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You are misunderstanding fractional reserve banking. Fractional reserve banking means that the bank only has to keep enough cash on hand to meet their expected

You are misunderstanding fractional reserve banking. Fractional reserve banking means that the bank only has to keep enough cash on hand to meet their expected reasonable obligations. Banks still need their books to balance. That means that their liabilities can not exceed their assets. A bank can be solvent on paper but if there was a rush to withdraw by their customers, they may not be able to pay cash for all withdrawals because that cash would be tied up in loans. In the Tether case it isn't that they loaned out the money they took in, rather their liabilities exceed their assets. Thus Tether is bankrupt on paper. And if everyone tried to withdraw their assets, they would also not be able to pay everyone back. Thus banks may be illiquid with a balance sheet that ultimately balances (e.g. not bankrupt), but tether is both bankrupt and likely also illiquid because of the 850M loan fiasco. I swear tether is like Wiley Coyote who has run off a cliff but hasn't yet looked down. I question my sanity a little bit because I do not understand why tether isn't completely disreputable at this point, I must be missing something.

ei8htyfi5e 8y ago
I tend to agree with your Wiley Coyote comment and it made me laugh. Thanks.
cremp 8y ago
Because Tether is the de-facto way for the exchanges to bypass USD regulations.
b_tterc_p 8y ago
Bankruptcy doesn’t mean assets < liabilities. It means you can’t pay off the liabilities you have and are basically giving up on doing so in the future. As far as I’m aware, tether doesn’t really have any liabilities. They claimed that each tether was backed by a dollar, but didn’t say it was redeemable for a dollar. They don’t need to pay anything. There can’t be a run on the bank because this bank doesn’t give you your money back. Why does the market allow this? ... I have no clue but I would guess that money laundering fits into it somewhere.
- comex 8y ago
  That’s not correct; Tether does nominally allow redeeming for USD, although only in bulk, and the service has opened and closed over time and generally been a mess AFAIK.
  - b_tterc_p 8y ago
    Fine. Sometimes they do, but legally are not obligated to do so. So it’s a moot point. They’re protected from runs because they don’t have to cash out. Their current terms of service state: > 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. Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all.
    - comex 8y ago
      Not sure whether it's moot. Even though they're not legally required to provide cash, Tether's accomplishment of establishing and then maintaining a $1 market value is presumably assisted at least to some extent by their offer to provide it. To what extent precisely remains to be seen. The longstanding doubts about Tether's reserves didn't impair its market value; the more recent revelations may not either, but that's not certain yet (in particular, if the market is being manipulated, the muted short-term response may not last). But yes, they are protected from runs. Edit: Also, that text wasn't always there; in 2015 they claimed Tether was "redeemable for cash at any time" [1] and didn't have any similar disclaimer in their terms, as far as I can tell [2]. In addition, even with the disclaimer, if someone sued Tether for breach of contract (because they breached their promise to hold 1:1 reserves), fraud (because at certain points they made false claims that they did hold them), etc., they might be able to recover some USD in the form of restitution. [1] https://web.archive.org/web/20150320090830/https://tether.to/faqs/ https://web.archive.org/web/20150320090830/https://tether.to... [2] https://web.archive.org/web/20150921163244/https://tether.to/legal/ https://web.archive.org/web/20150921163244/https://tether.to...
roro159 8y ago
What you're missing is that Tether is not truly bankrupt yet. Yes, sane accounting would say their liabilities exceed their assets, but only because 26% of their assets are a high risk loan to Bitfinex. They still have assets > USDT supply. What makes the liabilities exceed the assets is the credit risk associated with the loan. You can't undisputedly say Bitfinex won't be able to pay the loan. Maybe the frozen assets are real and will be unfrozen soon. Nobody knows. They aren't bankrupt yet, but in a very risky position of becoming so. Another possibility is that you misread the article title, which seems kind of misleading. It says that only 74% of Tether is backed by cash or cash-equivalents. The loan to Bitfinex is neither, so it should be the remaining 26% (26% of $2.8B is $745M). That being said, I agree with you on the Wiley Coyote point. Tether should be completely disreputable, not only because of it's risky situation, but because the whole move was completely shady. Silently changing the wording of the website, after assuring everyone that they had it 100% backed... I don't see how anyone can trust it anymore.
darawk 8y ago
> Banks still need their books to balance. That means that their liabilities can not exceed their assets. Tether's books do balance. They've made a loan to Bitfinex. That loan is an asset equal in value to the missing funds. Now, you could make the case that Bitfinex is insolvent, and therefore you ought to mark down the value of that loan. However, Bitfinex is generating a ton of revenue, and should have no trouble making payments on that loan. So, your argument pretty much falls apart, unless you have some other reason to expect Bitfinex to miss payments.
keymone 8y ago
> they may not be able to pay cash for all withdrawals because that cash would be tied up in loans How is that “assets”? Loan can be defaulted on and where bank has $X in the books it’s actually $0. The non-bankrupt case for tether looks like this: people realize tether isn’t worth $1, but they still need to get rid of it and so they sell for $.74c, that’s the risk they took buying tether in the first place.
- bhouston 8y ago
  The idea is fractional reserve banking is that the loans are at least good enough in aggregate in normal course to cover its liabilities. Of course there are black swan events (https://www.investopedia.com/terms/b/blackswan.asp https://www.investopedia.com/terms/b/blackswan.asp) that are so far out of expected that banks fail anyways, or the banks are incompetent and make things like sub-prime mortgages (https://en.wikipedia.org/wiki/Subprime_mortgage_crisis https://en.wikipedia.org/wiki/Subprime_mortgage_crisis) that tend to fail all at a once.
  - keymone 8y ago
    Yes, I understand that, I just don’t see this bitfinex situation much different from what is generally accepted as normal in banking sector.
- village-idiot 8y ago
  A loan is an asset, it just isn't a riskless one. A great example are bonds, typically considered to be assets, which are technically a loan that you have given to a government or company.

