Tether is technically solvent (at least, assuming they aren't lying). However, they made a loan of $700M to Bitfinex. If Bitfinex pays back the loan on schedule and no more than 74% of Tether holders run for the exit, they're fine.
However, that's a lot of counterparty risk, particularly considering it isn't clear whether Bitfinex is solvent, and that the big debtor (Bitfinex) and all the creditors (Tether holders) have correlated behavior. If Bitfinex becomes insolvent and defaults on the loan, Tether becomes insolvent. Bitfinex is more likely to become insolvent if Tether holders start withdrawing their money, which is the same event that would trigger a run on the bank and require that Tether call in its loan to Bitfinex.
It actually looks a lot like the derivatives bomb in the financial industry from 2006-2008. You had some institutions that were insolvent because they made bad trades. You had other institutions that were technically solvent, but were standing next to insolvent ones, and would become insolvent if they had to write off the contracts they had with the insolvent ones. It's possible that all of your books would balance at the end - but do you want to be standing next to the bomb when it goes off?
Tether is admitting that they only have enough cash and securities to cover 74% of the outstanding tether balance. This isn’t fractional reserve, this is just straight up insolvency. If your bank only has enough cash and mortgages to cover 74% of their deposits, then it’s time for the FDIC to step in.
Tether is not. So it is solvent or insolvent.
Which is not to say I think unregulated banking is the same as regulated banking.
> Lord Adair Turner, formerly the UK's chief financial regulator, said "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo (out of nothing) – extending a loan to the borrower and simultaneously crediting the borrower’s money account
> the German central bank explains that the money supply is not determined by the reserves of private banks, but by market factors and regulatory decisions.
https://en.wikipedia.org/wiki/Fractional-reserve_banking#Cri...
Not even physical cash, just a transfer to an overseas account. The money simply isn't there and the scales are enormous. US banks only can pay back 3-10% of cash deposits. The FDIC only has enough to cover a tiny proportion of bank liabilities.
It seems very disingenuous for people in this thread to say "well if everyone cashed out tethers" and then handwave away the alternative of "well if everyone cashed out USD". These scenarios playing out would have Tether actually being able to pay a reasonable percentage of creditors.
Not even physical cash, just a transfer to an overseas account. The money simply isn't there and the scales are enormous."
What do you mean by "money"? How can money "simply" not be available, when it's a matter of updating a row in a database? The issue is whether assets exist. Googling suggests the US contains assets worth $124 trillion; is that incredible to you?
And if we wanted to print $124 trillion of cash to represent all the assets, that would be silly, but just as doable as a wall on the Mexican border.
Yes, because the US government can literally fiat dollars into existence.
OTOH, the big point of guaranteeing deposits is that a credible party doing that prevents bank runs, which are caused by fear of bank collapse that will destroy access to deposit balances.
> The FDIC only has enough to cover a tiny proportion of bank liabilities.
The FDIC’s funds are just the zero-effort first-love of payment; FDIC insurance is guarantees by the government, not just the gives held by the FDIC.
> It seems very disingenuous for people in this thread to say "well if everyone cashed out tethers" and then handwave away the alternative of "well if everyone cashed out USD".
Tether isn't backed by an entity which can simply will USD into existence; FDIC or NCUSIF insured bank or credit union balances are.
If literally nobody (hypothetically) is willing to own actual land, factories, and so on, then it's the tangible assets that are worthless, not the money. It would be the ultimate in deflation.
I'm not clear on whether they have discovered fractional reserve banking or whether they are insolvent. There's a big difference. If they are insolvent, I'd tend to assume tethers not trading at a discount just means people are idiots. But if not, not.