4 ms·

Can someone explain to me how did they manage to mess it up? Issuing stable coin seems like an easy business on paper. You collect $$$, mint coins, collect int

by yreg 4y ago

Can someone explain to me how did they manage to mess it up? Issuing stable coin seems like an easy business on paper. You collect $$$, mint coins, collect interest on those $$$ in a bank and that's your profit. Does everyone become greedy and lose the treasury in gambling instead, or what?

JumpCrisscross 4y ago
> stable coin seems like an easy business on paper For one, finding a bank that will hold your money will be tough. They’re taking on significant liability, for the AML officer, personal criminal liability.
- yreg 4y ago
  Ok, but they could still do some wealth management solution that's practically risk free. With the amount of deposits they don't even need to beat inflation to turn significant profit.
  - JumpCrisscross 4y ago
    > they could still do some wealth management solution that's practically risk free Mechanically, what does this mean? When someone buys Tether from you, to which bank account do you have them wire the money? By the way, your suggestion is a reasonable leap. But it still involves handling U.S. dollars, and now you've added a new regulated area (wealth management). It's easy to imagine the transgressions starting small. Say you have someone ready to wire you $100mm. You don't yet have a bank account, but you're working on it. Do you tell them to pound sand? Or do you temporarily use a side account, to hold the funds until the main one is ready?
    - yreg 4y ago
      How is this issue relevant to keeping vs. losing the treasury funds?
      - JumpCrisscross 4y ago
        > How is this issue relevant to keeping vs. losing the treasury funds? It's relevant to the difficulty of launching and operating a U.S. dollar stablecoin.
        yreg 4y ago
        Fine, operating a stable coin is not trivial. What I meant by saying 'it seems easy on paper' is that the need to be profitable shouldn't force you to make decisions which eventually lead your treasury to not being valuable enough to back the minted coins. Also: Perhaps I don't understand how tether works, but I don't see why they need to be liable for holding customer funds. Why do they need a deposit/withdrawal process at all? Can't they just do the following? IF USDT on open markets is <$1 THEN buy coins and burn them IF USDT on open markets is >$1 THEN mint coins and sell them And then they can do whatever they want with the treasury, no? Store it in banks or buy US treasury bonds, etc. Just don't lose it.
    - stickfigure 4y ago
      How about something like "You buy US treasury bonds, then give those bonds to us in exchange for xyzcoin"? Likewise redemptions always paid in treasury bonds? I'm not very familiar with how treasuries get bought/sold/transferred between parties. But they seem pretty cash-equivalent, Uncle Sam will sell as much as you want, and your profit margin is baked into it.
      - JumpCrisscross 4y ago
        > Likewise redemptions always paid in treasury bonds? This is better! But a couple issues. One, this means the U.S. Treasury has an open book into your in and outflows. Not sure that's Tether's vibe. Two, you've limited yourself to people who can transfer Treasuries. Given Tether doesn't provide consumer redemption, this isn't a huge issue. But transferring Treasuries takes more financial savvy than wiring cash, and that savvy is likely to ask for their interest (as is common in collateral arrangements).
tylerhou 4y ago
Because your execs are affiliated with other companies and suddenly those other companies lack liquidity and need a loan. If you’re Tether, that other company is Bitfinex. If you’re FTX, that other company is Alameda. If the other company makes good use of the loan and recovers to pay the original company back — great, you still have enough assets to cover your deposits. That may be what happened with Bitfinex. On the other hand, the other company might go tits up. Now the first company has no money to cover deposits, declares bankruptcy, and if all is right in the world the execs see some punishment.
MuffinFlavored 4y ago
> Can someone explain to me how did they manage to mess it up? Ideas: Greed, incompetence, a combination of the two. Just guesses out of thin air: Collect $1b, don't just keep $1b sitting around in low-risk instruments 1:1. Take $200m for yourself. Try to turn it into $1.2b through risky investments.
MereInterest 4y ago
Because at that point, they are a bank. Nothing fancier, nothing further, a bank. They aren't going to be a better bank than the bank at which they deposit the real money, so what do they do instead? Just say that they're totally not a bank, not at all, and that's why they don't need to do any of the fancy paperwork or background checks or meet minimum reserve requirements, because those are things that banks are required to do, and they're definitely not a "bank". So now there's a business where the only way to make money is to break the regulations that exist to stop banks from doing exactly what they're doing. It's in the cryptocurrency environment, where the entire culture is made up of scammers, chumps, and chumps who aspire to be scammers. And in that environment, there's a big pile of money that could be transferred out without any oversight at all. At that point, it isn't just that people "become greedy", but that every single aspect of the situation is aligned to select greedy people and create a situation that rewards theft.
- chii 4y ago
  > So now there's a business where the only way to make money is to break the regulations that exist to stop banks from doing exactly what they're doing so it worked for uber & AirBNB, i'm sure these companies doing this are asking why not for them?
  - ravel-bar-foo 4y ago
    Hotels are locally regulated, with side effects for maybe one town if a few go backrupt. This gives nationwide startups leeway to out-innovate regulators. Banks can have a much larger reach if they fail, and so are federally regulated. This prevents the same from happening. There are no startups seeking to out-innovate the FAA, for example.
bushbaba 4y ago
Where do you suggest they park all that USD $$$. Banks wont touch them. You can't just buy Treasuries, as that requires having banks. Even in a bank such a high balance is not FDIC insured, so what if there's theft/fraud/etc. Its not as trivial as it sounds, and eventually you'll end up needing to create what amounts to a bank.
- yreg 4y ago
  So what does Tether do if it doesn't use banks?
deleted 4y ago
[deleted]
voytec 4y ago
> Can someone explain to me how did they manage to mess it up? You're assuming an intent to make (all) customers whole. In Ponzi Scheme you collect $$$, mint coins or forge other confirmation, move money to Panama or spend it and when asked to pay out, you use other investors money. The only reason for making some customers whole is to keep the scheme going. The problem for Ponzi operator starts when too many victims want they money back and there is no big enough source of it to cover payouts.

