Tether/Stablecoins are the hot air inside the Bitcoin bubble...their regulation will burst it

Brendan Burgess · 12 May 2022

Lads

Every thread is becoming a repeat of other threads. So we can have just one huge Bitcoin/crypto/blockchain thread or separate threads dealing with different issues.

I think that the latter is better, so I have deleted all the recent posts not dealing with the thread title:

Tether/Stablecoins are the hot air inside the Bitcoin bubble...their regulation will burst it

This is a very specific topic.

The Irish Times says that TerraUSD has collapsed. Has it? Could someone (Tecate?) maybe do a summary of the different stable coins and the pros and cons of them and their implications for cryptos.

TerraUSD meltdown sends shockwaves through crypto markets

Bitcoin slumps to 16-month low as sell-off gains momentum

www.irishtimes.com

Duke of Marmalade · 12 May 2022

Should be short and sweet.

evil_g · 12 May 2022

I see Tether dropped as low as .95 this morning. Currently sitting at .98.

https://www.ft.com/content/5887ef43-d43a-4608-a1ac-aacc99f076b9#myft:my-news:page

Free money for the select few who can redeem these at face value, no? How can a vacuum like this persist?

Brendan Burgess · 12 May 2022

evil_g said:
the select few who can redeem these at face value,

I find this fascinating but don't understand the details.

Can some people actually buy these at .98 and cash them for 1 ? Who are these people?

If I bought Tether for $1 , can I not convert it into real dollars?

Brendan

evil_g · 12 May 2022

Brendan Burgess said:
I find this fascinating but don't understand the details.

Can some people actually buy these at .98 and cash them for 1 ? Who are these people?

If I bought Tether for $1 , can I not convert it into real dollars?

Brendan

https://www.ft.com/content/7ced3098-84a3-4c22-85ec-ac323d6d70e0

Here’s a quick, simplified explanation of how Tether works. The company guarantees one-for-one redemptions at $1 to “verified customers”, with the caveat that redemption might be delayed “if such delay is necessitated by the illiquidity or unavailability or loss of any reserves held by Tether to back the Tether Tokens”.

In normal circumstances, the handful of verified-customer institutions that can access Tether’s primary exchange window would buy discount coins in the secondary market then redeem them direct, thereby reducing supply and arbitraging the price back to $1.

But an ugly demise for the Terra stablecoin since Monday has caused synchronised panic across the crypto space, including for assets similarly marketed as safe. Speculation is rife about solvency issues at coin custodians, funds and even tradfi shops, which has been raising familiar questions about the exact nature of Tether’s reserves and its real-world protections against a run. And for the past few hours, the arb trade doesn’t seem to be happening.

Who are these people? I have no idea. Do they even exist? If they do, they must surely be bleeding Tether's reserves dry right now, no?

evil_g · 12 May 2022

https://www.coindesk.com/price/tether/

Brendan Burgess · 12 May 2022

The company guarantees one-for-one redemptions at $1 to “verified customers”, with the caveat that redemption might be delayed “if such delay is necessitated by the illiquidity or unavailability or loss of any reserves held by Tether to back the Tether Tokens”.

So, in other words, we might redeem them one for one or we might not.

Brendan

evil_g · 12 May 2022

Brendan Burgess said:
The company guarantees one-for-one redemptions at $1 to “verified customers”, with the caveat that redemption might be delayed “if such delay is necessitated by the illiquidity or unavailability or loss of any reserves held by Tether to back the Tether Tokens”.

So, in other words, we might redeem them one for one or we might not.

Brendan

Four hours ago. If they are redeeming them, they must currently be hemorrhaging money.

If they are not redeeming them, or they stop at some point....well, that's the ball game, no?

tecate · 12 May 2022

evil_g said:
Four hours ago. If they are redeeming them, they must currently be hemorrhaging money.

If they are not redeeming them, or they stop at some point....well, that's the ball game, no?

As discussed previously, Tether is a private entity and so there is always potential for wayward behaviour. That said, on redemptions and USDT going off it's dollar peg, they've been here many times before and have always weathered it.
UST is an algorithmic stablecoin so they're quite different by design.

evil_g · 12 May 2022

tecate said:
As discussed previously, Tether is a private entity and so there is always potential for wayward behaviour. That said, on redemptions and USDT going off it's dollar peg, they've been here many times before and have always weathered it.
UST is an algorithmic stablecoin so they're quite different by design.

Thanks for the reply.

How do Tether describe their business model do you know? If each tether is backed one for one by a dollar equivalent asset how do they fund their infrastructure / make a profit? Genuine question.

