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I'm not really an expert on anything crypto, but I very much like the idea of stablecoins as a realistic bridge between the traditional financial system and cry

I'm not really an expert on anything crypto, but I very much like the idea of stablecoins as a realistic bridge between the traditional financial system and cryptocurrency technologies. Honestly I think it's both understandable and sad how aggressive people have gotten about trying to get organizations to "prove" they're adequately backing their stablecoins with cash reserves. It feels like a fundamental misunderstanding that arises from layperson terms vs. legal/accounting terms. Attestations vs. audits, what purpose each one serves in an accounting sense, and why an organization would opt for one over another; these are conversations I don't see being had, but conversations that, I think, would clear a lot of the frustration and confusion up, on the part of the skeptics.

whoisburbansky 5y ago
Are you lamenting the aggression or the mere fact that the organizations are being asked to prove adequate backing?
- EGreg 5y ago
  Why are the authorities asking stablecoins to prove 100% reserves, also letting banks have fractional reserves closer to zero... and since 2020, actually let them have zero percent reserves: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm Zero reserves means print as much as you want, subject only to the bank's own underwriters. The banks went and minted trillions of dollars in unbacked currency. Most of our fiat money supply comes from M2 and M3 money issued by banks. Meanwhile, algorithmic stablecoins like DAI have 150% reserves, yet the government doesn't trust them as much as the banking system?
  - 6gvONxR4sf7o 5y ago
    Isn't it because the stablecoins are asserting 100% reserves?
    - remarkEon 5y ago
      Can you walk me through why that's relevant? Is the implication that it's because we (or some) think the stablecoins are lying about their reserve levels, and we let banks hold fractional reserves approaching zero because they just admit this outright?
      - 6gvONxR4sf7o 5y ago
        Yeah, exactly. It's the authorities making sure that these groups are doing what they say they're doing.
        EGreg 5y ago
        Not so sure. The authorities are in charge of determining the bank reserve requirements. The fact that they allowed zero reserves at these institutions is troubling and deserves to be discussed. This is like the Free Banking Era, except back then the States were in charge of enforcing reserve requirements. If you search online for the Fed's own explanation for these policies, they make some overconfident assertions about "ample reserves" and how their policy assumes there are now "ample" reserves, so they can just set the reserve requirements at zero. Seems to me some political doublespeak in order to provide the unprecedented level of Keynesian stimulus that was planned to be released.
      - Nursie 5y ago
        "Buy my stablecoin, it's 100% backed by actual dollars and therefore cannot crash" "OK, can we see behind the curtain?" "Absolutely not" "Can I cash them in with you to get the dollars back out?" "Hell no" That's why it's relevant. Because this is not a bank or bank-like situation, and comparisons to fratctional reserve are spurious. They're sold specifically on not being fractional.
        EGreg 5y ago
        So now that we know, does it still apply? https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b4d9 https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b...
  - wolverine876 5y ago
    Aren't they doing two different things? Bank reserves are (broadly speaking) against loan defaults. Also, the risk of what banks do is very well known; the risk of cryptocurrencies is the opposite.
    - EGreg 5y ago
      Loan defaults are very likely when you've lent out over a trillion dollars, with repayment over 30 years. Businesses (especially small ones) run into all kinds of things during a 30 year stretch. Also, what about loan forgiveness, what happens to that money?
      - Retric 5y ago
        Loan defaults are only a problem when they are faster than your ROI. Aka if you loan 1T dollars and get 50B in interest payments after expenses and 40B in loan defaults you didn’t lose money.
        EGreg 5y ago
        I disagree. Let's say a bank issues some Principal amount P of money, which is then used to pay various participants in the economy. The bank now has liabilities to pay out. Then the borrower defaults. The lender may have received some percentage of P in interest, but unless that percentage is greater than 100%, the lender lost money when the borrower defaulted. They now have to make up the difference somehow, and may become insolvent.
