20 ms·

Regulators should treat stablecoins like banks

142 points by martincmartin 5y ago

MattGaiser 5y ago
> With estimated leverage of 383-to-1, Tether would be unable to honour all its tokens after losses of just 0.26%—a safety cushion that regulators would never allow at a bank. So even if they are telling the truth, it is still on the edge.
- simmerup 5y ago
  So if 0.26% of tether is withdrawn into currency the coin would collapse? Am I reading that right?
  - JumpCrisscross 5y ago
    > if 0.26% of tether is withdrawn into currency the coin would collapse If 0.26% of Tether is withdrawn, it would need to start liquidating assets. That will, most of the time, be fine. Commercial paper is exceedingly liquid. But sometimes, the liquidation will prompt a price fall. This is a fire sale. That, in turn, prompts more redemption, as holders of Tether grow concerned about its stability. This is a bank run. If Tether has a safety buffer between the value of its assets (U.S. dollar money market securities) and its liabilities (Tethers), this will--most of the time--be fine. If the situation spirals, however, a bank run can lead to collapse.
    - simmerup 5y ago
      I guess Tether make it hard to withdraw dollars for a reason.
    - user-the-name 5y ago
      > Commercial paper is exceedingly liquid If it is not complete junk. Which there is good reason to believe Tether's is, and zero willingness from their side to show it isn't.
    - arcticbull 5y ago
      This is your regularly scheduled reminder that no US persons are permitted to redeem Tether according to their terms of service. Further according to their terms of service only designated customers are permitted to redeem Tether, they at their sole discretion make the determination as to who is the designated customer, they are permitted to delay redemptions arbitrarily, and they are permitted to fulfill redemptions in-kind with whatever garbage backing they may have instead of dollars. [1] Their “reserves” and ratios and backing mean basically nothing since nobody’s ever going to be permitted to redeem a meaningful quantity anyways - while at the same time being too big to fail in the crypto industry. Exchanges know this. They are chuck-e-cheese tokens used to facilitate capital flight from mainland China, and to provide 85% of all trading volume in the crypto space. $4.9B of BTC daily trade volume vs $0.17B for USD proper. [2] [1] tether.to/legal [2] https://coinlib.io/coin/BTC/Bitcoin https://coinlib.io/coin/BTC/Bitcoin
      - wbc 5y ago
        I'm confused, how does that capital flight work exactly? Say I start w/ $1 million in RMB, how does Tether factor in here?
        arcticbull 5y ago
        You go to an OTC desk in China, you buy Tethers with $1M USD worth of RMB, you send the Tethers out of China and cash them out either directly at Coinbase or via BTC. [1] There's been a big market for escaping RMB capital controls since they were instituted, often via various gangs and casinos [2] [1] https://twitter.com/patio11/status/1424897022268645379 https://twitter.com/patio11/status/1424897022268645379 [2] https://www.casino.org/news/us-marshals-service-to-seize-imperial-palace-saipan-casino-assets/ https://www.casino.org/news/us-marshals-service-to-seize-imp...
    - archontes 5y ago
      Tether doesn't have any liabilities, because it has no obligation whatsoever to redeem tethers for dollars.
    - deleted 5y ago
      [deleted]
    - vkou 5y ago
      > Commercial paper is exceedingly liquid. If Tether actually owned any commercial paper, they'd be the biggest player in the commercial paper space. Nobody's ever heard of them, and they don't own 30 billion dollars of it. What they do own are paper promises from other companies that are controlled by them. Which are worthless. I own a paper promise from my dad to pay me a trillion dollars, that doesn't make me the richest man in the world. [1] [1] Until I leverage it into minting a 'commercial-paper-backed', unredeemable, unaudited 'stable'coin.
      - civilized 5y ago
        I take it you don't buy their latest Official Report From An Official Assurance Reporting Company Whose Job Is To Assure Us?
  - kwonkicker 5y ago
    Prob not but itd shake everything up. They'd have to get a lot of loans, and maybe sell out the company. For comparison, banks allowed to go as high as 10:1 so 383:1 is insane.
  - FabHK 5y ago
    I don't think that's the right way to read it. Currently, all the holders of tether could ask for dollars, and they'd all get them, and there'd even be 0.26% of the original balance left. (Under quite some assumptions, namely that they could sell the commercial paper at the value at which they hold it in their accounts.) However, if the value of their assets would shrink, say, by 1%, their equity would be wiped out, and they'd not have enough dollars to satisfy their liabilities. Then, if people would start demanding their dollars, the last 1%-0.26% = 0.74% of tether holders would get nothing, because there'd be nothing left. That could trigger a good old bank run - you don't want to be among that last percent of bag holders, so better take out your dollars now while they still have some.
    - jpmattia 5y ago
      > Currently, all the holders of tether could ask for dollars, and they'd all get them, and there'd even be 0.26% of the original balance left. This is the correct reading: 0.26% is the excess in total capital compared to liabilities. Earlier in the article, they state that Tether has 5% cash+equivs, so you know that 5% of Tether could be redeemed without trouble. If there were redemptions in excess of that, they would need to sell securities.
    - jellicle 5y ago
      Can anyone "take out" dollars at all? Tether is a bank with a deposit window but no withdrawal window. If Tether ceased operations tomorrow, just abandoned USDT and walked away with all the cash, what happens?
      - passwordreset 5y ago
        https://tether.to/fees/ https://tether.to/fees/ claims that fiat withdrawal is possible, with a fee of "The greater of $1,000 or 0.1%".
        simmerup 5y ago
        Wow, minimum of 100k before they'll convert into real money. That's one way to stop a bankrun.
  - liuliu 5y ago
    You can only redeem USDT to USD through centralized exchanges (after all, that's the point of stablecoins in dEx ...). As long as these centralized exchanges collude to refuse redeeming USDT to USD, there is no run of the bank scenario.
  - deleted 5y ago
    [deleted]
  - space_rock 5y ago
    This statement from the Economist is basically a lie. It's like saying people trade Forex leveraged so your cash in hand is leveraged. Tether is leveraged by 3rd parties. Tether is redeemable 1to1
- SilasX 5y ago
  Banks are now required to have 0% of deposits as cash.[1] It’s funny whenever people start to get outraged at seeing fractional reserve banking in any context besides where we’ve ignored it and accepted it. [1] Citation for those who missed this development: https://www.eidebailly.com/insights/articles/2020/4/federal-reserve-eliminates-reserve-requirements https://www.eidebailly.com/insights/articles/2020/4/federal-...
  - eightysixfour 5y ago
    Yes, because the areas where we ignore and accept it are highly regulated and insured as a result of hundreds of years of learnings at this point. People react negatively when they see it outside of that context because it is something we have repeatedly seen fail and cause instability. This isn't hard to understand.
    - SilasX 5y ago
      Yes, that is a valid distinction to make, if the arguments/concerns around Tether were merely "hey, let's make sure regular banking regulation extends to this organization as well, to make sure it's all going in tip-top shape". But that's not why people bring up the figures. They're acting like it's inherently shady to have less than 100% (or 3, or whatever) cash reserves for something that ostensibly "has your money on demand", and such a scheme is inherently unsustainable, even though this is exactly what banks do.[1] Be careful not to equate "one technical distinction that makes sense" with "the the things the hive mind is actually outraged about". (Sorry, would have responded sooner but I got a "you're posting too fast, slow down" error.) [1] Fortunately, this article is focusing on the point about just extending regulation, but every other time this comes up, the figure is supposed to provoke outrage about "how can they not have our cash ready to go?"
