Untethered
March 15, 2019 8:00 AM   Subscribe

When cryptocurrency prices are quoted, the prices are mostly based on trading in USDT. Not USD - the US dollar - but the cryptocurrency Tether, which claimed in the past to be backed 1:1 by U.S. dollars. Its importance in cryptocurrency trading has made it a systemic risk in that space. Tether is no longer making the claim that they have one dollar in the bank for ever USDT in circulation; now, they admit, some of their reserves consist of loans to affiliated parties.
posted by clawsoon (36 comments total) 6 users marked this as a favorite
 
So cryptocurrency is basically a scam.
posted by blob at 8:17 AM on March 15 [4 favorites]


It's turtles fraud all the way down
posted by nubs at 8:18 AM on March 15 [6 favorites]


Anyone who tells you that cryptocurrency isn't a scam has some of it that they'd like to sell you.
posted by delfin at 8:21 AM on March 15 [16 favorites]


People have been pointing out that Tether is a scam for several years now and it hasn't yet blown up; maybe it will now.

"Loans made by Tether to third parties, which may include affiliated entities" is absolutely hilarious.
posted by vogon_poet at 8:22 AM on March 15 [7 favorites]


Stablecoins make no sense. They have all the problems of cryptocurrencies and none of the safety of real money.
posted by bhnyc at 8:25 AM on March 15 [8 favorites]


It's astonishing to me that this slowly unfolding scam is unfolding so slowly.
posted by Nelson at 8:28 AM on March 15 [28 favorites]


It's astonishing to me that this slowly unfolding scam is unfolding so slowly.

Takes a while to decrypt the blockchain
posted by nubs at 8:29 AM on March 15 [14 favorites]


Seems like a spectacular idea.
posted by gryftir at 8:37 AM on March 15 [1 favorite]


I feel like the reason this is taking so long to unfold is that 75% of people buying cryptocurrencies don't understand the scam, and the other 25% know all about it and are hoping to maximize their cash out of the scam before it falls apart.
posted by tocts at 8:40 AM on March 15 [11 favorites]


A fool and his money are soon untethered.
posted by Catblack at 8:48 AM on March 15 [18 favorites]


It's astonishing to me that this slowly unfolding scam is unfolding so slowly.

The market can stat irrational longer than you can stay solvent.
posted by VTX at 8:51 AM on March 15 [1 favorite]


It's all fun and games until pension funds start investing.
posted by RobotVoodooPower at 8:51 AM on March 15 [5 favorites]


Joking aside, I think the scam hasn't fallen apart yet because it's a bit more sophisticated than "take all the money and run" or a garden variety Ponzi scheme that blows up under the inevitable weight of exponential paybacks.

From what I've read, Tether is mostly used to manipulate the value of Bitcoin itself. If BTC:USD goes down the Tether folks swoop in and buy a bunch of BTC with their not-quite-USD, raising the price again. If you know that currency manipulation is going to happen and can make a side bet you can make a lot of money. And carry on doing that for potentially infinite time, so long as BTC doesn't drop so far you can't prop it up anymore for the short duration of your temporary exposure during a trade.
posted by Nelson at 8:52 AM on March 15 [7 favorites]


RobotVoodooPower: It's all fun and games until pension funds start investing.
it does seem like a natural fit for universities to be more involved in crypto given how many millennials have embraced crypto.
I... I...

no evens. Can't even.
posted by clawsoon at 8:55 AM on March 15 [8 favorites]


I just always think of Milo Minderbinder's various scams in Catch-22, culminating in buying all the Egyptian cotton.
posted by aspersioncast at 9:02 AM on March 15 [9 favorites]


The joke about Dunning-Krugerrands is evergreen, I guess. These guys don't seem to know enough about banking to even know how badly they're running their bank.

The fate of the Reserve Primary Fund, linked in the article, is worth reading up on. It's basically a fund that tried to do the same thing—get some extra juice by investing deposits in shaky loans—but in the traditional, regulated banking world, and also run by not-stupid people (I mean, you may not think much of Credit Crunch-era Wall Streeters, but they were not, by and large, stupid; mendacious, maybe; greedy, certainly).

