Tethers are supposed to be backed by $1 in assets. You're complaining that dollars are created out of nothing - they're not, of course, but even if they were: When Tether holds less than $1 of backing assets for each $1 of USDT in circulation it's worth strictly less than the $1 you're deriding. It is this gap we're talking about. So your comment isn't just wrong, it's completely irrelevant and a distraction from a real problem.
Dollars enter circulation when they're borrowed. They leave circulation when the loan is repaid. The value of a dollar is derived from the obligation to repay the debt that created that dollar, and the legal system which enforces these contracts. Banks undergo rigorous audits so we know for a fact how this works and that this works.
Banks are backed by the FDIC which in turn is backed by the Fed, you cannot have a bank run anymore. It's not possible. As such fractional reserve isn't a meaningful risk to depositors.
Tether has no lender of last resort. $.80 of backing reserves for $1 of USDT doesn't mean each person gets $0.80. It means the first 80 people get $1, the last 20 people get $0. Tether has also never been audited.
> you cannot have a bank run anymore. It's not possible. As such fractional reserve isn't a meaningful risk to depositors.
It's not possible for the "average person" to lose bank deposits. But if a cryptocurrency company is storing much more than FDIC limits in a single bank(because few banks are willing to deal with them), you could easily have a run on that bank.
So even having $1 of USD backing reserves for $1 of USDT, there could still be withdrawal limits, halts, etc. because the underlying bank lent the deposits out.
It needs to be paper cash in a safe to really protect against mass-withdrawals, and even then getting it "into the system" when people want it back could take a few days and lead to temporary halts.
> Banks are backed by the FDIC which in turn is backed by the Fed, you cannot have a bank run anymore. It's not possible.
Yes, it is possible. FDIC doesn't insure all deposits. Typically you're capped at X thousands across all your accounts. I'm not sure what the current value of X is, 250?
That said, a bank run is improbable. Also, be careful with cash holdings at investment institutions. Those are typically not FDIC ensured, especially if your cash is held in a money market account.
> Yes, it is possible. FDIC doesn't insure all deposits. Typically you're capped at X thousands across all your accounts. I'm not sure what the current value of X is, 250?
This is not correct. The FDIC is very concise with their commitments.
> A: Yes. The FDIC insures deposits according to the ownership category in which the funds are insured and how the accounts are titled. The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category.
Yeah, the UK had a bank run (Northern Rock) during the financial crisis in 2007. Once confidence was lost, some of the run was people with more money than our insurance limit in there, the rest ordinary small depositors who didn't feel like trusting an untested insurance mechanism when they could have banknotes.
That run was stopped by the government guaranteeing all assets and nationalising the Rock. That's not likely to happen with crypto.
Are you really trying to defend Tether by saying they are no different than the banks and that they are applying the same tactics from the fiat-system?
By your own standard, if the existing system is so broken and morally corrupt, why do you think it is right to defend Tether?
Tether started with the promise they were fully 1:1 backed with USD. They broke this promise. Later they came up with "collaterized with a basket of assets", which was also a lie and they required re-capitalization [0]
How long are you going to keep lying to yourself and trying to defend a company that is run by criminals?
No, this is not a Taco Bell. This is HackerNews, and while it may not be exactly a graduate-level economics classroom, we do try to have serious discussions here. You are not adding to that in any way.
If you think that something someone says is wrong, then address it (and/or downvote). If you think that something someone says is breaking the rules, flag it.
Don't mock the very idea of meaningful discussion just because you don't like what someone trying to be sincere says.
> Right, because the banking system can always create dollars out of nothing to satisfy any outstanding liabilities.
Can they though? Don't they create new liablities with this? Effectively ending in "finance debt with more debt" scheme that has eventually got to collapse?
It’s a category error to confuse household liabilities with sovereign liabilities. So long as a sovereign currency issuer retains sovereignty it can expand its balance sheet freely. And yes through gross mismanagement it could provoke a revolution and thus lose sovereignty.
No one's being told otherwise with banks though. The current backup plan for 19th-century-style fiat bank runs is central bank insurance and money printing, not a rather bold claim that the banks are holding on to tens of billion of dollars in cash and not doing anything with it.
> The current backup plan for 19th-century-style fiat bank runs is central bank insurance and money printing...
It's the FDIC. The FDIC was created in the wake of the Great Depression to make sure bank runs stopped. And in the last ~100 years since it was created they've succeeded. [1]
Banks pay into the fund, which is used to make depositors whole in the event of insolvency. If the fund is exhausted, the FDIC also has a line of credit with the Fed. They have $125B of assets give or take, and a $100B line of credit.
That said, we haven't drawn on the fund yet, AFAIK. Even in 2008, when WaMu collapsed, the OTS took ownership of WaMu Bank and sold it to JPMorgan. [2]
There's more than the FDIC. The government has shown over and over that it will bailout and/or nationalize financial institutions that could bring the entire system down (such as AIG). I'm not saying this system is perfect, but it's a LOT more robust and time tested than any cryptocurrency we have today.
I was being general because there are more countries in the world than the US, but this mechanism is the norm in most of the (US-aligned at least) world.
