To summarise, Tether is bad. Tether, like all the other attempts to create shadow banks, risks becoming systemically important while not being capable of maintaining their dollar peg if there is a large demand for liquidity.
What Tether is not:
- A Ponzi Scheme. Tether makes no guarantees on returns for investors. If you have $1 worth of tether it will never be worth more or less. This is as opposed to a Ponzi scheme where your $1 increases in value (on paper) but those returns do not represent an actual increase in value, but just a gamble that enough people won't try to withdraw their money.
- A scheme to pump up the price of cryptocurrencies by creating unbacked tether from thin air and using that to buy cryptocurrencies. The balance sheet summary published shows that they have reserves equal to the amount issued, with varying amounts of liquidity. In addition, this was the conclusion reached by the NYAG. Note that "absence of evidence is not evidence of absence", this could still be the case but there is no credible evidence of this.
- Backed entirely by bank deposits or by bags full of dollar bills. They are instead using a number of debt instruments of varying degrees of liquidity. Although this is contrary to their initial claims, it is not dissimilar from any organization purporting to hold "cash", like corporations, etc. And realistically at the scale they are at there is no realistic way to hold that amount of money in the traditional banking system.
Tether is still bad! Read up on Rohan Grey's critiques of stablecoins from a systemic risk perspective; he's a very clear thinker in this space with a vast knowledge of historical antecedents for exactly this kind of thing. It's just not bad for the reasons that people think it's bad.
> It's just not bad for the reasons that people think it's bad.
Yes, it is. You’ve glossed over some very important issues and dismissed them. If I told you I grew wings and could fly, you don’t need evidence that it’s not true. There is enough information about other rules of the universe to suggest that probability of this is zero. The same is true for Tether.
An insignificant offshore bank has not suddenly become the beneficial owner of 3% of one of the most important markets in the largest financial sector in the world. And they certainly haven’t accumulated 1% in a matter of weeks as they would purport. This would cause monumental moves in systemically important markets (the GFC catalyst was commercial paper markets locking up…)
Wouldn't Tether in effect be a Ponzi scheme if the value of 1 Tether permanently drops below 1 USD at some point?
The reasonable assumption here is that Tether (the entity) does some sort of embezzling in the background, which means that their assets will at some point be so much smaller than their liabilities that there's no way to maintain the illusion that 1 Tether is worth 1 dollar.
Ergo money has to keep flowing into Tether to maintain its price. That's close enough to equivalent to the critical part of what I understand a Ponzi scheme to be.
It's probably some kind of fraud, but not a Ponzi. A Ponzi operates under the pretence that it's an investment scheme whereas tether does not. A tether is a token that isn't supposed to appreciate over time and as such can't be seen as an investment.
Opposite would be needed. That is I buy 1 tether for one USD. And then later I can sell that same tether for more than 1 USD. And possibly re-invest it again by buying more tether... That would be a Ponzi.
What Tether is not:
- A Ponzi Scheme. Tether makes no guarantees on returns for investors. If you have $1 worth of tether it will never be worth more or less. This is as opposed to a Ponzi scheme where your $1 increases in value (on paper) but those returns do not represent an actual increase in value, but just a gamble that enough people won't try to withdraw their money.
- A scheme to pump up the price of cryptocurrencies by creating unbacked tether from thin air and using that to buy cryptocurrencies. The balance sheet summary published shows that they have reserves equal to the amount issued, with varying amounts of liquidity. In addition, this was the conclusion reached by the NYAG. Note that "absence of evidence is not evidence of absence", this could still be the case but there is no credible evidence of this.
- Backed entirely by bank deposits or by bags full of dollar bills. They are instead using a number of debt instruments of varying degrees of liquidity. Although this is contrary to their initial claims, it is not dissimilar from any organization purporting to hold "cash", like corporations, etc. And realistically at the scale they are at there is no realistic way to hold that amount of money in the traditional banking system.
Tether is still bad! Read up on Rohan Grey's critiques of stablecoins from a systemic risk perspective; he's a very clear thinker in this space with a vast knowledge of historical antecedents for exactly this kind of thing. It's just not bad for the reasons that people think it's bad.