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It was news to me. I hold USDC because I thought every USDC was backed by a US dollar. That's what all their statements said. I don't even know what commercial

by troymc 5y ago

It was news to me. I hold USDC because I thought every USDC was backed by a US dollar. That's what all their statements said. I don't even know what commercial paper is. Why did they find the need to back some USDC with that? Is something wrong? The lack of communication is troubling.

bequanna 5y ago
A simple Google search will answer your question about commercial paper. As for why they would do this: cash management 101. Why let cash sit in an account when you can make interest on low or no risk, short term debt? Crypto/defi/etc is high risk and requires you to DYOR. If that makes you uncomfortable, this space may not be a good fit for you.
- scarmig 5y ago
  > Why let cash sit in an account when you can make interest on low or no risk, short term debt? Because you've promised "investors," or at least made lots of strong statements that led them to believe, that you're letting cash sit in an account? When I invest in a fund, and it says that it does X, but then secretly does Y because they believe it's obviously better, that's something between totally untrustworthy and outright fraud.
  - bequanna 5y ago
    This is a somewhat naïve view. Investing in high quality short term commercial paper or treasuries is essentially the same or less risk vs. letting $XX billion sit in some bank account. In accounting, these instruments are actually regarded the same as cash and called “cash equivalents”.
    - NationalPark 5y ago
      If it’s the same risk then why does it pay more than T bills? Regardless, the issue is the misrepresentation, not the actual assets (which most people don’t believe add up to the total anyway, right?)
      - AlexandrB 5y ago
        We haven't seen a true market crash in >10 years and everyone has forgotten why commercial paper is not the same as cash.
      - kiklion 5y ago
        I have no crypto investments, but this is basically where the line is for me. If they took the 1 USD backing the coin and invested it in US government bonds so that only a fraction is immediately available (but a large enough fraction to cover the most likely withdrawal rates) then it would be fine with me though they should advertise that more clearly. If they take the money and invest it in ‘good’ companies, that is too much risk to the underlying assets. Though I’m American and could see foreigners not thinking US bonds were safe enough.
    - nonameiguess 5y ago
      It's important to remember commercial paper tanked and almost took the global economy with it only 13 years ago. The only reason it's regarded as low risk, if you're AIG or Bank of America, is the US government has shown an extreme willingness to bail you out by buying them at face value even when they become worthless on the open market. The US government is extremely unlikely to bail out Coinbase.
      - scarmig 5y ago
        > The US government is extremely unlikely to bail out Coinbase. Part of Coinbase's implicit strategy is to become the "too big to fail" of the crypto space. And if its collapse would threaten to destabilize the broader financial system, the US gov absolutely would bail it out. We've not reached that point yet (and hopefully never will), but it's important to understand the play here.
    - scarmig 5y ago
      In 2006, the original money market fund, the Reserve Primary Fund, decided to purchase risk-free commercial paper, and by 2008 over half its assets were in this risk free, high quality commercial paper. Unfortunately, a significant part of this risk free, high quality commercial paper was issued by Lehman. And that risk free, high quality commercial paper turned out to be worthless, causing the oldest money market fund to fail and forcing it to liquidate, at well below $1.
    - ketzo 5y ago
      “essentially the same” is… not as reassuring as you think it sounds, not when we’re talking $28 billion in circulation.
- simmerup 5y ago
  The fact that a stable coin should be assumed to be high risk betrays a major problem of the crypto crowd.
  - bequanna 5y ago
    It’s new and relatively untested. We don’t say that because new spacecraft have a high risk of failure vs a 747 that there is a “major problem” with space exploration.
    - gogoincar 5y ago
      True, but in this case the new spacecraft is being marketed as a safe alternative to the 747, while still having a higher risk of failure.
- AlexandrB 5y ago
  > requires you to DYOR How do you do this when the parties involved are not transparent about their holdings and have a history of misleading investors? Go off of rumours? Given their history, why would I believe that USDC is actually holding short term commercial paper and not higher risk, higher return equities?
  - bequanna 5y ago
    I’m not saying you should trust USDC is backed by anything at all. It is tricky situation. Consumers want assurances, protection but the crypto true believers abhor regulation and disclosure. Trust is difficult in this space and right now many people are speculators consumed by FOMO vs. rational individuals/institutions. No one knows how this will all play out.
dsr_ 5y ago