      - eightysixfour 5y ago
        I think it is fair for people to say it is inherently shady when the original plan for these tokens was to be 1:1 dollar backed. Moving the goal posts in this situation IS shady, and why people are now calling for regulation. People aren't railing against fractional reserves, they're railing against something that was advertised as having full reserve turning fractional with a few sentences on a website.
- chroem- 5y ago
  As opposed to banks in the US, which legally have a 0% reserve requirement. [1] [1] https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  - kn0where 5y ago
    The big difference is the FDIC.
    - toomuchtodo 5y ago
      Which, if it were to fail (which is exceptionally unlikely), is backed by the US Treasury and the Federal Reserve. EDIT: Walking back to first principals, why can't the USD fail? Because you can print whatever adults in the room decide need to be printed to hold the economy up. You cannot do this with a deflationary digital asset, nor one tied to smart contracts.
      - dannyw 5y ago
        AKA: You, the American taxpayer.
        deleted 5y ago
        [deleted]
        howinteresting 5y ago
        Sounds good to me. Why do neo-goldbugs always try and present this as some sort of gotcha? As an American taxpayer I'm happy to buy into the social contract that it implies.
      - gruez 5y ago
        >Because you can print whatever adults in the room decide need to be printed to hold the economy up. You cannot do this with a deflationary digital asset, nor one tied to smart contracts. Sounds like a feature to me. Printing money is effectively a socialized loss for everyone who's holding the currency.
- nonameiguess 5y ago
  This is unfortunately no longer true. The Fed set the required reserve ratio to 0% last March. They still incentivize holding cash reserves by paying interest to banks roughly equal to what they could get by holding something like commercial paper, effectively giving banks free money since there isn't actually any risk, but they technically no longer require banks to hold any cash at all. Of course, the Fed allows this because demand deposit accounts at banks are insured by the FDIC, so people will get their money back even if the bank doesn't have it.
  - lottin 5y ago
    Do you understand that cash reserves and regulatory capital are two different things?
- username_my1 5y ago
  The problem is the promise, bitcoin and other "nonstable" crypto don't promise a fixed dollar value, similar to gold if you will. But if a crypto claims that it has a fixed currency value, then like banks (which they also say they have a fixed dollar reserve) it has to be regulated by the issuer of that currency. I don't see any problem in regulating stable coin.
CryptoPunk 5y ago
Intellectuals should stop advocating that people be treated like children. PayPal and other e-wallets are not required to have bank charters to issue dollar-backed digital currency, and neither should stablecoins. In the wake of the 2008 financial crisis, a well-capitalized player, Walmart, which was expanding its banking activity via its Sam's Club lending, was well positioned to replace the incumbent Wall Street firms as a major lender, but that was forestalled by Congress withholding a bank charter for political reasons: https://www.nytimes.com/2007/03/17/business/17bank.html https://www.nytimes.com/2007/03/17/business/17bank.html Gatekeeping a market activity is extremely dangerous because it allows for massive rent seeking through corruption of the gatekeeper. It's inherently concentrates power in the hands of an elite. e.g. this is a bit dated, but gets the point across about the revolving door between regulatory agencies and major market players: https://philebersole.files.wordpress.com/2013/10/venn-diagram-jpg_large.jpeg https://philebersole.files.wordpress.com/2013/10/venn-diagra... Even a non-corrupt gatekeeper can do enormous damage by poorly regimenting the industry. Something that has a systemic impact on a market is a systemic risk to the market. And government intervention is the only phenomena that no market player can opt out of, so it is the only one with a truly systemic impact on the market. Reducing government intervention reduces systemic risk. Right now there is a free market in stablecoins. If you trust the attestations of USDT [1], you can use USDT. If you trust those of USDC [2] more, you can use that instead. People should decide for themselves. And the systemic risk argument for limiting people's choices is absurd. The risk posed by any financial asset is not distributed uniformly across the economy. Its impact on any party is proportional to their direct and indirect exposure to that asset, which is something that they control and have to take responsibility for. In the absence of the government bodies that socialize the losses of irresponsible actors, those actors who take on imprudent risks would see the share of the financial market that they control steadily shrink at the expense of those who do not. The suspension of this market feedback mechanism is what increases the risk of financial crisis. [1] https://tether.to/wp-content/uploads/2021/08/tether_assuranceconsolidated_reserves_report_2021-06-30.pdf https://tether.to/wp-content/uploads/2021/08/tether_assuranc... [2] https://www.centre.io/usdc-transparency https://www.centre.io/usdc-transparency
- JumpCrisscross 5y ago
  > stop advocating that people be treated like children Stablecoins are money market funds. Those initially came about due to regulatory limits on deposit-account interest rates and risk thresholds. They nearly took out the real economy in 2008. Stablecoins are recreating that structure, guaranteeing a peg against a portfolio of risky assets inextricably tied to the mainline financial system. (This is a summary of the article.)
sorenso 5y ago
But if they were treated like real banks, one stable coin would be even less backed by real cash than right now.
- zakember 5y ago
  Sorry for my ignorance, but can you please explain what you mean by this?
  - shawabawa3 5y ago
    That banks are only required to keep 10% of reserves in cash (maybe even less now?) And the rest can be loaned out
zapataband1 5y ago
Hm wasn't regulation the problem that cryptocurrency was originally intended to solve? How does this regulation work for p2p transactions. The economist got one thing right, they are indeed a threat to existing systems of money, manipulation, and control.
hiddencache 5y ago
No cryptocurrency currently passes the test as a currency in terms of acceptance, transaction speed and stability. So if it's classed rather as a store of value (read investment) then I don't see the difference between it and other investment classes which you need to be a sophisticated investor to access. Noobs typically need protecting from themselves.
- pacifist 5y ago
  > Noobs typically need protecting from themselves. Whenever I hear this I start looking for my wallet.
- SparkyMcUnicorn 5y ago
  Other than acceptance, that's a rather bold blanket statement. Visa and Mastercard handle roughly 7000 transactions per second. Solana's chain (as an example) is among the highest performing and can handle north of 50k TPS. Edit: Please challenge my position and make me think. Votes are pointless, but being proven wrong is a learning experience.
  - hiddencache 5y ago
    I see I'm also getting some downvotes, but I'll try to clarify just from my perspective. We looked into the option of accepting cryptocurrency as a payment method but came up against too many obstacles. Without being able to prove the provenance of client funds we would be at risk of breaching "proceeds of crime" / anti-money laundering regulations. And while the value of cryptocurrencies bounces all over the place and makes it impossible to budget, even stablecoins present problems. While they are pegged to something, the question is to what. Those pegged to precious metals such as gold or silver were a no-no, and even those pegged to the dollar present a problem. (As an aside it obviates one of the cited advantages of bitcoin - as a hedge against monetary policy-driven inflation). The question our board came up with was, if the currency is pegged to the dollar, why not just accept dollars? At least with established currencies we can buy currency hedging. With stablecoins, we'd be looking at specialist forex hedging, or messing about with futures. The board looked at the cost-benefit for about five minutes before they threw it out.
