Rising Tether Loans Add Risk To Stablecoin, Crypto World (wsj.com) 73
The company behind the tether stablecoin has increasingly been lending its own coins to customers rather than selling them for hard currency upfront. The shift adds to risks that the company may not have enough liquid assets to pay redemptions in a crisis. From a report: Tether says it lends only to eligible customers and requires that borrowers post lots of "extremely liquid" collateral, which could be sold for dollars if borrowers default. These loans have appeared for several quarters in the financial reports that Tether shows on its website. In the most recent report, they reached $6.1 billion as of Sept. 30, or 9% of the company's total assets. They were $4.1 billion, or 5% of total assets, at the end of 2021.
Tether calls them "secured loans" and discloses little about the borrowers or the collateral accepted. Alex Welch, a Tether spokeswoman, confirmed that all of the secured loans listed in the reports were issued and denominated in tether. The company said the loans were short-term and that Tether holds the collateral. Tether, which is incorporated in the British Virgin Islands, doesn't publish audited financial statements or a complete balance sheet, leaving outsiders with an incomplete picture of the company's financial health. "Tether's disclosures are limited to the information contained in the mentioned reports," Ms. Welch said. The rise in Tether's lending represents a broad risk to the crypto world. Stablecoins such as tether are anchors in the system. They are vital for trading many cryptocurrencies and are widely held by traders. The premise of tether -- and other stablecoins -- is that the issuer always will redeem one coin for $1. Issuers take pains to demonstrate they have ample funds available to do so. The company's reports show only U.S. dollar amounts for the loans and don't say the loans were made in tether tokens. The reports also say the loans were "fully collateralized by liquid assets."
Tether calls them "secured loans" and discloses little about the borrowers or the collateral accepted. Alex Welch, a Tether spokeswoman, confirmed that all of the secured loans listed in the reports were issued and denominated in tether. The company said the loans were short-term and that Tether holds the collateral. Tether, which is incorporated in the British Virgin Islands, doesn't publish audited financial statements or a complete balance sheet, leaving outsiders with an incomplete picture of the company's financial health. "Tether's disclosures are limited to the information contained in the mentioned reports," Ms. Welch said. The rise in Tether's lending represents a broad risk to the crypto world. Stablecoins such as tether are anchors in the system. They are vital for trading many cryptocurrencies and are widely held by traders. The premise of tether -- and other stablecoins -- is that the issuer always will redeem one coin for $1. Issuers take pains to demonstrate they have ample funds available to do so. The company's reports show only U.S. dollar amounts for the loans and don't say the loans were made in tether tokens. The reports also say the loans were "fully collateralized by liquid assets."
What assets? (Score:3)
if 9% is worth $6.1Bn, then 100% is $67.77Bn. $67.77Bn of what, exactly?
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I like tulips, they are pretty and smell nice.
Re: What assets? (Score:1)
Re: What assets? (Score:1)
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Currency is already a made up process. It was a way to Exchange for Goods and Services that you need much easier.
So instead of trying to sell a sack of potatoes to buy a plow from someone who may already have enough potatoes, But the tool maker is in the need of Fish, while the Fisherman wants the potatoes.
So to buy said tool with the barter system, they will need to go around the whole community in trading to match their access.
So currency will allow the Fisherman to buy potatoes from you, which you can b
Re:What assets? (Score:4, Interesting)
The usual crux of the crypto argument are from those who see it as a new chance at the vision of the 'gold standard', where they have unwavering belief that so long as the total amount is both clearly 'owned' by someone and fixed, that mass consensus will drive to a value. The favored rhetoric is that fiat currency allows powerful people to just print themselves money at the expense of inflation for all, and surely an unmanageable fixed 'thing' would be impervious.
This year has been a reminder that it's not a purely mathemetical concept. The USD has suffered high inflation, but the crypto currencies have fared soooo much worse. In the prior years, crypto currencies suffered catastrophic deflation (it would be catastrophic if the economy had actually been trying to *run* on it). Ultimately, this is illustrating the mediating effect of money supply control. When economic triggers that would have sent us into the great depression appeared, worrisome and even unfair things were done to keep the money supply flowing. However, it was better than having a repeat of the great depression. This year, between real factors (post-COVID supply chains, trying to re-figure worker-employer relations, invasion of Ukraine, and a glut of money) inflation hit, but monetary policy to take down money supply has taken the edge off to avoid hyperinflation (so far). The cheap loans going away have propagated hard into things like stock valuations, but has favored 'real' economy being more on-track, which is generally the more important part of the economy when you have to pick winners and losers.