If you think USDC is backed 1:1 by US dollars, you should try selling them all and see what you get. If you sell early enough, you might get most of your money back because other people aren't paying attention, or have been similarly misled.
- alisonkisk 5y ago
  A regular bank is the same. If everyone withdraws, not everyone gets paid. FDIC offers partial protection, though.
  - elliekelly 5y ago
    It most certainly is not the same. Take WaMu, for example. I think it was the largest bank failure in the history of the United States and it was largely due to a bank run. Do you know how much money depositors lost? $0.00 And I don’t mean only up to the FDIC insured amount. Even those with WaMu deposits well in excess of FDIC coverage didn’t lose a penny. And it wasn’t thanks to the complex system of placing overnight deposits at various institutions for pass-through coverage in excess of the FDIC amount. Because do you know how much money the FDIC insurance fund lost paying out claims to WaMu depositors? $0.00 Do you know who did lose a lot of money? WaMu investors and shareholders. That is not even remotely close to how a stablecoin or crypto “bank run” would play out. Our banking system has built-in safety nets that work. Crypto safety nets don’t even exist.
- deleted 5y ago
  [deleted]
whitepaint 5y ago
I'm in the same boat. Seriously, WTF?! We really can't have centralized entities issuing stable coins, can we. The real solution is DAI, right?
- lugged 5y ago
  Just hold BUSD if you're concerned, that really is safe, even in turbulent market conditions. Not financial advice.
  - ethanbond 5y ago
    Why exactly would you think BUSD is safe? Buy USD. Financial advice.
    - kenneth 5y ago
      Why would you think USD is safe? It's been dropping precipitously over the past 18 months as the Federal Reserve just increases the money supply exponentially. Just check the USD/CHF pair for an example.
      - ethanbond 5y ago
        BUSD's risk is a superset of USD's, no? It's just USD but you subtract the part where the world's most powerful military cares about it and then you add in a part where random crypto people can add their own fraud.
      - yunohn 5y ago
        How is this solved by buying a stablecoin? It’s pegged to 1 USD regardless of inflation.
- unyttigfjelltol 5y ago
  >We really can't have centralized entities issuing stable coins, can we. You can. It's called a 'bank' and they're heavily regulated. Instead, what crypto has are wildcat banks. You've never heard that term because when they existed, 150 years ago, "[b]ank closures and outright scams regularly occurred, leaving people with worthless money."[1] Sound familiar? [1] https://en.m.wikipedia.org/wiki/Wildcat_banking https://en.m.wikipedia.org/wiki/Wildcat_banking
relax88 5y ago
It’s actually not very complicated how all of this works: * Crypto exchanges have the problem of collecting fees in crypto, and wanting to make a profit in USD. * Stablecoin operator receives commercial paper (IOUs) from businesses, usually crypto exchanges. Issues tokens in return. (Note that the Stablecoin issuers are connected directly to the biggest exchanges e.g. Bitfinex/Coinbase/Binance) * Now the crypto exchange has a debt to the Stablecoin operator, some crypto profits, and some stablecoins. * Crypto company trading desk does the following: * Trade crypto (e.g. Bitcoin) for USD and take profit * Trade stablecoins for crypto on any number of exchanges The Stablecoin allows them to take profit without trading against themselves, and it allows them to remove USD from the system while adding debt in the form of an IOU. It also spreads liquidity risk across the entire ecosystem and allows the movement of vast sums without banking regulations getting in the way. So yes… there is something very wrong. What is amazing is how many people are blind to it.
- deweller 5y ago
  Serious question: What is wrong with this?
  - relax88 5y ago
    The “corporate paper” backing the now nearly $100 BILLION of issued stablecoins relies largely on crypto exchanges to continue making money in order to have any value whatsoever. This is basically a giant distributed Ponzi scheme resembling wildcat banks of the early 1800s. Customer US dollars come into the market, USD goes out into the pockets of crypto insiders, and the crypto market remains propped up by the “value” of these stablecoins. The only thing that keeps it going is that the stablecoin issuers (same people who are running the exchanges) have no incentive to collect the debt they are owed so everyone is happy (for now). Crypto fans like to think they are innovating but all they’ve done is found a way to circumvent regulation and try a concept that was ended in 1863 by the national bank act. https://en.m.wikipedia.org/wiki/Wildcat_banking https://en.m.wikipedia.org/wiki/Wildcat_banking If you think this ends any other way than regulation and tears I’m not sure what to tell you.
- lamontcg 5y ago

by troymc 5y ago

bequanna 5y ago

A simple Google search will answer your question about commercial paper. As for why they would do this: cash management 101. Why let cash sit in an account when you can make interest on low or no risk, short term debt? Crypto/defi/etc is high risk and requires you to DYOR. If that makes you uncomfortable, this space may not be a good fit for you.