The Reserve Primary Fund was a "money market" fund which held, in addition to traditional government bonds and stuff (which is what most people tend to assume is in their money market fund, if indeed they think of it it as being distinct from cash at all), a shitload of commercial paper. Including, most regrettably, $785 million in Lehman Brothers short-term paper. (This is the part where you should probably be wincing, because, yeah. That Lehman Brothers.) When Lehman went (deservedly) tits-up, that paper suddenly became worthless, and the net assets of the Primary Fund fell below its liabilities to investors; it "broke the buck". Unlike in a couple of other instances, Uncle Sam declined to bail out Reserve Primary, and... sucked to be you, if you had money parked there. (Not that bad, by cryptocurrency standards; Reserve Primary eventually paid out 99.1 cents on the dollar when it liquidated. Some people had to wait until 2014, though. Hope that wasn't your kids' college fund.)

So it's kinda hilarious that these titans of the cryptocurrency industry are basically walking down the same garden path. Except they're not buying Lehman Brothers paper (and Reserve Primary only had < $780M out of $64.8B total assets in Lehman paper—it doesn't take much poison to make you really sick!); Tether is potentially buying crypto-backed stuff that we know are basically not worth wiping your ass with. (If they were buying traditional safe-bet bonds, they wouldn't need to be so sketchy about what they're holding.) And ironically, crypto-backed assets are exactly the sort of exposure that people are presumably buying Tether to avoid! (In fairness, there were probably people in 2008 who bought Reserve Primary as a way of getting their assets away from toxic mortgage debt—lol oops.)

And if/when Tether breaks the buck, I have zero confidence that they'll be able to wind down operations with anything like the gracefulness of five years of grueling litigation, like Reserve Primary. I fully expect them to take the more traditional cryptocurrency route, and disappear in the middle of the night, perhaps faking their own deaths and retiring to somewhere in Asia with lax extradition laws. As one does.
posted by Kadin2048 at 9:07 AM on March 15 [24 favorites]


Ah. I get it now. It wasn't that fiat currencies were corrupt that supposedly made crypto a better idea, it was that fiat currencies weren't corrupt enough.
posted by Thorzdad at 9:13 AM on March 15 [20 favorites]


The thing I find so incredible about cryptocurrency is that it is often championed by the very same people who criticize the US dollar as “fiat currency” because there’s no gold backing it up anymore.

The cognitive dissonance of people who reject the US dollar because there is no physical gold sitting in a bank somewhere for each physical paper dollar, while embracing Bitcoin, which has no physical existence whatsoever, and is nominally “backed” by another virtual cryptocurrency, which itself was nominally “backed” by US dollars — now not even that appears to be the case — is astounding.


On preview: nthing Thorzdad.
posted by darkstar at 9:16 AM on March 15 [19 favorites]


I was idly browsing back through older cryptocurrency threads on Metafilter, and was struck by this comment by The Whelk: "What happens when Bitcoin fails and the people most invested in it tend to be attracted to fringe ideologies?"

Somehow it wasn't surprising to learn that the New Zealand shooter had made money on the BitConnect scam.
posted by clawsoon at 9:27 AM on March 15 [1 favorite]


The joke about Dunning-Krugerrands is evergreen, I guess. These guys don't seem to know enough about banking to even know how badly they're running their bank.

You have far more faith in these people than I do to that this was done out of ignorance and not malice. The people running Tether know exactly what they're doing: bilking suckers for everything they're worth.

At this point involvement with cryptocurrency in any capacity should be prima facie evidence of fraud that an accused must rebut at trial.
posted by Sangermaine at 10:04 AM on March 15 [2 favorites]


RobotVoodooPower: It's all fun and games until pension funds start investing.