So the 'value' of currency is basically a mathematical model of mass psychology, and a well-audited, competent central bank serves to try to keep the 'value' workable by participants better than something like a crypto currency.
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The gold standard was a failure. The supply of gold grew very slowly compared to the growth of the economy, or the growth in population. It was not sustainable. Nixon abandoned this in the US because if there was a crisis and everyone demanded their gold there was not enough. After abandoning the gold standard, the US dollar has remained strong and useful and has not had wild fluctuations in value.
Crypto was never going to recreate the gold standard and it was never a goal. The growth in bitcoin, the f
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I will disagree on the crypto having no wistful eyes toward the gold standard, a *lot* of crypto folks would hold up the gold standard as a role model for crypto.
National currencies are kind of a mix. It is to some extent a mutual agreement of value, but with a central authority to take measures to counter when that consensus goes off the rails.
I can understand the concern about so few people able to manipulate such important stuff, but in a good system there is healthy auditing and folks ready to challeng
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The thing that most people either dont realise or just outright ignore when it comes to comparing accepted fiat (or historical gold standard) currencies and crypto currencies is something that differentiates the two very well...
In fiat currencies (and older gold standard currencies) the issuers of the currency have a vested interest in stability - not too much inflation or deflation, a couple of percentage points here and there is acceptable within the bounds of stability. Too much instability in either di
Wrong (Score:2)
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Re: What assets? (Score:1)
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Hot air. That is the only thing the crapcoin "economy" produces. Unless the mining-rigs are water-cooled, then it will be warm water.
Please just stop pretending it's a thing (Score:3, Insightful)
Nonexistent currency is just that. It's not a currency.
You can't "peg" funny numbers to real money without having real money to begin with.
As your "funny money" stupidly rises in value because pyramid scheme, you either have to put real money in or admit you can't.
Here's my number: 19700101. Send me cash to "peg" it to the USD. You can "despoit" and "withdraw" said fake crap all day long at a 5% rate.
Also stand on one leg while whistling. We have to make they CryptoBroRipOff thing work just right.
E
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You can't "peg" funny numbers to real money without having real money to begin with.
Well, that's the thing.. A tether is supposed to represent a dollar Because they backed it 100% with real money reserves AND their compensation are fees charged for creating tether and redeeming tether tokens back to real money - You pay more than $1 to create $1 worth of tether: The additional amount above the $1 is their money to keep, and the rest is supposed to be reserve kept 100% safe, they Don't have to and
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However, Even so-called riskless securities are not free from risk, Because they have an obligation to redeem tokens for real money In real time - Almost instantly... Whereas the money they are loaning out has a repayment schedule. The lender cannot Call in a Government bond and force the government to repay it right away before maturity.
Actually, while they can't call the bond they can sell it on the open market. If they hold it they get the par value; if they sell it it they may have to sell it at a discount or for a premium depending on the bond's interest rate and the prevailing rate. They are a very liquid asset and are cash equivalents.
And there's a high chance that they get greedy and decide to take on more and more risk than even that over time.
That is the real risk - they already have shown they have a propensity for risk taking getting into crypto; will they be happy with a few percentage points with government bonds or decide they are sma
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Actually, while they can't call the bond they can sell it on the open market. ...
Yes, they can sell it At a potential loss - which is a problem because the fees charged to create/redeem tokens will Not make up for a loss caused by interest rates rising after they acquired the bond.
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>... at a potential loss.
That's how the pyramid scheme works. It's not "tethered", "tied", or "pegged" to the US dollar or an other real currency, which the idiots call "fiat currency."
You bring REAL MONEY and convert it to SCAM COIN and then complain when the latter goes to zero.
Nobody INVESTS in CRYPTO-CRAP. People gamble the crap they buy today with X REAL MONEY will sell tomorrow for MORE THAN X REAL MONEY.
It's not an investment.
Nobody in the entire world sells or buys stuff using fake/crypto money
Re: Please just stop pretending it's a thing (Score:1)
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Actually, while they can't call the bond they can sell it on the open market. ...
Yes, they can sell it At a potential loss - which is a problem because the fees charged to create/redeem tokens will Not make up for a loss caused by interest rates rising after they acquired the bond.
Or at a profit if the bond rate is higher.
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This seems to be a problem with crypto bros. Also financial bros in general. Ie, they promise to do X, but the lure of extra profit encourages cheating. So, we'll give you our own special cryptocurrency, and we'll speculate with that on the side, after all we believe in us and therefore we'll always be solvent, forever and ever. Or we'll take your investment dollars and invest in mortgage backed slice-and-dice securities, and we'll make so much money, and make our customers a little bit more money, and
Re: Please just stop pretending it's a thing (Score:2)
Re:Please just stop pretending it's a thing (Score:4, Interesting)
The problem here is that based on several videos I've seen tether isn't backed by a fiat currency. Which would be fine except they seem to be claiming that they are.
