* Crypto exchanges have the problem of collecting fees in crypto, and wanting to make a profit in USD.
* Stablecoin operator receives commercial paper (IOUs) from businesses, usually crypto exchanges. Issues tokens in return. (Note that the Stablecoin issuers are connected directly to the biggest exchanges e.g. Bitfinex/Coinbase/Binance)
* Now the crypto exchange has a debt to the Stablecoin operator, some crypto profits, and some stablecoins.
* Crypto company trading desk does the following:
* Trade crypto (e.g. Bitcoin) for USD and take profit
* Trade stablecoins for crypto on any number of exchanges
So yes… there is something very wrong.
What is amazing is how many people are blind to it.
There's about 1,000,000 BTC in cold wallets of customers of stablecoins. They prove to the stablecoin issuer that they control the wallet (send two small transactions to some address somewhere). Then the issuer loans them the stablecoin and holds the paper against that debt, denominated in dollars. This provides a service to create liquidity out of BTC cold wallets, which is why it is popular to begin with.
Since the debt is dollar denominated that means if the stablecoin falls to $.50 then they have to pay back half the debt in real USD. So that creates upwards pressure to maintain the PEG. Downwards pressure is easy and just profit taking if it exceeds $1.00
Also explains why Tether printing stops once the outstanding number of Tethers is worth roughly 1,000,000 BTC and BTC pulls back. Once the BTC price falls much lower than that, you start to see redemptions and burn. Then when it rises near that point again you start to see more issuance.
This also answers the question of "who buys Tethers with USD?" Nobody does, it is all crypto debt.
And this all creates a positive feedback cycle driven by debt, backed by crypto. What could go wrong?
This is basically a giant distributed Ponzi scheme resembling wildcat banks of the early 1800s. Customer US dollars come into the market, USD goes out into the pockets of crypto insiders, and the crypto market remains propped up by the “value” of these stablecoins.
The only thing that keeps it going is that the stablecoin issuers (same people who are running the exchanges) have no incentive to collect the debt they are owed so everyone is happy (for now).
Crypto fans like to think they are innovating but all they’ve done is found a way to circumvent regulation and try a concept that was ended in 1863 by the national bank act.
https://en.m.wikipedia.org/wiki/Wildcat_banking
If you think this ends any other way than regulation and tears I’m not sure what to tell you.
If you sell early enough, you might get most of your money back because other people aren't paying attention, or have been similarly misled.
Do you know how much money depositors lost? $0.00
And I don’t mean only up to the FDIC insured amount. Even those with WaMu deposits well in excess of FDIC coverage didn’t lose a penny. And it wasn’t thanks to the complex system of placing overnight deposits at various institutions for pass-through coverage in excess of the FDIC amount.
Because do you know how much money the FDIC insurance fund lost paying out claims to WaMu depositors? $0.00
Do you know who did lose a lot of money? WaMu investors and shareholders.
That is not even remotely close to how a stablecoin or crypto “bank run” would play out. Our banking system has built-in safety nets that work. Crypto safety nets don’t even exist.
The real solution is DAI, right?
You can. It's called a 'bank' and they're heavily regulated.
Instead, what crypto has are wildcat banks. You've never heard that term because when they existed, 150 years ago, "[b]ank closures and outright scams regularly occurred, leaving people with worthless money."[1] Sound familiar?
Not financial advice.
Crypto/defi/etc is high risk and requires you to DYOR. If that makes you uncomfortable, this space may not be a good fit for you.
Because you've promised "investors," or at least made lots of strong statements that led them to believe, that you're letting cash sit in an account?
When I invest in a fund, and it says that it does X, but then secretly does Y because they believe it's obviously better, that's something between totally untrustworthy and outright fraud.
Investing in high quality short term commercial paper or treasuries is essentially the same or less risk vs. letting $XX billion sit in some bank account.
In accounting, these instruments are actually regarded the same as cash and called “cash equivalents”.
Unfortunately, a significant part of this risk free, high quality commercial paper was issued by Lehman. And that risk free, high quality commercial paper turned out to be worthless, causing the oldest money market fund to fail and forcing it to liquidate, at well below $1.
If they take the money and invest it in ‘good’ companies, that is too much risk to the underlying assets.
Though I’m American and could see foreigners not thinking US bonds were safe enough.
Part of Coinbase's implicit strategy is to become the "too big to fail" of the crypto space. And if its collapse would threaten to destabilize the broader financial system, the US gov absolutely would bail it out.
We've not reached that point yet (and hopefully never will), but it's important to understand the play here.
How do you do this when the parties involved are not transparent about their holdings and have a history of misleading investors? Go off of rumours? Given their history, why would I believe that USDC is actually holding short term commercial paper and not higher risk, higher return equities?
It is tricky situation. Consumers want assurances, protection but the crypto true believers abhor regulation and disclosure. Trust is difficult in this space and right now many people are speculators consumed by FOMO vs. rational individuals/institutions. No one knows how this will all play out.