And let's not forget the RIDICULOUS carbon footprint (previously), which might include buying a small coal-fired power plant in Wyoming to run a bitcoin mine. At least it's supporting a new 36 megawatt Moroccan wind farm that doesn't have transmission lines, but does have internet access. (Ars Technica x 2)

But if you untether (sorry) blockchain from bitcoin, industries are still looking for ways to use the underlying technology: Big Data conference highlights rail industry’s embrace of analytics, blockchain, AI (Progressive Railroading).
posted by filthy light thief at 10:07 AM on March 15 [4 favorites]


(Just for the record, money market funds totally hold commercial paper. "Commercial paper" is not categorically "shaky loans," it's very-short-term unsecured loans issued either by a corporation or a conduit for a securitization, used for cash flow management or bridge funding. If you work for a big company, your paycheck may well get paid from the proceeds of commercial paper. If you think it's a bad idea to be owning CP, you better check your money-market fund's prospectus carefully.)
posted by praemunire at 10:07 AM on March 15 [1 favorite]


The cognitive dissonance of people who reject the US dollar because there is no physical gold sitting in a bank somewhere for each physical paper dollar, while embracing Bitcoin, which has no physical existence whatsoever, and is nominally “backed” by another virtual cryptocurrency, which itself was nominally “backed” by US dollars — now not even that appears to be the case — is astounding.

Bitcoin is supposed to be "backed" by the artificial algorithmic difficulty of "mining" Bitcoin, no? You could say it's still ironic that goldbug-types are so into something that is "rare" but not "real," but I'm pretty sure the artificial scarcity element was designed to appeal to such people - a lot of early adoption was definitely driven by the idea that it just might make you rich one day, which has meanwhile worked against its usefulness as an actual medium of exchange.

The Tether sort of stuff seems like a downward spiral of shadiness - reputable financial institutions don't want to deal in fly-by-night Internet coins, so some startup comes along with a scam solution. Then everyone eventually figures out its a scam and now reputable financial institutions really don't want to be part of it.
posted by atoxyl at 10:41 AM on March 15 [3 favorites]


Yeah, I wasn't implying that there's anything inherently wrong with commercial paper as an investment vehicle; historically it's been pretty safe... but periodically it does go bad. Like once a generation or so, seemingly; the big one before Lehman was Penn Central, and it also reverberated around the entire system. But the default rate on short-term commercial paper is like 3%-ish, historically. Not bad. Certainly not cryptocurrency bad!

My only real criticism is I think there's a disconnect in the minds of many retail investors between what they believe their "money market" account is invested in, and what it actually is. (TBH I am not a big fan of the term "money market" in general, but it's hard to avoid. Ask most people what a "money market account" is, and if they don't just make an analogy to a high-interest savings account or certificate of deposit, they'll probably say something about government bonds. I think the marketed name of a product should be more reflective of what it is, but that's just me.)

Anyway, if you are looking to protect the sort of nest-egg money where you'd be looking for a high-floor window to jump out of if it suddenly disappeared, IMO what you want is called a "savings account", which comes from a bank with those fancy FDIC Insured signs near the teller windows. (Or a credit union with the NCUA signs, those are fine too.) MM funds are more suited for money that's important, but where it wouldn't literally destroy you as a person if something happened to it, or if it became tied up for some length of time (e.g. investors in Reserve Primary had to wait up to 5-6 years in some cases, although I think they paid out the smaller investors earlier).

Crypto is appropriate for the investor who has more money than sense. And for those folks, I have an exciting new opportunity, which involves simply Venmoing me your money. It's the environmentally responsible choice to crypto investing—we cut out the middleman and pass the savings on to me!
posted by Kadin2048 at 10:43 AM on March 15 [3 favorites]


Is Tether telling the truth when it says that each of its digital coins is backed by one U.S. dollar?

I mean, even if it is true, holding a currency peg is easier said than done, and when it's not longer possible to keep the peg, or you have to widen the band, disaster ensues. Witness the Thai baht in 1997, the Russian ruble in 1998, or the Mexican peso in 1995.

Anyway, if you are looking to protect the sort of nest-egg money where you'd be looking for a high-floor window to jump out of if it suddenly disappeared, IMO what you want is called a "savings account", which comes from a bank with those fancy FDIC Insured signs near the teller windows.

