Both are derivative do Both will be block probably
The problem is that Tether is either worth $1 (Current status quo), or $0 (When everyone loses faith in it.)
It will transition from one to the other at... Some point. And there will, by definition, be a lot of bagholders who have not managed to redeem it in time.
The rest of the ecosystem will not have a soft landing from that. Oh, sure, anyone who bought USDC will be fine, but all the non-pegged coins will be in for a very, very rough ride.
This continues until the reserves are depleted.
The most likely scenario is that Tether is _overall_ solvent, though not in liquid assets.
What would likely happen in case of a bank run is:
1) Tether will defend the peg and redeem at $1
2) Tether will freeze redeems because of limited liquidity
3) Tether will fill face huge pressure and regulatory threats
4) Some people will want to exit USDT immediately at a discounted price (say $0.5), while some others will buy discounted USDT hoping once Tether solves its liquidity issues or bankrupt they could get more than $0.5 per USDT.
TLDR: USDT will most likely not go to $0 in case of default. Most likely there will be speculation on Tether's illiquid assets value that could be sold back to pay creditors.
1. They defend the peg
2. Run out of money
3. Remaining tether is worth $0.
Now, probably they will not defend until exactly 0, and maybe they will have some illiquid assets that will be worth something, but I think $0.5 on a dollar is extremely ambitious. Kind of like FTX isn’t a liquidity issue, it’s a solvency issue.
I don't think solvency is really at stake for Tether. They have so much capital at this point that they are filthy rich just with treasuries returns. Of course that's just my opinion, you're free to disregard it.
The main risk IMHO is their greed in investing in illiquid assets.
> If they are insolvent then > 1. They defend the peg > 2. Run out of money > 3. Remaining tether is worth $0.
My (picky) point is that no, this does not happen, because a company becomes bankrupt and ceases operation before $0.
Even now, there are people actively buying FTX accounts at a discount, expecting to cash in once the liquidation settlement is over.
What makes you believe this?
How many billions are they short? What redemption rate would it take? Which catalyst?
At this point, the question should be: what makes you believe they are insolvent?
We don't really know this, and a lot of their assets seem to be things like "corporate paper", which may simply be IOUs from exchanges they've given Tethers to.
> At this point, the question should be: what makes you believe they are insolvent?
A history of lies about audits, for a start. Admissions that they weren't fully backed in court at various points in the past (73% was bandied around by their own people at some point). Plus if the 'corporate paper' situation is anything like described, in any sort of crunch situation it could prove to be worthless.
Yes, I should have said 66B in liabilities. We don't know how much they have backing these liabilities.
> A history of lies about audits, for a start ...
Indeed. So we're free to come up with our various estimates. None more correct than the other.
Doesn’t this seem like a massive, systemic threat in itself, that an audit-dodging, opaque institution underpins the ecosystem?
Even if it is all present and correct (for some definition of present and correct) shouldn’t we be highly suspicious purely because of this evasive behaviour?
It was. But it's increasingly less so. The market has hedged this risk somewhat, by decreasing its market share: https://www.theblock.co/data/decentralized-finance/stablecoi.... And will likely continue to do so.
Tether decreased the amount of corporate paper it was exposed to throughout 2022.
December 03, 2021: 44.24% of the reserves was corporate paper
September 30, 2022: 0.07% corporate paper
Over this time frame Tether's shareholder captial cushion (assets - liabilities) increased from $137,337,226 to $250,107,738
If you want to be accurate you can say most of their assets are US treasury bonds.
Such as?
>and the fact that even the crypto-friendly auditing companies are dropping crypto company clients left right and centre
This has to do with the auditing companies being risk adverse as regulatory pressure around crypto increases. It doesn't mean that the reports they made were fraudulent.
For years their website claimed that the company was regularly audited, when they hadn't (still haven't AFAICT) undergone a single audit.
> This has to do with the auditing companies being risk adverse as regulatory pressure around crypto increases.
In at least some cases I think it has more to do with concerns over how the reports they were producing were being used by their clients -
"Mazars Group said in a statement to CNBC that it had “paused its activity relating to the provision of Proof of Reserves Reports for entities in the cryptocurrency sector due to concerns regarding the way these reports are understood by the public.”