jpmattia 5y ago
> It says it will update the figures soon and that it is “fully backed by reserves”. The updated report is here (PDF): https://tether.to/wp-content/uploads/2021/08/tether_assuranceconsolidated_reserves_report_2021-06-30.pdf https://tether.to/wp-content/uploads/2021/08/tether_assuranc...
- ceejayoz 5y ago
  Tether has pulled this shit regularly. https://ag.ny.gov/press-release/2021/attorney-general-james-ends-virtual-currency-trading-platform-bitfinexs-illegal https://ag.ny.gov/press-release/2021/attorney-general-james-... > Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’ > On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account. I don't see much reason to have faith in the latest round.
- grey-area 5y ago
  For certain values of “fully backed by reserves”
- runeks 5y ago
  Interesting. So almost all of their commercial paper is (allegedly) rated A-2 or higher by S&P.
  - ceejayoz 5y ago
    Not if you read the footnotes. > Where a rating is unavailable, publicly available industry standard conversion tables have been used to convert ratings from Moody’s or Fitch to the S&P equivalent.
jyu 5y ago
Paypal is not a licensed bank. Square, whose IPO was 11/19/2015, only got their bank license in 2020. Why should cryptocurrency be under the purveyance of banking regulations? Cryptocurrency is pulling back the iron curtain and revealing the real Wizard of Oz when you consider unequal regulatory treatment and unequal enforcement efforts. Remember BOA robosigning fake mortgages and commiting widespread fraud? Remember HSBC getting slaps on the wrist for multibillion dollar drug laundering? Let's see how far this political doublethink and perverse incentive onion goes.
- dcminter 5y ago
  Paypal within the EU is indeed a bank.
  - ogogmad 5y ago
    Who uses it? Aren't debit cards and online bank transfers more common there?
    - xyzzy123 5y ago
      You can always punch in your digits but Paypal have some great merchant integrations on a wide variety of ecommerce platforms (including ebay...). They're worth studying to this day if you're a startup in the "ecosystem" space. Everyone hates them but the stickiness is real.
    - spiralx 5y ago
      It made it easy to pay for things from sites that didn't support debit cards and other European-only payment methods. And while bank transfers have been free for years, doing so online or on your phone hasn't necessarily been easy - or even possible - if you're talking about a few years back.
    - dcminter 5y ago
      Paypal is often the method with the lowest barrier to entry for making payments online. One clicks the paypal button and then approves the transaction, done. Versus (often) needing to enter all card details, billing address, delivery address, and so on. It's often a good choice for making informal payments between friends because you just need the paypal address - versus, for example, sort code, account number, and bank name. You might also need the bank address and to pay a fee for an international transfer. Depending on the country you're in various other payment services may be available and/or common. For example I see services like Klarna's eating into this a bit, but they're certainly not ubiquitous. I don't really follow how Paypal have managed to avoid becoming a bank in the US given that they offer what is, to my eye, clearly a suite of banking services!
AcerbicZero 5y ago
Why should we let obviously captured regulators attempt to wrangle the only thing that even remotely looks like competition to their captors’ core business models?
- wins32767 5y ago
  Because despite being captured, those regulators make sure the system works much better than it did 100 years ago when there were regular, crippling depressions and people lost their life savings when banks failed. The financial system undergirds the rest of the economy and some stability and caution is warranted when messing with a core part of the architecture of modern society.
- user-the-name 5y ago
  You would rather have a handful of ex-criminals run a supposed $60 billion "currency"? How is any of that better?
mrhwick 5y ago
AgeUSD protocol[1] can already be used to encode such regulatory forces into the stablecoin itself, if desired. [1] https://github.com/Emurgo/age-usd https://github.com/Emurgo/age-usd
gunshai 5y ago
>Tether, has issued $62bn-worth of tokens which it says are redeemable for a dollar apiece. But of the assets backing the tokens in March only about 5% were cash or Treasury bills Cash & Cash Equivalents & Other Short-Term Deposits & Commercial Paper: Commercial Paper and Certificates of Deposit2 $30,807,654,349 Cash & Bank Deposits3 $6,282,756,692 Reverse Repo Notes4 $1,000,662,458 Treasury Bills5 $15,279,528,705 Subtotal $53,370,602,204 How do we go from an assumption of 5% in March to ~85% (53/62) in June? The author I can understand being cautious about the subject of stable coins, but this seems to be the wrong evidence to back their claim. https://tether.to/wp-content/uploads/2021/08/tether_assuranceconsolidated_reserves_report_2021-06-30.pdf https://tether.to/wp-content/uploads/2021/08/tether_assuranc...
- lalaland1125 5y ago
  Note the terminology there: Cash or treasury bills. That $31 billion in commercial paper might not be actually liquid. The only thing that counts are the $6 billion in cash and $15 billion in treasury bills. There are a number of other issues as well. Which bank is holding that cash? Is it actually a real bank?
  - wutbrodo 5y ago
    > The only thing that counts are the $6 million in cash and $15 million in treasury bills. Those figures are all in billions. 21B/62B is still much much higher than the claimed 5%
- JumpCrisscross 5y ago
  For an effective money market fund, there is a huge difference between cash and bank deposits; Treasuries; and commercial paper, certificates of deposit and reverse repos.
- namdnay 5y ago
  Careful, commercial paper is most definitely not the same as cash or treasury bills. It could be AAA, it could be BBB- Wasn't there a story about an independent audit that was cancelled or something? I remember the weird assertion that they couldn't disclose whose commercial paper they were holding, which I've never heard before
marcusestes 5y ago
Regulating stablecoins like banks would absolutely have to involve reform of the OCC, whose willingness to actually issue new banking charters has slowed to a near halt in recent years. https://wp-vip.law.columbia.edu/wp-content/uploads/sites/2/2020/09/zaring.png https://wp-vip.law.columbia.edu/wp-content/uploads/sites/2/2... Many fintechs would be more willing to submit to banking regulation if they felt there was a sane and cost effective path to, you know, actually becoming a bank.
- JumpCrisscross 5y ago
  > stablecoins like banks would absolutely have to involve reform of the OCC, whose willingness to actually issue new banking charters has slowed to a near halt in recent years The article calls for regulators "to subject stablecoins to bank-like rules for transparency, liquidity and capital." Not to literally require Tether charter itself as a bank. Think money market funds or PayPal versus Wells Fargo.
  - legutierr 5y ago