ei8htyfi5e 8y ago

I tend to agree with your Wiley Coyote comment and it made me laugh. Thanks.

cremp 8y ago

Because Tether is the de-facto way for the exchanges to bypass USD regulations.

b_tterc_p 8y ago

Bankruptcy doesn’t mean assets < liabilities. It means you can’t pay off the liabilities you have and are basically giving up on doing so in the future. As far as I’m aware, tether doesn’t really have any liabilities. They claimed that each tether was backed by a dollar, but didn’t say it was redeemable for a dollar. They don’t need to pay anything. There can’t be a run on the bank because this bank doesn’t give you your money back. Why does the market allow this? ... I have no clue but I would guess that money laundering fits into it somewhere.

comex 8y ago
That’s not correct; Tether does nominally allow redeeming for USD, although only in bulk, and the service has opened and closed over time and generally been a mess AFAIK.
- b_tterc_p 8y ago
  Fine. Sometimes they do, but legally are not obligated to do so. So it’s a moot point. They’re protected from runs because they don’t have to cash out. Their current terms of service state: > 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. Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all.
  - comex 8y ago
    Not sure whether it's moot. Even though they're not legally required to provide cash, Tether's accomplishment of establishing and then maintaining a $1 market value is presumably assisted at least to some extent by their offer to provide it. To what extent precisely remains to be seen. The longstanding doubts about Tether's reserves didn't impair its market value; the more recent revelations may not either, but that's not certain yet (in particular, if the market is being manipulated, the muted short-term response may not last). But yes, they are protected from runs. Edit: Also, that text wasn't always there; in 2015 they claimed Tether was "redeemable for cash at any time" [1] and didn't have any similar disclaimer in their terms, as far as I can tell [2]. In addition, even with the disclaimer, if someone sued Tether for breach of contract (because they breached their promise to hold 1:1 reserves), fraud (because at certain points they made false claims that they did hold them), etc., they might be able to recover some USD in the form of restitution. [1] https://web.archive.org/web/20150320090830/https://tether.to/faqs/ https://web.archive.org/web/20150320090830/https://tether.to... [2] https://web.archive.org/web/20150921163244/https://tether.to/legal/ https://web.archive.org/web/20150921163244/https://tether.to...

roro159 8y ago

What you're missing is that Tether is not truly bankrupt yet. Yes, sane accounting would say their liabilities exceed their assets, but only because 26% of their assets are a high risk loan to Bitfinex. They still have assets > USDT supply. What makes the liabilities exceed the assets is the credit risk associated with the loan. You can't undisputedly say Bitfinex won't be able to pay the loan. Maybe the frozen assets are real and will be unfrozen soon. Nobody knows. They aren't bankrupt yet, but in a very risky position of becoming so. Another possibility is that you misread the article title, which seems kind of misleading. It says that only 74% of Tether is backed by cash or cash-equivalents. The loan to Bitfinex is neither, so it should be the remaining 26% (26% of $2.8B is $745M). That being said, I agree with you on the Wiley Coyote point. Tether should be completely disreputable, not only because of it's risky situation, but because the whole move was completely shady. Silently changing the wording of the website, after assuring everyone that they had it 100% backed... I don't see how anyone can trust it anymore.

darawk 8y ago

> Banks still need their books to balance. That means that their liabilities can not exceed their assets. Tether's books do balance. They've made a loan to Bitfinex. That loan is an asset equal in value to the missing funds. Now, you could make the case that Bitfinex is insolvent, and therefore you ought to mark down the value of that loan. However, Bitfinex is generating a ton of revenue, and should have no trouble making payments on that loan. So, your argument pretty much falls apart, unless you have some other reason to expect Bitfinex to miss payments.

keymone 8y ago

> they may not be able to pay cash for all withdrawals because that cash would be tied up in loans How is that “assets”? Loan can be defaulted on and where bank has $X in the books it’s actually $0. The non-bankrupt case for tether looks like this: people realize tether isn’t worth $1, but they still need to get rid of it and so they sell for $.74c, that’s the risk they took buying tether in the first place.

bhouston 8y ago
The idea is fractional reserve banking is that the loans are at least good enough in aggregate in normal course to cover its liabilities. Of course there are black swan events (https://www.investopedia.com/terms/b/blackswan.asp https://www.investopedia.com/terms/b/blackswan.asp) that are so far out of expected that banks fail anyways, or the banks are incompetent and make things like sub-prime mortgages (https://en.wikipedia.org/wiki/Subprime_mortgage_crisis https://en.wikipedia.org/wiki/Subprime_mortgage_crisis) that tend to fail all at a once.
- keymone 8y ago
  Yes, I understand that, I just don’t see this bitfinex situation much different from what is generally accepted as normal in banking sector.
village-idiot 8y ago
A loan is an asset, it just isn't a riskless one. A great example are bonds, typically considered to be assets, which are technically a loan that you have given to a government or company.