        jboy55 5y ago
        The parent post contains a scenario where a bank has 1 T out in loans. If they make 50b (5%) in profit, they can withstand 4% of those loans going default. If profit goes up, and they can have more go default, and, get this, they charge more interest on loans more likely to go into default to cover this. They may even look at historical rates of insolvency and make sure they charge interest so that they make enough profit to cover any losses. Certainly this can go sideways when they don't understand the risk in one type of loan, like 2007-2008, but most of the time, they can figure this out.
  - jcranmer 5y ago
    There's a substantial misunderstanding of what the financial terminology actually means here. In particular, you're using reserves to mean several different things and not realizing it. The "zero reserve requirement" means that banks are now required to keep $0 in their account with the Federal Reserve Bank for every $100 of deposits they take in--a literal pile of cash in their bank vault would not count a dime. That is the only thing that qualifies as reserves for that requirement, and hopefully you understand that that is by no means an accurate reflection of any lay person definition's of "reserve". Instead, modern financial regulations use capital requirements instead of reserve requirements. In essence, banks need to keep a buffer of their own cash--this isn't part of the assets/liabilities calculation--that can be raided if assets prove to be undervalued, and the amount that is needed depends on the risk of the assets. Something safe like cash requires no equity to be covered, while something like a mortgage might require about 3.5% of the par value in equity, and something like cryptocurrency 100%. Note that you can also judge banks by how much their assets exceed liabilities. A typical bank is seen as perilously close to insolvent if their assets are "only" 107% of liabilities. By this metric, I will point out that Tether's assets are about 101% of liabilities the last I checked--and that's assuming that Tether's statement of its assets are in fact accurate, which given their history of lying, is not necessarily a safe assumption.
  - zionic 5y ago
    Well for one, taking on fractional reserve banking is a great way to get killed.
lupire 5y ago
The critics have explained it clearly. The stablecoin companies are the ones deliberately creating the confusion because they are covering up their unsound financials.
- zionic 5y ago
  >the stablecoin companies Why do so many crypto critics pretend DAI doesn’t exist?
  - dudus 5y ago
    DAI represents less than 6% of the current stablecoins marketcap. It's just not big enough to be representative of the whole market.
    - zionic 5y ago
      Wow, TIL. Can anyone explain why? DAI seems superior to tether/USDC in every way.
      - mv1234 5y ago
        Because Tether and USDC print billions monthly with only "trust us" as backing.
        throw_nbvc1234 5y ago
        Jon Stewart got an ex-Fed CEO to describe the US economy as a faith based system [1] when trying to get him to explain why the USA can't just "print money" to pay off the national debt. There's a lot of "trust us" in the foundation of millions/billions of peoples lives; ironically "In God we trust" is literally written on USD bills. I'm assuming the ex-CEO didn't exactly mean what he said but Jon's response is pretty relatable. HN comments are 'worried' that Tether (and other Stable coins) injecting money into the bitcoin/crypto markets are artificially inflating prices and makes the whole thing a scam. Yet that's pattern is the underlying premise of Quantitative Easing that kept the stock market from crashing (or inflated the bubble depending on your point of view) for the past 2 years. I'm open to a conclusion that both are a scam. I'm also open to a simple and understandable explanation for how these two approaches are fundamentally different from each other. But if someone's viewpoint is one approach is better then the other because a) USD has worked fine for USA up to this point or b) USD is back by USA govt and it's military, then i think they should realize that those are factors are not some unalienable truth that's guaranteed to continue forever. An anti-fragile system would consider hedging against them. [1] https://youtu.be/psSYiidw-v0?t=279 https://youtu.be/psSYiidw-v0?t=279

