Stablecoins: Growth potential and impact on banking(federalreserve.gov)
federalreserve.gov
Stablecoins: Growth potential and impact on banking
https://www.federalreserve.gov/econres/ifdp/stablecoins-growth-potential-and-impact-on-banking.htm
159 comments
The first author left the Federal Reserve right after this paper to lead research at a crypto exchange:
https://twitter.com/gordonliao/status/1484605701435523072
https://twitter.com/gordonliao/status/1484605701435523072
Great catch. That's a shockingly good paper on stable coins!
Yeah that guy who later joined Uniswap is an asian-american Phd from Harvard genius boii
What's ethnicity got to do with this?
Uniswap is not a crypto exchange. The uniswap router, is a decentralized exchange. Once deployed uniswap does not control it.
Oh.
I'm confused why the comments here aren't more critical of stablecoins. A stablecoin is just a bank deposit without an interest rate, and with very little in the way of regulation over what the issuer does with the cash that has been deposited. Without some other mechanism, they wouldn't exist except as a novelty.
The question must become "what is the other mechanism?". In the case of Tether, which has the largest market cap of any stablecoin, as far as I know, the scam is this. If I want to have liquidity on Bitfinex, I need to go buy tethers. If I try to make a transaction for bitcoins with dollars on the exchange, it could take days to process. There's no particular reason for this, You're just trading shares of a large wallet. So I must first go buy some tether from bitfinex, but wait, USD to Tether liquidity is also artifically capped. If I try to buy tether for dollars, it can also take days.
It follows that the only way to obtain liquidity on one of these exchanges is to buy and hold stablecoins. This is the premise upon which the exchanges that print these currencies can then turn around and lend the dollars used to buy them.
If you discovered, suddenly, that a casino had 78 billion dollars in chips just floating around, you would rightly wonder what the hell was going on, although the explanation would likely be different.
Tether is not a cryptocurrency, it's a casino chip. An escrow account that the bank is illegally investing in risky securities, entirely for the profit of its executives, investment in which is entirely funded by manipulating access to the wider crypto market.
The question must become "what is the other mechanism?". In the case of Tether, which has the largest market cap of any stablecoin, as far as I know, the scam is this. If I want to have liquidity on Bitfinex, I need to go buy tethers. If I try to make a transaction for bitcoins with dollars on the exchange, it could take days to process. There's no particular reason for this, You're just trading shares of a large wallet. So I must first go buy some tether from bitfinex, but wait, USD to Tether liquidity is also artifically capped. If I try to buy tether for dollars, it can also take days.
It follows that the only way to obtain liquidity on one of these exchanges is to buy and hold stablecoins. This is the premise upon which the exchanges that print these currencies can then turn around and lend the dollars used to buy them.
If you discovered, suddenly, that a casino had 78 billion dollars in chips just floating around, you would rightly wonder what the hell was going on, although the explanation would likely be different.
Tether is not a cryptocurrency, it's a casino chip. An escrow account that the bank is illegally investing in risky securities, entirely for the profit of its executives, investment in which is entirely funded by manipulating access to the wider crypto market.
To be clear, Tether is highly problematic, but there are other stablecoins too. While not "regulation" concerning deposits, there are so-called algoirthmic stablecoins, which are fully collateralized on-chain, meaning the coin issuer can't just go buying junk bonds or whatever.
Can you recommend any stable coins that aren't collateralized by either other stable coins or floating un-backed crypto like bitcoin et al? I wish El Salvador or some entity in some favorable jurisdiction would issue a commodities backed stable coin actually redeemable, fully backed, and audited.
The vast majority of bank accounts offer abysmal interest rates. And holding a stable coin is nothing like a bank deposit its like holding cash in your wallet, you and only you have control over the coin. And there are opportunities to "stake" the coin and earn an interest rate.
The primary reason for delays between buying crypto and actually receiving it is your bank. Not the exchange. Your bank is fucking around with your money and not sending it to the exchange immediately and even after they send it they have the ability to reverse the transaction, so the exchange needs the guarantee the money will not be taken from them.
The rest of your comment is just nonsense. Tether is a cryptocurrency I don't even understand how you could argue its not. You should look into all the laws traditional banks break using your money too.
The primary reason for delays between buying crypto and actually receiving it is your bank. Not the exchange. Your bank is fucking around with your money and not sending it to the exchange immediately and even after they send it they have the ability to reverse the transaction, so the exchange needs the guarantee the money will not be taken from them.
The rest of your comment is just nonsense. Tether is a cryptocurrency I don't even understand how you could argue its not. You should look into all the laws traditional banks break using your money too.
You have some valid critiques about the post, but the big point that you didn't answer in this is the idea that tether is more or less "unbacked" and with significantly less regulation that doesn't have even the (often critiqued) limits set forward in Basel II/III. USD is backed by the full weight of the US government, Tether is backed by a bank account with unknown things in it.
The fact that the market isn't totally efficient doing USD/BTC transactions directly and the fact that Tether is clearly far more risky than USD kinda indicates something is up. Who knows, they could be playing it safe and be well capitalized, but if they're not, it becomes a very similar situation to when Soros made a mint "breaking" the Pound.
The fact that the market isn't totally efficient doing USD/BTC transactions directly and the fact that Tether is clearly far more risky than USD kinda indicates something is up. Who knows, they could be playing it safe and be well capitalized, but if they're not, it becomes a very similar situation to when Soros made a mint "breaking" the Pound.
Yes I am aware tether is not backed by nearly as much liquid capital as it claims. Neither are any traditional banks. Any flaws with tether are present in the traditional banking system. Tether at least solves a few of its flaws however.
I am by no means a fan of tether or any other stable coins, but they are just as legitimate as our current banking system.
I am by no means a fan of tether or any other stable coins, but they are just as legitimate as our current banking system.
Geez, just because the current banking system also has risks in their investments doesn't mean they are the same as Tether. The amount of risks we are talking about is completely different. The US banks are backed by insurances, which are backed by the US government and Fed. This Tether company is registered in a tax haven and this guy supposedly lives somewhere in Hongkong. Most of their reserve are in offshore shady private banks since major banks won't accept cryptocurrency related transactions. There is a whole history how this guy found some banker from his hometown to start off the Tether reserve things. This Tether guy also was involved in fraud before. They could literally just disappear tomorrow with all the money and you can't even find him. So before putting out such claims like all the banks are the same as Tether, do your research first and stop blanket generalization.
Let me know when a cryptocurrency causes a global crisis because of their inability to safely manage funds, because banks have a history of doing exactly that.
Stay tuned!
Your deposit in an actual bank is both highly regulated in terms of what it is allowed to finance, and also insured up to $250,000 by the FDIC. The situation is extraordinarily different.
>USD is backed by the full weight of the US government
What precisely does that mean?
What precisely does that mean?
The full weight and threat of action by the US military gives the USD its global position.
[deleted]
> The question must become "what is the other mechanism?".
For one, in theory, one useful aspect of a stable coin is to allow a user to get in and out of numerous crypto currencies while minimizing fees and delays.
Any engagement with the fiat banking system will typically cost time and/or money basically due to the potential for fraud and existing anti-fraud measures both for the banks as well as the exchanges.
As such, stable coins in theory should be a reasonable proxy for fiat for folks who trade crypto aggressively (e.g., day trading).
In practice, you get the train wreck that is Tether and Bitfinex. I realize that Tether is huge, but it’s not the best poster child for what a stable coin should be or can be.
