Does Tether work like a fractional reserve bank?

By Ben Munster
Crypto-currencies•5 min reading•March 14, 2019March 14, 2019

[UPDATED AT BOTTOM OF ARTICLE WITH RESPONSE FROM TETHER]

The Tether Stablecoin has diversified its dollar reserves, like a traditional bank, according to a recent, seductive update from its official bank. website (copywriter credit AtlasRand1, the alter ego legendary tether-skeptic BitFinex '). It's less than ideal because it's do not a traditional bank: it is a fragile, high-risk cryptocurrency ecosystem, the very operation of which depends on a basic principle: debt recognition.

We call Tether an "IOU Stablecoin" because it pulls (supposedly) its dollar counter from the insurance that every link is backed by a fully refundable dollar, that is to say. a debt. Yet, the following quote raises questions about Tether's ability to repay this debt:

"Each lanyard is always 100% guaranteed by our reserves, which include traditional currencies and cash equivalents and may, from time to time, include other badets and receivables from loans made by Tether to third parties, including affiliated entities (collectively, reserves "). Each attachment is also indexed to the dollar, so 1 USD is always valued by Tether at 1 USD."

So what's going on?

In general, the suspicion surrounding Tether is primarily focused on the liquidity of its reserves – whether all fasteners are protected or not. The confusion is due to several factors: Tether shares a board with BitFinex, a accused to use the cryptocurrency Tether to fraudulently increase the price of bitcoin; Tether has never conducted a full audit, relying instead on lovers and a Bloomberg reporter and, finally, the liquidity of Tether relies heavily on banks in uneven traces.

The corrected statement above only further complicates these liquidity issues. What was a clear statement describing the model / simple mechanisms of debt recognition – that each attachment is supported 1: 1 with " dollars' in Tether's reserves – has been replaced by the more nebulous guarantee of 'our reserves'. These "reserves" include "traditional currency" (unspecified dollars) and, crucially, "from time to time, may include other badets and claims arising from loans made by Tether to third parties, which may include affiliated entities. "(Let's emphasize ours.)

Let us unpack this. The most clear implication is that Tether operates as a fractional reserve bank. Fractional reserve banks lend their customers' badets to a range of trusted third parties / investors, who hopefully make them into interest. This is fine for banks, whose customers expect to generate interest. Tether, on the other hand, promises exactly the opposite: customer investments will remain stable. (Not to mention that it only replicates the existing and hated financial system.)

That Tether diversifies its stock with "other badets" could amplify this instability. Of course, other badets fluctuate at different rates of the dollar. Let's say that Tether is partially supported by gold, for example. If the notional value of gold rises faster than its dollar value, the bonds will be strengthened. excess. If gold depreciates, the ankle may collapse.

Now, imagine that these "other badets" are actually crypto-currencies specifically highly volatile bitcoin. Trust in Tether's stability would collapse.

And now we come to the heart of the problem. "Other badets" may include "affiliated entities". What is the best known affiliate entity of Tether? BitFinex, the largest trading volume encryption exchange, which, as we mentioned, stock his executives with Tether. (Revealed originally via a flight in the Paradise Papers.)

If Tether's reserves are partially backed by other badets provided by BitFinex, in exchange for "loans and receivables from Tether", this effectively means that Tether lends funds to himself , in exchange for badets from herself which means that it works as a kind of fake simulacrum of perpetual motion. Even worse, if these badets are bitcoins, which would imply, provided that the allegations that Tether buys bitcoins with unsupported bonds are true, that Tether supports its reservations with badets purchased well below their face value in dollars.

Or, like "PaloAltcoin" wrote on Reddit:

"If I read this correctly, [tethers] are actually supported by cryptocurrency. So when the price goes down and people flock to Tether, it increases the amount of Tether and decreases the funds on which it is guaranteed. This is just Bitconnect with additional steps. "

Damn, maybe we should look at Tether's "proof of funds" link and check the reserves ourselves?

Ah, the link is dead woman.

UPDATE:

We emphasized the nature of the underlying badets, its relationship with BitFinex, the dysfunctional "proof of funds" link and the timing of the update. A spokesman named "Kaspar Bitfinex" told us this:

"From time to time, Tether reviews its terms of service and its risk disclosures to ensure that they remain appropriate and up-to-date. Our latest revisions were to update our disclosures based on Tether's growth and operations and consistent with the types of information used by other institutions.

These changes were made several weeks ago and were directly communicated to Tether's customers who connect to the site. This was done by scrollwrap with new service requirements requiring active consent.

The links remain completely stable and 100% guaranteed, so that the Tether reserves are always equal to or greater than the number of links issued. The only change is that the composition of the badets that provide this support includes a combination of cash, cash equivalents and may also include other badets or receivables from loans issued by Tether. "

I hope this answers your questions. "

You are the judge.