    There is a framework for this kind of regulation in place already, in the form of money transmitter licensing. Coinbase, for instance, is licensed as a money transmitter in 40+ states, and relies on those licenses to do business in most of the United States, including with regards to the issuance of USDC, per my understanding. Paypal also operates in the United States under this licensing scheme. The rigor of money transmitter regulation and licensing requirements varies state by state, but regulators' rigor overall has been increasing steadily for decades. In addition to annual and quarterly paper filing requirements, a number of states—including California, New York, and Texas, among others—perform periodic (often annual) on-site examinations of licensed companies—paid-for by licensees—wherein visiting examiners expect to have complete access to records and data. These examinations are rigorous. After an examination, it is very unlikely that a stablecoin issuer will be allowed to continue operating as a licensed entity without being financially sound, and without fully backing its financial obligations with safe investments. Any inability by a licensee to comply with requests made during the course of an examination, and any inability to provide acceptable answers to questions asked, can result in fines, limitations placed on the operations of the licensee, or even the loss of the license. Depending on the jurisdiction, and depending on the specific activity, operating without a license may be a crime, and would likely put a licensee out of business. Among the requirements imposed under these licensing schemes are bonding requirements, and "permissible investment" requirements. Typically, permitted investments include bank deposits and government debt, supplemented by surety bonds issued by large insurers. In many ways, these liquidity requirements are more rigorous than those imposed on banks. Most outstanding consumer liabilities—presumably including stablecoins issued by a licensee—must be backed by these permissible investments. Of course, given that there are 50 separate state regulatory regimes with regards to money transmission, and given stablecoins' novelty, regulation specifically pertaining to stablecoins is not standardized yet. This is a matter of education and standards setting among regulators, however. It is not a matter of requiring new legislation at the national level, or even at the state level; nor does it necessarily require major involvement by the federal bank regulators. In most US states, banking regulators already have sufficient legal authority to craft stablecoin regulations if they want to—and they have the operational capacity to enforce such regulations as well—based on their authority to license and regulate money transmitters.
Zamicol 5y ago
Firstly, Tether is rat poison. Unfortunately, newcomers to the space identify "stable coins" = "tether" or wrongly assume that other stablecoins share similar mechanisms. There are many alternatives that operate radically differently in the nascent space. DAI is immensely exciting. Stablecoins like DAI are interesting experiments that could powerfully create new online economies. Blockchains like Ethereum are currently far more transparent than the state-sponsor US monetary system. I hope to live in a society where economic experiments can be executed, new lessons learned, and transparency maintained. If stablecoins are persecuted, the need for cryptographic zero-knowledge proofs will allow these systems to continue with far less transparency. As a different matter, how can society say "2008 bad", which resulted in little economic progress, and then threaten problem solvers from making new solutions? Innovation is a hedge against regulator lethargy.
- Marazan 5y ago
  Isn't DAI backed by USDC and Tether in part?
  - xur17 5y ago
    The debt ceiling for Tether is currently set to 0 [0] for dai. And USDC + other stablecoins do partially back it [1]. [0] https://daistats.com/#/collateral https://daistats.com/#/collateral [1] https://dune.xyz/SebVentures/maker---accounting_1 https://dune.xyz/SebVentures/maker---accounting_1
  - njade 5y ago
    You are correct. Last time I checked, more than 50% backed by USDC. Makes no sense as the whole point of censorship resistance is defeated.
    - capableweb 5y ago
      Where/how did you check this? >50% of USDC sounds unreasonably high.
    - shawabawa3 5y ago
dalbasal 5y ago
Turning the proposition around, why not have regular banks, even the Bank of England. Issue an official GBPCoin, or a banking framework that does the same thing. Have whoever needs stablecoin use that. That is, stablecoins are basically USD accounts, just with the actual bank receipts (the coins) circulating. Make that a form of deposit account, and regulate and insure it like any other deposit account. It presents some questions that aren't answered in advance, but I don't think it's impossible to do this right. In some sense, a stablecoin system is easier to understand.
- bufferoverflow 5y ago
  What's the point of that? Using cryptocurrencies frees you from the possibility of your funds being frozen or seized or even detected/associated with you. GBPCoin would be no different from using GBP on a bank account.
  - dalbasal 5y ago
    If the only point is avoiding authorities, then I guess a regulator's job is to kill it. If it's useful to the economy, regulate it.
  - short_sells_poo 5y ago
    Using cryptocurrencies prevents your funds being frozen or seized until a couple of masked men come around and beat it out of you with a $5 wrench. Eventually, somewhere, you have to spend money or take delivery of goods or services rendered. I don't think you can buttress that.
    - emn13 5y ago
      And I hope most of us don't want to live in the hypothetical society where courts and lawmakers have zero sway over the rich. We complain enough about how untouchable they are already; why would we want to increase that? If a court or law has no way to freeze or redirect funds, that's a bug, not a feature.
    - 6AA4FD 5y ago
cblconfederate 5y ago
And then maybe, banks like stablecoins
Animats 5y ago
Why the attraction to USDT? There are better stablecoins with real backing and audits, such as GUSD. You can trade 1.00 USDT for about 1.01 GUSD, which is strange.
- runeks 5y ago
  > Why the attraction to USDT? It’s by far the biggest. Both by both volume and liquidity.
  - asah 5y ago
    ...and "places accepted" i.e. exchanges, DeFi companies, investors, traders, etc etc etc
jcaldas 5y ago
In my opinion, regulators have a too-big-to-fail problem here. Tether is known to be used for artificially inflating the crypto market in collusion with certain exchanges. There is a lot of documentation on this, the following two articles are a good start: https://theodoregreenbaum.medium.com/the-crypto-time-bomb-is-finally-about-to-explode-d7d825cb9cea https://theodoregreenbaum.medium.com/the-crypto-time-bomb-is... https://www.bloomberg.com/news/articles/2021-07-26/tether-executives-said-to-face-criminal-probe-into-bank-fraud https://www.bloomberg.com/news/articles/2021-07-26/tether-ex... If news suddenly come out about Tether being formally accused by the Department of Justice, the market may react in panic and things might get ugly. As an anecdote, I have a friend who told me she put a significant amount of her life savings into "etherium and carnado" (sic). There are millions of people like this who will get absolutely crushed. I don't see a non-painful solution here. The regulators were too slow and have allowed a monster to be created.
- 6AA4FD 5y ago
  What a depressing situation... having to protect a bunch of people on a get rich quick mission from themselves. Of course you can adapt that argument to people buying cheap food, clothes, housing, etc. A lot of people do these things because they are in situations where they have very real fears about their future safety and solvency, so it is not an argument against consumer protection by the state but an expression of frustration I guess.
space_rock 5y ago
> With estimated leverage of 383-to-1, Tether would be unable to honour all its tokens after losses of just 0.26%—a safety cushion that regulators would never allow at a bank. This statement from the Economist is basically a lie. It's like saying people trade Forex leveraged so your cash in hand is leveraged. Tether is leveraged by 3rd parties. Tether is redeemable 1to1
- ryan_lane 5y ago
  Tether's terms of service say they do not have to allow redemption.
  - space_rock 5y ago
    It's still not leveraged as they describe
RNCTX 5y ago
Regulators should treat cryptocurrencies as industrial electricity users and regulate/tax their grid impact accordingly. Then, finally, we could be rid of these ridiculous things and on to the next ridiculous thing.