I think some smart folks have realized that running solidly backed stable coin — that is, with actual currency rather than proxies like more crypto, bonds/loans, etc. — is a something worth pursuing. Perhaps for reasonable profit, perhaps for power… who knows? I think proper stable coins will become more prominent moving forward.
A second mechanism, and I think this is a big one, is that stable coins managed directly or indirectly by nation states (specifically US and China and maybe EU) will be a big deal in developing countries for both savings as well as transactions. China is already doing this on a small scale. Without getting into the nitty gritty, being a winner in this area will provide the issuer of the stable coin a tremendous amount of influence on the world economy.
For one, in theory, one useful aspect of a stable coin is to allow a user to get in and out of numerous crypto currencies while minimizing fees and delays.
Any engagement with the fiat banking system will typically cost time and/or money basically due to the potential for fraud and existing anti-fraud measures both for the banks as well as the exchanges.
As such, stable coins in theory should be a reasonable proxy for fiat for folks who trade crypto aggressively (e.g., day trading).
In practice, you get the train wreck that is Tether and Bitfinex. I realize that Tether is huge, but it’s not the best poster child for what a stable coin should be or can be.
I think some smart folks have realized that running solidly backed stable coin — that is, with actual currency rather than proxies like more crypto, bonds/loans, etc. — is a something worth pursuing. Perhaps for reasonable profit, perhaps for power… who knows? I think proper stable coins will become more prominent moving forward.
A second mechanism, and I think this is a big one, is that stable coins managed directly or indirectly by nation states (specifically US and China and maybe EU) will be a big deal in developing countries for both savings as well as transactions. China is already doing this on a small scale. Without getting into the nitty gritty, being a winner in this area will provide the issuer of the stable coin a tremendous amount of influence on the world economy.
> I think some smart folks have realized that running solidly backed stable coin — that is, with actual currency rather than proxies like more crypto, bonds/loans, etc. — is a something worth pursuing. Perhaps for reasonable profit, perhaps for power… who knows? I think proper stable coins will become more prominent moving forward.
I know little about finance but I don't understand why it is smarter to back a stable with cash rather than with bonds and loans for instance.
I know little about finance but I don't understand why it is smarter to back a stable with cash rather than with bonds and loans for instance.
Because the perfect hedge for a debt is to own precisely your liability for that debt. Dollar stablecoins aren't redeemable as bonds, they're redeemable (sometimes, not for tether) as dollars. Using bonds/loans introduces risk and makes the books look 1:1 (mature bonds may pay the full liabilities -- assuming the issuer doesn't default), but actually it turns out to be unregulated fractional reserve banking as people buy these bonds at a discount.
I'm not impugning fractional reserve banking per se here, just the idea that a stable coin backed by bonds is the same as a stable coin backed by the asset it represents.
I'm not impugning fractional reserve banking per se here, just the idea that a stable coin backed by bonds is the same as a stable coin backed by the asset it represents.
> I know little about finance but I don't understand why it is smarter to back a stable with cash rather than with bonds and loans for instance.
It’s probably not a bad idea if done in good faith.
I probably should have said “sketchy bonds/loans”.
What bitfinex has been doing is extremely sketchy and (imho) probably won’t survive a run (if a run ever happens).
It’s probably not a bad idea if done in good faith.
I probably should have said “sketchy bonds/loans”.
What bitfinex has been doing is extremely sketchy and (imho) probably won’t survive a run (if a run ever happens).
"As found in the order, Tether held sufficient fiat reserves in its accounts to back USDT tether tokens in circulation for only 27.6% of the days in a 26-month sample time period from 2016 through 2018. The order also finds that, instead of holding all USDT token reserves in U.S. dollars as represented, Tether relied upon unregulated entities and certain third-parties to hold funds comprising the reserves; comingled reserve funds with Bitfinex’s operational and customer funds; and held reserves in non-fiat financial products. The order further finds that Tether and Bitfinex’s combined assets included funds held by third-parties, including at least 29 arrangements that were not documented through any agreement or contract, and that Tether transferred Tether reserve funds to Bitfinex, including when Bitfinex needed help responding to a “liquidity crisis.”"
https://www.cftc.gov/PressRoom/PressReleases/8450-21
https://www.cftc.gov/PressRoom/PressReleases/8450-21
How hard is it to trade USDT (Tether) for USDC (supposedly fully-backed)? USDC can (supposedly) be cashed in for US dollars.
It is in the interest of the scheme that it (at least seem to be) be very easy to cash out. If it is difficult to cash out, then holding tether results in a loss of liquidity.
Not hard. In fact, USDC recently flipped USDT in volume.
I'm not really an expert on anything crypto, but I very much like the idea of stablecoins as a realistic bridge between the traditional financial system and cryptocurrency technologies.
Honestly I think it's both understandable and sad how aggressive people have gotten about trying to get organizations to "prove" they're adequately backing their stablecoins with cash reserves. It feels like a fundamental misunderstanding that arises from layperson terms vs. legal/accounting terms.
Attestations vs. audits, what purpose each one serves in an accounting sense, and why an organization would opt for one over another; these are conversations I don't see being had, but conversations that, I think, would clear a lot of the frustration and confusion up, on the part of the skeptics.
Attestations vs. audits, what purpose each one serves in an accounting sense, and why an organization would opt for one over another; these are conversations I don't see being had, but conversations that, I think, would clear a lot of the frustration and confusion up, on the part of the skeptics.
Are you lamenting the aggression or the mere fact that the organizations are being asked to prove adequate backing?
Why are the authorities asking stablecoins to prove 100% reserves, also letting banks have fractional reserves closer to zero... and since 2020, actually let them have zero percent reserves: https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Zero reserves means print as much as you want, subject only to the bank's own underwriters. The banks went and minted trillions of dollars in unbacked currency. Most of our fiat money supply comes from M2 and M3 money issued by banks.
Meanwhile, algorithmic stablecoins like DAI have 150% reserves, yet the government doesn't trust them as much as the banking system?
Zero reserves means print as much as you want, subject only to the bank's own underwriters. The banks went and minted trillions of dollars in unbacked currency. Most of our fiat money supply comes from M2 and M3 money issued by banks.
Meanwhile, algorithmic stablecoins like DAI have 150% reserves, yet the government doesn't trust them as much as the banking system?
There's a substantial misunderstanding of what the financial terminology actually means here. In particular, you're using reserves to mean several different things and not realizing it.
The "zero reserve requirement" means that banks are now required to keep $0 in their account with the Federal Reserve Bank for every $100 of deposits they take in--a literal pile of cash in their bank vault would not count a dime. That is the only thing that qualifies as reserves for that requirement, and hopefully you understand that that is by no means an accurate reflection of any lay person definition's of "reserve".
Instead, modern financial regulations use capital requirements instead of reserve requirements. In essence, banks need to keep a buffer of their own cash--this isn't part of the assets/liabilities calculation--that can be raided if assets prove to be undervalued, and the amount that is needed depends on the risk of the assets. Something safe like cash requires no equity to be covered, while something like a mortgage might require about 3.5% of the par value in equity, and something like cryptocurrency 100%.
Note that you can also judge banks by how much their assets exceed liabilities. A typical bank is seen as perilously close to insolvent if their assets are "only" 107% of liabilities. By this metric, I will point out that Tether's assets are about 101% of liabilities the last I checked--and that's assuming that Tether's statement of its assets are in fact accurate, which given their history of lying, is not necessarily a safe assumption.
