Let's talk about the Tether scandal, why recent disclosures about it are such a big deal, and why it represents a form of systemic risk for the already shady crypto market. (1/) 🧵
Stablecoins are virtual currencies that are always supposed to have the same real-dollar value. People that day trade cryptocurrencies often want shift their unstable tokens to safe real currencies (like the dollar) because wild market fluctuations make it unsafe to hold. (2/)
However when a company transacts in dollars they have to follow the rules of the bank that holds them and by proxy the rules US govt imposes on the bank. If you're trading crypto, then you probably don't like those rules since you're probably doing something shady. (3/)
The crypto exchange ecosystem has major problems getting access to normal banking. So enter Tether or USDT, a surrogate crypto dollar that theoretically has the same value as a dollar, but can be traded without following regulation on dollars. (4/)
The model is simple, you give the company a real dollar, they store that real dollar and give you one tether. You trade that tether for whatever you want, and at any point you can redeem that tether back for one dollar. Simple enough. (5/)
It's a simple pitch:

Have dollars, buy tether, do shady things, redeem tether, get dollars.

"The virtual dollar for regulatory arbitrage." (6/)
However this depends on one centralised point. The company that runs this service needs to keep an accounting book of all the money that flows in and out.

Every dollar in has to be matched with a tether issued, every tether redeemed a real dollar that flows out. (7/)
The real dollars held in the so-called "reserve" has to be precisely equal to the number of tether dollars issued.

If that's not the case, (i.e. unbacked tethers) then a certain percentage of holders of this coin can't actually redeem because the money is not there. (8/)
What is clear is that the company has allegedly issued $59 billion virtual dollars.

At that scale, it is highly unlikely any bank in the entire world would those reserves on behalf of a crypto company. Not even the dodgiest banks would take on that insane level of risk. (9/)
So where is the money? Most financial journalists have speculated that the company is engaged in some opaque accounting skulduggery where instead of matching tethers to inflow dollars, they produce *vast* amounts of tethers that aren't backed by anything. (10/)
Now the company that issues these products is notoriously opaque and set up shop in the tax haven of British Virgin Islands to avoid any regulation and reporting obligations. So we really don't know much.

What we do know comes from lawsuits and investigative journalists. (11/)
In 2020 the New York Attorney General investigated the US entity associated with trading Tether and indeed found massive amounts of misrepresentation in their findings. In the AGs words: (12/)
"Tether's claims that its virtual currency was fully backed by dollars at all times was a lie. These companies obscured the true risk investors faced and were operated by unlicensed and unregulated entities dealing in the darkest corners of the financial system." (13/)
"Tether made false statements about the backing of the 'tether' stablecoin, and about the movement of hundreds of millions of dollars between the two companies to cover up the truth about massive losses." (14/)

Last Wednesday, we finally got the court-mandated disclosures of what's actually in the reserves. And not surprisingly when the vault is opened, the money isn't actually there. (15/)
What we see is a lot of "commercial paper". Which is a form of short-term debt, a company-to-company unsecured loan. It's put on the books for the face value of the loan, but in reality that value depends on the credit risk of the other counterparty to the loan. (16/)
If the counterparty isn't good for the value of the paper then it's worthless, just an accounting trick. And we don't know who the other parties are.

Every Tether is backed by a giant pile of IOUs to strangers. And that's worth exactly what you think it is. (17/)
A mere 2.9% of Tether treasury is actually in real dollars held by a bank.

So for every 1 USDT there is $0.03 real dollars. (18/)

Now this is a huge problem because by volume Tether is BY FAR the most traded cryptocurrency in the entire world. Surprising every other token by a significant margin. (19/)
Also the most traded cryptocurrency FOR bitcoin. 80% of bitcoin volume is where one party is trading Tether for bitcoin. If price of bitcoin is quoted in dollars, and sold in tether, that price isn't reflecting the the vast risk/value differential between the two. (20/)
It's widely suspected that many exchanges are receiving large deliveries of unbacked tethers, using them to wash trade with themselves for bitcoin to drive up demand, and thus the synthetically inflate the price.

This is illegal in other markets.
A significant portion of bitcoin price formation is therefore quoted in dollars, but paid for in USDT dollars that are only actually backed by three cents.

Which would make most of the price formation of bitcoin completely synthetic. (23/)
Which leads to the obvious inconvenient truth that most people who look at the crypto space come to understand.