142 points by martincmartin 5y ago

> With estimated leverage of 383-to-1, Tether would be unable to honour all its tokens after losses of just 0.26%—a safety cushion that regulators would never allow at a bank. So even if they are telling the truth, it is still on the edge.

simmerup 5y ago
So if 0.26% of tether is withdrawn into currency the coin would collapse? Am I reading that right?
- JumpCrisscross 5y ago
  > if 0.26% of tether is withdrawn into currency the coin would collapse If 0.26% of Tether is withdrawn, it would need to start liquidating assets. That will, most of the time, be fine. Commercial paper is exceedingly liquid. But sometimes, the liquidation will prompt a price fall. This is a fire sale. That, in turn, prompts more redemption, as holders of Tether grow concerned about its stability. This is a bank run. If Tether has a safety buffer between the value of its assets (U.S. dollar money market securities) and its liabilities (Tethers), this will--most of the time--be fine. If the situation spirals, however, a bank run can lead to collapse.
  - simmerup 5y ago
    I guess Tether make it hard to withdraw dollars for a reason.
  - user-the-name 5y ago
    > Commercial paper is exceedingly liquid If it is not complete junk. Which there is good reason to believe Tether's is, and zero willingness from their side to show it isn't.
  - arcticbull 5y ago
    This is your regularly scheduled reminder that no US persons are permitted to redeem Tether according to their terms of service. Further according to their terms of service only designated customers are permitted to redeem Tether, they at their sole discretion make the determination as to who is the designated customer, they are permitted to delay redemptions arbitrarily, and they are permitted to fulfill redemptions in-kind with whatever garbage backing they may have instead of dollars. [1] Their “reserves” and ratios and backing mean basically nothing since nobody’s ever going to be permitted to redeem a meaningful quantity anyways - while at the same time being too big to fail in the crypto industry. Exchanges know this. They are chuck-e-cheese tokens used to facilitate capital flight from mainland China, and to provide 85% of all trading volume in the crypto space. $4.9B of BTC daily trade volume vs $0.17B for USD proper. [2] [1] tether.to/legal [2] https://coinlib.io/coin/BTC/Bitcoin https://coinlib.io/coin/BTC/Bitcoin
    - wbc 5y ago
      I'm confused, how does that capital flight work exactly? Say I start w/ $1 million in RMB, how does Tether factor in here?
      - arcticbull 5y ago
        You go to an OTC desk in China, you buy Tethers with $1M USD worth of RMB, you send the Tethers out of China and cash them out either directly at Coinbase or via BTC. [1] There's been a big market for escaping RMB capital controls since they were instituted, often via various gangs and casinos [2] [1] https://twitter.com/patio11/status/1424897022268645379 https://twitter.com/patio11/status/1424897022268645379 [2] https://www.casino.org/news/us-marshals-service-to-seize-imperial-palace-saipan-casino-assets/ https://www.casino.org/news/us-marshals-service-to-seize-imp...
  - archontes 5y ago
    Tether doesn't have any liabilities, because it has no obligation whatsoever to redeem tethers for dollars.
  - deleted 5y ago
    [deleted]
  - vkou 5y ago
    > Commercial paper is exceedingly liquid. If Tether actually owned any commercial paper, they'd be the biggest player in the commercial paper space. Nobody's ever heard of them, and they don't own 30 billion dollars of it. What they do own are paper promises from other companies that are controlled by them. Which are worthless. I own a paper promise from my dad to pay me a trillion dollars, that doesn't make me the richest man in the world. [1] [1] Until I leverage it into minting a 'commercial-paper-backed', unredeemable, unaudited 'stable'coin.
    - civilized 5y ago
      I take it you don't buy their latest Official Report From An Official Assurance Reporting Company Whose Job Is To Assure Us?
- kwonkicker 5y ago
  Prob not but itd shake everything up. They'd have to get a lot of loans, and maybe sell out the company. For comparison, banks allowed to go as high as 10:1 so 383:1 is insane.
- FabHK 5y ago
  I don't think that's the right way to read it. Currently, all the holders of tether could ask for dollars, and they'd all get them, and there'd even be 0.26% of the original balance left. (Under quite some assumptions, namely that they could sell the commercial paper at the value at which they hold it in their accounts.) However, if the value of their assets would shrink, say, by 1%, their equity would be wiped out, and they'd not have enough dollars to satisfy their liabilities. Then, if people would start demanding their dollars, the last 1%-0.26% = 0.74% of tether holders would get nothing, because there'd be nothing left. That could trigger a good old bank run - you don't want to be among that last percent of bag holders, so better take out your dollars now while they still have some.
  - jpmattia 5y ago
    > Currently, all the holders of tether could ask for dollars, and they'd all get them, and there'd even be 0.26% of the original balance left. This is the correct reading: 0.26% is the excess in total capital compared to liabilities. Earlier in the article, they state that Tether has 5% cash+equivs, so you know that 5% of Tether could be redeemed without trouble. If there were redemptions in excess of that, they would need to sell securities.
  - jellicle 5y ago
    Can anyone "take out" dollars at all? Tether is a bank with a deposit window but no withdrawal window. If Tether ceased operations tomorrow, just abandoned USDT and walked away with all the cash, what happens?
    - passwordreset 5y ago
      https://tether.to/fees/ https://tether.to/fees/ claims that fiat withdrawal is possible, with a fee of "The greater of $1,000 or 0.1%".
      - simmerup 5y ago
        Wow, minimum of 100k before they'll convert into real money. That's one way to stop a bankrun.
- liuliu 5y ago
  You can only redeem USDT to USD through centralized exchanges (after all, that's the point of stablecoins in dEx ...). As long as these centralized exchanges collude to refuse redeeming USDT to USD, there is no run of the bank scenario.
- deleted 5y ago
  [deleted]
- space_rock 5y ago
  This statement from the Economist is basically a lie. It's like saying people trade Forex leveraged so your cash in hand is leveraged. Tether is leveraged by 3rd parties. Tether is redeemable 1to1
SilasX 5y ago
Banks are now required to have 0% of deposits as cash.[1] It’s funny whenever people start to get outraged at seeing fractional reserve banking in any context besides where we’ve ignored it and accepted it. [1] Citation for those who missed this development: https://www.eidebailly.com/insights/articles/2020/4/federal-reserve-eliminates-reserve-requirements https://www.eidebailly.com/insights/articles/2020/4/federal-...
- eightysixfour 5y ago
  Yes, because the areas where we ignore and accept it are highly regulated and insured as a result of hundreds of years of learnings at this point. People react negatively when they see it outside of that context because it is something we have repeatedly seen fail and cause instability. This isn't hard to understand.
  - SilasX 5y ago
    Yes, that is a valid distinction to make, if the arguments/concerns around Tether were merely "hey, let's make sure regular banking regulation extends to this organization as well, to make sure it's all going in tip-top shape". But that's not why people bring up the figures. They're acting like it's inherently shady to have less than 100% (or 3, or whatever) cash reserves for something that ostensibly "has your money on demand", and such a scheme is inherently unsustainable, even though this is exactly what banks do.[1] Be careful not to equate "one technical distinction that makes sense" with "the the things the hive mind is actually outraged about". (Sorry, would have responded sooner but I got a "you're posting too fast, slow down" error.) [1] Fortunately, this article is focusing on the point about just extending regulation, but every other time this comes up, the figure is supposed to provoke outrage about "how can they not have our cash ready to go?"
    - eightysixfour 5y ago
      I think it is fair for people to say it is inherently shady when the original plan for these tokens was to be 1:1 dollar backed. Moving the goal posts in this situation IS shady, and why people are now calling for regulation. People aren't railing against fractional reserves, they're railing against something that was advertised as having full reserve turning fractional with a few sentences on a website.
chroem- 5y ago
As opposed to banks in the US, which legally have a 0% reserve requirement. [1] [1] https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- kn0where 5y ago
  The big difference is the FDIC.
  - toomuchtodo 5y ago
    Which, if it were to fail (which is exceptionally unlikely), is backed by the US Treasury and the Federal Reserve. EDIT: Walking back to first principals, why can't the USD fail? Because you can print whatever adults in the room decide need to be printed to hold the economy up. You cannot do this with a deflationary digital asset, nor one tied to smart contracts.
    - dannyw 5y ago
      AKA: You, the American taxpayer.
      - deleted 5y ago
        [deleted]
      - howinteresting 5y ago
        Sounds good to me. Why do neo-goldbugs always try and present this as some sort of gotcha? As an American taxpayer I'm happy to buy into the social contract that it implies.
    - gruez 5y ago
      >Because you can print whatever adults in the room decide need to be printed to hold the economy up. You cannot do this with a deflationary digital asset, nor one tied to smart contracts. Sounds like a feature to me. Printing money is effectively a socialized loss for everyone who's holding the currency.
nonameiguess 5y ago
This is unfortunately no longer true. The Fed set the required reserve ratio to 0% last March. They still incentivize holding cash reserves by paying interest to banks roughly equal to what they could get by holding something like commercial paper, effectively giving banks free money since there isn't actually any risk, but they technically no longer require banks to hold any cash at all. Of course, the Fed allows this because demand deposit accounts at banks are insured by the FDIC, so people will get their money back even if the bank doesn't have it.
- lottin 5y ago
  Do you understand that cash reserves and regulatory capital are two different things?
username_my1 5y ago
The problem is the promise, bitcoin and other "nonstable" crypto don't promise a fixed dollar value, similar to gold if you will. But if a crypto claims that it has a fixed currency value, then like banks (which they also say they have a fixed dollar reserve) it has to be regulated by the issuer of that currency. I don't see any problem in regulating stable coin.