[edit]

I found this:

https://productmint.com/tether-business-model-how-does-tether-make-money/#:~:text=Executive Summary:,as well as through investments.

Executive Summary:

Tether is a cryptocurrency that is pegged to a given fiat currency, for example, the USD, as well as physical assets such as gold.

Tether makes money from various fees, by issuing loans to other institutions, as well as through investments.

With regards to fees:

The company charges $150 for every customer that wants to have their account verified. Verification is needed to deposit and withdraw cash with Tether.

Apart from its verification fee, Tether also charges deposit and withdrawal fees. Users can only transact directly with Tether if they deposit a minimum of $100,000.

For deposits, Tether charges a fee of 0.1 percent. A similar fee structure is applied to withdrawals. However, a minimum withdrawal fee of $1,000 is always applied.

No details on the withdrawal fee structure is provided, but the revenue from fees is surely buttons relative to their overheads.

Then the good stuff, with regards to loans:

Tether, furthermore, makes money from issuing loans to other businesses and institutions that then pay interest on those loans.

In October 2021, for instance, Tether loaned $1 billion to Celsius Network, which is a cryptocurrency lender.

Its CEO Alex Mashinsky came out days later and confirmed that Celsius would pay between 5 to 6 percent in interest per year. Essentially, Tether would generate between $50 million to $60 million per year from that transaction alone.

Tether got under fire in September 2021 after subsequent reporting revealed that it also had lent billions of dollars to large Chinese companies, which is often avoided by money-market funds due to the greater involved risk.

And investments:

Lastly, Tether also generates a small portion of revenue from investing in other businesses and participating in their growth.

In January 2021, for example, it invested $1 million into Exordium, a studio focused on blockchain game development. The investment granted it a pro-rata right to 20 percent of Exordium’s profit.

Investing in the crypto ecosystem is a strategy that is largely employed by other exchanges such as Binance or Coinbase.

What's the current outlook on these loans and investments? Have they invested any of their reserves?

letitroll · 12 May 2022

Bloomberg - Are you a robot?

evil_g · 12 May 2022

evil_g said:
What's the current outlook on these loans and investments? Have they invested any of their reserves?

To answer part of my own question. In relation to:

Tether, furthermore, makes money from issuing loans to other businesses and institutions that then pay interest on those loans.

In October 2021, for instance, Tether loaned $1 billion to Celsius Network, which is a cryptocurrency lender.

Its CEO Alex Mashinsky came out days later and confirmed that Celsius would pay between 5 to 6 percent in interest per year. Essentially, Tether would generate between $50 million to $60 million per year from that transaction alone.

Meanwhile:
FT: Crypto industry shaken as Tether’s dollar peg snaps

Paolo Ardoino, Tether’s chief technology officer, on Thursday vowed to defend the token’s dollar peg and said the company had bought “a ton” of US government debt, which it is willing to offload in that effort. But in an interview with the Financial Times, he declined to give details about its $40bn hoard of US government bonds because he did not “want to give our secret sauce”.

“Our counterparties are not public. We are not a public company,” he said. “So we keep that information [to] ourselves, but we are working with many big institutions in the traditional financial space.”

letitroll · 12 May 2022

“Our counterparties are not public. We are not a public company,” he said. “So we keep that information [to] ourselves, but we are working with many big institutions in the traditional financial space.”

As I mentioned earlier in this thread Tether has used this line before.......they claim to hold commercial paper.......and by size of assets they claim to hold they should be one of the largest commercial paper counterparties in the world......yet when financial investigative journalists have spoken to people in the biggest CP brokerage houses nobody has heard of them.

The simplest explanation is that they haven't heard of them because the commercial paper doesn't exist.....and either do the dollars they claim hold.

Tickle · 12 May 2022

evil_g said:
With regards to fees:

evil_g said:
No details on the withdrawal fee structure is provided, but the revenue from fees is surely buttons relative to their overheads.

150 dollars to join the party. It has ponzi scheme written all over it!

tecate · 12 May 2022

letitroll said:
As I mentioned earlier in this thread Tether has used this line before.......they claim to hold commercial paper.......and by size of assets they claim to hold they should be one of the largest commercial paper counterparties in the world......yet when financial investigative journalists have spoken to people in the biggest CP brokerage houses nobody has heard of them.

The simplest explanation is that they haven't heard of them because the commercial paper doesn't exist.....and either do the dollars they claim hold.

Tether or Bitfinex are not on my Christmas card list but by the same token there's a lot of talking that gets done about 'simple explanations' and no evidence. Evidence is actionable - anyone in the crypto space has an interest in gaining that insight. However, as I've pointed out many times, there are tether truthers who despise the notion of decentralised money coming out with this stuff.
Anyone in the space will tell you that depending upon any centralised entity is something that is likely to go wrong given enough time. However, there is nothing substantive as yet to prove Tether to be unsound. Produce that and I'm interested.