Crypto is in a bizarre state where everybody knows that if they start trying to get their money out of it there's a good chance they won't be able to get it because of a run on the banks (and yes these aren't exchanges their banks. They have deposits that they are interest and give out loans).
I don't think there's going to be a giant crash though. I think what's going to keep happening is that the real Banks that are properly regulated and it loaned these Jokers billions of dollars are going to start calling in those loans. That'll trigger bankruptcy which will trigger a run on these phony Banks which will take them out of the market.
Every time one of these guys goes tits up the price of Bitcoin drops about 3 Grand. I think eventually it'll hover around 10K which is where the ransomware and drug money keeps it at and then eventually the government will crack down on that money laundering and it'll go back down to whatever the crazy libertarian true believer sovereign citizen types or keeping it at before criminals noticed they could use it. Probably around 8 to 10 hours for Bitcoin and maybe a dollar or two for ethereum and then everything else will just go away.
Anyone know how much dogecoin Elon Musk still holds?
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Tether isn't like bitcoin. It doesn't "rise" and it's supposed to have actual money backing it. It's exactly the same thing a regular bank does.
The difference is, there are big bad regulatory agencies making sure the regular bank actually has money backing it, up to and including reimbursing customers if somehow it turns out they don't.
A random company incorporated in the BVIs? Well, they might. Or they might not.
Loans from a stablecoin? (Score:2)
Tether says it lends only to eligible customers and requires that borrowers post lots of "extremely liquid" collateral, which could be sold for dollars if borrowers default.
This is starting to sound a lot like BlockFI who is now in Chapter 11. And calls for regulator involvement, as So-called Stablecoins should Not be assuming
counterparty default risks against the Backing of their currency itself.
One problem is despite the "Liquidity" of your collateral: If your collateral is in a different currency
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The big problem here is clients default and there is any kind of 'run' on the coin they might not be able to 'buy' coin at market for the value of the collateral; even if the collateral is repetitively good ie dollars, euros, treasury bonds. The situation has a lot of potential to spiral out of control
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The big problem here is clients default and there is any kind of 'run' on the coin they might not be able to 'buy' coin at market for the value of the collateral
Yes, exactly, AND "A run" is exactly what a Stablecoin should be keeping its reserves prepared for.
"A run" in either direction would be extremely likely to be a cause for client defaults; They must be able to process every redeem immediately even during such extreme times, otherwise the so-called Stablecoin will destabilize, which would permanen
Re:Loans from a stablecoin? (Score:4, Interesting)
Tether says it lends only to eligible customers and requires that borrowers post lots of "extremely liquid" collateral, which could be sold for dollars if borrowers default.
I don't get why anyone would borrow StableCoin. If it is pegged at 1 coin = 1 dollar; they are essential the Western Union of crypto. I buy $100 of coin, I get send them to someone else, who redeems them for $100 and StableCoin gets paid a fee. If they are always worth $1, why would I want to hold them? It's not like they will go up or down in value and I can make money on the fluctuations; and if I borrow them I probably pay a fee or interest on the loan so I am essentially losing money to get a coin that will not change in value. I might as well drop the money in a Cd and get a few points in interest.
One possibility is the loan is a way to transfer money instead of paying someone directly. I loan you you a million coins at 0%, you cash them in and I don't call the loan; potentially a tax free transfer of cash as a way to cash out?
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Exactly why crypto is a ponzi. No one wants crypto if they can't sell it to someone later for more USD. The whole point is to get rich buying it.
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why would I want to hold them?
They are useful for those who would want to be able to do swaps or other transactions where they trade between Stablecoins and other crypt coins or Tokens.
I loan you you a million coins at 0%, you cash them in and I don't call the loan; potentially a tax free transfer of cash as a way to cash out?
Why would you be willing to loan at 0%? It sounds like you are not being paid for the service, and the IRS would most likely declare this an illegal tax evasion scheme, Because o
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The only reason I can see for holding a stable coin pegged to the US dollar is if you cant get US dollar investments directly - at the sort of scale we are talking in these stories (millions of dollars of investment at a time), thats only going to be available directly in US dollars via regulated investment schemes...
Which means the "regulated" part is the reason people cant do it directly and instead go with, what is essentially, a middle-man-currency which is supposed to be 1:1 with the currency you want
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I don't get why anyone would borrow StableCoin.