The "zero reserve requirement" means that banks are now required to keep $0 in their account with the Federal Reserve Bank for every $100 of deposits they take in--a literal pile of cash in their bank vault would not count a dime. That is the only thing that qualifies as reserves for that requirement, and hopefully you understand that that is by no means an accurate reflection of any lay person definition's of "reserve".
Instead, modern financial regulations use capital requirements instead of reserve requirements. In essence, banks need to keep a buffer of their own cash--this isn't part of the assets/liabilities calculation--that can be raided if assets prove to be undervalued, and the amount that is needed depends on the risk of the assets. Something safe like cash requires no equity to be covered, while something like a mortgage might require about 3.5% of the par value in equity, and something like cryptocurrency 100%.
Note that you can also judge banks by how much their assets exceed liabilities. A typical bank is seen as perilously close to insolvent if their assets are "only" 107% of liabilities. By this metric, I will point out that Tether's assets are about 101% of liabilities the last I checked--and that's assuming that Tether's statement of its assets are in fact accurate, which given their history of lying, is not necessarily a safe assumption.
Aren't they doing two different things? Bank reserves are (broadly speaking) against loan defaults. Also, the risk of what banks do is very well known; the risk of cryptocurrencies is the opposite.
Loan defaults are very likely when you've lent out over a trillion dollars, with repayment over 30 years. Businesses (especially small ones) run into all kinds of things during a 30 year stretch. Also, what about loan forgiveness, what happens to that money?
Loan defaults are only a problem when they are faster than your ROI.
Aka if you loan 1T dollars and get 50B in interest payments after expenses and 40B in loan defaults you didn’t lose money.
Aka if you loan 1T dollars and get 50B in interest payments after expenses and 40B in loan defaults you didn’t lose money.
I disagree. Let's say a bank issues some Principal amount P of money, which is then used to pay various participants in the economy. The bank now has liabilities to pay out. Then the borrower defaults. The lender may have received some percentage of P in interest, but unless that percentage is greater than 100%, the lender lost money when the borrower defaulted. They now have to make up the difference somehow, and may become insolvent.
First banks don’t actually issue money, people treat the IOU from a bank in their checking or savings account as money but it is an IOU. This is why economists use M0 vs M1 vs M2 vs M3 etc
Second Banks want to have outstanding loans. They are going to issue new ones as the old ones are paid off. Therefore cash on hand + outstanding loans get modified by defaults, new loans, principal payments, and interest payments. Suppose from that 1,000B in loans they got 5B in interest, 3B in principle payments, and had 4B in defaults and issued 7B in new loans. They now have 1,000 - 3 - 4 + 7 = 1,000B in loans and an extra 5 + 3 - 7B = 1B in cash.
Those changes can be calculated on a day by daily, monthly, or yearly basis, but dividends means a bank can make money in some year and still fail. Which is why regulators care about bank reserves not profitability.
Second Banks want to have outstanding loans. They are going to issue new ones as the old ones are paid off. Therefore cash on hand + outstanding loans get modified by defaults, new loans, principal payments, and interest payments. Suppose from that 1,000B in loans they got 5B in interest, 3B in principle payments, and had 4B in defaults and issued 7B in new loans. They now have 1,000 - 3 - 4 + 7 = 1,000B in loans and an extra 5 + 3 - 7B = 1B in cash.
Those changes can be calculated on a day by daily, monthly, or yearly basis, but dividends means a bank can make money in some year and still fail. Which is why regulators care about bank reserves not profitability.
The parent post contains a scenario where a bank has 1 T out in loans. If they make 50b (5%) in profit, they can withstand 4% of those loans going default. If profit goes up, and they can have more go default, and, get this, they charge more interest on loans more likely to go into default to cover this. They may even look at historical rates of insolvency and make sure they charge interest so that they make enough profit to cover any losses.
Certainly this can go sideways when they don't understand the risk in one type of loan, like 2007-2008, but most of the time, they can figure this out.
Certainly this can go sideways when they don't understand the risk in one type of loan, like 2007-2008, but most of the time, they can figure this out.
[deleted]
Yet our banking system actually works very well with long term loans.
Isn't it because the stablecoins are asserting 100% reserves?
Can you walk me through why that's relevant? Is the implication that it's because we (or some) think the stablecoins are lying about their reserve levels, and we let banks hold fractional reserves approaching zero because they just admit this outright?
"Buy my stablecoin, it's 100% backed by actual dollars and therefore cannot crash"
"OK, can we see behind the curtain?"
"Absolutely not"
"Can I cash them in with you to get the dollars back out?"
"Hell no"
That's why it's relevant. Because this is not a bank or bank-like situation, and comparisons to fratctional reserve are spurious. They're sold specifically on not being fractional.
"OK, can we see behind the curtain?"
"Absolutely not"
"Can I cash them in with you to get the dollars back out?"
"Hell no"
That's why it's relevant. Because this is not a bank or bank-like situation, and comparisons to fratctional reserve are spurious. They're sold specifically on not being fractional.
So now that we know, does it still apply?
https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b...
https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b...
You mean now we know they’ve committed multi-year multi-billion dollar fraud against their users?
I would have thought that would be a fantastic reason never to go anywhere near the entire ecosystem, personally. Especially as their website is still doing it (or at least using weasel-words to heavily imply it) -
“All Tether tokens are pegged at 1-to-1 with a matching fiat currency (e.g., 1 USD₮ = 1 USD) and are backed 100% by Tether’s reserves.”
I would have thought that would be a fantastic reason never to go anywhere near the entire ecosystem, personally. Especially as their website is still doing it (or at least using weasel-words to heavily imply it) -
“All Tether tokens are pegged at 1-to-1 with a matching fiat currency (e.g., 1 USD₮ = 1 USD) and are backed 100% by Tether’s reserves.”
Tether has lost dominance, the markets are moving away from them hopefully.
Could you go into what you mean by “Lost dominance?” Looking at CoinMarketCap, it looks like they (Tether) have the largest stablecoin market cap by 50%, and their 24h volume was an order of magnitude greater than the next closest stablecoin.
Yeah, exactly. It's the authorities making sure that these groups are doing what they say they're doing.
Not so sure. The authorities are in charge of determining the bank reserve requirements. The fact that they allowed zero reserves at these institutions is troubling and deserves to be discussed. This is like the Free Banking Era, except back then the States were in charge of enforcing reserve requirements.
If you search online for the Fed's own explanation for these policies, they make some overconfident assertions about "ample reserves" and how their policy assumes there are now "ample" reserves, so they can just set the reserve requirements at zero. Seems to me some political doublespeak in order to provide the unprecedented level of Keynesian stimulus that was planned to be released.
If you search online for the Fed's own explanation for these policies, they make some overconfident assertions about "ample reserves" and how their policy assumes there are now "ample" reserves, so they can just set the reserve requirements at zero. Seems to me some political doublespeak in order to provide the unprecedented level of Keynesian stimulus that was planned to be released.
Well for one, taking on fractional reserve banking is a great way to get killed.
The critics have explained it clearly. The stablecoin companies are the ones deliberately creating the confusion because they are covering up their unsound financials.
>the stablecoin companies
Why do so many crypto critics pretend DAI doesn’t exist?
Why do so many crypto critics pretend DAI doesn’t exist?
DAI represents less than 6% of the current stablecoins marketcap. It's just not big enough to be representative of the whole market.
