be inconvenient down the road for it to have been clearly established that, at one point, Tether really did have the cash.
- tialaramex 8y ago
  Particularly extraordinary because if you're a crook and you need an audit you can get one for a price. All the Big Four firms signed off on accounts at (mostly Eastern European) banks which subsequently turned out to be either straight up frauds or so corrupt that it hardly matters. So Tether not only couldn't manage to get a clean audit they couldn't find a way to bribe their way past this obstacle or they weren't willing to splash the money to do so.
  - tim333 8y ago
    They are reluctant to do that though. It can be very expensive if they get sued.
  - londons_explore 8y ago
    The cost of the audit is the main barrier. The CEO of bitfinex is super stingy, and if something can't be done with minimum wage workers, it probably won't be done at all.
Tsubasachan 8y ago
Rational traders? What planet do you live on. Humans are not rational. The world of finances has more to do with psychiatry and sociology.

vkou 8y ago

> But in fact Tether did have the money, at a real bank, and at this point that bank was Deltec Bank & Trust Ltd. in the Bahamas. It had... Some amount of money. At a real bank. It's not yet clear that they had all of the reserve money at a real bank.

b_tterc_p 8y ago

Not an expert here but I don’t think this is correct. They had some money in the bank. They were supposed to have more. It shouldn’t be surprising that they have some cash given that they have sold so much Tether’s. I also don’t think tether makes it easy (or possible?) to sell Tether’s back for the $1. It’s “backed”, but it is a meaningless idea. It’s all the best parts of a bank without the hard parts. And is basically fraud.

SeanAppleby 8y ago
At one point their T&S explicitly said that tether had no obligation to buy back tether at any price at any time. They then changed it to be more opaque.
- jerf 8y ago
  If there's any financial idea the crypto people just do not get, it's the idea of "backing". A currency is not backed by dollars unless I can convert that currency freely back into dollars. It does not constitute "backing" to have the money nominally somewhere in existence, but not actually available. Heck, who'd like a few hundred thousand jerfcoins? Come and get 'em! They're backed by dollars, in the sense that I guarantee there exists in the world many hundreds of thousands of dollars. jerfcoins don't give you any claim to those dollars, of course, but they're backed by them just the same! ("But jerf, what are US dollars backed by?" Purchasing from the US government the right to not be arrested and thrown in jail for lack of payment on taxes. Just 11 days ago, many people completed trading in their dollars for the year for that backing, so it's definitely a transaction that can done by real people. It may not be an aesthetically pleasing form of backing, but it seems to be working.)
  - paganel 8y ago
    > But jerf, what are US dollars backed by I agree with you almost 100%, just wanted to add that no current Government/State can back the nominal monetary mass flowing through its economy with real money, no matter the amount of taxes they're collecting. The reason being that the nominal monetary mass it's pretty big (to use an euphemism) compared to the real money flowing through the real economy. For example in 2008 the CDS market alone was at some point "valued" at close to $36 trillion [1], while for comparison the US GDP back then I'd say was around $14-15 trillion (give or take a few trillion). Yeas, I know the CDS market back then was a financial abomination, and I do know that a lot of those $36 trillion were probably money counted twice or thrice or even more, but the idea remains. And that's just one market. What indeed still keeps this whole house of cards still standing, what keeps any financial system standing, is trust. And, as you very well put it, once you have the power to put people in jail (or launch inter-continental ballistic missiles) you kind of have a lot of trust by default. But there are moments when no matter how powerful you are you still manage to lose that trust, see the USSR post 1989 or the Spanish Empire during and after the rule of Philip II [2], that's when things turn nasty: > Charles V had left his son Philip with a debt of about 36 million ducats and an annual deficit of 1 million ducats. This debt caused Phillip II to default on loans in 1557, 1560, 1575, and 1596 (including debt to Poland, known as Neapolitan sums). Lenders had no power over the King and could not force him to repay his loans. These defaults were just the beginning of Spain's economic troubles as its kings would default six more times in the next 65 years.[9] Aside from reducing state revenues for overseas expeditions, the domestic policies of Philip II further burdened the Spanish kingdoms and would, in the following century, contribute to its decline, as maintained by some historians.[10] [1] https://www.bis.org/publ/qtrpdf/r_qt1806/images/graph-1.jpg https://www.bis.org/publ/qtrpdf/r_qt1806/images/graph-1.jpg [2] https://en.wikipedia.org/wiki/Philip_II_of_Spain#Economy https://en.wikipedia.org/wiki/Philip_II_of_Spain#Economy
- Scoundreller 8y ago
  I was excited for the concept of DOWN banking: Deposit Often, Withdraw Never.
  - jandrese 8y ago
    One advantage of this is Ponzi schemes never have to fall apart. As long as people are willing to HODL forever your crows never have to come in to roost.
panarky 8y ago
> It’s “backed”, but it is a meaningless idea Let's assume that it's impossible to sell Tethers for dollars. I don't think that's completely true, but that's the "steel man" argument. Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency? You would know this was happening if the price of Tether dropped far below $1.00, or if the supply of Tether contracted as Tethers were destroyed on redemption. The fact that we don't see either of these things tells me that the backing isn't actually "meaningless". Rational traders with their own capital at stake don't appear to be selling.
- treis 8y ago
  >Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency? They (or at least some) are. BTC crashed about 10% yesterday.
  - panarky 8y ago
    If people are selling Tether to buy BTC, the price of Tether should decline while the price of BTC should increase. What actually happened is the price of Tether dropped < 1% and the price of BTC reverted to where it was a week ago.
    - henryfjordan 8y ago
      My understanding is that the existence of Tether provides liquidity and confidence in BTC (especially the ability to sell quickly). If Tether takes a big confidence hit that might affect BTC strongly.
    - grey-area 8y ago
      Are you sure the price of tether is accurate? Are you really sure? It appears to be defying gravity while the backer is accused of fraud and doesn't have funds to back it. These exchanges are unregulated and unaudited, the movements in price are inexplicable, and the simplest explanation is fraud.
deleted 8y ago
[deleted]

