Will Tether Bring All The Cryptocurrencies Way Down?

Yves here. I have a simpler way of coming to a conclusion similar to the one Barkley Rosser reaches below on Tether. Tether is meant to solve one of the big problem with Bitcoin and other cryptocurrencies that Nassim Nicholas Taleb identified in his recent paper on Bitcoin, that unless they have a stable relationship to a real world currency used for commerce, they’ll never become a medium of exchange.

For those who have managed not to hear of Tether, let us turn the mike over to Wikipedia:

Tether is a controversial cryptocurrency with tokens issued by Tether Limited, which in turn is controlled by the owners of Bitfinex. Tether Limited formerly falsely claimed that each token was backed by one United States dollar, but on 14 March 2019 changed the backing to include loans to affiliate companies. The Bitfinex exchange was the subject of a lawsuit by the New York Attorney General of using Tether’s funds to cover up $850 million in funds missing since mid-2018. The investigation found that iFinex — the operator of Bitfinex and Tether — made false statements about the backing of the Tether and about the movement of hundreds of millions of dollars between the two companies to cover up the truth about massive losses by Bitfinex. According to the New York Attorney General, “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie”.

Tether is called a stablecoin because it was originally designed to always be worth $1.00, maintaining $1.00 in reserves for each tether issued. Nevertheless, Tether Limited states that owners of tethers have no contractual right, other legal claims, or guarantee that tethers will be redeemed or exchanged for dollars.[4] On 30 April 2019 Tether Limited’s lawyer claimed that each tether was backed by only $0.74 in cash and cash equivalents. In May 2021, Tether published a report showing that only 2.9% of Tether was backed by cash, with over 65% backed by commercial paper.

Tether Limited and the Tether cryptocurrency are controversial because of the company’s alleged role in manipulating the price of bitcoin,[14] an unclear relationship with the Bitfinex exchange, and the company’s failure to provide a promised audit showing adequate reserves backing the Tether token.

In other words, Tether tries to make itself a vehicle that can be used in normal commerce by maintaining a very hard currency peg to the dollar. History shows currency pegs don’t work, even the famed gold standard. Countries cheated all the time by changing the gold price of their currency. Countries that have tied their currency to the dollar have either had unhappy results, aka debt or currency crises or both, or like China, have had to loosen the peg (to simplify a long and complicated story, China had to allow the renminbi to appreciate via a mechanism informally described as a dirty float).

By Barkley Rosser, Professor of Economics at James Madison University in Harrisonburg, Virginia. Originally published at EconoSpeak

I do not know, but there is a fairly serious argument now out there that this could happen. It is made by Gennaro at hackermoon.com/tether-and-the-great-crypto-ice-age-115h329k , picked up on by Tyler Cowen on Marginal Revolution without comment. Among those Gennaro cites at least partly supporting his argument are Nassim N. Taleb.

So the argument is that bitcoin and most other major cryptocurrencies are now fundamentally based on stablecoins tied to the US dollar, with claims those stablecoins can be easily traded into dollars. According to Gennaro, and I do not know if he is right, the various non-stablecoin cryptocurrencies now use stablecoins to trade between each other at low costs, with these stable coins providing liquidity, but at the cost of a dangerous potential instability. If there is a rush on them, they have no ultimate backer, and a crash by them could drag all of the cryptocurrencies into an ultimate total crash into an effectively zero absorption barrier, with Taleb apparently providing some support for this possible scenario.

As it is, Tether is now the leading stablecoin, indeed the #3 cryptocurrency overall, behind Bitcoin and Ethereum. According to Gennaro, the central fact of crypto trading is that the most important ratio is that between bitcoin and tether, not bitcoin and the dollar, although the latter is the ultimate measure of value, the de facto “gold” of the cryptocurrency markets, even as bitcoin itself has been claimed to the “new gold,” and gold has definitely become quite boring.

