> We're not really going to do anything except make you not our problem and leave it for the next guy/town/state/etc
That's fine. I was recently discussing the American financial system's exposure to Tether [1]. It appears there isn't much. Ceteris paribus, when that blows over, it shouldn't hit us. It will hit the next guy, in the next town or state or country.
But you forget about DeFi (decentralized finance).
People are using DeFi to make degenerate bets on various crypto projects. That typically involves
(1) buying tether,
(2) using it in an overly collateralized loan to borrow tether,
(3) then using that tether to buy another crypto,
(4) watching/hoping the price of that go up
(5) selling that corresponding crypto, locking in gains, and repaying the loan
If tether drops dramatically in price due to a lack of confidence, these loans will be affected. Such crypto tokens may be bubbling up only because these DeFi loans are possible.
Which will wipe out those investors. Not anyone else. People are free to lose their own money. It becomes a regulatory issue when those losses cascade, or if someone who didn't realize they were taking those risks is forced to bear them.
I don’t disagree with anything you’ve said but I do wonder whether the typical crypto “investor” does realize the risk. In many cases (like Tether, for example) I’m not sure the risk has been adequately disclosed prior to purchase.
Who is the typical crypto "investor", though, that is getting into these schemes?
I personally know people who have gotten into the GME craze, I know people who are stupid enough to day-trade options, and I know people who spent a paycheck on buying dogecoin. They are all relatively normal people, and while some of them should not have gotten into these transactions, given what I understand of their personal finances, I understand why this happens. They live in America, where nobody's stopping you from spending your rent money on buying dumb meme stocks, and RobinHood has a cool mobile app for trading options, and maybe you win, or maybe you get burnt, it is what is, yolo, etc.
But of all those people, I don't know of anyone who dipping their feet into borrowing tethers to trade crypto on margin, or investing into crypto ponzi schemes. Who, exactly, is getting roped into that sort of thing? Posters on the crypto equivalent of r/wsb? Day-traders? Or is it Joe Average?
There's so many ways to screw up buying or selling options, that I believe retail investors should stay away from them, period. There are a lot fewer ways to screw up buying stocks.
Is DeFi SO large??? Stablecoins have a mkt cap of ~130bn.
And it's not like bitcoin (or the stock market), where you can start with 1000 tokens valued at $1 each, and then when the price increases suddenly the nominal wealth increases as well. These are stablecoins after all!
DeFi isn't limited to stablecoins though. I think the current TVL (total value locked) across all DeFi has to be in tens of billions of dollars ATM, judging from the values I've seen on some of the more popular services.
It doesn't sound like the USD has a ton of exposure here, so how would it bubble up? Does a major bank (Citi, Chase, BofA, etc.) have a large position in Tether?
A recent fear was Tether holding dollar-denominated commercial paper. If they went under, they'd dump that paper. This happened in '08 with money market funds, and we passed a lot of regulation to ensure that failure mode can't happen again.
Fortunately, to the extent Tether holds anything, it isn't cash or U.S. dollar commercial paper. So contagion vector contained.
Can someone explain why USDC or Tether is held to such a high standard ... 100% reserves, and they all have to be in cash -- while banks have fractional requirements that hover around 10% and since the pandemic have been essentially zero?
Why the huge disparity? From an economic point of view, the bank is just as required to redeem its obligations as Tether.
Banks have very specific regulations to comply with that are much much much stricter than anything Tether or USDC face.
The better comparison for stablecoins are money market funds. The lockup of those caused the worst of the 2008 financial crisis. They also have much stricter regulations than stablecoins.
Fitch today released an opinion that stablecoin liquidations could cause a similar sort of systemic risk. They need some kind of regulation. No stablecoin has even done an audit! (Attestations are not the same)
Yup. They’ve had attestations. In those, an auditor just looks at an account at a moment in time. So you could, for example:
1. Get a loan
2. Put it in the reserve account
3. Ask accountant to verify the amount
4. Accountant attests to seeing money in the reserve account
5. Afterwards, move money out to pay off the loans
Sound crazy? Tether actually did this, it only came out in the NYAG settlement.
USDC uses a US accountant, but nothing in the procedures they use would prevent such a scenario. The auditor merely relies on management assertions in an attestation.
The US dollar is backed the US. All banks are supervised and insured by that same government. If a bank takes on too much risk, a) there are people watching that, and b) the US can wind it up and pay everybody back. So a single bank failure causes approximately zero currency risk. As long as you stay under the FDIC limits, you'll get back every dollar you put in.
Tether, on the other hand, is backed a bunch of shady characters who have been caught lying about what backs their currency. They claim it's 1:1 with US dollars, meaning that people buying Tether have no risk. But the more we learn about what they're doing, the clearer it is that it's not the case.
Because banks are heavily regulated, professionally managed and back-stopped by the most powerful entities in the world (the governments of the countries of their operations).
Tether by contrast is a pretty much an obvious ponzi scheme that everyone is just playing along with because they're making money and hoping they get out with profits before it implodes.
why someone would colletarize a stablecoin like USDC to generate less stablecoins like DAI? Where id the gain while on a dollar to dollar its close to 1:1 ratio all the time?
It’s not that DAI is over-collateralized with USDC, it’s that among all the different collateral types, USDC is over represented. This Reddit thread provides a pretty good explanation as to what is going on:
Main reason is that banks are more responsible with giving out loans. Those loans are assets. Of course once you start giving out loans like candy to people who should never get them who then use them to buy highly speculative assets then the whole idea goes to hell.
With Tether they print it and give it out to their buddies for who knows what, maybe a pinky promise to repay some day.
Banks have two things
1. Whateve they don't hold in cash is invested in loans, cash plus loans have a value greater than the redemptions they could face.
2. In the case of liquidy problems they have the federal reserve system to backstop a healthy bank with cash so there isn't a run on the bank.
Tether, well who knows? Tether has cash + nothing which very likely is less than the redemptions they may face. If people want to get real cash out tether has no one to go to to make sure they have cash.
According to free banking they would issue their own currency that would trade with an exchange rate vs the USD. The idea of pegging the exchange rate with the dollar while not having any meaningful dollar reserves is the absurd part.
Most countries that peg their currencies like China buy USD or "cash equivalents" like US treasury bonds. They don't lend out their reserves to a third party.
That's fine. I was recently discussing the American financial system's exposure to Tether [1]. It appears there isn't much. Ceteris paribus, when that blows over, it shouldn't hit us. It will hit the next guy, in the next town or state or country.
[1] https://news.ycombinator.com/item?id=28882319