Wow, TIL. Can anyone explain why? DAI seems superior to tether/USDC in every way.
Because Tether and USDC print billions monthly with only "trust us" as backing.
Jon Stewart got an ex-Fed CEO to describe the US economy as a faith based system [1] when trying to get him to explain why the USA can't just "print money" to pay off the national debt. There's a lot of "trust us" in the foundation of millions/billions of peoples lives; ironically "In God we trust" is literally written on USD bills. I'm assuming the ex-CEO didn't exactly mean what he said but Jon's response is pretty relatable.
HN comments are 'worried' that Tether (and other Stable coins) injecting money into the bitcoin/crypto markets are artificially inflating prices and makes the whole thing a scam. Yet that's pattern is the underlying premise of Quantitative Easing that kept the stock market from crashing (or inflated the bubble depending on your point of view) for the past 2 years.
I'm open to a conclusion that both are a scam. I'm also open to a simple and understandable explanation for how these two approaches are fundamentally different from each other. But if someone's viewpoint is one approach is better then the other because a) USD has worked fine for USA up to this point or b) USD is back by USA govt and it's military, then i think they should realize that those are factors are not some unalienable truth that's guaranteed to continue forever. An anti-fragile system would consider hedging against them.
[1] https://youtu.be/psSYiidw-v0?t=279
HN comments are 'worried' that Tether (and other Stable coins) injecting money into the bitcoin/crypto markets are artificially inflating prices and makes the whole thing a scam. Yet that's pattern is the underlying premise of Quantitative Easing that kept the stock market from crashing (or inflated the bubble depending on your point of view) for the past 2 years.
I'm open to a conclusion that both are a scam. I'm also open to a simple and understandable explanation for how these two approaches are fundamentally different from each other. But if someone's viewpoint is one approach is better then the other because a) USD has worked fine for USA up to this point or b) USD is back by USA govt and it's military, then i think they should realize that those are factors are not some unalienable truth that's guaranteed to continue forever. An anti-fragile system would consider hedging against them.
[1] https://youtu.be/psSYiidw-v0?t=279
Every monetary system is based on a shared belief of value, therefore "faith". That does not mean that any cryptocoin is the same as USD. For example, there is no independent auditing to help assure me that Tether actually has the reserves they claim. And there is no transparent way to know where this money supposedly is, making it much easier to scam people than a traditional bank. If there is a problem with a bank, there are several legal and financial consequences for everyone involved, enforced by the government. The government also will, as it has, try to undo the mess even if it is at the expense of inflation or debt.
So yes, USD, Tether and my poker chips at home do share a fundamental characteristic of any method of exchange, a subjective belief about their worth that is ultimately decided by collective agreement. That does not mean they are anywhere close to the same thing, or scams.
So yes, USD, Tether and my poker chips at home do share a fundamental characteristic of any method of exchange, a subjective belief about their worth that is ultimately decided by collective agreement. That does not mean they are anywhere close to the same thing, or scams.
My point is less about tether and more with the assets tether is inflating. I'm saying the narrative that BTC is inflated/manipulated because of tether, means that many other assets are also inflated due to accepted government fiscal policy.
> If there is a problem with a bank, there are several legal and financial consequences for everyone involved, enforced by the government.
What if that bank is the central bank? Which entity is responsible for judging the actions of that bank and deal out consequences if their actions cause more harm then good? And who would end up on the receiving end of those consequences (guessing not any individuals)? Time will tell if the doomsday folks (3 sigma bubble) are right or the mainstream folks (everything will go back to normal after a few interest rate hikes) are right but I'm pretty certain nobody will face meaningful consequences for being wrong.
> If there is a problem with a bank, there are several legal and financial consequences for everyone involved, enforced by the government.
What if that bank is the central bank? Which entity is responsible for judging the actions of that bank and deal out consequences if their actions cause more harm then good? And who would end up on the receiving end of those consequences (guessing not any individuals)? Time will tell if the doomsday folks (3 sigma bubble) are right or the mainstream folks (everything will go back to normal after a few interest rate hikes) are right but I'm pretty certain nobody will face meaningful consequences for being wrong.
DAI is collateralized by crypto. A lot of it is USDC.
The problem with unstable collateral is that it unwinds in market downturns, making the stable coin less useful when most needed
The problem with unstable collateral is that it unwinds in market downturns, making the stable coin less useful when most needed
DAI is great in principle and is built on fascinating technology, but the incentives for issuing DAI are not worth the risks. DAI is only created as a means of leverage, you take your collateral, lock it into a contract and receive 1/3rd of the collateral's value back in the form of DAI with the idea being that you can immediately sell that DAI and buy more crypto with it. But because of this, DAI is created precisely when its demand is fairly low and it's destroyed precisely when its demand is fairly high.
When crypto markets are volatile there's more demand to cash out of crypto and into a stable coin, but volatility is also when people take on the least amount of leverage meaning that it's also when there's the least amount of DAI available.
When crypto markets are not volatile, then the utility of a stable coin goes down and yet that's also when people assume the most amount of leverage and hence when the most amount of DAI is available.
The end result is that the incentives for DAI don't really work out all that well.
When crypto markets are volatile there's more demand to cash out of crypto and into a stable coin, but volatility is also when people take on the least amount of leverage meaning that it's also when there's the least amount of DAI available.
When crypto markets are not volatile, then the utility of a stable coin goes down and yet that's also when people assume the most amount of leverage and hence when the most amount of DAI is available.
The end result is that the incentives for DAI don't really work out all that well.
It’s so much more complex, with the money markets and lending markets and stablecoin liquidity pools. And the emerging tech is other stable coins for decentralized forex. So there are many reasons for minting DAI, interest rate arbitrage is a good one.
DAI is small and half of DAI collateral is USDC in any case.
No, and that's exactly my point. The opposite problem is something the Fed is concerned about!
Matt Levine wrote a great article explaining how stablecoins could actually be too safe, and that concerns the Fed, possibly to the point of action [0]:
> A less obvious risk of stablecoins is that they might be too stable. A stablecoin is, among other things, a substitute for putting money in a bank. Banks are generally very safe places to put money, but they are not perfectly safe. There can be runs on banks; banks can fail. For most U.S. retail bank accounts this is not a very salient problem, since they are backed by government deposit insurance, but many large institutional pools of money (corporate cash accounts, money-market funds, etc.) park their money in short-term bank instruments and are sensitive to risk. If a bank gets riskier, it will lose deposits. And if a stablecoin is so stable that it is safer than a bank, then banks generally will lose deposits.
> Why is this a risk? Well, banks do useful stuff. Classically, they take people’s deposits and lend them out to other people to start businesses and buy homes. The provision of credit by banks helps the economy grow. More to the point, the withdrawal of credit by banks hurts the economy, and the risk here is wrong-way. If people get nervous about banks and pull out all their money to put it in safer stablecoins, then (1) that will probably happen at a time when the economy is shaky and (2) that will definitely make the economy shakier. The bulk of the response to the 2008 financial crisis involved preventing runs on banks, because those would have made all of the problems of the crisis much worse.
The critics are asking for something that's a little ridiculous and not in line with a) how banking works or b) accurate according to what the definitions of "attestation" and "audit" means in accounting.
[0] https://www.bloomberg.com/opinion/articles/2022-02-01/hedge-...
