Commercial paper definitely shouldn't be classed as cash. They can have quite a lot of risk attached to them.
The biggest problem with this whole thing is that Tether is essentially acting as a unregulated and unaudited bank. It has a whole bunch of depositors that have the right to demand their funds within 72 hours, meanwhile many of their assets cannot be converted into cash within that period.
Tether is highly susceptible to a bank run and isn't eligible for federal deposit insurance.
That got me curious about what their rules actually are. From their terms of service [1]:
> Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves.
Also, US citizens aren’t allowed to use their service at all.
This seems sort of like an unregulated ETF that keeps all profits from investments for themselves. Easy money if you get it. If they don’t get too greedy it seems like they could keep it going indefinitely?
I externalize risk, but it's a relatively low risk. That's different from a pyramid scheme.
Low risk isn't the same as unimportant risk. The whole point of crypto is to mitigate very similar sorts of systemic risks. Cash works pretty well most of the time.
You're right. A lot of crypto schemes are very close to classical, preregulation banks.
Early banks issued IOUs for deposits. At some point, traders started swapping bank IOUs in lieu of moving gold, since slips of papers were easier-to-handle and equivalent.
At some point after that, bankers noticed they could lend out the gold for a profit.
Fast-forward a few hundred years, and the central bank issues IOUs in the form of dollar bills, and no one else is legally permitted to mint currency. As of a half-century ago, those are no longer backed by gold. Banks, in turn, handle deposits as bits on a computer (which are even more convenient than paper), backed by worthless slips of US-issued paper. Only the US doesn't even bother printing much of the paper anymore, since it's "deposits at the fed."
I wonder if we're heading for a similar path? Government bans the use of non-sanctioned cryptocurrency, like it once did with bank-issued bank notes, and issues it's own cryptocurrency? It kinda makes sense, since it wants to be able to adjust money supply in the public (or political) good.
T-bills are OK, but it's entirely unclear what the "commercial paper" consists of. Amy Castor notes that if Tether gives USDT for free to large customers like Binance etc, that loan would be a form of commercial paper.
> And quite a few exchanges are offering crazy interest rates (up to 10%) for USDT deposits, which strongly implies they're getting some for free
I'd think the 10% is due to the high risk of default. (Someone else receives it, but usually only gives a crypto collateral, there's a fairly high chance of default since if the lender gets wiped there's a high chance the collateral won't be sufficient and it might snowball from there as all the lending platform try to liquidate at the same time)
It's comparable to investing in junk bonds (but since it's call "savings/interests" most users won't realize the default risk.
>The pitch is clearly a lie, but I'm also not too worried about them counting commercial paper and t-bills as "cash."
The pitch being a lie is EXACTLY the problem. Tether is supposed to be nothing more than the gateway between crypto and the rest of the financial system. There is no reason for them to hold anything other than deposits at insured institutions. There is no reason for them to be making loans. There is no reason for them to be paying above market interest rates to holders,
The giveaway is that they don’t even disclose what this commercial paper is or who the issuers are. Given their history of fraud the most likely explanation is they are shell companies run by the same people and the money doesn’t exist.
I do wonder to what extent Tether has a symbiotic relationship with large exchanges, and what the loans are denominated in.
It's easy to imagine how issuing loans denominated in USDT would be attractive to Tether. And that debt can be converted into an asset on Tether's balance sheet. And voila the tether is backed.
The biggest problem with this whole thing is that Tether is essentially acting as a unregulated and unaudited bank. It has a whole bunch of depositors that have the right to demand their funds within 72 hours, meanwhile many of their assets cannot be converted into cash within that period.
Tether is highly susceptible to a bank run and isn't eligible for federal deposit insurance.