scarmig 5y ago
> Why let cash sit in an account when you can make interest on low or no risk, short term debt? Because you've promised "investors," or at least made lots of strong statements that led them to believe, that you're letting cash sit in an account? When I invest in a fund, and it says that it does X, but then secretly does Y because they believe it's obviously better, that's something between totally untrustworthy and outright fraud.
- bequanna 5y ago
  This is a somewhat naïve view. Investing in high quality short term commercial paper or treasuries is essentially the same or less risk vs. letting $XX billion sit in some bank account. In accounting, these instruments are actually regarded the same as cash and called “cash equivalents”.
  - NationalPark 5y ago
    If it’s the same risk then why does it pay more than T bills? Regardless, the issue is the misrepresentation, not the actual assets (which most people don’t believe add up to the total anyway, right?)
    - AlexandrB 5y ago
      We haven't seen a true market crash in >10 years and everyone has forgotten why commercial paper is not the same as cash.
    - kiklion 5y ago
      I have no crypto investments, but this is basically where the line is for me. If they took the 1 USD backing the coin and invested it in US government bonds so that only a fraction is immediately available (but a large enough fraction to cover the most likely withdrawal rates) then it would be fine with me though they should advertise that more clearly. If they take the money and invest it in ‘good’ companies, that is too much risk to the underlying assets. Though I’m American and could see foreigners not thinking US bonds were safe enough.
  - nonameiguess 5y ago
    It's important to remember commercial paper tanked and almost took the global economy with it only 13 years ago. The only reason it's regarded as low risk, if you're AIG or Bank of America, is the US government has shown an extreme willingness to bail you out by buying them at face value even when they become worthless on the open market. The US government is extremely unlikely to bail out Coinbase.
    - scarmig 5y ago
      > The US government is extremely unlikely to bail out Coinbase. Part of Coinbase's implicit strategy is to become the "too big to fail" of the crypto space. And if its collapse would threaten to destabilize the broader financial system, the US gov absolutely would bail it out. We've not reached that point yet (and hopefully never will), but it's important to understand the play here.
  - scarmig 5y ago
    In 2006, the original money market fund, the Reserve Primary Fund, decided to purchase risk-free commercial paper, and by 2008 over half its assets were in this risk free, high quality commercial paper. Unfortunately, a significant part of this risk free, high quality commercial paper was issued by Lehman. And that risk free, high quality commercial paper turned out to be worthless, causing the oldest money market fund to fail and forcing it to liquidate, at well below $1.
  - ketzo 5y ago
    “essentially the same” is… not as reassuring as you think it sounds, not when we’re talking $28 billion in circulation.
simmerup 5y ago
The fact that a stable coin should be assumed to be high risk betrays a major problem of the crypto crowd.
- bequanna 5y ago
  It’s new and relatively untested. We don’t say that because new spacecraft have a high risk of failure vs a 747 that there is a “major problem” with space exploration.
  - gogoincar 5y ago
    True, but in this case the new spacecraft is being marketed as a safe alternative to the 747, while still having a higher risk of failure.
AlexandrB 5y ago
> requires you to DYOR How do you do this when the parties involved are not transparent about their holdings and have a history of misleading investors? Go off of rumours? Given their history, why would I believe that USDC is actually holding short term commercial paper and not higher risk, higher return equities?
- bequanna 5y ago
  I’m not saying you should trust USDC is backed by anything at all. It is tricky situation. Consumers want assurances, protection but the crypto true believers abhor regulation and disclosure. Trust is difficult in this space and right now many people are speculators consumed by FOMO vs. rational individuals/institutions. No one knows how this will all play out.

dsr_ 5y ago

If you think USDC is backed 1:1 by US dollars, you should try selling them all and see what you get. If you sell early enough, you might get most of your money back because other people aren't paying attention, or have been similarly misled.