Again, according to Gennaro, a major problem with Tether is that while on the one hand it has essentially centralized Bitcoin trading into itself, if not all crypto trading. But unlike the dollar, which has the Fed to back it up, Tether has nothing. It is owned by a semi-murky Hong Kong based entity, Bitfinext, which has already been in legal trouble in the state of New York for misrepresenting and hiding certain transactions and assets. Gennaro argues this shows that it has no backing, and that a run on it will make it unable to access actual US dollars, the world’s actual key currency, which could lead to an implosion dragging down the entire cryptocurrency market, given the nonexistence of any entity capable of coming to its rescue.

For those who want to find this particular tale somewhere between laughable and unlikely, while Bitcoin, Ethereum, and several other leading cryptocurrencies have suffered major declines recently, driven by such things as the Chinese government imposing serious restrictions on their mining and use, the one cryptocurrency that has gained in the last week has been, oh yes, Tether. But then pride goeth before a fall,. While I am going to stay out of forecasting anything in these markets, given how many important market manipulators are playing in them, regarding whom I have no idea what they will do, it does seem that the possible volatility and more deeply threatening threats in them has increased.

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  1. Chris Herbert

    Any bank in any monetary sovereign nation that agrees to convert a cryptocurrency into the fiat currency is undermining that nation’s sovereignty and should be convicted of a criminal act.

  2. Zamfir

    The Tether thing completely boggles my mind. It’s pretty much an open scam, and I cant understand why it hasn’t collapsed. Most bitcoin-related stuff feels scammy, but at least it comes with handwavy tales why it’s not a scam. I don’t believe the tales, but I can imagine why some else believes them. Tether is just ” you can trust us because we keep reserves except we don’t”

    It might collapse any day. But then again, it’s been around for years already, and the scam was hardly hidden before. For all I know, it will go the way of Amway. In 2065 the heirs of the Bitfinex fortune will be respected leaders of the business, education and mercenary communities.

  3. Tom Stone

    “And two to take him” comes to mind with a smile.
    I had a conversation with Andrew Kahr years ago about the various credit card programs he had pioneered before starting the bank now known as Providian.
    “I started out with the premise that Mencken was right and designed a program that would appeal to suckers,the stupid ones with good credit.
    I went as far as I dared and it worked.
    The next program I designed assumed that my targets were even stupider.
    And it REALLY worked.
    We made a killing.
    So I started the First Deposit Savings/National Banks and we are taking it to the limit”
    It was an interesting place to work.

  4. IMOR

    Wow, how ‘disruptive’ and ‘innovative’ and ‘futuristic’: a bunch of servers heating us all up further to prop up the U.S. dollar.
    Not at all someone’s finscam or anyone’s op. No way.

  5. kirk seidenbecker

    Pretty damn sad the extent to which young minds have been corrupted by crypto… just another sign of how much the parasite has infected the host…. understandable, tho, given the fairytale logic of mainstream neoclassical economics being taught at university… the donor class hire the best and brightest to deny there is such a thing as a free lunch….

    Go long MMT kids….

    1. Anders K

      Just one problem, how do the kids go “long MMT” ?

      Crypto claims to be accessible for the regular person, unlike “liquidity injections”, corporate aid for “necessary” companies etc.

      If the state can magic up money, why shouldn’t others do so? I mean, free money sounds too good to be true, but then you turn on the TV and see big companies getting bailed out by the public purse, with nary a whimper from our supposedly hard right, market uber alles High Priests.

      I do think that cryptocurrencies present an – unlikely – danger to “real” currencies, but mostly in showing how both can be conjured out of thin air by the ones controlling them.

      1. Yves Smith Post author

        They are not currencies. Did you miss that? They are not accepted in commerce. No product or service (except the lone example cited by Taleb) is denominated in any crypto. It’s not different than using baseball cards. You have to sell the baseball card to get real currency to make a purchase.

        1. Tigfx

          Nice Yves
          “Like baseball cards” I like that analogy. It is a specialized market, but I think it’s a giant one. In Alberta my children, my nieces and nephews, all their friends in their mid-20s have crypto accounts on their phone. They buy and sell stocks (9.30 to 4 PM and crypto 24/7). They’re not doing big amounts but it’s a fast volatile market and they’re still in it, they’re trying to get ahead. They are getting their careers on track buying homes and having children. I don’t see crypto disappearing.

