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Is it possible to regulate a stablecoin to a zero-risk point? Many central banks themselves failed to perpetuate fixed exchange systems. How is it different at

Is it possible to regulate a stablecoin to a zero-risk point? Many central banks themselves failed to perpetuate fixed exchange systems. How is it different at a smaller scale? That a stablecoin could blow up is, IMO, unavoidable. The important question is what's at risk. What happens if USDT fails to maintain parity? Is USD affected? Seems far fetched, in this sense, considering current scale. Regulation might make it more likely that these will be "attacked" with a Soros/GBP strategy. Explicit rules mean more certainty about what Tether's "central bank" will do in extreme circumstances, and how much liquidity that have to target. I wish regulators had more of a "fail gracefully" approach than a "never fail" one.

smackeyacky 5y ago
If you look back at the LTCM collapse it should be obvious that it is impossible to make anything risk free, no matter how clever you are. Your other question is a good one. Nobody knew that the collapse of LTCM would cause a market wide collapse at the time, so the question is how big are the hedging risks that financial firms dabbling in Bitcoin will be multiplied by the collapse of tether. That is, if it is being used as a hedge, what kinds of financial instruments have the quants cooked up based on tether, then how much worst case exposure are we talking about? It might be nothing, but who knows until the tide goes out.
- dalbasal 5y ago
  In this case though, people own tether... not an investment in a hedge fund. Hedge funds returns a supposed to have risk. With a stablecoin, someone is promising to buy an unlimited number of coins for a set price. If the market says USDT = $0.95, and that someone's market activities fail to achieve USDT = $1... something gives fast.
  - smackeyacky 5y ago
    The scenario that scares me is somebody dabbling in an instrument like a CDO where the bitcoin hedge is tether rather than bitcoins. I don't know whether anybody has been stupid enough to confect something like that with these dodgy products but it seems almost inevitable somebody will try.
    - quickthrowman 5y ago
      Your post doesn’t make any sense. How on earth would you hedge a Bitcoin position with tether? This is like saying you’re going to hedge your SPY position with dollars. Also, a CDO is a variety of debt packaged into a single instrument that pays out cash flows to tranches, some of which are paid before others.
      - smackeyacky 5y ago
        Tether has been suspected of being used to manipulate the price of bitcoin, so its fair to assume you could make a financial instrument that mirrored that activity and use it as a hedge. I don't know if its possible to short bitcoin via a reputable dealer, but its possible to construct a CDO out of anything that can be borrowed. Edit: holy mother of meltdowns you can short bitcoin.
        quickthrowman 5y ago
        Do you understand what hedging is or how to hedge a position? Please explain to me how you would hedge a 50 BTC position with tether... I’ll save you some trouble and point out that it’s impossible. You can hedge bitcoins with Bitcoin options or perpetual swaps/futures, it’s impossible to hedge Bitcoin with tether, full stop.
        smackeyacky 5y ago
        You can hedge anything with anything where you perceive a relationship. It doesn't have to be formally linked or related in any way.
        quickthrowman 5y ago
        Please explain how you hedge BTC against tether, which is supposed to maintain a $1 peg. There is no correlation between BTC and tether, how can you not see that?? Bitcoin goes up and down, tether stays at a buck, plus or minus a tiny fraction at times. You cannot hedge Bitcoin with tether!! At this point, I’m going to assume you have a fundamental misunderstanding somewhere, I won’t be responding any more. If you want to believe you can hedge a volatile crypto coin with a pegged stable coin, I could care less, just don’t spread that nonsense here.
tonfa 5y ago
Zero risk likely doesn't exist, especially not without the backing of a lender of last resort. In practice many stable coins are similar to money market funds or eurodollar banking, so mechanisms and risks are somewhat well known.
- dalbasal 5y ago
  My point was the even with such a backing (central banking), currencies have failed to maintain a fixed exchange rate. That's why more currencies free float today. I guess i'm basically asking how stablecoins could be immune to something the GBP isn't/wasn't imune to. ..Could be some part I'm missing. Don't know much about stablecoins.
  - cinquemb 5y ago
    Stablecoins (over collateralized, 1:1 collateralized, etc) on chain do float. They rely on arb or other incentives to keep them near a peg. They are only immune to the degree that the market mechanics in place surrounding each of them in particular to incentivize people to keep them pegged. Can't wait for people to start complaining about uncollateralized decentralized stable coins that will eventually be even more leveraged against other stablecoins that are backed fully by USD deposits (or over collateralized by crypto assets, or even USDT [can hear the screams and pearl clutching now lol]) where there is no specific entity to go after like Tether Ltd… Im glad for this all, because I think we are quickly approaching the point where we will no longer be trapped in bailoutistan… where risk will need to get priced in and over capacity/ team save-zombie-companies/ bad trades at tradfi bank desks and overall malfeasance (and failure to hedge against such) will be punished severely.
    - jkhdigital 5y ago
      You’ve got a great point here; decentralized finance has no villain (except perhaps the contract creators, but they don’t have your money) so when things go south there’s no one to blame except yourself. The only solution is to stop participating an unsustainable system, and when enough people choose to do so we might get back to an economy based on reality rather than derivatives.
RandomLensman 5y ago
Sounds it is more like a money market fund and not an exchange rate regime. Yes, the latter are difficult to maintain but central banks have a large arsenal to act and some are in fact pretty stable and uncontested (those policy tools are not available to Tether). In the end,money market funds are highly regulated.
- dalbasal 5y ago
  I meant fixed exchange regimes, which are less common now among major currencies. With a floating exchange rate, there are lots of tools central banks have. Stablecoins can't do this, agreed. In a fixed exchange, there's only buying and selling the currency you are maintaining... the stablecoin, so to speak.