Most exchanges are *vastly* undercapitalised and will never be able to pay out even a tiny fraction of their customers in real dollars. (24/)
Crypto markets are not significantly different than Ponzi schemes.

Short-term dollar inflows are used to pay-out short-term outflows and the whole thing stays afloat so long as there's not too many withdrawals. When that day comes, it implodes. (25/)
It seems inevitable that at some point in the near future everyone that holds tethers will see all of their holdings go poof. They'll go from being worth 1.0x a dollar to 0.0x a dollar probably in a very short period of time. (26/)
Some fintech bloggers have described Tether as "the internal accounting system for the largest fraud since Madoff."

If that is the case, and the allegedly $800b bitcoin market collapse, that truly will be a scandal for the history books.


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More from @smdiehl

14 May
People often ask me if there's anything related to blockchain that isn't tied to grift. Possibly, but the only way you can tell is by examining the business model. (1/) 🧵
Anything that self-identifies itself as a cryptocurrency is clearly a scam (see my vast number of other threads for the reasons), so let's get that out of the way first. (2/)
I wouldn't go so far as to say that everything that self-identifies as a blockchain project is a scam. For instance Microsoft had a Azure Blockchain Service that recently got shut down. (3/)
Read 12 tweets
13 May
The crypto industry is following exactly the same playbook as the tobacco industry when it comes spreading disinformation and spin about bitcoin not being the ecological disaster we all know it is.
In the 1970s the tobacco lobby revealed the mechanism they spin public opinion. You don't try to refute facts directly, you just spread doubt.

> "Doubt is our product since it is the best means of competing with the 'body of fact' that exists in the mind of the general public."
Bitcoiners want you to believe the truly nonsensical position that because the carbon footprint of mining is not absolutely precisely knowable, we shouldn't even ask questions about the per-transaction cost.

They don't want you to ask about bitcoin's inconvenient truth.
Read 5 tweets
13 May
Let's talk about Elon's "hustle" with Tesla's bitcoin holdings and why it's horrible for markets and the public at large. (1/) 🧵
Disclosure: It won't come as a shock to anyone I'm not a fan of Muskrat cult of personality that emerged around him. However a person is not reducible down to a single facet, we're all the sum of our good and bad choices.

While there is some good, let's talk about the bad. (2/)
The facts:

In January 2021, Tesla the company decided to use company funds to silently purchase bitcoin at $34,200 facilitated by the then private company Coinbase. The company spent $1.5bn to secretly purchase 48,000 coins. (3/)
Read 25 tweets
9 May
Let's talk about the phenomenon of "mathcoins" and how fancy tech and academic obscurantism is used to defraud the public into buying scam crypto investments. (1/) 🧵
Cryptocurrencies are nothing but a form of investment fraud that enriches a small group of people by directing funds from new investors to pay out old investors. They're a variant of the classic Ponzi scheme, but where the cashflows are obscured with internet technology. (2/)
Now Ponzis schemes can indeed make people very rich. Madoff got rich, and made plenty of his early investors rich. But at some point there is an inflection point in which cash outflows exceed inflows and the scheme inevitably collapses. (3/)
Read 29 tweets
7 May
Some pundits compare blockchain to the dot-com bubble or the early internet.

This is complete nonsense. (1/) 🧵
You work in tech long enough, you start to understand the bubbly nature of it all. And that timing trends is just part of the whole structure of how things work, and how even bullshit can actually drive innovation if incentives are aligned. (2/)
And we've seen a TON of them even just in my time:

Agile, big data, blogging, cloud, CMS, data science, DevOps, IoT, intranets, Java, LANs, Linux, online advertising, microservices, PaaS, PDAs, search engines, social media, Web 2.0 ... the list goes on on and on.
Read 27 tweets
5 May
This year #ESG investing has a lot of momentum in Europe, and many funds are interested in how crypto factors into their portfolios. (1/) 🧵
For those that don't know, ESG stands for:

* Environmental
* Social
* Corporate Governance

It's an investment philosophy that tries to allocate capital towards companies that are better than their peers with regards to sustainability and societal impact. (2/)
Investing in directly cryptocurrency is one of the most anti-ESG investment you can possibly make.

The environmental exposure of crypto is a nightmare that directly contributes to carbon emissions and climate change at the level of nation states. (3/)

Read 22 tweets

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