[repomies68]

People trust banks, even when the fiat in banks isn't fully backed. Usually the reserve ration is backed to something like 10%.

To my understanding tether is just like a bank, except the accounts are kept on Blockchain instead of private database. So, it is rational to use them if you think they habe enough reserves to keep them liquid. Full backing is not needed, as it isn't needed with banks as well.

[Scoundreller]

Banks generally have full backing, verified by frequent auditing, it just may not be all cash or cash-like assets.

But then again, not all of bank’s liabilities are cash either. E.g.: CDs.

Things get hairy when their long-term assets go down in value and/or there’s a sudden demand for withdrawals triggering a mismatch between short-term liabilities and long-term assets.

We have strikingly little audits from this stablecoin. Do assets match liabilities or not? For a bank, they always will or else they get shutdown before losses become too great.

[btilly]

Actually they don't quite get shut down. At least not in the USA. Instead they get taken over by a more stable bank, which receives some money to make the transaction make sense. People with deposits in the bank do not lose their money.

This is how FDIC insurance actually works in practice.

However there is a systemic risk if the entire system cannot absorb the bad banks. According to multiple people involved, in 2008 we came within a few hours of the whole banking system having to be shut down with no idea how much chaos that would cause. This is why TARP got passed.

[Scoundreller]

I get that. When people say “they lost their house”, they still know where it is, it’s just not theirs anymore.

When your bank is forcibly taken over by the government and the assets forcibly sold to someone else with nothing going to the owners of the bank, most would say the bank was shutdown.

In 2008, since TARP recipients didn’t wipe out their shareholders and sell shares to new owners (perhaps .gov), I would say they had plenty of time left before needing a bailout.

The gov should have created an express bankruptcy protection process instead of bailing out shareholders and boards that took too much risk.

[btilly]

The problem wasn't that the banks were unsound. Most of them were sound. But each bank didn't know which others were solvent, and that fact was about to shut down the ATM and credit card systems.

Once the government stepped in, everyone was sure that normal operations were safe, and chaos was averted.

In fact, as https://www.americanbanker.com/opinion/tarp-was-not-a-bailou... points out, the government actually made a $30 billion profit on TARP in the end. (It can be debated how much of that profit was a result of other Treasury actions, like quantitative easing.)

[Scoundreller]

A $15b return on $400b invested in 2008/2009 over ?5? years is a terrible return. And it conveniently ignores management costs.

That was "close down your hedge fund(s) and change your name" embarrassing level of return.

Your link's source for its $30.7b profit figure is unsupported by its linked treasury.gov press release

[jerguismi]

Yeah they are loans, like apartment loans. The loan might be for something like 20 years and might default.

In my opinion having assets like house loans is pretty far away from being "backed". If enough customers want their money out, bank can go bust. If they have lent the money to wrong people, they also can go bust. Banks go bust now and then.

[Scoundreller]

The bank can sell the loan off to another bank if it needs cash now. It could be at a loss, or it could be at a profit depending on how interest rates chgd since issue.

It takes a lot for a bank to go bust when they can do that with their assets if they go through their reserves.

The value of their loans may be good enough to sell shares to investors instead of selling to another bank.

The trick is to loan out to lots of different people so any one group being “wrong” is made up with profits.

We’re seeing none of that with this stablecoin. They’ve put a huge chunk of money into a ???bank(s) in a ??? country, at best.

What’s your definition of “backed”? Banks will gladly keep your fiat in an insured safety deposit box, but they’re going to charge you for the privilege. And the government will just inflate away your attempt at deflation.

[jerguismi]

Well, banks can give out loans too eagerly to wrong people meaning that the resell value of the loan can be much less than the value of the loan. In fact nowadays it is not that rare for bonds to have negative returns.

Banks can fuck up and go bust. It doesn't happen often but it happens.

[notahacker]

Banks' deposits are backed with outstanding loans, and they have a guaranteed right to borrow temporary shortfalls at lower interest rates to make up the difference if people want to cash out their savings quicker than their loans can be repaid.

This isn't at all similar to an organization claiming to back an asset with dollars and actually backing it with their imagination.

[jdietrich]

One of the primary arguments in favour of cryptocurrency is avoiding the fragility of fractional reserve banking. Building a cryptocurrency with a fractional reserve is basically building an unlicensed and uninsured bank. That's not a particularly attractive prospect for depositors, so naturally Tether were incredibly dishonest about it.

[jpmattia]

> One of the primary arguments in favour of cryptocurrency is avoiding the fragility of fractional reserve banking.

Only by people that don't understand fractional reserve lending. For example, the exchanges are loaning BTC for the purpose of shorting. This is exactly fractional reserve lending, just like the banks.

[Scoundreller]

If you have 10 BTC in your wallet that says you have 10 BTC, it will always be 10 BTC and available to you.

If you have 10 drachmas in your bank account that says you have 10 drachmas, there are a lot of different* ways that it can suddenly become partially/fully unavailable to you that wouldn't happen with your self-hosted BTC wallet.

[jpmattia]

> If you have 10 BTC in your wallet that says you have 10 BTC, it will always be 10 BTC and available to you.

Not if your wallet is held at an exchange, which is why that keyword appears in my comment.

[Scoundreller]

Then you have failed to counter the claim of "One of the primary arguments in favour of cryptocurrency is avoiding the fragility of fractional reserve banking."

[jpmattia]

Most people would define fractional reserve banking" as a bank* that loans out a fraction of its reserves.

You are of course free to equate that to "your self-hosted BTC wallet", but I doubt it will gain much traction as a definition.