by yreg 4y ago

JumpCrisscross 4y ago

> stable coin seems like an easy business on paper For one, finding a bank that will hold your money will be tough. They’re taking on significant liability, for the AML officer, personal criminal liability.

yreg 4y ago
Ok, but they could still do some wealth management solution that's practically risk free. With the amount of deposits they don't even need to beat inflation to turn significant profit.
- JumpCrisscross 4y ago
  > they could still do some wealth management solution that's practically risk free Mechanically, what does this mean? When someone buys Tether from you, to which bank account do you have them wire the money? By the way, your suggestion is a reasonable leap. But it still involves handling U.S. dollars, and now you've added a new regulated area (wealth management). It's easy to imagine the transgressions starting small. Say you have someone ready to wire you $100mm. You don't yet have a bank account, but you're working on it. Do you tell them to pound sand? Or do you temporarily use a side account, to hold the funds until the main one is ready?
  - yreg 4y ago
    How is this issue relevant to keeping vs. losing the treasury funds?
    - JumpCrisscross 4y ago
      > How is this issue relevant to keeping vs. losing the treasury funds? It's relevant to the difficulty of launching and operating a U.S. dollar stablecoin.
      - yreg 4y ago
        Fine, operating a stable coin is not trivial. What I meant by saying 'it seems easy on paper' is that the need to be profitable shouldn't force you to make decisions which eventually lead your treasury to not being valuable enough to back the minted coins. Also: Perhaps I don't understand how tether works, but I don't see why they need to be liable for holding customer funds. Why do they need a deposit/withdrawal process at all? Can't they just do the following? IF USDT on open markets is <$1 THEN buy coins and burn them IF USDT on open markets is >$1 THEN mint coins and sell them And then they can do whatever they want with the treasury, no? Store it in banks or buy US treasury bonds, etc. Just don't lose it.
  - stickfigure 4y ago
    How about something like "You buy US treasury bonds, then give those bonds to us in exchange for xyzcoin"? Likewise redemptions always paid in treasury bonds? I'm not very familiar with how treasuries get bought/sold/transferred between parties. But they seem pretty cash-equivalent, Uncle Sam will sell as much as you want, and your profit margin is baked into it.
    - JumpCrisscross 4y ago
      > Likewise redemptions always paid in treasury bonds? This is better! But a couple issues. One, this means the U.S. Treasury has an open book into your in and outflows. Not sure that's Tether's vibe. Two, you've limited yourself to people who can transfer Treasuries. Given Tether doesn't provide consumer redemption, this isn't a huge issue. But transferring Treasuries takes more financial savvy than wiring cash, and that savvy is likely to ask for their interest (as is common in collateral arrangements).

