Tether Armageddon – Simon Paige
“There is extreme cause for concern to the holders of Tether that they could lose access to funds overnight (if assets are seized by regulators).” Edan Yago, Founder, Cement DAO
The great irony of Tether is that while it is supposed to be a safe haven from crypto-currency volatility, holding Tether could to be the greatest risk a crypto-trader ever takes. Tether may even threaten the viability of the entire crypto-ecosystem. Looking for risk? Buy Tether.
If you trade Tether as least get to know what you are dealing with:
· Not 100% backed. “back in early May, an affidavit from the company’s lawyer admitted that only 74 percent of Tether in circulation is actually backed by cash reserves.”
· Leadership dishonest — see above
· Regulator risk of asset seizure: “Back in April this year, the New York State Attorney General (NYSAG) was building a case to sue Tether and its partner exchange Bitfinex. The case came after investigators discovered the companies tried to cover up the loss of $850 million from one its banking partners”
· Highly concentrated ownership: “only about 300 entities control around 80% of Tether”
· Bankers are a little known bank, Deltec Bank & Trust Limited, based in the Bahamas.
As Edan Yugo points out in his recent interview on BlockTV if the New York State Attorney General’s office decides to seize Tether’s bank assets the value of the coin could fall to zero. Already $800 million of Tether funds have been confiscated in 3 different countries on behalf of what appears to be US authorities. Such actions by US regulators, suggests Yugo, are not uncommon. In 2011 funds from online poker companies were seized. Eight years later people have still not had their money back.
Which carries most risk, Tether or Bitcoin? When you trade where is your risk hotspot, in the currency during the trade or in stablecoin when you exit? While Bitcoin is decentralised, Tether is fully centralised with one company controlling all the coins.
Design Error
The main difference between Tether and Bitcoin is that the value of Bitcoin is non-collateralised — people give value to the coins themselves. Tether is (supposed to be) collateralised, with one US dollar for every Tether issued. This simple design feature lies at the heart of the risk for Tether users.
Because Tether is collateralised Tether users have to:
· Trust the leadership of the Tether company without whom they cannot redeem their US dollars.
· Trust Tether’s bankers for the same reason
· Trust regulators will not seize Tether’s assets
Compare this with Bitcoin where users:
· Trust no one — the currency’s value is held by owners on a decentralised blockchain
· Require no collateral that regulators can seize.
· Depend on no banks or other fiat intermediaries for the coin’s value.
To put this another way Bitcoin has no counterparty and little regulatory risk, while Tether, by its very design has heaps.
We should probably also mention the systemic risk of the fiat financial system having another 2008 crisis. Tether and other fiat-collateralised stablecoins are simply fiat currency in a crypto wrapper. As such they can fail in the same way that Lehman Brothers did in 2008 simply by being part of the fiat system. Bitcoin on the other hand has no dependencies that link it to the fiat system and is therefore the perfect hedge against systemic fiat collapse.
Saver Token — Stablecoin Built Like Bitcoin
If you want a stablecoin to reduce, not increase, your trading risk, there is a Tether-alternative. Called Saver Token, the Waves based asset is designed like Bitcoin where the value of the token is held on the blockchain by token holders. Savers are also not pegged to a fiat currency, all of which are depreciating assets due to inflation. Instead the token tracks the value of the US Consumer Price Index (CPI-U). This makes the token a long term store of value and also shares Bitcoin’s independence from the systemic risks of the fiat system. A reserve system keeps liquidity of the token high.
Maintaining a Peg
Another Tether irony is that the stablecoin has demonstrated the effectiveness of the Saver Token approach. According to Coindesk, millions of dollars are crossing the Russian-Chinese border each day in the form of Tether. The Chinese importers of goods into Russia do no care if Tether is collateralised or not:
“’Nobody actually cares if tether is backed or not,’ says Konstantin Plavnik, chief operating officer of Moscow-based crypto derivatives exchange Xena. Confidence in Tether’s solvency relies on long-time habit and convenience: this market needs Tether, so Tether is trusted.”
As Mr Plavnik rightly points out, Tether’s peg to the US dollar is not being maintained by its collateral in Deltec Bank. Instead its value is held to the dollar by the need and expectation of Tether users. The stability of gold for thousands of years is the classic example of people maintaining a peg. Tether is the modern demonstration of the same ability — an ability built into Saver Token.
Wake up and De-risk
One of the most interesting features of the crypto-currency phenomenon is the way it is waking people up to the fact that people, and only people create monetary value. Tether’s role in this has been to highlight the risks involved when people do NOT create the value directly as they do with Bitcoin or Saver Token but rely instead on collateral. Does this awareness need to be learnt the hard way through a catastrophic loss of funds? That’s a choice every crypto-investor has to make. Bitcoin, and now Saver Token, show that as people realise they create value, they can also de-risk.
Published at Thu, 15 Aug 2019 03:16:53 +0000
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