Matt Levine wrote a great article explaining how stablecoins could actually be too safe, and that concerns the Fed, possibly to the point of action [0]:
> A less obvious risk of stablecoins is that they might be too stable. A stablecoin is, among other things, a substitute for putting money in a bank. Banks are generally very safe places to put money, but they are not perfectly safe. There can be runs on banks; banks can fail. For most U.S. retail bank accounts this is not a very salient problem, since they are backed by government deposit insurance, but many large institutional pools of money (corporate cash accounts, money-market funds, etc.) park their money in short-term bank instruments and are sensitive to risk. If a bank gets riskier, it will lose deposits. And if a stablecoin is so stable that it is safer than a bank, then banks generally will lose deposits.
> Why is this a risk? Well, banks do useful stuff. Classically, they take people’s deposits and lend them out to other people to start businesses and buy homes. The provision of credit by banks helps the economy grow. More to the point, the withdrawal of credit by banks hurts the economy, and the risk here is wrong-way. If people get nervous about banks and pull out all their money to put it in safer stablecoins, then (1) that will probably happen at a time when the economy is shaky and (2) that will definitely make the economy shakier. The bulk of the response to the 2008 financial crisis involved preventing runs on banks, because those would have made all of the problems of the crisis much worse.
The critics are asking for something that's a little ridiculous and not in line with a) how banking works or b) accurate according to what the definitions of "attestation" and "audit" means in accounting.
[0] https://www.bloomberg.com/opinion/articles/2022-02-01/hedge-...
Honest question: how many hackernews people are cool with all their purchases being on a blockchain forever that is accessible ad infinitum to whichever party has access to it (and potentially all of the public) ?
Good question. There are tools and procedures that can be used to maintain anonymity within the blockchain. For instance, tornado cash is a popular dapp used to break the on-chain link between source and destination addresses of a transaction, so you could fund a spending address and make payments with it. The companies receiving money (stablecoins) would maintain off-chain data of your purchase (e.g. product, quantity, your contact info and delivery address) not available publicly.
The UX of paying a third-party broker to opt into a semblance of privacy isn't particularly great.
It's amusing (to me) how the cryptocurrency community has managed to convince its members to accept ridiculous amounts of commoditization and middlemen in exchange for anonymity properties that are strictly worse than cash, and arguably worse than payment cards.
It's amusing (to me) how the cryptocurrency community has managed to convince its members to accept ridiculous amounts of commoditization and middlemen in exchange for anonymity properties that are strictly worse than cash, and arguably worse than payment cards.
What do you mean by third party broker?
Tornado Cash is a decentralized protocol based on zero knowledge proofs. Its smart contracts are immutable, have no admins.
Besides that, let us not forget that the Mastercard/Visa middlemen charge us large fees for using their services and knows everthing about our purchase habits.
(unless you're living a cash based life, but that would make you an exception)
Tornado Cash is a decentralized protocol based on zero knowledge proofs. Its smart contracts are immutable, have no admins.
Besides that, let us not forget that the Mastercard/Visa middlemen charge us large fees for using their services and knows everthing about our purchase habits.
(unless you're living a cash based life, but that would make you an exception)
I don't know about Tornado Cash specifically, but every cryptocurrency tumbler that I'm familiar with takes a cut of the pork, on top of any transaction fees. This community discussion[1] makes it sound expensive.
> Besides that, let us not forget that the Mastercard/Visa middlemen charge us large fees for using their services and knows everthing about our purchase habits.
This is a common refrain, but it isn't quite accurate: the payment card networks charge merchants to use their services.
And sure, they know what you buy. But my Aunt Susie doesn't, nor does the next person who I pay using my payment card. Privacy as a concept is described by the security or threat model one is trying to conform to; cash and payment cards both protect me from unrelated prying eyes. Cryptocurrencies can also protect me from prying eyes, but they charge me for the privilege. By default, both my Aunt Susie and my neighborhood restaurant can see that I've been unfaithful and tried a new place for dinner.
[1]: https://torn.community/t/fee-how-much-does-it-cost-to-use/68
> Besides that, let us not forget that the Mastercard/Visa middlemen charge us large fees for using their services and knows everthing about our purchase habits.
This is a common refrain, but it isn't quite accurate: the payment card networks charge merchants to use their services.
And sure, they know what you buy. But my Aunt Susie doesn't, nor does the next person who I pay using my payment card. Privacy as a concept is described by the security or threat model one is trying to conform to; cash and payment cards both protect me from unrelated prying eyes. Cryptocurrencies can also protect me from prying eyes, but they charge me for the privilege. By default, both my Aunt Susie and my neighborhood restaurant can see that I've been unfaithful and tried a new place for dinner.
[1]: https://torn.community/t/fee-how-much-does-it-cost-to-use/68
Cash is dying and all credit card payments, bank transfers, Venmo / PayPal, literally everything is sucked up by data miners and is easily available to the government. You are arguing against a new system by comparing it to an irretrievably broken privacy financial system.
Privacy is difficult on the blockchain but not impossible. The tools continue to get better. I anticipate the privacy tools in the blockchain world will improve faster than any semblance or hope of privacy in the traditional financial world.
Privacy is difficult on the blockchain but not impossible. The tools continue to get better. I anticipate the privacy tools in the blockchain world will improve faster than any semblance or hope of privacy in the traditional financial world.
Again: the privacy/threat model is what matters.
I do not operate under the delusion that I will stop my bank or payment card provider from seeing my transactions, or that my government can't obtain a lawful order to inspect the details of my finances. My interest is in protecting my privacy from people who are not in those domains: my local bodega owner, a bored Internet denizen who decides that They Just Don't Like Me, a snooping relative. I do not want to live in a world where those people, by default, get to see and evaluate my financial behavior. That, so far, is the only world that immutable public ledgers currently offer me.
Thus far, privacy in the blockchain space seems to have become more expensive, not "better" in either the statistical or colloquial sense of the word. I'll believe it when I see it. In the mean time, the dollars I use to buy my morning coffee are about as anonymous as they were yesterday, last week, and last year.
I do not operate under the delusion that I will stop my bank or payment card provider from seeing my transactions, or that my government can't obtain a lawful order to inspect the details of my finances. My interest is in protecting my privacy from people who are not in those domains: my local bodega owner, a bored Internet denizen who decides that They Just Don't Like Me, a snooping relative. I do not want to live in a world where those people, by default, get to see and evaluate my financial behavior. That, so far, is the only world that immutable public ledgers currently offer me.
Thus far, privacy in the blockchain space seems to have become more expensive, not "better" in either the statistical or colloquial sense of the word. I'll believe it when I see it. In the mean time, the dollars I use to buy my morning coffee are about as anonymous as they were yesterday, last week, and last year.
There are technologies like Tornado cash and Railgun that can hide transactions on Ethereum. The current issue is they're too expensive to use on mainnet.
Once we have layer 2 payments using zk-rollups, transaction costs will fall to a few cents and many apps could easily integrate these technologies to tumble your wallet (taking all funds and send them through this tech into a new wallet) any time you want for a dollar or two. Or they could automatically do this after every transaction.
Then everyone will have access to easy completely anonymous payments in any currency they like.
We're just in the early days of this tech, like the internet when we used http everywhere and no one knew what a VPN was.
Once we have layer 2 payments using zk-rollups, transaction costs will fall to a few cents and many apps could easily integrate these technologies to tumble your wallet (taking all funds and send them through this tech into a new wallet) any time you want for a dollar or two. Or they could automatically do this after every transaction.