eunoia 8y ago

> The real mystery to me is why rational traders continue to buy Tether at $0.9926, less than 1% from parity with USD. Why wouldn't people sell? They are. Take a look at the BTC spread between USD and USDT exchanges. (almost $300 atm) [1] https://www.cryptocompare.com/coins/btc/markets/USD https://www.cryptocompare.com/coins/btc/markets/USD

Canada 8y ago
Well, every previous incident, those who bet against tether lost. Those who went long on tether picked up a nice quick profit and laughed at the fools on the wrong side of the trade. We'll see what happens this time.

paulgb 8y ago

> The real mystery to me is why rational traders continue to buy Tether at $0.9926 Unless there is reason to believe otherwise that I'm not aware of, shouldn't we assume that this is just Tether buying up the supply to keep the peg? Isn't that how a stablecoin is supposed to work?

panarky 8y ago
> this is just Tether buying up the supply to keep the peg Buying up the supply with what? Skeptics claim Tether isn't backed by actual dollars, so it's impossible to convert Tether for dollars. But if Tether is buying up the supply, what are the sellers of Tether receiving in return? If they're getting dollars, then doesn't that refute the skeptics' claims?
- paulgb 8y ago
  Skeptics generally claim it's not backed 1:1, not that they have zero dollars left. They can afford to buy up the demand until at some point they can't.
  - jandrese 8y ago
    Otherwise known as a Ponzi scheme.
    - jerguismi 8y ago
      More like fractional reserve banking.
      - Scoundreller 8y ago
        You can be solvent (assets = liabilities) with fractional cash reserves. You can also be insolvent (assets << liabilities), in which you must be fractional too.
        8y ago

iambvk 8y ago

If they are not actually backed by dollar numbers, but with volatile assets (like real estate, stock, metals, or bitcoin, etc.), their holdings are not correct.

