8 ms·

Because if there is a "run on the bank", someone will end up short. Either the first people out will get 100% of their money and last 26% will get zero, or ever

by joshe 7y ago

Because if there is a "run on the bank", someone will end up short. Either the first people out will get 100% of their money and last 26% will get zero, or everyone will get 74% of their money. This very fact will actually cause a run on the bank in any sort of crisis. You don't need to actually believe that tether is a complete sham and has no money to decide to withdraw. You just need to worry that 74% of people might get worried. Because if they all withdraw, you will get none of your money. The point of FDIC insurance (aka lender of last resort) is that when you hear that Wells Fargo is in trouble you don't worry about your checking account going to zero. This used to happen quite a bit as late as during the great depression in the early 1930s. Being 100% backed by liquid assets was supposed to serve that function, it's not a nice to have, it's the whole point.

cperciva 7y ago
Ironically, tether is pretty much immune from bank runs... because it's impossible to withdraw money at all.
- gruez 7y ago
  >because it's impossible to withdraw money at all. I heard this meme being repeated since forever and it never made sense to me. As I understand it, you could exchange USDT for real USD at any participating exchange. Not being able to convert USDT would mean not being able to withdraw from any of those exchanges, but there's no widespread reports of this. Also, you could convert USDT to USD at Kraken, and they definitely don't have any withdraw problems. Finally, if you really couldn't withdraw USD from an exchange, it would become evident because BTC priced would skyrocket as people scramble to find other ways to withdraw their cash. We saw this with mtgox, but not here (there's a premium but nowhere close to mtgox levels) edit: clarified which part I'm replying to
  - bb88 7y ago
    The point of having the reserves in US Dollars is that Tether could theoretically buy back surplus USDT's from an exchange that trades in it. Otherwise an exchange could be left holding millions of worthless USDT with no means to move that back to US dollars.
  - wmf 7y ago
    Imagine if Bitfinex shut down with no warning. All the USDT stored in Bitfinex would simply be lost so it wouldn't cause a bank run. But massive amounts of USDT would flow from Bittrex, Hitbtc, and Poloniex to Kraken where the price would drop to pennies due to lack of liquidity. Maybe then Kraken suspends trading "to calm the market" and never resumes. I am reminded of the default of BTCST which I guess no one remembers.
  - shkkmo 7y ago
    > As I understand it, you could exchange USDT for real USD at any participating exchange. Not being able to convert USDT would mean not being able to withdraw from any of those exchanges That's selling Tether, not withdrawing Tether from the pool. The point is, since it was already effectively impossible to withdraw any Tethers from the pool, does it really matter that the fund that backs those tethers can only support withdrawing 74% of the available USDT? Currencies doesn't have to be backed to have value. Ours used to be backed by gold, but then we figured out that doesn't necessarily matter as long as people have to use it and the supply of it matches demand consistently enough. So the interesting question is, will they be able to keep the price pegged to USD by selling and buying USDT in sufficient quantities to keep the price stable. This is rather the point this comment is making: https://news.ycombinator.com/item?id=19793326 https://news.ycombinator.com/item?id=19793326
- bb88 7y ago
  Only if you ask for permission from Tether, first. If you have power to seize the bank accounts, however... https://www.investopedia.com/terms/t/tether-usdt.asp https://www.investopedia.com/terms/t/tether-usdt.asp "On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers."
  - dzdt 7y ago
    "We have been informed that" is lawyerspeak that has as an implication of "we don't actually believe the following and it almost certainly isn't true, but what we were told is..."
    - jcranmer 7y ago
      And "seized and safeguarded" itself sounds suspiciously like a polite way of saying "our accounts are frozen on suspicion of financial regulations (and/or money laundering), and we hope to be able to successfully defend ourselves in court."
deleted 7y ago
[deleted]
perl4ever 7y ago
"Because if there is a "run on the bank", someone will end up short. Either the first people out will get 100% of their money and last 26% will get zero, or everyone will get 74% of their money." I'm not clear on whether they have discovered fractional reserve banking or whether they are insolvent. There's a big difference. If they are insolvent, I'd tend to assume tethers not trading at a discount just means people are idiots. But if not, not.
- bb88 7y ago
  I think the difference is that in the end a Bank is backed and regulated by the US Government. Tether is not. So it is solvent or insolvent.
  - perl4ever 7y ago
    I don't see why being regulated or not has anything to do with whether you are practicing fractional reserve banking. As I understand it, the concept is just that your assets are not all liquid, but rather some of them are long term loans. Which is not to say I think unregulated banking is the same as regulated banking.
    - ShorsHammer 7y ago
      Bank reserves have little to do with money creation: > Lord Adair Turner, formerly the UK's chief financial regulator, said "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo (out of nothing) – extending a loan to the borrower and simultaneously crediting the borrower’s money account > the German central bank explains that the money supply is not determined by the reserves of private banks, but by market factors and regulatory decisions. https://en.wikipedia.org/wiki/Fractional-reserve_banking#Criticisms_of_textbook_descriptions_of_the_monetary_system https://en.wikipedia.org/wiki/Fractional-reserve_banking#Cri...
  - ShorsHammer 7y ago
    Do you think the US government could cover every single cent if all the depositors wanted their money out now? Not even physical cash, just a transfer to an overseas account. The money simply isn't there and the scales are enormous. US banks only can pay back 3-10% of cash deposits. The FDIC only has enough to cover a tiny proportion of bank liabilities. It seems very disingenuous for people in this thread to say "well if everyone cashed out tethers" and then handwave away the alternative of "well if everyone cashed out USD". These scenarios playing out would have Tether actually being able to pay a reasonable percentage of creditors.