Say you have a few bitcoins you've been holding for a few years. You'd like to use that money to do some home improvements. You could sell your bitcoin, but then you'd be faced with some steep taxes. Or, you could deposit your bitcoin into a defi protocol to be used a collateral and take out a loan in a stable coin. Send this to your exchange of choice, swap 1:1 for dollars, and deposit it in your bank account. Now you have real money you can use but still have exposure to bitcoin for when it moons. O
Due dilligence? (Score:2)
The reports also say the loans were "fully collateralized by liquid assets."
And I bet every loan was evaluated and approved by an underwriter with thumbs-up emojis, because I hear that's the new way of doing business. [slashdot.org]
Pointless Ponzi scheme (Score:2)
No upside, 100% potential downside. At least with the rest of the “coins” you at least have a chance to be on the good side of a pump-and-dump. Stable coins just seem pointless.
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They're not pointless at all. If I had thought people would give me billions of dollars in exchange for a digital IOU I would absolutely have set it up. I would even have been honest, taken 100% of those billions and used them to buy whatever investment wide consensus agreed was safe.
What a way to get rich. People giving you money to hold for them, interest free.
Fankly, My Dear. (Score:2)
The point of Tether (Score:5, Insightful)
You can find plenty of videos online explaining in detail how Tether is almost certainly under capitalized. e.g. it's not 1 to 1 USD. The only question is when will the run on them start.
But that's not the interesting part. The interesting part is that because Tether is the "way in" to crypto when it does crash it takes everything down. Crypto is very, very centralized and has been for some time. The big exchanges have been propping up Bitcoin to stave off a run on their banks (let's stop calling them "exchanges", they're collecting and paying interest, they're banks). But every time one of them drops out the floor gets a little lower and speculators get a little more nervous.
Oh, and Bitcoin miners are starting to go belly up. Hilariously they used the mining rigs as collateral for billions in loans. Rigs that are now known to be worthless since if they weren't the miner wouldn't be out of business.
So far it seems to be playing out exactly like the regulators wanted. It's not an instant crash, just a bunch of little crashes. Not a pop, but letting air out of the balloon.
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While it might be possible for USDT to at least temporarily lose its peg, Tether, Inc. can and will refuse to redeem USDT for USD whenever they please.
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A bank shutting its doors does not solve the run on the bank. In some cases, it is the correct response for responsible bank manager to do, in order to avoid immediate insolvency and more fairly protect the interests of the depositors. But once you shut the door, it is now very public knowledge that the bank is in trouble, and the pressure builds.
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All true.
And Tether does not have the many options that a real bank has. My point being, that shutting doors does not solve anything. As you correctly point out, a real bank is backed by a system of support in the event of a crisis, while Tether does not have those resources to draw upon.
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Real banks have the option because in the past, it ruined the economy and thus the government stepped in and heavily regulated banking.
Deregulated Finance is basically going back 100 years to before the Great Depression where we had
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Banks are not subject to runs in the way that you think. Banks have *many* financing options available. Taking deposits is the *cheapest* finance mechanism, but it's far from the only one. Banks can borrow from each other. Banks can access repo markets. Banks can show up at the Federal Reserve discount window. As long as a bank is *solvent*, it can find ways to deal with *liquidity*. Now some of them are expensive enough that the bank *might* become insolvent. But liquidity and solvency are different concepts. If a bank *does* experience a severe run, the FDIC will "wind down" the bank in some way or other and depositors will be made whole. Tether is nothing like banking.
Tether is nothing like regulated banking. It does strike me as akin to wildcat banking [wikipedia.org].
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Yes, I was thinking the same thing.
At a powerpoint level of understanding, crypto currencies are supposed to protect you from certain shenanigans. Well, if you are an expert who is technologically savvy enough to do all your transactions manually from your home computer, and keeps an arm's length relationship with exchanges, perhaps it will work out that for you.
But the reality is (1) doing things manually is too costly/painful for most people, including most financially savvy people, and (2) the exchanges
That'll destroy them (Score:2)
Again, they're banks. We're just not regulating them as such because we went crazy in the 80s and forgot why we regulated banks in the 1st place. As other's have pointed out crypto is speedrunning 200 years of finance history. They're approaching the Great Depression, but unlike a real economy they won't come out the other end of WWII in good shape.
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> They aren't worthless, they can play video games with near max settings.
Not Bitcoin miners. Those are specialized ASICs that are only good for Bitcoin.
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So far it seems to be playing out exactly like the regulators wanted. It's not an instant crash, just a bunch of little crashes. Not a pop, but letting air out of the balloon.