alisonkisk 5y ago
A regular bank is the same. If everyone withdraws, not everyone gets paid. FDIC offers partial protection, though.
- elliekelly 5y ago
  It most certainly is not the same. Take WaMu, for example. I think it was the largest bank failure in the history of the United States and it was largely due to a bank run. Do you know how much money depositors lost? $0.00 And I don’t mean only up to the FDIC insured amount. Even those with WaMu deposits well in excess of FDIC coverage didn’t lose a penny. And it wasn’t thanks to the complex system of placing overnight deposits at various institutions for pass-through coverage in excess of the FDIC amount. Because do you know how much money the FDIC insurance fund lost paying out claims to WaMu depositors? $0.00 Do you know who did lose a lot of money? WaMu investors and shareholders. That is not even remotely close to how a stablecoin or crypto “bank run” would play out. Our banking system has built-in safety nets that work. Crypto safety nets don’t even exist.
deleted 5y ago
[deleted]

whitepaint 5y ago

I'm in the same boat. Seriously, WTF?! We really can't have centralized entities issuing stable coins, can we. The real solution is DAI, right?

lugged 5y ago
Just hold BUSD if you're concerned, that really is safe, even in turbulent market conditions. Not financial advice.
- ethanbond 5y ago
  Why exactly would you think BUSD is safe? Buy USD. Financial advice.
  - kenneth 5y ago
    Why would you think USD is safe? It's been dropping precipitously over the past 18 months as the Federal Reserve just increases the money supply exponentially. Just check the USD/CHF pair for an example.
    - ethanbond 5y ago
      BUSD's risk is a superset of USD's, no? It's just USD but you subtract the part where the world's most powerful military cares about it and then you add in a part where random crypto people can add their own fraud.
    - yunohn 5y ago
      How is this solved by buying a stablecoin? It’s pegged to 1 USD regardless of inflation.
unyttigfjelltol 5y ago
>We really can't have centralized entities issuing stable coins, can we. You can. It's called a 'bank' and they're heavily regulated. Instead, what crypto has are wildcat banks. You've never heard that term because when they existed, 150 years ago, "[b]ank closures and outright scams regularly occurred, leaving people with worthless money."[1] Sound familiar? [1] https://en.m.wikipedia.org/wiki/Wildcat_banking https://en.m.wikipedia.org/wiki/Wildcat_banking

relax88 5y ago

It’s actually not very complicated how all of this works: * Crypto exchanges have the problem of collecting fees in crypto, and wanting to make a profit in USD. * Stablecoin operator receives commercial paper (IOUs) from businesses, usually crypto exchanges. Issues tokens in return. (Note that the Stablecoin issuers are connected directly to the biggest exchanges e.g. Bitfinex/Coinbase/Binance) * Now the crypto exchange has a debt to the Stablecoin operator, some crypto profits, and some stablecoins. * Crypto company trading desk does the following: * Trade crypto (e.g. Bitcoin) for USD and take profit * Trade stablecoins for crypto on any number of exchanges The Stablecoin allows them to take profit without trading against themselves, and it allows them to remove USD from the system while adding debt in the form of an IOU. It also spreads liquidity risk across the entire ecosystem and allows the movement of vast sums without banking regulations getting in the way. So yes… there is something very wrong. What is amazing is how many people are blind to it.

deweller 5y ago
Serious question: What is wrong with this?
- relax88 5y ago
  The “corporate paper” backing the now nearly $100 BILLION of issued stablecoins relies largely on crypto exchanges to continue making money in order to have any value whatsoever. This is basically a giant distributed Ponzi scheme resembling wildcat banks of the early 1800s. Customer US dollars come into the market, USD goes out into the pockets of crypto insiders, and the crypto market remains propped up by the “value” of these stablecoins. The only thing that keeps it going is that the stablecoin issuers (same people who are running the exchanges) have no incentive to collect the debt they are owed so everyone is happy (for now). Crypto fans like to think they are innovating but all they’ve done is found a way to circumvent regulation and try a concept that was ended in 1863 by the national bank act. https://en.m.wikipedia.org/wiki/Wildcat_banking https://en.m.wikipedia.org/wiki/Wildcat_banking If you think this ends any other way than regulation and tears I’m not sure what to tell you.
lamontcg 5y ago