CryptoPunk 5y ago

Intellectuals should stop advocating that people be treated like children. PayPal and other e-wallets are not required to have bank charters to issue dollar-backed digital currency, and neither should stablecoins. In the wake of the 2008 financial crisis, a well-capitalized player, Walmart, which was expanding its banking activity via its Sam's Club lending, was well positioned to replace the incumbent Wall Street firms as a major lender, but that was forestalled by Congress withholding a bank charter for political reasons: https://www.nytimes.com/2007/03/17/business/17bank.html https://www.nytimes.com/2007/03/17/business/17bank.html Gatekeeping a market activity is extremely dangerous because it allows for massive rent seeking through corruption of the gatekeeper. It's inherently concentrates power in the hands of an elite. e.g. this is a bit dated, but gets the point across about the revolving door between regulatory agencies and major market players: https://philebersole.files.wordpress.com/2013/10/venn-diagram-jpg_large.jpeg https://philebersole.files.wordpress.com/2013/10/venn-diagra... Even a non-corrupt gatekeeper can do enormous damage by poorly regimenting the industry. Something that has a systemic impact on a market is a systemic risk to the market. And government intervention is the only phenomena that no market player can opt out of, so it is the only one with a truly systemic impact on the market. Reducing government intervention reduces systemic risk. Right now there is a free market in stablecoins. If you trust the attestations of USDT [1], you can use USDT. If you trust those of USDC [2] more, you can use that instead. People should decide for themselves. And the systemic risk argument for limiting people's choices is absurd. The risk posed by any financial asset is not distributed uniformly across the economy. Its impact on any party is proportional to their direct and indirect exposure to that asset, which is something that they control and have to take responsibility for. In the absence of the government bodies that socialize the losses of irresponsible actors, those actors who take on imprudent risks would see the share of the financial market that they control steadily shrink at the expense of those who do not. The suspension of this market feedback mechanism is what increases the risk of financial crisis. [1] https://tether.to/wp-content/uploads/2021/08/tether_assuranceconsolidated_reserves_report_2021-06-30.pdf https://tether.to/wp-content/uploads/2021/08/tether_assuranc... [2] https://www.centre.io/usdc-transparency https://www.centre.io/usdc-transparency

JumpCrisscross 5y ago
> stop advocating that people be treated like children Stablecoins are money market funds. Those initially came about due to regulatory limits on deposit-account interest rates and risk thresholds. They nearly took out the real economy in 2008. Stablecoins are recreating that structure, guaranteeing a peg against a portfolio of risky assets inextricably tied to the mainline financial system. (This is a summary of the article.)

sorenso 5y ago

But if they were treated like real banks, one stable coin would be even less backed by real cash than right now.

zakember 5y ago
Sorry for my ignorance, but can you please explain what you mean by this?
- shawabawa3 5y ago
  That banks are only required to keep 10% of reserves in cash (maybe even less now?) And the rest can be loaned out

zapataband1 5y ago

Hm wasn't regulation the problem that cryptocurrency was originally intended to solve? How does this regulation work for p2p transactions. The economist got one thing right, they are indeed a threat to existing systems of money, manipulation, and control.

hiddencache 5y ago

No cryptocurrency currently passes the test as a currency in terms of acceptance, transaction speed and stability. So if it's classed rather as a store of value (read investment) then I don't see the difference between it and other investment classes which you need to be a sophisticated investor to access. Noobs typically need protecting from themselves.

pacifist 5y ago
> Noobs typically need protecting from themselves. Whenever I hear this I start looking for my wallet.
SparkyMcUnicorn 5y ago
Other than acceptance, that's a rather bold blanket statement. Visa and Mastercard handle roughly 7000 transactions per second. Solana's chain (as an example) is among the highest performing and can handle north of 50k TPS. Edit: Please challenge my position and make me think. Votes are pointless, but being proven wrong is a learning experience.
- hiddencache 5y ago
  I see I'm also getting some downvotes, but I'll try to clarify just from my perspective. We looked into the option of accepting cryptocurrency as a payment method but came up against too many obstacles. Without being able to prove the provenance of client funds we would be at risk of breaching "proceeds of crime" / anti-money laundering regulations. And while the value of cryptocurrencies bounces all over the place and makes it impossible to budget, even stablecoins present problems. While they are pegged to something, the question is to what. Those pegged to precious metals such as gold or silver were a no-no, and even those pegged to the dollar present a problem. (As an aside it obviates one of the cited advantages of bitcoin - as a hedge against monetary policy-driven inflation). The question our board came up with was, if the currency is pegged to the dollar, why not just accept dollars? At least with established currencies we can buy currency hedging. With stablecoins, we'd be looking at specialist forex hedging, or messing about with futures. The board looked at the cost-benefit for about five minutes before they threw it out.