“They do not constitute either an assurance or an audit opinion on subject matter. Instead they report limited findings based on the agreed procedures performed on the subject matter at a historical point in time,”
https://www.cnbc.com/2022/12/16/mazars-suspends-all-work-wit...
Have you considered they may have audited it themselves? Just because there wasn't an audit published by an external auditer that doesn't mean no one has ever audited their accounts.
I would consider this every bit as bad. “We marked our own homework! And guess what? It was great!”
The whole concept is ludicrous.
Internal audits still have value as it means that someone can't steakily steal money from the reserves without them noticing.
Further, they paid $41 million to settle a case over their lies - https://fortune.com/2021/10/15/tether-crypto-stablecoin-fine...
I don't think it's a stretch at this point to say they have a history of, at the very least, being highly economical with the truth and misrepresenting their own level of transparency. And I do think your argument is unreasonable.
Take a look back to 2017 on the wayback machine -
"Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD."
"Our reserve holdings are published daily and subject to frequent professional audits."
We know that neither of those things was true.
The burden is absolutely on so-called "stable" coin issuers, exchanges, and other parties trying to sell crypto assets to prove that they are somehow the exceptional case of responsible grownups working within the ecosystem...b/c the "success stories" of circa 2019 are turning out to just be the folks who had the biggest scams running, and no one seems to be able to explain what's actually changed since then. (Hint: nothing! Nothing has changed, except that some of the rubes are becoming aware that they're the suckers left holding the bag, which makes actual cash somewhat thinner on the ground.)
Yes, sure, many of the exchanges are still running and money is moving around, so _someone_ is making a profit. But every time another domino falls the stans immediately challenge everyone to prove that _this particular_ actor is somehow insolvent, since obviously the rest of the ecosystem is sound...and in fact, the future of finance! Really!
It all stinks, just like it did a year ago, and five years before that.
To your numbers: they're made up, based on "value" of other crypto assets being shifted around, with no accounting standards, audits, or regulatory scrutiny to validate or back them.
The burden, perhaps. The question was about belief.
Surely the rest of your comment (rant?) cannot be in response to my comment.
Which seems to indicate that they signed an agreement with BDO Italia, "an independent subsidiary" of BDO. Not sure if that's significant in itself. Probably not.
Secondly, BDO are "evaluating" their ongoing relationship with crypto firms - https://www.wsj.com/livecoverage/stock-market-news-today-12-...
And third, well, it's not an audit, it's more of a "Reserve balances look OK to us on this date" report. It doesn't (for instance) take into account any other liabilities the company may have.
So I'd say this is (as another poster mentioned) better than nothing, which is what they used to give, but worse than an actual audit.
Their unwillingness to undergo an audit, combined with their constant lies on this subject.
This is something that literally every financial company on earth is capable of doing in an above-board fashion. That they haven't done so is deafening.
What do you think this means?
Tether is not an algorithmic stablecoin.
In practice if this is the case they will probably redeem the first 50%, and then run and hide with the remaining 20% USD they have.
But, my point to GP is that USDT redemption is offchain, and peg defense (for algorithmic stablecoins) or price discovery (for Tether) is onchain. So the market determines the onchain rate.
If it goes to 70c, for example, arbitrageurs will likely step in to pick up cheap USDT and take on the redemption risk. Of course if the market loses complete faith and no party is willing to take on the redemption risk (an unlikely scenario imo), the onchain rate could fall to zero.
Only if Tether is visibly doing redemptions. If they freeze redemptions then you'd be dumb to pay 70c for their magic beans. So there's a tight linkage between the onchain price and redemptions.
As soon as people realize the issue, they will trade USDT for USD. Tether will defend the peg, spending $30 Billion to hold it's value at 1 USDT for $1.
Thirty Billion later, the overall situation is 30 Billion USDT remaining, but the bank vaults are empty nothing left over to defend the peg.
At this point, USDT snaps to $0 very quickly.
Partially backed is a fraud. There is no universe in which those assets are distributed without massive haircuts, seizures and delays.