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Although I agree with the author's position that an awful lot of sketchy things are happening, and I'm sure happy I don't own any of this so-called stable coin,

• phdp 8y ago
  It is different though. The FDIC would force the bank into receivership and return the insured money to account holders. That doesn’t exist for tether.
  • firekvz 8y ago
    Wouldn't this just be the gov giving free money to the banks so they can pay?
    • empath75 8y ago
      They pay for insurance in case this happens.
    • lugg 8y ago
      No.. this only happens if the bank is bust.
      • Scoundreller 8y ago
        Governments have a long history of bailing out banks and other corps without zeroing their shareholders first.
        • lugg 8y ago
          Yes but these guarantees are only accessable in receivership.
    • matt4077 8y ago
      No. The money would come from the federal deposit insurance program, which is funded by the banks, not the government. The money would also be recovered over time, when the bank’s loans become due and other assets are liquidated.
      • notahacker 8y ago
        In general the money would come long before the FDIC get involved, because the role of the Fed (and other country equivalents) is ensuring that commercial banks can always borrow enough money to meet short term withdrawal requests if their loans aren't defaulting. Lending at n+x% because it can always borrow at currency at n% is a modern bank's business model. Needless to say this is quite different from having a business model where you don't have any right to borrow money and claim to be backing it 1:1 with actual dollars, but it turns out that the bulk of the not-necessarily matching amount of actual dollars you have is lent out to some other shady operation...
  • nickelcitymario 8y ago
    > The FDIC would force the bank into receivership and return the insured money to account holders. Fair point. If a run-on-the-bank only occured at a single bank, that would work. And that's probably a more fair comparison to my example of everyone taking out their money at all the banks. But for clarity, my statement was that the money to cover everyone's deposits at all the banks simply doesn't exist. The FDIC can only cover so much insured money before they just plain run out.
    • joshfraser 8y ago
      And if the FDIC didn't have enough money, the government would start printing it like crazy and the US would start looking more like Venezuela in a very short period of time.
      • nickelcitymario 8y ago
        Thank you. I shoulda just said "Venezuela", because it's the perfect modern example.
      • bluquark 8y ago
        Bank collapses happen during times of deflation. In that environment, printing money like crazy just returns the financial system to normal, low levels of inflation.
      • shkkmo 8y ago
        Venezuela has more significant issues than "printing money like crazy"
      • gamblor956 8y ago
        Small amounts of inflation are a good thing. Deflation in a currency is almost always bad, and this is why limited-issue crypo like bitcoin will never replace real currencies.
    • jellicle 8y ago
      The USA can print as many dollar bills as needed, right? But Tether cannot.
• me_again 8y ago
  Yes but if everyone tries to take their all their money out of a single regular bank, the FDIC will cover it.
• snowwrestler 8y ago
  This is a strength of a so-called “fiat” currency, which is that if we suddenly need more of it, we can just create it. Banks are stable in 2019 because national governments back their stability.
  • nickelcitymario 8y ago
    Fair enough. We'll just print our way out of the problem. Except, that has obvious problems too. Consider the "Fractional" in Fractional Reserve Banking. If a bank only needs to have 10% of deposits on reserve (and I believe it's quite a bit lower than that in most countries), and there was a run on a bank, governments would need to print 9x more money than the bank has on deposit. What does that do to the value of money? Depends on the size of the bank. But what if it happened to ALL the banks? What if we collectively lost confidence in our banks, and demanded our deposits back? If our solution is to print our way out of it, then congratulations you've dropped the value of all currency by 90%. It now takes $100 to buy what used to only cost $10. Look, I'm not arguing whether this is good or bad. There's a lot of benefits to fiat currencies and fractional reserve banking. But let's not pretend the risk doesn't exist, either.
    • Frondo 8y ago
      But what set of circumstances would lead to this specific sequence of events? "Every bank customer wants to withdraw all of their money into cash on the same day." ??? I don't mean this as snark but that's a hypothetical that seems far less plausible than a lot of other world-ending scenarios, so I'm curious why you so much stock in its risk profile.