Obligatory Wade Gustafson:

"What the heck were you thinkin'? If I'm only gettin' bank interest I want want complete security. Heck, FDIC. I don't see nothin' like that here."
posted by mandolin conspiracy at 11:06 AM on March 15 [2 favorites]


Stablecoins, as in the Augean Stables.
posted by acb at 11:31 AM on March 15 [6 favorites]


Bitcoin is supposed to be "backed" by the artificial algorithmic difficulty of "mining" Bitcoin, no?

That's not backing. "Backing" is having something of value you can reliably exchange for the currency.
posted by praemunire at 12:51 PM on March 15 [3 favorites]


Cryptocurrency continues to speedrun through all of monetary history and all of the solved problems within it.
posted by odinsdream at 1:03 PM on March 15 [16 favorites]


That's not backing. "Backing" is having something of value you can reliably exchange for the currency.

Fair enough (though there's a reason I used quotation marks) but my point was that the idea is that the constraints on the "production" of Bitcoin (and the real energy cost) make it in itself a precious commodity, while at the same time the magic of the Internet allows it to be exchanged directly. As far as I know in reality the vision of "Bitcoin as (maybe) gold" and the vision of "Bitcoin as convenient electronic payment method" have coexisted at best uneasily since day one.

A defense of Bitcoin this is not.
posted by atoxyl at 1:28 PM on March 15 [2 favorites]


And let's not forget the RIDICULOUS carbon footprint

i propose a new cryptocoin where, instead of doing a ton of useless math to mine coins, the proof of work for each block is sequestering a ton of carbon dioxide
posted by murphy slaw at 1:35 PM on March 15 [17 favorites]


criticize the US dollar as “fiat currency” because there’s no gold backing it up anymore

Aren't fiat currencies backed by the future economic growth of the issuing country? If the "market" loses faith in that growth they devalue the currency (relative to others) to compensate.

Bitcoin is supposed to be "backed" by the artificial algorithmic difficulty of "mining" Bitcoin, no?

There's no inherent value in the difficulty of creation, though. The value seems to be based entirely on the existence of a "bigger sucker" who's willing to buy it from you.
posted by rocket88 at 2:00 PM on March 15 [1 favorite]


> i propose a new cryptocoin where, instead of doing a ton of useless math to mine coins, the proof of work for each block is sequestering a ton of carbon dioxide

Stupid rules-lawyer loophole: you didn't say I had to be a net sequesterer, so I circumvent your well-intentioned proposal by hooking up diesel engines to power my carbon capture plant and emitting more CO2 than I capture and sequester.

¯\_(ツ)_/¯
posted by RedOrGreen at 2:58 PM on March 15 [3 favorites]


Really though what kind of fucking idiots think you can give a business a dollar and they pinky promise to keep that dollar and also provide you ANYTHING ABOVE THAT IN VALUE oh my god nothing about this makes sense and you don't even need a cocktail napkin sketch to show it's absurd.
posted by odinsdream at 4:52 PM on March 15


The value seems to be based entirely on the existence of a "bigger sucker" who's willing to buy it from you.

Some kind of greater fool?
posted by axiom at 9:41 PM on March 15


Tether is potentially buying crypto-backed stuff that we know are basically not worth wiping your ass with

Ooo, it tingles
posted by flabdablet at 6:05 AM on March 16


Floating back to the money market derail I was unaware till 6 months ago that some genius had decided that banks should be able to offer money market accounts. The way I found this out was the usual beery argument about personal finance when one of my companions asserted that the Money Markets were insured but said there was no point because they paid a fraction of a percent in interest. I was completely confused arguing about Prime vs Government vs Treasury, breaking the buck, the money market guarantees circa financial crisis etc. It was a surreal argument finally resolved by the Iphone. My point is don't use the words Money Market Account and Money Market Fund interchangeably or you will get into arguments the pitch of which gets people looking at you apprehensively.
posted by Pembquist at 11:28 AM on March 17


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