          1. Yves Smith Post author

            I am old enough to recall people who ought to know better similarly declaring (in the mid 1980s) that Japanese real estate would never go down, that dot com companies needed only to deliver eyeballs, not cash flow, and US housing would never go down on a national basis. I specifically recall entire communities in the Inland Empire of California based solely on real estate speculation in the runup to the great financial crisis. They were too far from anywhere to have a legitimate economic base. Those communities shriveled to close to nothing and the real-estate dependent inhabitants saw their net worths shrink. They had to reinvent themselves.

            Now if any of these kids are smart enough to collect their winning and leave the casino, they will do well. But very few are any good at market timing, particularly since speculative bubbles are seductive.

      2. kirk seidenbecker

        The kids ‘go long MMT’ by taking the time to understand how a sovereign currency system functions which would enable them to realize the subsequent policy implications for their and their children’s futures; maybe inspire them to fight for greater control of their currency system.; constrict Wall Street, corporate and military welfare, meanwhile putting an end to social and public infrastructure austerity.

        Nonetheless, as Yves points out, cryptocurrency has a serious fungibility (exchangeability) problem.

  6. Susan the other

    I agree. Crypto is “deeply threatening” to our sovereign money system. It’s a silly intruder at best. This, above, sounds like some 4-step process to successful counterfeiting. Nuts. So one question, If crypto insinuates itself into the system like this, like classic money laundering really, does unlaundered crypto still qualify as an “asset?” Because it sounds like the very process (laundry) to make crypto useful as a medium of exchange actually eliminates its own (self-proclaimed) value altogether. (As Taleb’s frustrated libertarian learns) – It is proving itself to be a nothing burger here.

  7. drumlin woodchuckles

    Let us hope that this Tether does indeed sink to zero and take every cryptocurrency down to zero with it.
    And take to zero every “crypto-adjacent” investment and speculation as well. Let the people who contribute to carbon skyflooding for no public good whatever . . . . get what they deserve.

  8. Old Sarum

    Dog on a string (but tethered all the same):

    A bead of sweat came to my brow after using the British slang expression “dog on a string”. It just popped out after a woman described what I assumed to be her daughter’s “traveller” lifestyle in the UK. To get confirmation of the situation I said without thinking, “Dog on a string?” There was a dispairing nod, and I realized my faux pas.

    It really depends on the strength of the material, but to me “tether” is a very loosey-goosey term, compared to “bolted on”.

    The problem with asking yourself the question “what backs what”, starts you down the road of imponderables. and those imponderables are backed by powerful institutions intent on upholding the status quo (however much it seems to be changing).

    In the case of the Pound Sterling the crisis of two wars revealed the situation and the fragility of the tether and a lack of bolts. No longer maker-to-the-world, and eclipsed as a major military power, its backer was no longer the reference standard.

    A real crisis will reveal all.

    Pip pip!

  9. Eve

    As a kid, I took a summer job in a re-insurance firm. I went home on that first day thinking adults were crazy putting their faith in that system, backed by nothing but backing. Insurance policies for insurance policies? What could go wrong?

    The kids aren’t stupid. They’re on to you.

    1. paul

      It’s a long read, but written so well you are compelled to finsh it.
      The ruthless aggregation of the high and low, ML and sports, is an effective pathetic.