      • nickelcitymario 8y ago
        The fact that it has happened before?
        • Frondo 8y ago
          When did a bank run on "all the banks" happen? Referring to what you said here: > But what if it happened to ALL the banks?
• Aqua 8y ago
  The problem is that it's the point behind the construct called "stablecoin". It's called stable because in theory one coin should be worth one dollar and all(most?) companies behind such coins claim that all issued coins are backed by real dollars.
• cesarb 8y ago
  > With Tether, it is at least plausible that the money still exists and is simply frozen due to some terrible business decisions. With banks, the money doesn't exist. You're missing a small detail: the money backing the Tether, if it exists, is held in a bank account.
  • nickelcitymario 8y ago
    ...good point.
• ShorsHammer 8y ago
  Out of the two groups both trying to redeem their money Tether would at least be able to pay the overwhelming majority. The banks even with Federal government assistance and emergency measures would struggle to pay a third. It would simply make laws to prevent withdrawals as has happened the world over.
• mjlee 8y ago
  > But it seems unfair to hold Tether up to a higher standard than even our most established banks. I'm not sure it is. Tether states on their homepage: > Every tether is always 100% backed by our reserves So in this case, they're being held to a standard they have set for themselves.
  • dmix 8y ago
    When they failed to provide an audit and establish a relationship with a reliable bank, this statement became pointless. This was the only public "proof" Tether provided: https://cdn-images-1.medium.com/max/1250/1*CMifyYT4dLVdDDPRSwP64Q.jpeg https://cdn-images-1.medium.com/max/1250/1*CMifyYT4dLVdDDPRS... It was signed with a scribble, without even a name underneath, and provides no details. The bank is based in the Bahamas and stopped responding to press questions about their relationship with Tether as well. Whether it's crypto or a traditional bank, what matter's most is that it's set up in a legitimate way with transparent layers of responsibility and trust. A good example is how TrueUSD "stablecoin" provide's monthly statements with a reputable western auditor who is backing each report's findings. Tether should have been doing this since day 1. At a minimum.
    • stordoff 8y ago
      > stopped responding to press questions about their relationship with Tether as well Would you expect a bank to answer questions about who it does business with?
      • dmix 8y ago
        Yes, you're right they should respect privacy. But in this case Tether initiated it by claiming they had a relationship with the bank and clearly asked them for a letter stating such a fact. But still the bank "declined to confirm the information in the letter to reporters". > Tether, which has faced questions about whether it actually backs its popular namesake digital coins with dollars as it claims, released a letter attributed to Deltec Thursday that said the company has an account with the bank. Deltec spokeswoman Melanie Hutcheson, reached by phone Friday, declined to confirm or deny whether that’s true. https://www.bloomberg.com/news/articles/2018-11-02/bank-tied-to-tether-goes-quiet-on-relationship-with-crypto-firm https://www.bloomberg.com/news/articles/2018-11-02/bank-tied... That combined with the wording of the letter and the squiggle signature just makes this whole thing sketchy.
• calgaryeng 8y ago
  > But it seems unfair to hold Tether up to a higher standard than even our most established banks. You mean standards held on banks that are insured/backstopped by the government, have mass-adoption amongst the vast majority of the population, are regulated, and have disclosure requirements through securities regulators?
• capsulecorp 8y ago
  >But it seems unfair to hold Tether up to a higher standard than even our most established banks. As others have pointed out, this is a standard Tether set for themselves so how is that 'unfair' at all?
• simias 8y ago
  But banks don't claim otherwise. If bitfinex was upfront about only having a fractional reserve the story would be completely different. If you buy a beefsteak and you later realize that it was chicken would you say "well other shops do sell chicken and people are fine with that so why would I hold this butcher to a different standard?"
• Scoundreller 8y ago
  > With banks, the money doesn't exist. The money doesn’t, but the other assets on the balance sheet do.
