Plastic Surgeons Are the Best Bankers.
The objective reasons for Tether’s opaque reserve reporting.
Digital tokens conjured by a child actor from the The Mighty Ducks, run by an ex-plastic surgeon from Italy, banked in the Bahamas by a bank owned by the co-creator of Inspector Gadget.
Tether, one of the most gratifying subjects of financial journalism, has been blessed by many good lines like this, written by FT, Bloomberg and many other reporters on a quest to untangle its bizzare past.
The central question of all these articles? Why has there not been a bank run yet? How do people send hundreds of millions of dollars every day to the Inspector Gadget banker to mint them Tethers to trade without knowing where their dollars go. Why have they not, on so many occasions of doubt (from court cases to fines by CFTC, all regarding Tether’s reserves) rushed to redeem their dollars all at once?
Bizzare as it is, Tether continues to stand. Not even the dramatic demise of Terra-Luna at the moment of peak distrust in anything-crypto-representing-real-money, could bring Tether down. So far, at least. And yes, this article might age very badly, but let’s go:
Tether as you will know is a depositary stablecoin, meaning it guarantees that for every $1 of Tether, it holds a $1 somewhere in safe and liquid form. The problem is, where. No one really knows.
Tether’s secretiveness, its unwillingness to disclose its reserves on a granular level has brought the company trouble, entertaining publicity and million dollar fines.
So, like, why? OK, there are some explanations.
1.
Some argue that Tether is a bad bank. Because, if you think about it, that is what Tether is, a bank. It takes in deposits that it should keep safe and mints tokens.
Unlike bank, it does not pay any interest to its depositors, and also unlike bank, its capital requirements are virtually none (0.2%). It does not want to show what it is doing with the reserves, really, because it uses them to earn interest on risky stuff, which is pure profit for Tether, i.e. the ex-plastic surgeon and his crew.
2.
The other reason for Tether’s secretiveness is the not-so-obvious fact (unless you have been a crypto founder) that when you set up a crypto startup, you get turned away several times by several banks in several countries, simply trying to open a bank account.
It is not easy for Tether to put those billions somewhere safe and normal. Most normal counterparties won’t do business with it. Bank accounts get closed. Prime brokers, who Tether might like to use to buy securities, won’t do business with them.
Tether operates on the very fringes of the financial industry, constantly having to reshuffle its portfolio to meet redemptions when required, while not revealing its counterparties, both because they may be somewhat obscure, and also so as to not give its adversaries any advantage…
3.
…which brings me to the third point. It is somewhat esoteric, but please bear with me. There is a bit of magic about finance in the old world. Finance can convert a risky investment into a safe investment and very risky investment. The “safe” in the safe investment comes from the fact that if anything goes wrong, that tranche gets paid first, leaving the very risky tranche with whatever remains.
You could say that the fractional reserve system itself — the system of creating money from air — sort of works because it is opaque and because people are partly or completely agnostic as to how it works.
Or to put it in better words of Matt Levine: “notice that this is magic: At one end of the process you have risky businesses, at the other end of the process you have perfectly safe dollars. Again, this is due in part to deposit insurance and regulation and lenders of last resort, but it is due mainly to the magic of composing senior claims on senior claims.”
Does a little bit of mystery help Tether? Hedge funds have been shorting Tether or setting up put options on Tether for months now. But not seeing inside Tether, not knowing how, when and what has to Tether sell, move or transfer to accommodate redemptions, gives them only a too wide field of attack, i.e. shorting the $65B token itself.
Just a wild speculation, but let’s say that they can see inside. They could attack where it hurst the most at a critical moment, disrupting Tether’s ability to make redemptions, triggering market panic. Maybe?
Never mind its strange set up, Tether seems to work. In its obscure, second-hand way, it always redeems funds and provides a product that is indispensable to the cryptoland — instantaneous unregulated funds transfers without exchange rate risk.
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