jpmattia 5y ago

> It says it will update the figures soon and that it is “fully backed by reserves”. The updated report is here (PDF): https://tether.to/wp-content/uploads/2021/08/tether_assuranceconsolidated_reserves_report_2021-06-30.pdf https://tether.to/wp-content/uploads/2021/08/tether_assuranc...

ceejayoz 5y ago
Tether has pulled this shit regularly. https://ag.ny.gov/press-release/2021/attorney-general-james-ends-virtual-currency-trading-platform-bitfinexs-illegal https://ag.ny.gov/press-release/2021/attorney-general-james-... > Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’ > On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account. I don't see much reason to have faith in the latest round.
grey-area 5y ago
For certain values of “fully backed by reserves”
runeks 5y ago
Interesting. So almost all of their commercial paper is (allegedly) rated A-2 or higher by S&P.
- ceejayoz 5y ago
  Not if you read the footnotes. > Where a rating is unavailable, publicly available industry standard conversion tables have been used to convert ratings from Moody’s or Fitch to the S&P equivalent.

jyu 5y ago

Paypal is not a licensed bank. Square, whose IPO was 11/19/2015, only got their bank license in 2020. Why should cryptocurrency be under the purveyance of banking regulations? Cryptocurrency is pulling back the iron curtain and revealing the real Wizard of Oz when you consider unequal regulatory treatment and unequal enforcement efforts. Remember BOA robosigning fake mortgages and commiting widespread fraud? Remember HSBC getting slaps on the wrist for multibillion dollar drug laundering? Let's see how far this political doublethink and perverse incentive onion goes.

dcminter 5y ago
Paypal within the EU is indeed a bank.
- ogogmad 5y ago
  Who uses it? Aren't debit cards and online bank transfers more common there?
  - xyzzy123 5y ago
    You can always punch in your digits but Paypal have some great merchant integrations on a wide variety of ecommerce platforms (including ebay...). They're worth studying to this day if you're a startup in the "ecosystem" space. Everyone hates them but the stickiness is real.
  - spiralx 5y ago
    It made it easy to pay for things from sites that didn't support debit cards and other European-only payment methods. And while bank transfers have been free for years, doing so online or on your phone hasn't necessarily been easy - or even possible - if you're talking about a few years back.
  - dcminter 5y ago
    Paypal is often the method with the lowest barrier to entry for making payments online. One clicks the paypal button and then approves the transaction, done. Versus (often) needing to enter all card details, billing address, delivery address, and so on. It's often a good choice for making informal payments between friends because you just need the paypal address - versus, for example, sort code, account number, and bank name. You might also need the bank address and to pay a fee for an international transfer. Depending on the country you're in various other payment services may be available and/or common. For example I see services like Klarna's eating into this a bit, but they're certainly not ubiquitous. I don't really follow how Paypal have managed to avoid becoming a bank in the US given that they offer what is, to my eye, clearly a suite of banking services!

AcerbicZero 5y ago

Why should we let obviously captured regulators attempt to wrangle the only thing that even remotely looks like competition to their captors’ core business models?

wins32767 5y ago
Because despite being captured, those regulators make sure the system works much better than it did 100 years ago when there were regular, crippling depressions and people lost their life savings when banks failed. The financial system undergirds the rest of the economy and some stability and caution is warranted when messing with a core part of the architecture of modern society.
user-the-name 5y ago
You would rather have a handful of ex-criminals run a supposed $60 billion "currency"? How is any of that better?

mrhwick 5y ago

AgeUSD protocol[1] can already be used to encode such regulatory forces into the stablecoin itself, if desired. [1] https://github.com/Emurgo/age-usd https://github.com/Emurgo/age-usd

gunshai 5y ago

>Tether, has issued $62bn-worth of tokens which it says are redeemable for a dollar apiece. But of the assets backing the tokens in March only about 5% were cash or Treasury bills Cash & Cash Equivalents & Other Short-Term Deposits & Commercial Paper: Commercial Paper and Certificates of Deposit2 $30,807,654,349 Cash & Bank Deposits3 $6,282,756,692 Reverse Repo Notes4 $1,000,662,458 Treasury Bills5 $15,279,528,705 Subtotal $53,370,602,204 How do we go from an assumption of 5% in March to ~85% (53/62) in June? The author I can understand being cautious about the subject of stable coins, but this seems to be the wrong evidence to back their claim. https://tether.to/wp-content/uploads/2021/08/tether_assuranceconsolidated_reserves_report_2021-06-30.pdf https://tether.to/wp-content/uploads/2021/08/tether_assuranc...

lalaland1125 5y ago
Note the terminology there: Cash or treasury bills. That $31 billion in commercial paper might not be actually liquid. The only thing that counts are the $6 billion in cash and $15 billion in treasury bills. There are a number of other issues as well. Which bank is holding that cash? Is it actually a real bank?
- wutbrodo 5y ago
  > The only thing that counts are the $6 million in cash and $15 million in treasury bills. Those figures are all in billions. 21B/62B is still much much higher than the claimed 5%
JumpCrisscross 5y ago
For an effective money market fund, there is a huge difference between cash and bank deposits; Treasuries; and commercial paper, certificates of deposit and reverse repos.
namdnay 5y ago
Careful, commercial paper is most definitely not the same as cash or treasury bills. It could be AAA, it could be BBB- Wasn't there a story about an independent audit that was cancelled or something? I remember the weird assertion that they couldn't disclose whose commercial paper they were holding, which I've never heard before

marcusestes 5y ago

Regulating stablecoins like banks would absolutely have to involve reform of the OCC, whose willingness to actually issue new banking charters has slowed to a near halt in recent years. https://wp-vip.law.columbia.edu/wp-content/uploads/sites/2/2020/09/zaring.png https://wp-vip.law.columbia.edu/wp-content/uploads/sites/2/2... Many fintechs would be more willing to submit to banking regulation if they felt there was a sane and cost effective path to, you know, actually becoming a bank.