• gamblor956 8y ago
  This is true of banks, too. In fact, if everyone took out all of their money from all of the banks, there isn't enough real money in existence to cover it. True, but we're not talking about "all banks," we're talking about one "bank." There's more than enough money to handle a bank run on a single bank. More importantly, while banks don't have 1:1 cash to deposits, they do have 1:1 assets to deposits, so economically their depositors can be made whole eventually. With Tether, the issue is that there is substantial evidence that they lied about the amount of actual currency backing their deposits. If that's the case, then many/all of their depositors are SOL without any possibility of being made whole.
• BenoitEssiambre 8y ago
  Real banks have other assets to cover their liabilities. Sure some of these assets are not liquid. Banks cannot ask people to pay off their mortgage instantaneously so if too many people try to redeem deposits all at the same time, the bank might have to ask some people to wait. But the banks always have enough assets so that in the longer term they can pay everyone. Plus in times of crises the central bank might step in and allow commercial banks to swap their illiquid assets for cash thus providing the needed liquidity.
  • jerguismi 8y ago
    > Sure some of these assets are not liquid. Most of the banks assets are not liquid, such as the loans they have lent out. Banks quite often have problems that they give credit out too easily, which leads to the situation where their assets aren't worth much. They often also give loans to the stakeholders of the bank which makes it a bit sketchy.
    • perl4ever 8y ago
      Well, banks can become insolvent, like any business can fail. That doesn't mean it's their normal operating mode.
• amalcon 8y ago
  Banks don't continue to represent assets on the balance sheet once they come to believe that those assets are without value. Or rather, if we find out they are doing this, they are subject to lawsuits like this one.
• blake1 8y ago
  But tether isn’t claiming to be a bank account. A bank account is an unsecured loan, tether claimed to be taking secured loans. With a bank, you are lending cash to them when you make a deposit. You are taking a risk that the bank’s credit won’t be good, and you will lose your money, so you should require interest to compensate for that. Deposit insurance changes this only a little. But it’s not like there are zero assets backing the accounts: there are still enough to cover expected liquidity needs. The credit risk mentioned early is that his expectation will fall short of reality. But owning tether wasn’t supposed to invoke any credit risk at all. It was a secured loan: if you bought a tether, you had sole claim on a dollar in a bank account. By the way, banks buy and sell secured loans all the time. Mortgages are a particularly common example in retail banking. Although usually, secured lending is used to convert a low liquidity asset, like a house, into a liquid one, like cash. Tether makes no sense economically because it converts one liquid asset into another.
  • jfk13 8y ago
    Doesn't it convert a liquid asset into a much less liquid one, given that tether is far less widely accepted than USD? If I have a million dollars in greenbacks, I can use them for almost any transaction I like. If I have a million tethers, I'm not sure I can do much with them except exchange them for other similarly-illiquid "tokens" via a few variously-reputable exchanges.
    • blake1 8y ago
      You are right. Tethers are not liquid in any real sense, and should actually pay a pretty hefty interest.
  • perl4ever 8y ago
    "With a bank, you are lending cash to them when you make a deposit. You are taking a risk that the bank’s credit won’t be good, and you will lose your money, so you should require interest to compensate for that." Hmm...I did not think I was taking that risk. As far as I knew, up to I think $250K, the money I have in a bank (actually a credit union) is backed by the full faith and credit of the United States, whatever that is worth today. Are you a banker?
• segmondy 8y ago
  > This is true of banks, too. In fact, if everyone took out all of their money from all of the banks, there isn't enough real money in existence to cover it. True and not true. There can be enough money, it's just paper. It can be printed. It only makes sense to print enough to cover what's in actual circulation. If not there there would be tons of warehouse & vaults just sitting and holding tons of cash. On the other hand with Tether, they can't print money. So they could never come up with enough money.
  • jerguismi 8y ago
    Central banks can print money, banks can't. Banks can only do fractional reserve. Sometimes banks go bust, sometimes central bank might save them.