[joshe]

Because if there is a "run on the bank", someone will end up short. Either the first people out will get 100% of their money and last 26% will get zero, or everyone will get 74% of their money.

This very fact will actually cause a run on the bank in any sort of crisis. You don't need to actually believe that tether is a complete sham and has no money to decide to withdraw. You just need to worry that 74% of people might get worried. Because if they all withdraw, you will get none of your money.

The point of FDIC insurance (aka lender of last resort) is that when you hear that Wells Fargo is in trouble you don't worry about your checking account going to zero. This used to happen quite a bit as late as during the great depression in the early 1930s. Being 100% backed by liquid assets was supposed to serve that function, it's not a nice to have, it's the whole point.

[cperciva]

Ironically, tether is pretty much immune from bank runs... because it's impossible to withdraw money at all.

[gruez]

>because it's impossible to withdraw money at all.

I heard this meme being repeated since forever and it never made sense to me. As I understand it, you could exchange USDT for real USD at any participating exchange. Not being able to convert USDT would mean not being able to withdraw from any of those exchanges, but there's no widespread reports of this. Also, you could convert USDT to USD at Kraken, and they definitely don't have any withdraw problems. Finally, if you really couldn't withdraw USD from an exchange, it would become evident because BTC priced would skyrocket as people scramble to find other ways to withdraw their cash. We saw this with mtgox, but not here (there's a premium but nowhere close to mtgox levels)

edit: clarified which part I'm replying to

[wmf]

Imagine if Bitfinex shut down with no warning. All the USDT stored in Bitfinex would simply be lost so it wouldn't cause a bank run. But massive amounts of USDT would flow from Bittrex, Hitbtc, and Poloniex to Kraken where the price would drop to pennies due to lack of liquidity. Maybe then Kraken suspends trading "to calm the market" and never resumes.

I am reminded of the default of BTCST which I guess no one remembers.

[shkkmo]

> As I understand it, you could exchange USDT for real USD at any participating exchange. Not being able to convert USDT would mean not being able to withdraw from any of those exchanges

That's selling Tether, not withdrawing Tether from the pool.

The point is, since it was already effectively impossible to withdraw any Tethers from the pool, does it really matter that the fund that backs those tethers can only support withdrawing 74% of the available USDT?

Currencies doesn't have to be backed to have value. Ours used to be backed by gold, but then we figured out that doesn't necessarily matter as long as people have to use it and the supply of it matches demand consistently enough.

So the interesting question is, will they be able to keep the price pegged to USD by selling and buying USDT in sufficient quantities to keep the price stable.

This is rather the point this comment is making: https://news.ycombinator.com/item?id=19793326

[bb88]

The point of having the reserves in US Dollars is that Tether could theoretically buy back surplus USDT's from an exchange that trades in it. Otherwise an exchange could be left holding millions of worthless USDT with no means to move that back to US dollars.

[bb88]

Only if you ask for permission from Tether, first. If you have power to seize the bank accounts, however...

https://www.investopedia.com/terms/t/tether-usdt.asp

"On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers."

[dzdt]

"We have been informed that" is lawyerspeak that has as an implication of "we don't actually believe the following and it almost certainly isn't true, but what we were told is..."

[jcranmer]

And "seized and safeguarded" itself sounds suspiciously like a polite way of saying "our accounts are frozen on suspicion of financial regulations (and/or money laundering), and we hope to be able to successfully defend ourselves in court."

[perl4ever]

"Because if there is a "run on the bank", someone will end up short. Either the first people out will get 100% of their money and last 26% will get zero, or everyone will get 74% of their money."

I'm not clear on whether they have discovered fractional reserve banking or whether they are insolvent. There's a big difference. If they are insolvent, I'd tend to assume tethers not trading at a discount just means people are idiots. But if not, not.

[nostrademons]

You could look at it as fractional reserve banking where one single borrower accounts for 26% of the assets.

Tether is technically solvent (at least, assuming they aren't lying). However, they made a loan of $700M to Bitfinex. If Bitfinex pays back the loan on schedule and no more than 74% of Tether holders run for the exit, they're fine.

However, that's a lot of counterparty risk, particularly considering it isn't clear whether Bitfinex is solvent, and that the big debtor (Bitfinex) and all the creditors (Tether holders) have correlated behavior. If Bitfinex becomes insolvent and defaults on the loan, Tether becomes insolvent. Bitfinex is more likely to become insolvent if Tether holders start withdrawing their money, which is the same event that would trigger a run on the bank and require that Tether call in its loan to Bitfinex.