jfk13 8y ago
Some gems from their Legal pages: > Tether Tokens are 100% backed by by Tether’s Reserves. But... > “Reserves” means traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities; and... > Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. So even if they agree to redeem your Tether Tokens (which they do not promise to do), you might get some other kind of "security" rather than actual cash. If that happened to be another crypto token, for example, and if you then have trouble exchanging that token for cash (or its value is busy crashing)... well, too bad.
- tim333 8y ago
  So Tether holders may get redemption in Bitfinex IOUs shortly?
  - vkou 8y ago
    Well, they did just re-invent fractional reserve banking, except without FDIC insurance, or any audit controls.

dclusin 8y ago

> Why wouldn't people sell? Tether could be intervening in the markets and propping it up with reserves, similar to how banks prop up a stock for a while after IPO. Or it could be that Tether market is still irrational. Everyone in the crypto space really wants a stablecoin that trades for a dollar. The number of people who trade and desire to have such a coin could outnumber the more rational market participants who say it's worthless.

Scoundreller 8y ago
Exactly. That’s how pegs are maintained. If Tether has full reserves, it makes sense for them to maintain the peg: buy Tethers at a 1%+ discount and cancel them ad nauseum. I’m sure some desperate holders would even take a 10% haircut right now. This is no different than a corporation’s treasury buying back its own stock and cancelling it.
- repomies68 8y ago
  Full reserves aren't required to maintain the peg, fractional reserves can work as well. However with fractional reserves there is a risk that the backer might lose money.

repomies68 8y ago

People trust banks, even when the fiat in banks isn't fully backed. Usually the reserve ration is backed to something like 10%. To my understanding tether is just like a bank, except the accounts are kept on Blockchain instead of private database. So, it is rational to use them if you think they habe enough reserves to keep them liquid. Full backing is not needed, as it isn't needed with banks as well.

Scoundreller 8y ago
Banks generally have full backing, verified by frequent auditing, it just may not be all cash or cash-like assets. But then again, not all of bank’s liabilities are cash either. E.g.: CDs. Things get hairy when their long-term assets go down in value and/or there’s a sudden demand for withdrawals triggering a mismatch between short-term liabilities and long-term assets. We have strikingly little audits from this stablecoin. Do assets match liabilities or not? For a bank, they always will or else they get shutdown before losses become too great.
- jerguismi 8y ago
  Yeah they are loans, like apartment loans. The loan might be for something like 20 years and might default. In my opinion having assets like house loans is pretty far away from being "backed". If enough customers want their money out, bank can go bust. If they have lent the money to wrong people, they also can go bust. Banks go bust now and then.
  - Scoundreller 8y ago
    The bank can sell the loan off to another bank if it needs cash now. It could be at a loss, or it could be at a profit depending on how interest rates chgd since issue. It takes a lot for a bank to go bust when they can do that with their assets if they go through their reserves. The value of their loans may be good enough to sell shares to investors instead of selling to another bank. The trick is to loan out to lots of different people so any one group being “wrong” is made up with profits. We’re seeing none of that with this stablecoin. They’ve put a huge chunk of money into a ???bank(s) in a ??? country, at best. What’s your definition of “backed”? Banks will gladly keep your fiat in an insured safety deposit box, but they’re going to charge you for the privilege. And the government will just inflate away your attempt at deflation.

mannykannot 8y ago

Another mystery for me is why, if the backing actually existed, did Tether refuse to have that verified through independent auditing? I can think of a couple of reasons why not, but one of them is that it was not actually unencumbered, and another is that it might be inconvenient down the road for it to have been clearly established that, at one point, Tether really did have the cash.

tialaramex 8y ago
Particularly extraordinary because if you're a crook and you need an audit you can get one for a price. All the Big Four firms signed off on accounts at (mostly Eastern European) banks which subsequently turned out to be either straight up frauds or so corrupt that it hardly matters. So Tether not only couldn't manage to get a clean audit they couldn't find a way to bribe their way past this obstacle or they weren't willing to splash the money to do so.
- tim333 8y ago
  They are reluctant to do that though. It can be very expensive if they get sued.
- londons_explore 8y ago
  The cost of the audit is the main barrier. The CEO of bitfinex is super stingy, and if something can't be done with minimum wage workers, it probably won't be done at all.

Tsubasachan 8y ago

Rational traders? What planet do you live on. Humans are not rational. The world of finances has more to do with psychiatry and sociology.