Then everyone will have access to easy completely anonymous payments in any currency they like.
We're just in the early days of this tech, like the internet when we used http everywhere and no one knew what a VPN was.
Fortunately tornado cash is already on L2, I think even on every single bigger L2.
Not with the same volume as on mainnet, but still gradually increasing.
Not with the same volume as on mainnet, but still gradually increasing.
I am not. When I speak with those in defi they hardly even understand the most basic aspects of this technology. My personal hope is that quantum computing develops fast enough to decimate the decentralized financial industry powered by blockchain.
I don't think any forward looking state of quantum computing threatens SHA2.
This question presumes the envisioned future is where each person has their own non-custodial wallet that holds stablecoins that they use in transactions, no?
If the current trajectory is any indication, it's more likely that everyday users would mostly hold custodial accounts at organizations (e.g. Coinbase, like banks) and use stablecoins that way, which control aggregate wallets, and trackability stays within the org level (also like banks). Probably not as easy for the public to access (possible in data hacks) but just as easy for government access.
If the current trajectory is any indication, it's more likely that everyday users would mostly hold custodial accounts at organizations (e.g. Coinbase, like banks) and use stablecoins that way, which control aggregate wallets, and trackability stays within the org level (also like banks). Probably not as easy for the public to access (possible in data hacks) but just as easy for government access.
Amusing how it's gone from "be your own bank" back around to centralization, but this time with a colossal energy footprint behind it. Same shit, bigger pile I guess.
You can always build centralized systems on top of decentralized ones in order to mitigate the scaling costs of decentralization. It's essentially impossible to build a decentralized system on top of a centralized one in order to mitigate the downsides of centralization.
I don't think that's the case. If Paypal wanted, and it was legally allowed, they could anonymize my data to an extent where not even their own team could know who I am. We don't do it because it would be open to fraud and scams, not because it is impossible.
You didn't actually address anything I said. I'm not talking about privacy at all.
For most purposes, it doesn't matter. For others, there's Monero.
Even Bitcoin has the Lightning network that uses some clever smart contacts to avoid having to record every purchase on the blockchain. it's a layer built on top of Bitcoin that only requires an on-chain transaction to open or close a payment channel. Once the channel is open you can make a lot of extremely private payments through it.
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There are ways to maintain privacy with things like Block Wallet: https://blockwallet.io/
Crypto isn't for purchases, but if you decide to do that you should use an anonymous cryptocurrency.
Actually Bitcoin's initial promise was as a form of cash for purchases, and it has failed spectacularly to the point where even the strongest proponents rarely make that claim.
Is "purchase" some technical definition you're using? I've purchased many goods and services with cryptocurrency these past few years. Used physical silver a lot as well. Even paid rent. Also partially paid a contracting bill with one ounce of gold. It takes a bit more legwork and explanation but monetary systems don't change by magic. It takes an impassioned minority individually putting the work in.
You can do it but it's not a good idea. Transactions are slow, they're public on the blockchain forever, fees are variable, there's no way to correct erroneous transactions or dispute fraud, and of course you're missing out on future appreciation.
It's worth going through eary adopter hassles if the eventual result is better, but crypto won't ever be better.
It's worth going through eary adopter hassles if the eventual result is better, but crypto won't ever be better.
I generally only use private cryptocurrencies with low fees and fast transaction times, like Monero and PirateChain. If I have to use Bitcoin or any other surveillance coin, I am well-versed in "cleaning" my coins, but that's not desirable for a number of reasons. Perhaps you're focusing on co-opted surveillance coins, but privacy coins are amazing.
cryptocurrency is not intended for making purchases?
Cryptocurrency is not currency (unit of account); we just call it that for historical reasons. It's not usable for purchases and the intent is irrelevant.
So what is it then?
Disclaimer: This is just my interpretation of “unit of account”. This is not me agreeing with it or advocating for it.
When people say “unit of account” basically what they are saying is:
Cryptocurrency is an Open Source rewrite of the banking systems that currently run on Cobal. “Banks, please start using them as your database and reconciliation layer instead of your legacy software.”
Meanwhile, users continue to use credit / debit cards as they do now, and they continue to see some number on their bank accounts going up and down regardless of where the “money” actually is. Which is the same as today. That’s why we see “Pending” across so many of our transactions.
When people say “unit of account” basically what they are saying is:
Cryptocurrency is an Open Source rewrite of the banking systems that currently run on Cobal. “Banks, please start using them as your database and reconciliation layer instead of your legacy software.”
Meanwhile, users continue to use credit / debit cards as they do now, and they continue to see some number on their bank accounts going up and down regardless of where the “money” actually is. Which is the same as today. That’s why we see “Pending” across so many of our transactions.
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I'm in
Can someone explain how a stablecoin is different from the fiat it's backed by, other than the name?
Like why can't/shouldn't the government claim that a USD "coin" is just another name for... USD? And therefore maintaining a balance or reserve of it is equivalent to maintaining a bank account? (edit: or maybe I should say "fiat deposit account", which may not be FDIC insured)
Like why can't/shouldn't the government claim that a USD "coin" is just another name for... USD? And therefore maintaining a balance or reserve of it is equivalent to maintaining a bank account? (edit: or maybe I should say "fiat deposit account", which may not be FDIC insured)
USD banknote is a proof that USA as a country owes you a particular amount of good.
USDT is a proof that some shady unregulated organization owes you an equivalent amount of good. "Backed by USD" is just a claim (99% lie, in reality).
USDT is a proof that some shady unregulated organization owes you an equivalent amount of good. "Backed by USD" is just a claim (99% lie, in reality).
One is backed by the US government, but isn't able to be used on chain.
One is backed by a bank account, and is able to be used on chain.
Assuming the organization behind it appears to be good for the 1/1 USD/USDC exchange at all times that system works, but stuff gets weird if that peg ever moves.
Assuming the organization behind it appears to be good for the 1/1 USD/USDC exchange at all times that system works, but stuff gets weird if that peg ever moves.
The "chain" isn't a Thing that somehow changes the nature of whatever it records though, right? If I ran a bank and wrote people's balances on bamboo, and executed transfers via carrier pigeons, that wouldn't suddenly change the currency, right? The government backing also seems beside the point - even for non-FDIC-insured entities, holding someone's money to give it back to them later makes their money become backed by you, but doesn't change the currency.
I'm actually pretty worried about a fed coin. I can see it being a big win or a big loss to Americans and citizens of other countries. The big potential downside I see is that a digital currency can be easily tracked (blockchain or not blockchain, this is possible). Every bitcoin transaction is recorded, with a full history, and we can identify from who to whom (assuming we know who owns a wallet address, which I think is expected here). On the other hand, if a digital currency is using ZKPs then it would be a big win for privacy because it would be like digital cash. But I'm under the impression that this is unlikely to happen. There's questions about how we'd track things like taxes and for some reason the answer of "the same way we do now and the same way we did before digital money" isn't sufficient. I even see this as a win if there's a flat consumption tax (gas). But I almost never see this discussion taking place. So I'm curious what other HN users think. This seems like a nuanced distinction that I don't think anyone that isn't tech literate would even be aware of.
The real benefits could come from making taxation easy and automatic and a requirement that all public transactions be publically accessible while private could remain private. But I don't see states implementing this at any point, but maybe the reverse will happen anonimized public transactions while individuals have to keep all transactions transparent to states.
As I see it, there can be a lot of benefits to everyone.