smackeyacky 5y ago

If you look back at the LTCM collapse it should be obvious that it is impossible to make anything risk free, no matter how clever you are. Your other question is a good one. Nobody knew that the collapse of LTCM would cause a market wide collapse at the time, so the question is how big are the hedging risks that financial firms dabbling in Bitcoin will be multiplied by the collapse of tether. That is, if it is being used as a hedge, what kinds of financial instruments have the quants cooked up based on tether, then how much worst case exposure are we talking about? It might be nothing, but who knows until the tide goes out.

dalbasal 5y ago
In this case though, people own tether... not an investment in a hedge fund. Hedge funds returns a supposed to have risk. With a stablecoin, someone is promising to buy an unlimited number of coins for a set price. If the market says USDT = $0.95, and that someone's market activities fail to achieve USDT = $1... something gives fast.
- smackeyacky 5y ago
  The scenario that scares me is somebody dabbling in an instrument like a CDO where the bitcoin hedge is tether rather than bitcoins. I don't know whether anybody has been stupid enough to confect something like that with these dodgy products but it seems almost inevitable somebody will try.
  - quickthrowman 5y ago
    Your post doesn’t make any sense. How on earth would you hedge a Bitcoin position with tether? This is like saying you’re going to hedge your SPY position with dollars. Also, a CDO is a variety of debt packaged into a single instrument that pays out cash flows to tranches, some of which are paid before others.
    - smackeyacky 5y ago
      Tether has been suspected of being used to manipulate the price of bitcoin, so its fair to assume you could make a financial instrument that mirrored that activity and use it as a hedge. I don't know if its possible to short bitcoin via a reputable dealer, but its possible to construct a CDO out of anything that can be borrowed. Edit: holy mother of meltdowns you can short bitcoin.
      - quickthrowman 5y ago
        Do you understand what hedging is or how to hedge a position? Please explain to me how you would hedge a 50 BTC position with tether... I’ll save you some trouble and point out that it’s impossible. You can hedge bitcoins with Bitcoin options or perpetual swaps/futures, it’s impossible to hedge Bitcoin with tether, full stop.
        smackeyacky 5y ago
        You can hedge anything with anything where you perceive a relationship. It doesn't have to be formally linked or related in any way.
        quickthrowman 5y ago
        Please explain how you hedge BTC against tether, which is supposed to maintain a $1 peg. There is no correlation between BTC and tether, how can you not see that?? Bitcoin goes up and down, tether stays at a buck, plus or minus a tiny fraction at times. You cannot hedge Bitcoin with tether!! At this point, I’m going to assume you have a fundamental misunderstanding somewhere, I won’t be responding any more. If you want to believe you can hedge a volatile crypto coin with a pegged stable coin, I could care less, just don’t spread that nonsense here.

tonfa 5y ago

Zero risk likely doesn't exist, especially not without the backing of a lender of last resort. In practice many stable coins are similar to money market funds or eurodollar banking, so mechanisms and risks are somewhat well known.

dalbasal 5y ago
My point was the even with such a backing (central banking), currencies have failed to maintain a fixed exchange rate. That's why more currencies free float today. I guess i'm basically asking how stablecoins could be immune to something the GBP isn't/wasn't imune to. ..Could be some part I'm missing. Don't know much about stablecoins.
- cinquemb 5y ago
  Stablecoins (over collateralized, 1:1 collateralized, etc) on chain do float. They rely on arb or other incentives to keep them near a peg. They are only immune to the degree that the market mechanics in place surrounding each of them in particular to incentivize people to keep them pegged. Can't wait for people to start complaining about uncollateralized decentralized stable coins that will eventually be even more leveraged against other stablecoins that are backed fully by USD deposits (or over collateralized by crypto assets, or even USDT [can hear the screams and pearl clutching now lol]) where there is no specific entity to go after like Tether Ltd… Im glad for this all, because I think we are quickly approaching the point where we will no longer be trapped in bailoutistan… where risk will need to get priced in and over capacity/ team save-zombie-companies/ bad trades at tradfi bank desks and overall malfeasance (and failure to hedge against such) will be punished severely.
  - jkhdigital 5y ago
    You’ve got a great point here; decentralized finance has no villain (except perhaps the contract creators, but they don’t have your money) so when things go south there’s no one to blame except yourself. The only solution is to stop participating an unsustainable system, and when enough people choose to do so we might get back to an economy based on reality rather than derivatives.

RandomLensman 5y ago

Sounds it is more like a money market fund and not an exchange rate regime. Yes, the latter are difficult to maintain but central banks have a large arsenal to act and some are in fact pretty stable and uncontested (those policy tools are not available to Tether). In the end,money market funds are highly regulated.

dalbasal 5y ago
I meant fixed exchange regimes, which are less common now among major currencies. With a floating exchange rate, there are lots of tools central banks have. Stablecoins can't do this, agreed. In a fixed exchange, there's only buying and selling the currency you are maintaining... the stablecoin, so to speak.