tylerhou 4y ago

Because your execs are affiliated with other companies and suddenly those other companies lack liquidity and need a loan. If you’re Tether, that other company is Bitfinex. If you’re FTX, that other company is Alameda. If the other company makes good use of the loan and recovers to pay the original company back — great, you still have enough assets to cover your deposits. That may be what happened with Bitfinex. On the other hand, the other company might go tits up. Now the first company has no money to cover deposits, declares bankruptcy, and if all is right in the world the execs see some punishment.

MuffinFlavored 4y ago

> Can someone explain to me how did they manage to mess it up? Ideas: Greed, incompetence, a combination of the two. Just guesses out of thin air: Collect $1b, don't just keep $1b sitting around in low-risk instruments 1:1. Take $200m for yourself. Try to turn it into $1.2b through risky investments.

MereInterest 4y ago

Because at that point, they are a bank. Nothing fancier, nothing further, a bank. They aren't going to be a better bank than the bank at which they deposit the real money, so what do they do instead? Just say that they're totally not a bank, not at all, and that's why they don't need to do any of the fancy paperwork or background checks or meet minimum reserve requirements, because those are things that banks are required to do, and they're definitely not a "bank". So now there's a business where the only way to make money is to break the regulations that exist to stop banks from doing exactly what they're doing. It's in the cryptocurrency environment, where the entire culture is made up of scammers, chumps, and chumps who aspire to be scammers. And in that environment, there's a big pile of money that could be transferred out without any oversight at all. At that point, it isn't just that people "become greedy", but that every single aspect of the situation is aligned to select greedy people and create a situation that rewards theft.

chii 4y ago
> So now there's a business where the only way to make money is to break the regulations that exist to stop banks from doing exactly what they're doing so it worked for uber & AirBNB, i'm sure these companies doing this are asking why not for them?
- ravel-bar-foo 4y ago
  Hotels are locally regulated, with side effects for maybe one town if a few go backrupt. This gives nationwide startups leeway to out-innovate regulators. Banks can have a much larger reach if they fail, and so are federally regulated. This prevents the same from happening. There are no startups seeking to out-innovate the FAA, for example.

bushbaba 4y ago

Where do you suggest they park all that USD $$$. Banks wont touch them. You can't just buy Treasuries, as that requires having banks. Even in a bank such a high balance is not FDIC insured, so what if there's theft/fraud/etc. Its not as trivial as it sounds, and eventually you'll end up needing to create what amounts to a bank.

yreg 4y ago
So what does Tether do if it doesn't use banks?

deleted 4y ago

[deleted]

voytec 4y ago

> Can someone explain to me how did they manage to mess it up? You're assuming an intent to make (all) customers whole. In Ponzi Scheme you collect $$$, mint coins or forge other confirmation, move money to Panama or spend it and when asked to pay out, you use other investors money. The only reason for making some customers whole is to keep the scheme going. The problem for Ponzi operator starts when too many victims want they money back and there is no big enough source of it to cover payouts.