- Gov can easily collect consumption taxes through transaction fees
- Make transactions completely anonymous (similar to cash)
- Ease government infrastructure as we no longer need to print physical currency that can be lost or destroyed. Also potentially helping with counterfeit money. I'm also assuming coins would be pre-mined.
The major disadvantage I see is: Gov could reduce anonymity and further invade privacy of everyday citizens. I see this as too much power the dream of authoritarians.
I don't think you would need the public/private transaction paradigm (like zcash). We can watch transactions from wallets and know the owners without knowing who transactions are going to. This would operate the same way cash businesses operate. In a business wallet you'd still have to report everything on your taxes. We can still see when businesses make and lose money by tracking just their wallets. I think the best way to do this is not have wallets with special privileges nor privileged transactions. If we have to explicitly make transactions private they can do the same thing they do with encryption: "only bad guys use encryption because they have something to hide".
- Gov can easily collect consumption taxes through transaction fees
- Make transactions completely anonymous (similar to cash)
- Ease government infrastructure as we no longer need to print physical currency that can be lost or destroyed. Also potentially helping with counterfeit money. I'm also assuming coins would be pre-mined.
The major disadvantage I see is: Gov could reduce anonymity and further invade privacy of everyday citizens. I see this as too much power the dream of authoritarians.
I don't think you would need the public/private transaction paradigm (like zcash). We can watch transactions from wallets and know the owners without knowing who transactions are going to. This would operate the same way cash businesses operate. In a business wallet you'd still have to report everything on your taxes. We can still see when businesses make and lose money by tracking just their wallets. I think the best way to do this is not have wallets with special privileges nor privileged transactions. If we have to explicitly make transactions private they can do the same thing they do with encryption: "only bad guys use encryption because they have something to hide".
Yea, I was thinking more in terms of what would be good for society, regardless of current implementation. It would really help fight corruption if each state/business interaction can be tracked along with all supply chains.
Yeah, but you have to make tradeoffs. If we look at pareto we can't solve everything without infinite resources. There's also the assumption that people have to be good actors. So why not instead protect individual rights? We get the benefits of cash with anonymity but a digital currency also reduces tax evasion. We can have both. But not either perfectly. You just declare your wallets on your tax forms. We could also make it tied to a citizen ID (update SSN) and presto, everyone has access to banking (in some form). Which is a great for everyone.
> Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.
> Additionally, dollar-pegged stablecoins backed by adequately safe and liquid collateral can potentially serve as a digital safe haven currency during periods of crypto market distress.
That's the Federal Reserve being themselves. Buy US dollars, use US dollars as the global currency. It makes a lot of sense for the USA, not necessarily for the rest of the world. But the Federal Reserve represents it's country interest, so it makes sense.
That's the Federal Reserve being themselves. Buy US dollars, use US dollars as the global currency. It makes a lot of sense for the USA, not necessarily for the rest of the world. But the Federal Reserve represents it's country interest, so it makes sense.
Stablecoins already do this. Traders aren't exiting the crypto ecosystem during selloffs, they just go to stablecoins and move unlimited sums back into risk assets at a moment's notice.
This is the FederalReserve taking a measured analysis, saying "wow all those luddites were hilariously wrong and have no idea what they're talking about, but we're going to stop just short of saying this is already pretty amazing".
This is the FederalReserve taking a measured analysis, saying "wow all those luddites were hilariously wrong and have no idea what they're talking about, but we're going to stop just short of saying this is already pretty amazing".
The Chinese currency used to be and might still be pegged to the US dollar so why shouldnt I invest in the Chinese govt debt instead?
I do know some parts of the US govt has complained about the pegging because it made US workers more expensive than Chinese workers.
And the I remember the £ in the 90's crashing out of the Exchange Rate Mechanism when it was pegged to the German DM as Germany had(still has) a strong economy which sent interest rates soaring to something like 12 or 15%!!!
So pegging currency to others must be more nuanced than that it seems.
I do know some parts of the US govt has complained about the pegging because it made US workers more expensive than Chinese workers.
And the I remember the £ in the 90's crashing out of the Exchange Rate Mechanism when it was pegged to the German DM as Germany had(still has) a strong economy which sent interest rates soaring to something like 12 or 15%!!!
So pegging currency to others must be more nuanced than that it seems.
> The Chinese currency used to be and might still be pegged to the US dollar so why shouldnt I invest in the Chinese govt debt instead?
Because the US makes it easy for you to trade dollars around. The dollar's dominance will collapse the moment that significant restrictions are introduced around who can hold it, how they can hold it, and what they can trade it for.
China doesn't care one whit about making it easy for a foreigner (or a local) to trade its money (or derivatives) around. China cares about stabilizing its economy. If the CPC decides tomorrow that currency controls are necessary to stabilize their economy, you're going to be SOL. If the CPC decides tomorrow that USD, or BTC, or RMB can't flow out of China, you're SOL. And so on, and so on.
I wouldn't recommend making investments when you don't understand the risks.
Because the US makes it easy for you to trade dollars around. The dollar's dominance will collapse the moment that significant restrictions are introduced around who can hold it, how they can hold it, and what they can trade it for.
China doesn't care one whit about making it easy for a foreigner (or a local) to trade its money (or derivatives) around. China cares about stabilizing its economy. If the CPC decides tomorrow that currency controls are necessary to stabilize their economy, you're going to be SOL. If the CPC decides tomorrow that USD, or BTC, or RMB can't flow out of China, you're SOL. And so on, and so on.
I wouldn't recommend making investments when you don't understand the risks.
I don’t think you can invest in Chinese government debt as a foreigner, but there are some real estate bonds you can buy…just not very safe.
> I don’t think you can invest in Chinese government debt as a foreigner
You most certainly can. Hell, there are ETFs that allow you to do that.
You most certainly can. Hell, there are ETFs that allow you to do that.
The moment we see stable coins emerge denominated in other national currencies with these stable coins trading against each other in high volume crypto exchanges is the moment the traditional cross-border payments industry dies.
There's just no way traditional FX can compete when you can instantly swap a USD token for a token of any other currency at tiny cost everywhere in the world. Crypto exchange already does this, and sometimes better, it's just harder for people to figure out.
Even the half-way situation we have today of USD stablecoins trading for local currency in other countries is likely going to obliterate traditional FX in a few years. It's already happening, and really fast.
There's just no way traditional FX can compete when you can instantly swap a USD token for a token of any other currency at tiny cost everywhere in the world. Crypto exchange already does this, and sometimes better, it's just harder for people to figure out.
Even the half-way situation we have today of USD stablecoins trading for local currency in other countries is likely going to obliterate traditional FX in a few years. It's already happening, and really fast.
A quick search revealed that in 2019 88% of international transactions were made in USD. So even if Reserve Bank of India was doing this analysis -- they might likely take USD as a global reference instead of Indian Rupees.
True, but what's the alternative? What would work better?
Also, wouldn't that transfer the stress from crypto to USD, by creating inflation whenever people exit crypto?
> As commercial banks engage in fractional-reserve banking with stablecoin deposits, their balance sheet expands with expansions in credit and security holdings accounting for most of the expansion. The central bank shrinks its balance sheet on the net, as reserves increase slightly while cash liabilities decrease significantly. Households accumulate more assets, funded by the expansion in bank loans.
This is basically saying everyone can get more money because the Fed is less bound by its cash liabilities. This could allow them more direct control over the money supply which is less tied to physical cash deposits. Cautiously optimistic here but this seems like a good thing overall.