JumpCrisscross 5y ago
> stablecoins like banks would absolutely have to involve reform of the OCC, whose willingness to actually issue new banking charters has slowed to a near halt in recent years The article calls for regulators "to subject stablecoins to bank-like rules for transparency, liquidity and capital." Not to literally require Tether charter itself as a bank. Think money market funds or PayPal versus Wells Fargo.
- legutierr 5y ago
  There is a framework for this kind of regulation in place already, in the form of money transmitter licensing. Coinbase, for instance, is licensed as a money transmitter in 40+ states, and relies on those licenses to do business in most of the United States, including with regards to the issuance of USDC, per my understanding. Paypal also operates in the United States under this licensing scheme. The rigor of money transmitter regulation and licensing requirements varies state by state, but regulators' rigor overall has been increasing steadily for decades. In addition to annual and quarterly paper filing requirements, a number of states—including California, New York, and Texas, among others—perform periodic (often annual) on-site examinations of licensed companies—paid-for by licensees—wherein visiting examiners expect to have complete access to records and data. These examinations are rigorous. After an examination, it is very unlikely that a stablecoin issuer will be allowed to continue operating as a licensed entity without being financially sound, and without fully backing its financial obligations with safe investments. Any inability by a licensee to comply with requests made during the course of an examination, and any inability to provide acceptable answers to questions asked, can result in fines, limitations placed on the operations of the licensee, or even the loss of the license. Depending on the jurisdiction, and depending on the specific activity, operating without a license may be a crime, and would likely put a licensee out of business. Among the requirements imposed under these licensing schemes are bonding requirements, and "permissible investment" requirements. Typically, permitted investments include bank deposits and government debt, supplemented by surety bonds issued by large insurers. In many ways, these liquidity requirements are more rigorous than those imposed on banks. Most outstanding consumer liabilities—presumably including stablecoins issued by a licensee—must be backed by these permissible investments. Of course, given that there are 50 separate state regulatory regimes with regards to money transmission, and given stablecoins' novelty, regulation specifically pertaining to stablecoins is not standardized yet. This is a matter of education and standards setting among regulators, however. It is not a matter of requiring new legislation at the national level, or even at the state level; nor does it necessarily require major involvement by the federal bank regulators. In most US states, banking regulators already have sufficient legal authority to craft stablecoin regulations if they want to—and they have the operational capacity to enforce such regulations as well—based on their authority to license and regulate money transmitters.

Zamicol 5y ago

Firstly, Tether is rat poison. Unfortunately, newcomers to the space identify "stable coins" = "tether" or wrongly assume that other stablecoins share similar mechanisms. There are many alternatives that operate radically differently in the nascent space. DAI is immensely exciting. Stablecoins like DAI are interesting experiments that could powerfully create new online economies. Blockchains like Ethereum are currently far more transparent than the state-sponsor US monetary system. I hope to live in a society where economic experiments can be executed, new lessons learned, and transparency maintained. If stablecoins are persecuted, the need for cryptographic zero-knowledge proofs will allow these systems to continue with far less transparency. As a different matter, how can society say "2008 bad", which resulted in little economic progress, and then threaten problem solvers from making new solutions? Innovation is a hedge against regulator lethargy.

Marazan 5y ago
Isn't DAI backed by USDC and Tether in part?
- xur17 5y ago
  The debt ceiling for Tether is currently set to 0 [0] for dai. And USDC + other stablecoins do partially back it [1]. [0] https://daistats.com/#/collateral https://daistats.com/#/collateral [1] https://dune.xyz/SebVentures/maker---accounting_1 https://dune.xyz/SebVentures/maker---accounting_1
- njade 5y ago
  You are correct. Last time I checked, more than 50% backed by USDC. Makes no sense as the whole point of censorship resistance is defeated.
  - capableweb 5y ago
    Where/how did you check this? >50% of USDC sounds unreasonably high.
  - shawabawa3 5y ago

dalbasal 5y ago

Turning the proposition around, why not have regular banks, even the Bank of England. Issue an official GBPCoin, or a banking framework that does the same thing. Have whoever needs stablecoin use that. That is, stablecoins are basically USD accounts, just with the actual bank receipts (the coins) circulating. Make that a form of deposit account, and regulate and insure it like any other deposit account. It presents some questions that aren't answered in advance, but I don't think it's impossible to do this right. In some sense, a stablecoin system is easier to understand.

bufferoverflow 5y ago
What's the point of that? Using cryptocurrencies frees you from the possibility of your funds being frozen or seized or even detected/associated with you. GBPCoin would be no different from using GBP on a bank account.
- dalbasal 5y ago
  If the only point is avoiding authorities, then I guess a regulator's job is to kill it. If it's useful to the economy, regulate it.
- short_sells_poo 5y ago
  Using cryptocurrencies prevents your funds being frozen or seized until a couple of masked men come around and beat it out of you with a $5 wrench. Eventually, somewhere, you have to spend money or take delivery of goods or services rendered. I don't think you can buttress that.
  - emn13 5y ago
    And I hope most of us don't want to live in the hypothetical society where courts and lawmakers have zero sway over the rich. We complain enough about how untouchable they are already; why would we want to increase that? If a court or law has no way to freeze or redirect funds, that's a bug, not a feature.
  - 6AA4FD 5y ago

cblconfederate 5y ago

And then maybe, banks like stablecoins

Animats 5y ago

Why the attraction to USDT? There are better stablecoins with real backing and audits, such as GUSD. You can trade 1.00 USDT for about 1.01 GUSD, which is strange.

runeks 5y ago
> Why the attraction to USDT? It’s by far the biggest. Both by both volume and liquidity.
- asah 5y ago
  ...and "places accepted" i.e. exchanges, DeFi companies, investors, traders, etc etc etc

jcaldas 5y ago

In my opinion, regulators have a too-big-to-fail problem here. Tether is known to be used for artificially inflating the crypto market in collusion with certain exchanges. There is a lot of documentation on this, the following two articles are a good start: https://theodoregreenbaum.medium.com/the-crypto-time-bomb-is-finally-about-to-explode-d7d825cb9cea https://theodoregreenbaum.medium.com/the-crypto-time-bomb-is... https://www.bloomberg.com/news/articles/2021-07-26/tether-executives-said-to-face-criminal-probe-into-bank-fraud https://www.bloomberg.com/news/articles/2021-07-26/tether-ex... If news suddenly come out about Tether being formally accused by the Department of Justice, the market may react in panic and things might get ugly. As an anecdote, I have a friend who told me she put a significant amount of her life savings into "etherium and carnado" (sic). There are millions of people like this who will get absolutely crushed. I don't see a non-painful solution here. The regulators were too slow and have allowed a monster to be created.

6AA4FD 5y ago
What a depressing situation... having to protect a bunch of people on a get rich quick mission from themselves. Of course you can adapt that argument to people buying cheap food, clothes, housing, etc. A lot of people do these things because they are in situations where they have very real fears about their future safety and solvency, so it is not an argument against consumer protection by the state but an expression of frustration I guess.

space_rock 5y ago

> With estimated leverage of 383-to-1, Tether would be unable to honour all its tokens after losses of just 0.26%—a safety cushion that regulators would never allow at a bank. This statement from the Economist is basically a lie. It's like saying people trade Forex leveraged so your cash in hand is leveraged. Tether is leveraged by 3rd parties. Tether is redeemable 1to1

ryan_lane 5y ago
Tether's terms of service say they do not have to allow redemption.
- space_rock 5y ago
  It's still not leveraged as they describe

RNCTX 5y ago

Regulators should treat cryptocurrencies as industrial electricity users and regulate/tax their grid impact accordingly. Then, finally, we could be rid of these ridiculous things and on to the next ridiculous thing.