I find it quite amusing watching the most toxic players in the industry getting rekt by their own stupidity. These are good things and after the dust settles it will be a much healthier space for everyone.
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Tether has been fined numerous times for their lies about dollar holdings, and are currently in lawsuits about it.
The U.S. CFTC fined them 41 million and made them revise their statement about U.S. Fiat backing of 1:1. It actually turned out the backing was 2.9 percent, while the rest backed by various "commercial paper".
https://www.cftc.gov/media/664... [cftc.gov]
Scammers and toxic waste, avoid Tether and all stablecoin (others have imploded too)
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Indeed. The miners are worthless because they are not good for anything except mining. And yes, the crapcoin economy is centralized and controlled by few. Even more so than the real financial industry. But no, they are not banks and they are not even financial institutes. Both are heavily regulated and audited and if they violate the requirements by the regulator to the degree "exchanges" do, people go to prison even if nothing crashes. What exchanges are is ersatz banks without all the advantages banks hav
Who knew (Score:2)
So someone's mixing shit with poop, and it's making it crappier?
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So someone's mixing shit with poop, and it's making it crappier?
Isn't Tether supposed to be the cream of crypto currencies? Unfortunately, when you mix cream with crap it doesn't improve the crap, and it sure raises hell with the cream.
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So someone's mixing shit with poop, and it's making it crappier?
Isn't Tether supposed to be the cream of crypto currencies? Unfortunately, when you mix cream with crap it doesn't improve the crap, and it sure raises hell with the cream.
For very disgusting and repulsive values of "cream", to be sure. You can still make it worse by mixing it with, true.
Dumb question (Score:5, Interesting)
I am not a crypto wizard so I have an honest question. If I have the full equivalent of the loan in liquid assets to use as collateral, why take the loan? Why not use the already liquid assets for whatever purpose the loan is fulfilling? I take a loan when I need more money than I have available and use collateral that is less easy to liquify and the lending institution is willing to accept it.
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That is the big question isn't it? Why is your collateral really "liquid" while not being so liquid that it is convenient enough to just cash it out?
The suspicion is the definition of "liquid" is not trustworthy. You might bring forward a set of NFTs that look like they are worth $100k based on recent activity on an exchange. Is that collateral with a nominal value? Yes. Does it appear liquid today? Perhaps, yes. Is it safe for Tether to accept that as collateral and loan you $80k? Probably not. In
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Most likely because it's a scam (Score:4, Insightful)
In crypto this is most commonly using a crapcoin (or shitcoin if you prefer) that has been pumped to, say, $10 USD value, as loan collateral. With the obvious problem being that your coin will collapse in value if your loans get called in.
You can also see hilarious stuff like bitcoin miners taking out loans on the value of their data center equipment which, if they were ever in a position to need to sell them to pay the loan, would by definition be worthless since the crypto markets would have crashed.
The entire thing is a scam. Real Money comes in 2 ways: Greater fool speculators and rich people with too much money and crime.
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Why not use the already liquid assets for whatever purpose the loan is fulfilling?
Look to the wealthy for your answer. Truly wealthy people don't sell off assets when they need capital, they use them as collateral and take out a loan. Loans are way better for tax purposes than selling something for a profit.
Also people may wish to take out a loan in a different currency than they are using for collateral. This allows people to stay bullish on bitcoin, for example, but still access the capital from their gains.
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Yep. That is how a loan works when solid financial skill is involved.
Weeeell, they also add value, right? (Score:2)
There's a reason why every exchange out there denominates the value of BTC, ETH et al in Tethers, not US dollars.
At some point USDT will crash and the pump-and-dump cycle will end suddenly. Expect Bitcoin back to 2015 values by then.
Let's flip the Narrative. (Score:2)
"Under scrutiny, crypto-related enterprise the following was found to be true:
- they were above board and honest
- they kept the assets under appropriate technical locks without leaks
- they did not risk assets of others without their explicit permission, and provided honest risk assessments in pursuit of permission
- they did not make any unreasonable claims of returns, rewards, or upside
- they acted as knowledgeable, rational actors in business transactions"
Can we follow only those stories please? It will he
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Very good point. Silly of me not to notice. Consider my complaint rescinded.
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Yeah, people doing something right in the crapcoin space. That would be a real story. Probably not going to happen. The only honest reliable winning move is not to play.
Of all the activities ... (Score:2)
I don't care whether the loan is secured with gold, barrels of oil or your kneecaps. Some trusted intermediary needs to assure the parties involved that the assets are really there.
More on this... (Score:2)
So subprime in crapcpins? (Score:2)
Fits. These people really have no clue how finances work...