    2. paul

      Stevie Wonder had it:

      Very superstitious, writings on the wall,
      Very superstitious, ladders ’bout to fall,
      Thirteen-months-old baby broke the lookin’ glass
      Seven years of bad luck, the good things in your past

      When you believe in things that you don’t understand,
      Then you suffer,
      Superstition ain’t the way

      Very superstitious, wash your face and hands,
      Rid me of the problem, do all that you can,
      Keep me in a daydream, keep me goin’ strong,
      You don’t wanna save me, sad is my song

      When you believe in things that you don’t understand,
      Then you suffer,
      Superstition ain’t the way, yeah, yeah

      Very superstitious, nothin’ more to say,
      Very superstitious, the devil’s on his way,
      Thirteen-months-old baby broke the lookin’ glass,
      Seven years of bad luck, good things in your past

      When you believe in things that you don’t understand,
      Then you suffer, superstition ain’t the way, no, no, no

    1. Wellstone's Ghost

      Proof yet again that the best way to rob a bank is to own one.
      I hope they know who owned those bitcoin accounts. South Africa has some rough boys running around.

    2. Savita

      Africrypt. Well, you know what crypts are for! That article is kind of funny. It’s full of statements like ‘ and no one knows ‘ ‘ No one has an idea’ ‘ We are trying to get to the bottom of it, but because they’re gone, we can’t ‘ The fact it occurred in South Africa may, just maaaaay give a teeeeny weeeny idea of 1. how itwas able to happen 2. why nothing will eventuate. Genuinely though, I do not rejoice at the concept of people being the victims of theft. Losing their assets. It is never something to celebrate, given these are just a large collection of anonymous people. And, probably many South Africans. Lets be clear on that, we may feel queasy about cryptocurrency but lets not be glad when people get shafted.

  10. Bobbo

    So if I understand correctly: Tether is a privately-created substitute for a digital USD, which is only partly backed by USD, which means that it could bring down the entire system of digital assets. Does it follow a digital USD would render Tether unnecessary and obsolete, and arguably make the entire system of digital assets more secure and more robust?

    1. Yves Smith Post author

      Please explain what the point of a “digital dollar” is since the current payment system is several orders of magnitue faster and cheaper.

      The use case for crypto is not payments. It is speculation, crime, and making an ideological statement.

      1. Bobbo

        I thought it was received wisdom that it is only a matter of time before we see CBDCs, including a digital dollar. What is the point? I think the case for the digital Yuan was to make it possible to set an expiration date (to increase velocity) and to enable the PBOC to track and collect more data. I suppose the same purposes will also lurk behind the future digital dollar.

        1. Yves Smith Post author

          You have been straw manning and making unsubstantiated assertions. We already trashed one comment that violated our site Policies, for both straw manning and shifting the ground of argument.

          The onus is on you to provide evidence rather than handwave. This is yet another violation of our Policies. We blacklist based on whether commentors violate our rules of engagement. However, those who are losing arguments or are otherwise dug in have an unfortunate tendency to do that, and then blame having been moderated or banned on content, rather than the actual reason, their conduct.

      2. milesc

        I have my reservations about so-called stablecoins, and agree that e-money works just fine for your average Joe, but they can be incredibly useful. It is simply not possible to deliver USD as quickly or cheaply over existing payment rails. Tether, USDC and the like operate 24/7, with zero delay. They allow traders to take advantage of otherwise impossible to exploit arbitrage opportunities, for example. I can imagine an official digital dollar being enormously popular in a wholesale/capital markets context.

        1. Yves Smith Post author

          This is false. Making Shit Up is a violation of our site Policies.

          I was in 5 continents in eight weeks in 1997, including Croatia and Venezuela. I could get cash with my ATM card instantly, at very good FX rates. The existing payment system was and is vastly faster and cheaper by orders of magnitude when you accurately measure the full costs, and not just the remittance fees.

  11. catsick

    I think what tends to happen in equity bull markets is all the excess liquidity and temporary wealth needs to go some place so a lot of people will pile into collectables which then have a bubble of their own in parallel to the booming Stockmarket, then things all fall apart at the same time as well as a whole pile of hidden scams coming to light, crypto has been given a huge boost right at the top of the bull market with all these stimmie cheques going out to millenialls sat at home earning turbo unemployment cheques and wanting the dopamine hit of trading on their phones, I see it all as very similar to the dot com boom with its side kick of the beanie baby mania, really all these millennials are just collecting plush toys on their phones in their own special way, unfortunately for most will end up as a bunch of wasted time and money…

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