It actually looks a lot like the derivatives bomb in the financial industry from 2006-2008. You had some institutions that were insolvent because they made bad trades. You had other institutions that were technically solvent, but were standing next to insolvent ones, and would become insolvent if they had to write off the contracts they had with the insolvent ones. It's possible that all of your books would balance at the end - but do you want to be standing next to the bomb when it goes off?

[village-idiot]

A fractional reserve bank is only fractionally liquid, the rest is invested in a variety of interest bearing loans. Obviously there’s always a risk of many loans not being repaid or sudden rushes for withdrawal, hence all the regulation and the FDIC.

Tether is admitting that they only have enough cash and securities to cover 74% of the outstanding tether balance. This isn’t fractional reserve, this is just straight up insolvency. If your bank only has enough cash and mortgages to cover 74% of their deposits, then it’s time for the FDIC to step in.

[bb88]

I think the difference is that in the end a Bank is backed and regulated by the US Government.

Tether is not. So it is solvent or insolvent.

[perl4ever]

I don't see why being regulated or not has anything to do with whether you are practicing fractional reserve banking. As I understand it, the concept is just that your assets are not all liquid, but rather some of them are long term loans.

Which is not to say I think unregulated banking is the same as regulated banking.

[ShorsHammer]

Bank reserves have little to do with money creation:

> Lord Adair Turner, formerly the UK's chief financial regulator, said "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo (out of nothing) – extending a loan to the borrower and simultaneously crediting the borrower’s money account

> the German central bank explains that the money supply is not determined by the reserves of private banks, but by market factors and regulatory decisions.

https://en.wikipedia.org/wiki/Fractional-reserve_banking#Cri...

[ShorsHammer]

Do you think the US government could cover every single cent if all the depositors wanted their money out now?

Not even physical cash, just a transfer to an overseas account. The money simply isn't there and the scales are enormous. US banks only can pay back 3-10% of cash deposits. The FDIC only has enough to cover a tiny proportion of bank liabilities.

It seems very disingenuous for people in this thread to say "well if everyone cashed out tethers" and then handwave away the alternative of "well if everyone cashed out USD". These scenarios playing out would have Tether actually being able to pay a reasonable percentage of creditors.

[perl4ever]

"Do you think the US government could cover every single cent if all the depositors wanted their money out now?

Not even physical cash, just a transfer to an overseas account. The money simply isn't there and the scales are enormous."

What do you mean by "money"? How can money "simply" not be available, when it's a matter of updating a row in a database? The issue is whether assets exist. Googling suggests the US contains assets worth $124 trillion; is that incredible to you?

And if we wanted to print $124 trillion of cash to represent all the assets, that would be silly, but just as doable as a wall on the Mexican border.

[dragonwriter]

> Do you think the US government could cover every single cent if all the depositors wanted their money out now?

Yes, because the US government can literally fiat dollars into existence.

OTOH, the big point of guaranteeing deposits is that a credible party doing that prevents bank runs, which are caused by fear of bank collapse that will destroy access to deposit balances.

> The FDIC only has enough to cover a tiny proportion of bank liabilities.

The FDIC’s funds are just the zero-effort first-love of payment; FDIC insurance is guarantees by the government, not just the gives held by the FDIC.

> It seems very disingenuous for people in this thread to say "well if everyone cashed out tethers" and then handwave away the alternative of "well if everyone cashed out USD".

Tether isn't backed by an entity which can simply will USD into existence; FDIC or NCUSIF insured bank or credit union balances are.

[pbhjpbhj]

The USA gov can just print the money to pay off the backed cash. Everyone gets their money. It may not be worth much if everyone actually demanded they could hold the dollar amount of their accounts in their hands in paper money - indeed, I imagine, you'd cause severe privations on the government funds in order to produce the money.

[perl4ever]

"It may not be worth much if everyone actually demanded they could hold the dollar amount of their accounts in their hands in paper money"

If literally nobody (hypothetically) is willing to own actual land, factories, and so on, then it's the tangible assets that are worthless, not the money. It would be the ultimate in deflation.

[ShorsHammer]

I certainly agree it's possible, but at that stage you've gone down the Venezuelan path and I'd assume there are far smarter regulators in the States. The money wouldn't be given out, not even a fraction, it's a such a huge risk to stability that they'd cancel withdrawals and work from there. We saw this happen in Cyprus.

[stale2002]

It is literally impossible for the US to be "insolvent" when it comes to US dollars.

They just print more money.