by joshe 7y ago

cperciva 7y ago

Ironically, tether is pretty much immune from bank runs... because it's impossible to withdraw money at all.

gruez 7y ago
>because it's impossible to withdraw money at all. I heard this meme being repeated since forever and it never made sense to me. As I understand it, you could exchange USDT for real USD at any participating exchange. Not being able to convert USDT would mean not being able to withdraw from any of those exchanges, but there's no widespread reports of this. Also, you could convert USDT to USD at Kraken, and they definitely don't have any withdraw problems. Finally, if you really couldn't withdraw USD from an exchange, it would become evident because BTC priced would skyrocket as people scramble to find other ways to withdraw their cash. We saw this with mtgox, but not here (there's a premium but nowhere close to mtgox levels) edit: clarified which part I'm replying to
- bb88 7y ago
  The point of having the reserves in US Dollars is that Tether could theoretically buy back surplus USDT's from an exchange that trades in it. Otherwise an exchange could be left holding millions of worthless USDT with no means to move that back to US dollars.
- wmf 7y ago
  Imagine if Bitfinex shut down with no warning. All the USDT stored in Bitfinex would simply be lost so it wouldn't cause a bank run. But massive amounts of USDT would flow from Bittrex, Hitbtc, and Poloniex to Kraken where the price would drop to pennies due to lack of liquidity. Maybe then Kraken suspends trading "to calm the market" and never resumes. I am reminded of the default of BTCST which I guess no one remembers.
- shkkmo 7y ago
  > As I understand it, you could exchange USDT for real USD at any participating exchange. Not being able to convert USDT would mean not being able to withdraw from any of those exchanges That's selling Tether, not withdrawing Tether from the pool. The point is, since it was already effectively impossible to withdraw any Tethers from the pool, does it really matter that the fund that backs those tethers can only support withdrawing 74% of the available USDT? Currencies doesn't have to be backed to have value. Ours used to be backed by gold, but then we figured out that doesn't necessarily matter as long as people have to use it and the supply of it matches demand consistently enough. So the interesting question is, will they be able to keep the price pegged to USD by selling and buying USDT in sufficient quantities to keep the price stable. This is rather the point this comment is making: https://news.ycombinator.com/item?id=19793326 https://news.ycombinator.com/item?id=19793326
bb88 7y ago
Only if you ask for permission from Tether, first. If you have power to seize the bank accounts, however... https://www.investopedia.com/terms/t/tether-usdt.asp https://www.investopedia.com/terms/t/tether-usdt.asp "On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers."
- dzdt 7y ago
  "We have been informed that" is lawyerspeak that has as an implication of "we don't actually believe the following and it almost certainly isn't true, but what we were told is..."
  - jcranmer 7y ago
    And "seized and safeguarded" itself sounds suspiciously like a polite way of saying "our accounts are frozen on suspicion of financial regulations (and/or money laundering), and we hope to be able to successfully defend ourselves in court."

deleted 7y ago

[deleted]

perl4ever 7y ago

"Because if there is a "run on the bank", someone will end up short. Either the first people out will get 100% of their money and last 26% will get zero, or everyone will get 74% of their money." I'm not clear on whether they have discovered fractional reserve banking or whether they are insolvent. There's a big difference. If they are insolvent, I'd tend to assume tethers not trading at a discount just means people are idiots. But if not, not.

bb88 7y ago
I think the difference is that in the end a Bank is backed and regulated by the US Government. Tether is not. So it is solvent or insolvent.
- perl4ever 7y ago
  I don't see why being regulated or not has anything to do with whether you are practicing fractional reserve banking. As I understand it, the concept is just that your assets are not all liquid, but rather some of them are long term loans. Which is not to say I think unregulated banking is the same as regulated banking.
  - ShorsHammer 7y ago
    Bank reserves have little to do with money creation: > Lord Adair Turner, formerly the UK's chief financial regulator, said "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo (out of nothing) – extending a loan to the borrower and simultaneously crediting the borrower’s money account > the German central bank explains that the money supply is not determined by the reserves of private banks, but by market factors and regulatory decisions. https://en.wikipedia.org/wiki/Fractional-reserve_banking#Criticisms_of_textbook_descriptions_of_the_monetary_system https://en.wikipedia.org/wiki/Fractional-reserve_banking#Cri...
- ShorsHammer 7y ago
  Do you think the US government could cover every single cent if all the depositors wanted their money out now? Not even physical cash, just a transfer to an overseas account. The money simply isn't there and the scales are enormous. US banks only can pay back 3-10% of cash deposits. The FDIC only has enough to cover a tiny proportion of bank liabilities. It seems very disingenuous for people in this thread to say "well if everyone cashed out tethers" and then handwave away the alternative of "well if everyone cashed out USD". These scenarios playing out would have Tether actually being able to pay a reasonable percentage of creditors.