The other point is that just like right now with the demise of an algorithmic stablecoin that had vulnerabilities that upended it, Tether being upended will not spell the end of bitcoin. Would it cause a mess? - definitely. Will it kill it? Absolutely not.

Tickle said:
150 dollars to join the party. It has ponzi scheme written all over it!

Indeed - a company charging a fee for a service is definitely evidence of a ponzi scheme. All stablecoin projects account for $170 billion in market capitalisation right now. They all charge fees - so they're all definitely ponzis. That's without a doubt.

DublinHead54 · 13 May 2022

I take the audit and disclosures of Tether at face value, my one concern based on the 2021 YE disclosures is ~6% ($5bln) of assets is made up of 'Other Investments (including digital tokens). This suggests that depending on price they could face a 6% shortfall if prices went south and there was >94% redemption. However, I consider this a small risk.

Overall, though having such dependence on Tether for the trading market to function is not ideal and does increase systemic risk. This is true for any type of market and why traditional finance introduced things like central clearing parties to reduce the systemic risk if one large institution defaults.

This risk should reduce as other stablecoins gain market share and dependence on tether reduces.

My question to @tecate is can we not get rid of stablecoins for trading purposes?

I first used stablecoins to get out of my trading positions during periods of volatility and maintain the flat $ equivalent. I used them as it didn't require taking money out of exchanges and at the time from a tax perspective it was considered token to token so no tax required. Now that tax rules are that it is (taxable (in places like Ireland, US, UK etc) and connection of exchanges to fiat is stronger do we need them? Example on my degiro account if I sell a stock it just sits in cash on the platform until I withdraw. As established traditional finance adopts crypto, won't we just have a similar experience and hence the need for stablecoins physically backed my currency goes away?

tecate · 13 May 2022

Dublinbay12 said:
My question to @tecate is can we not get rid of stablecoins for trading purposes?

I first used stablecoins to get out of my trading positions during periods of volatility and maintain the flat $ equivalent. I used them as it didn't require taking money out of exchanges and at the time from a tax perspective it was considered token to token so no tax required. Now that tax rules are that it is (taxable (in places like Ireland, US, UK etc) and connection of exchanges to fiat is stronger do we need them? Example on my degiro account if I sell a stock it just sits in cash on the platform until I withdraw. As established traditional finance adopts crypto, won't we just have a similar experience and hence the need for stablecoins physically backed my currency goes away?

I have no idea, @Dublinbay12 - but then I'm not sure if that's the right way to look at it anyway. Shouldn't we just let the market decide?

If in your particular case, you no longer have a use case for them, then for sure - don't use them. However, I think there are different groups/categories of users of these things with different use cases being applied. I really never saw much chatter about the tax aspect being a leading motivation - I'm open to correction but I'm fairy sure that in most places, there's been clarity on this for a while (i.e. if you trade from one digital asset to another, that's a taxable event). The explosion in the use of stablecoins has come in after that clarification.

Insofar as I understand it, they provide less friction. For the digitally native, you can swap between a stable and other digital assets on a decentralised exchange with ease. Furthermore, there have been major issues with interaction between this new world of digital assets and the legacy banking system - and there still are. I'd wager that plenty of folks see the idea of simply staying within the crypto ecosystem as far more frictionless than trading in and out of it via the legacy system.

Stables also give the holder the ability to take direct ownership rather than have a bank custody funds. There's some value in that. We also have to always remember that our experiences are not everybodies. These digital assets are a global phenomenon that transcend borders. If you're in country X where the local currency is unstable, a mixture of crypto and stables may be a very attractive prospect. If you're already in that eco-system, its then easier to get your hands on USD equivalent - in spite of capital controls that potentially are being applied by government.

Also for lending markets, stables are playing a role. In developing nations, finance for small businesses can be hard to acquire or very expensive. Collateralised lending is becoming a big deal on that basis. Then from the perspective of the Americans, many think that they are (either consciously or accidentally) getting the upper hand here - as USD stables are actually advancing the use of the dollar globally - just in a different form.

Of course, there are risks - whether it's concerns with the backing via centralised stablecoins or algo design when it comes to algorithmic stables. From that perspective, it's one big experiment that's ongoing. With that, I'd expect there's plenty of development in the works. I've no doubt but that there will be more regulation on the way where centralised stables are concerned and they'll probably move from being buyers of commerical paper to buyers of bonds.

