Oh My..... (Tether/Bitcon)
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2018-08-24 10:10 by Karl Denninger
in Monetary , 184 references Ignore this thread
Oh My..... (Tether/Bitcon) *
[Comments enabled]

There's a rather nasty little secret in the "crypto" world -- a coin called Tether that is, as the name implies, allegedly "tethered" to the dollar.  In other words for each Tether there is an actual, hard reserve of one US dollar.

You would think with all the cryptocoins out there, from Bitcoin to the rest, that this one wouldn't matter much.  You'd be wrong, because an utterly enormous amount of transport, transaction volume and interchange takes place on "non-regulated" exchanges -- where there is no actual, documentary connection to the "mainstream" financial system.

As such there's no reference; you can't say a Bitcoin is worth $6,000 each unless you have an actual transaction made in dollars at that price.  Or can you?

Sure - provided you have a transaction in something else that has a hard reference to dollars, then it's fine.

Enter Tether.

Tether is the "glue" that binds all current crypto "valuations" to a real-world, government-issued reference -- the dollar, and by extension there (since dollars trade in the FX market against other government currencies) every other currency too, such as Euros and Yen.

But what if there are no actual dollars behind Tethers?

Then the entirety of the alleged pricing behind all of the other cryptos is at risk of being an immediate zero.

Note that Tether was allegedly supposed to produce a public audit (under GAAP) on a regular basis to ascertain that in fact its assertion of being 100% reserved with actual dollars has been met.  

In response, Tether Limited published a memo from an accounting firm affirming that it was fully backed. But the document fell suspiciously short of an official audit, and doubts only increased. On January 27, 2018, Tether parted ways with the auditor. Then, three days later, Bloomberg’s Matthew Leising reported that Tether Limited and its associated exchange had been subpoenaed by the Commodity Futures Trading Commission in another attempt to determine whether Tether is in fact backed by dollars. (To date, no charges have been filed.)

But wait -- they also issued $600 million worth of new Tethers on the same day they fired their auditor.

Where's the $600 million that had to be deposited and reserved, earning no interest, to back that?

It's not disclosed.

Where are the regular, public audits?  It sounds like the answer is "there aren't any."

The bigger problem is that there's no apparent justification for its business model in the first place.  There's no speculative interest in it since it is linked inextricably to the dollar, at least allegedly, it earns no rate of return and you can buy other crypto assets without going through it, so there is no reason to take the cost of the transaction either.

Unless.... the entire point was to at some point issue it unbacked, con people into thinking it is backed, and then convert it to dollars before anyone figures out you scammed them.

How did a "coin" that has no appreciation and is allegedly 100% backed, yet has no fundamental and necessary part of the crypto system go from $25 million in issued coins in early 2017 to more than $3 billion now without a single scintilla of appreciation?  Let me remind you that you cannot issue Tether, at least not legitimately, in exchange for anything other than actual dollars.

Where's the $3 billion on deposit and can you explain to me why instead of actual, regular audits under GAAP Tether issued instead a report from a law firm that had a caveat in it that it is not an accounting firm, did not conform to GAAP standards, and cannot attest to the sufficiency of the information the company supplied to it?

And finally, how did Tether's company intend to pay for said regular audits when the coin doesn't appreciate and it has a 100% reserve requirement?  If there is no discount rate on the coin who is paying the operating costs of the organization, including these alleged "audits" that have never happened, and how are they covering routine operating expenses since there appears to be no method to generate cash flow......

Further, if there really is nearly $3 billion sitting somewhere where did it come from and what motivation would the people who bought it have to have done so?  Remember that no transaction is ever without cost and it is not necessary to use this path; you can simply buy Bitcoin or whatever through Coinbase using dollars.

There is of course one very real possibility that comes to mind on fund sourcing, although that doesn't explain how the operating costs are being covered: The "investors" are all engaged in highly-illegal activity, such as pumping fentanyl and meth into the United States and elsewhere or running human trafficking (slavery, especially sexual slavery) organizations.

Is that the anchor of all cryptocurrencies today?

That's a pretty good question because if so it's all subject to seizure and "Tether" becomes, well, untethered.  Rapidly.

Then there's the other possibility -- there are no dollars and it's a scam.

Whatever it is, if the provenance of this thing doesn't prove up and confidence is lost, well, the entire crypto space will crash to its intrinsic value more-or-less all at once.

That would be zero, by the way.