Can you explain this 'common sense'? I was under the impression that Tether was in the business of taking USD (with the promise of returning it) and earning interest on that USD without paying any interest on it. If that's true, it sounds like a dream business to me
Anyone who's been paying attention knows that Tether is an opaque money-laundering scam, and it's only a matter of time before it totally unravels. The only reason Tether is making noises about cooperating with the US government is because they're being told in no uncertain terms that their continued near-term existence depends on it. Check back in a year.
Isn't that the case for every business operating in the US anyway? If they don't cooperate with OFAC, they will find themselves in deep doodoo very fast. Has nothing to do with being scam or not scam, it's the law and compliance is not optional.
The common sense is that they would make a lot more money by doing fractional reserve (leaving them open to a bank run collapse) and there is nothing really to stop them from doing that.
As with most common sense, that’s completely wrong. Deceptively operating at a fractional reserve would eventually end with everyone involved losing everything and spending large portions of their remaining lives in prison.
Except we know of occasions they printed tether in return for collateral promises, rather than actually for cash. Not to mention filling a hole with Bitfinex stock when one of their processors got raided.
Now, it's just a question of degree: they're so profitable they can recover from being fractional rapidly. OTOH, why mess with a working formula?
Yes, the NY investigation was all about this: they patched up the loss and quietly changed their terms to being backed by cash or equivalents.
And they later detailed the $1bn Tether printed for Celcius in return for collateral (once Celcius collapsed and they claimed it was fully repaid).
Understand: for modern banks this kind of fractional behaviour is considered normal. It's only from the weird Bitcoin perspective that full reserve would be a requirement.
This is pretty hilarious coming from someone defending a company that refuses to produce a legitimate audit. (no, an "attestation" is not an audit)
If all they're doing is sitting on a giant big pile of cash and treasury bonds, it should be absolutely trivial to provide proof: here's where those assets are deposited.
If you can’t see the value in an attestation, you’re not familiar with the topic.
And I’m not “defending” anything other than the basic idea that when one has not proven something, one cannot claim it as true. Nobody has been able to prove Tether is a scam, so it isn’t.
You have to look at the system as a whole. They run Bitfinex, a centralized exchange. They can just change balances in a database, like FTX. There’s no need for fractional reserve.
Tether is simply shadow banking and brings liquidity into Bitfinex. It’s very simple:
1. Export finished goods from China for dollars.
2. Import inputs for step 1 from places like Turkey, Ukraine, and others and pay inflated invoices with dollars from step 1.
3. Receive Tether out-of-band for step 2.
4. Swap Tether for dollars on Bitfinex.
5. Buy property in Western countries in the names of your children who have US, Canadian, and UK passports.
Tether makes money from interest on the funds that they do actually have. Maximizing the amount of money that they hold would actually increase the amount of profit they make. They have no incentive (and a pretty strong disincentive) to be insolvent.
That's what business they say they're in, but in reality they do things like (A) get nearly a billion dollars seized by the US for money laundering, (B) invest in risky Chinese corporate bonds, and (C) issue USDT loans backed by volatile crypto. They're usually solvent but they have been insolvent at various points in their history.
> I was under the impression that Tether was in the business of taking USD (with the promise of returning it) and earning interest on that USD...
To be fair there's a HN unicorn doing just that: Coinbase. They created a joint venture with Circle and are backing $25 billion USDC by US short term treasuries, minting a cool 1.25 billion yearly in interests.
And contrarily to tether, Coinbase does have the actual USDs / short term US treasuries backing the USDC emitted (big names banks have published the list and individual numbers of all the US treasuries they're holding for Coinbase and during the SVB fiasco Coinbase was shown to have 3.3 bn at SVB or something like that).