You previously expressed interest in algorithmic stablecoins. I'd love to see them work - but as per this weeks example (the implosion of Terra), it remains to be seen if there is a design possible that can be implemented where they can't be unhinged. We'll have to wait and see how that develops. Would be great if it was possible as then there's no concern about backing.

DublinHead54 · 13 May 2022

tecate said:
I have no idea, @Dublinbay12 - but then I'm not sure if that's the right way to look at it anyway. Shouldn't we just let the market decide?

If in your particular case, you no longer have a use case for them, then for sure - don't use them. However, I think there are different groups/categories of users of these things with different use cases being applied. I really never saw much chatter about the tax aspect being a leading motivation - I'm open to correction but I'm fairy sure that in most places, there's been clarity on this for a while (i.e. if you trade from one digital asset to another, that's a taxable event). The explosion in the use of stablecoins has come in after that clarification.

Insofar as I understand it, they provide less friction. For the digitally native, you can swap between a stable and other digital assets on a decentralised exchange with ease. Furthermore, there have been major issues with interaction between this new world of digital assets and the legacy banking system - and there still are. I'd wager that plenty of folks see the idea of simply staying within the crypto ecosystem as far more frictionless than trading in and out of it via the legacy system.

Stables also give the holder the ability to take direct ownership rather than have a bank custody funds. There's some value in that. We also have to always remember that our experiences are not everybodies. These digital assets are a global phenomenon that transcend borders. If you're in country X where the local currency is unstable, a mixture of crypto and stables may be a very attractive prospect. If you're already in that eco-system, its then easier to get your hands on USD equivalent - in spite of capital controls that potentially are being applied by government.

Also for lending markets, stables are playing a role. In developing nations, finance for small businesses can be hard to acquire or very expensive. Collateralised lending is becoming a big deal on that basis. Then from the perspective of the Americans, many think that they are (either consciously or accidentally) getting the upper hand here - as USD stables are actually advancing the use of the dollar globally - just in a different form.

Of course, there are risks - whether it's concerns with the backing via centralised stablecoins or algo design when it comes to algorithmic stables. From that perspective, it's one big experiment that's ongoing. With that, I'd expect there's plenty of development in the works. I've no doubt but that there will be more regulation on the way where centralised stables are concerned and they'll probably move from being buyers of commerical paper to buyers of bonds.

You previously expressed interest in algorithmic stablecoins. I'd love to see them work - but as per this weeks example (the implosion of Terra), it remains to be seen if there is a design possible that can be implemented where they can't be unhinged. We'll have to wait and see how that develops. Would be great if it was possible as then there's no concern about backing.

Good points. I'd lean on the side that Tether is still used mostly for trading purposes given the dominance of trading volume on the centralized Binance exchange, however I agree there are many uses in the wider market.

There is definitely a roll to play for stablecoins in the markets, but I'd like to see the dominance of single players like Tether reduce as I believe it will strengthen the overall crypto infrastructure and help prevent future crashes.

The algo coins do work and Terra was a great example until it wasn't. From reading what caused the crash it appears like it was a targeted very large trade that caused the sell off and exposed weakness in the algorithm. So they just need further evolution and testing for extreme moves, similar to how banks stress test for extreme market moves (they never did it really before the financial crisis).

Sunny · 13 May 2022

Dublinbay12 said:
View attachment 6239

View attachment 6238

That alone would make me run a mile. It is just crazy that this company is getting away with this. These are still not audited by a respectable audit firm. I have no idea who is issuing the commercial paper or the CD's that they claim to have but I can guarantee you 100% that they do not hold paper with a high enough credit rating to justify it as cash equivalent. They are not buying the paper through the market. They are obviously doing some private placement deals with who knows. I also seriously doubt that they directly hold $34 billion in Treasury Bills.

Forget the arguments about crypto or anything else. Just look at the company itself. It is built on nothing but sand.....

tecate · 13 May 2022

Sunny said:
That alone would make me run a mile. It is just crazy that this company is getting away with this. These are still not audited by a respectable audit firm. I have no idea who is issuing the commercial paper or the CD's that they claim to have but I can guarantee you 100% that they do not hold paper with a high enough credit rating to justify it as cash equivalent. They are not buying the paper through the market. They are obviously doing some private placement deals with who knows. I also seriously doubt that they directly hold $34 billion in Treasury Bills.

Forget the arguments about crypto or anything else. Just look at the company itself. It is built on nothing but sand.....

And if that's your assessment, that's fair enough. Then don't choose to access USDT - simples.

Tether/Stablecoins are the hot air inside the Bitcoin bubble...their regulation will burst it

Founder