whoisburbansky 5y ago

Are you lamenting the aggression or the mere fact that the organizations are being asked to prove adequate backing?

EGreg 5y ago
Why are the authorities asking stablecoins to prove 100% reserves, also letting banks have fractional reserves closer to zero... and since 2020, actually let them have zero percent reserves: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm Zero reserves means print as much as you want, subject only to the bank's own underwriters. The banks went and minted trillions of dollars in unbacked currency. Most of our fiat money supply comes from M2 and M3 money issued by banks. Meanwhile, algorithmic stablecoins like DAI have 150% reserves, yet the government doesn't trust them as much as the banking system?
- 6gvONxR4sf7o 5y ago
  Isn't it because the stablecoins are asserting 100% reserves?
  - remarkEon 5y ago
    Can you walk me through why that's relevant? Is the implication that it's because we (or some) think the stablecoins are lying about their reserve levels, and we let banks hold fractional reserves approaching zero because they just admit this outright?
    - 6gvONxR4sf7o 5y ago
      Yeah, exactly. It's the authorities making sure that these groups are doing what they say they're doing.
      - EGreg 5y ago
        Not so sure. The authorities are in charge of determining the bank reserve requirements. The fact that they allowed zero reserves at these institutions is troubling and deserves to be discussed. This is like the Free Banking Era, except back then the States were in charge of enforcing reserve requirements. If you search online for the Fed's own explanation for these policies, they make some overconfident assertions about "ample reserves" and how their policy assumes there are now "ample" reserves, so they can just set the reserve requirements at zero. Seems to me some political doublespeak in order to provide the unprecedented level of Keynesian stimulus that was planned to be released.
    - Nursie 5y ago
      "Buy my stablecoin, it's 100% backed by actual dollars and therefore cannot crash" "OK, can we see behind the curtain?" "Absolutely not" "Can I cash them in with you to get the dollars back out?" "Hell no" That's why it's relevant. Because this is not a bank or bank-like situation, and comparisons to fratctional reserve are spurious. They're sold specifically on not being fractional.
      - EGreg 5y ago
        So now that we know, does it still apply? https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b4d9 https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b...
- wolverine876 5y ago
  Aren't they doing two different things? Bank reserves are (broadly speaking) against loan defaults. Also, the risk of what banks do is very well known; the risk of cryptocurrencies is the opposite.
  - EGreg 5y ago
    Loan defaults are very likely when you've lent out over a trillion dollars, with repayment over 30 years. Businesses (especially small ones) run into all kinds of things during a 30 year stretch. Also, what about loan forgiveness, what happens to that money?
    - Retric 5y ago
      Loan defaults are only a problem when they are faster than your ROI. Aka if you loan 1T dollars and get 50B in interest payments after expenses and 40B in loan defaults you didn’t lose money.
      - EGreg 5y ago
        I disagree. Let's say a bank issues some Principal amount P of money, which is then used to pay various participants in the economy. The bank now has liabilities to pay out. Then the borrower defaults. The lender may have received some percentage of P in interest, but unless that percentage is greater than 100%, the lender lost money when the borrower defaulted. They now have to make up the difference somehow, and may become insolvent.
        jboy55 5y ago
        The parent post contains a scenario where a bank has 1 T out in loans. If they make 50b (5%) in profit, they can withstand 4% of those loans going default. If profit goes up, and they can have more go default, and, get this, they charge more interest on loans more likely to go into default to cover this. They may even look at historical rates of insolvency and make sure they charge interest so that they make enough profit to cover any losses. Certainly this can go sideways when they don't understand the risk in one type of loan, like 2007-2008, but most of the time, they can figure this out.
- jcranmer 5y ago
  There's a substantial misunderstanding of what the financial terminology actually means here. In particular, you're using reserves to mean several different things and not realizing it. The "zero reserve requirement" means that banks are now required to keep $0 in their account with the Federal Reserve Bank for every $100 of deposits they take in--a literal pile of cash in their bank vault would not count a dime. That is the only thing that qualifies as reserves for that requirement, and hopefully you understand that that is by no means an accurate reflection of any lay person definition's of "reserve". Instead, modern financial regulations use capital requirements instead of reserve requirements. In essence, banks need to keep a buffer of their own cash--this isn't part of the assets/liabilities calculation--that can be raided if assets prove to be undervalued, and the amount that is needed depends on the risk of the assets. Something safe like cash requires no equity to be covered, while something like a mortgage might require about 3.5% of the par value in equity, and something like cryptocurrency 100%. Note that you can also judge banks by how much their assets exceed liabilities. A typical bank is seen as perilously close to insolvent if their assets are "only" 107% of liabilities. By this metric, I will point out that Tether's assets are about 101% of liabilities the last I checked--and that's assuming that Tether's statement of its assets are in fact accurate, which given their history of lying, is not necessarily a safe assumption.
- zionic 5y ago
  Well for one, taking on fractional reserve banking is a great way to get killed.

lupire 5y ago

The critics have explained it clearly. The stablecoin companies are the ones deliberately creating the confusion because they are covering up their unsound financials.

zionic 5y ago
>the stablecoin companies Why do so many crypto critics pretend DAI doesn’t exist?
- dudus 5y ago
  DAI represents less than 6% of the current stablecoins marketcap. It's just not big enough to be representative of the whole market.
  - zionic 5y ago
    Wow, TIL. Can anyone explain why? DAI seems superior to tether/USDC in every way.
    - mv1234 5y ago
      Because Tether and USDC print billions monthly with only "trust us" as backing.
      - throw_nbvc1234 5y ago
        Jon Stewart got an ex-Fed CEO to describe the US economy as a faith based system [1] when trying to get him to explain why the USA can't just "print money" to pay off the national debt. There's a lot of "trust us" in the foundation of millions/billions of peoples lives; ironically "In God we trust" is literally written on USD bills. I'm assuming the ex-CEO didn't exactly mean what he said but Jon's response is pretty relatable. HN comments are 'worried' that Tether (and other Stable coins) injecting money into the bitcoin/crypto markets are artificially inflating prices and makes the whole thing a scam. Yet that's pattern is the underlying premise of Quantitative Easing that kept the stock market from crashing (or inflated the bubble depending on your point of view) for the past 2 years. I'm open to a conclusion that both are a scam. I'm also open to a simple and understandable explanation for how these two approaches are fundamentally different from each other. But if someone's viewpoint is one approach is better then the other because a) USD has worked fine for USA up to this point or b) USD is back by USA govt and it's military, then i think they should realize that those are factors are not some unalienable truth that's guaranteed to continue forever. An anti-fragile system would consider hedging against them. [1] https://youtu.be/psSYiidw-v0?t=279 https://youtu.be/psSYiidw-v0?t=279