One problem scenario: banks invest more with larger balance sheets. What if those investments fail? Now they have liabilities for their deposits which are backed by stable coins which, in turn, are backed by the Fed, which has slightly more cash than before (due to households replacing cash with stable coins) but likely not enough to cover the difference. Could this be a problem or would the Fed simply print more stable coins?
This is basically saying everyone can get more money because the Fed is less bound by its cash liabilities. This could allow them more direct control over the money supply which is less tied to physical cash deposits. Cautiously optimistic here but this seems like a good thing overall.
One problem scenario: banks invest more with larger balance sheets. What if those investments fail? Now they have liabilities for their deposits which are backed by stable coins which, in turn, are backed by the Fed, which has slightly more cash than before (due to households replacing cash with stable coins) but likely not enough to cover the difference. Could this be a problem or would the Fed simply print more stable coins?
I was with you to the end... how can the Fed print more stable coins? Unless you're suggesting that they'd issue their own stable USD, which honestly would be a great idea. IMO it seems more likely that they'd print more traditional dollars via congressional authorization or treasury nonsense instead.
“Print” stable coins referring to issuing their own CBCD, yes. I mean, the Fed determines monetary policy, correct? They control the interest rates of the economy basically which gives them all sorts of levers to manipulate. My concern is basically: banks have more assets, backed with CBDC, in turn backed by the Fed. If banks make poor investments (say in a housing market which collapses and they are unable to sell their underlying assets), their “money” is even less tied to cash than before, since the Fed can now just issue more CDBC without needing cash reserves. It seems to be getting all a bit abstract.
Stablecoins are a vital part of decentralized exchanges (DEXs). Since there is no central party running the exchange, it is impossible to store or account for a FIAT money. With stables, you can pull out of crypto on a DEX and hold some (virtual) inflationary FIAT with very low slippage and fees. You're free to re-enter at a later time, or swap 1:1 for FIAT on a CEX.
Stables have the transferability properties of crypto (borderless, fast, no counter-party risk) without the downside of the erratic price fluctuations. A common critique of crypto is that it's too volatile to be paid in, or spent day-to-day, which is fair. Stables solve that mostly.
Other issues with backing/reserves and who is getting rich off the interest are important but I feel that stables are a valuable piece of the financial space and I hope they can be regulated lightly to eliminate some of those black-box characteristics.
Stables have the transferability properties of crypto (borderless, fast, no counter-party risk) without the downside of the erratic price fluctuations. A common critique of crypto is that it's too volatile to be paid in, or spent day-to-day, which is fair. Stables solve that mostly.
Other issues with backing/reserves and who is getting rich off the interest are important but I feel that stables are a valuable piece of the financial space and I hope they can be regulated lightly to eliminate some of those black-box characteristics.
Any stablecoins pegged to the dollar are loosing value at all times due to inflation. During normal times its ~2% annually, but right now it's much worse than that of course. I appreciate the idea of stablecoins and they certainly have a utility value in higher stability, but I can't envision any circumstance one would want to hodl a large amount of stablecoins as an asset.
[Edit] And now that I've actually read some of the paper it makes sense the Fed would be ok with backing some stablecoins with reserves. It provides the government a way to get a taste of an invisible tax on it via inflation (as all stablecoins are exposed to inflation).
Another angle I had not fully comprehended before is the governments complaint that stablecoins are only fractionally backed. While the reserve system is obviously a fractional reserve system, crypto represents solely the cash component of that system just as the US dollar does. Crypto does not represent a reserve split circuit money system. So, in order for crypto to operate as a fractional reserve it is doing something distinct (and a little more dangerous) from our current reserve system and hence why crypto is getting heat for this behavior.
And of course any currency system operating freely outside of the reserve system is a challenge to the Fed's authority so there will naturally be pressure to get crypto tied in somehow. The Fed's other paper released this month with the open call for CBDC feedback would seem to tie nicely into this one. In that paper they quickly realized that they needed to take over that last 10% of the US population that don't use banking services in order to successfully kill off cash. The other branch of that problem they did not discuss in that paper is tying crypto into the reserve system.
We're doomed the moment Congress blesses the Fed with the legal authority to issue CBDC backed by reserves. It's coming.
https://www.federalreserve.gov/publications/files/money-and-...
https://headlineusa.com/bank-of-international-settlements-ch...
[Edit] And now that I've actually read some of the paper it makes sense the Fed would be ok with backing some stablecoins with reserves. It provides the government a way to get a taste of an invisible tax on it via inflation (as all stablecoins are exposed to inflation).
Another angle I had not fully comprehended before is the governments complaint that stablecoins are only fractionally backed. While the reserve system is obviously a fractional reserve system, crypto represents solely the cash component of that system just as the US dollar does. Crypto does not represent a reserve split circuit money system. So, in order for crypto to operate as a fractional reserve it is doing something distinct (and a little more dangerous) from our current reserve system and hence why crypto is getting heat for this behavior.
And of course any currency system operating freely outside of the reserve system is a challenge to the Fed's authority so there will naturally be pressure to get crypto tied in somehow. The Fed's other paper released this month with the open call for CBDC feedback would seem to tie nicely into this one. In that paper they quickly realized that they needed to take over that last 10% of the US population that don't use banking services in order to successfully kill off cash. The other branch of that problem they did not discuss in that paper is tying crypto into the reserve system.
We're doomed the moment Congress blesses the Fed with the legal authority to issue CBDC backed by reserves. It's coming.
https://www.federalreserve.gov/publications/files/money-and-...
https://headlineusa.com/bank-of-international-settlements-ch...
speaking of stablecoins, I remember reading a few years ago that Tether (USDT) was surely a huge bubble waiting to pop because they couldn't possibly have enough liquid USD to cover their issued coins. Whatever happened to that story, is it basically the same situation today?
It's still a similar situation, but most people with a basic understanding of crypto avoid USDT if they can, because there are better alternatives now.
Yes, but usdt is not as important as it used to be
The grail of crypto is syntetic anonymous stablecoins which will free everyone from the games of the people in power, but the backed by fiat centralized stablecoins will be used by governments and banks to further their control over people.
> backed by fiat centralized stablecoins will be used by governments and banks to further their control over people.
Democratic government is the people; it is the people having power over things. Other sources of power, like big business and wealthy people, like to spread ideas deriding government (e.g., the Koch Brothers), so that the power shifts to them.
Who has power over your favorite cryptocurrency? If government gives up regulatory power, who gets that power?
Reasonably, the American people want control over the currency and money supply in their own country.
Democratic government is the people; it is the people having power over things. Other sources of power, like big business and wealthy people, like to spread ideas deriding government (e.g., the Koch Brothers), so that the power shifts to them.
Who has power over your favorite cryptocurrency? If government gives up regulatory power, who gets that power?
Reasonably, the American people want control over the currency and money supply in their own country.
There are no democratic governments, we have republics which are just a bit better oligarchies. We can make free and open systems that are more democratic based on participation, voluntarism and actual people voting. Which is what is happening in crypto. Of course in every system there is a possibility of corruption, but for crypto that's obvious and people are actually working on sloving this as a problem while in the real world that's a feature.
> Reasonably, the American people want control over the currency and money supply in their own country.
Sure and they can keep it, I just don't know why they need to control everyone else too. I'm on the other side of the planet and the only relevant politics is the US, whether or not I get to own a home in my lifetime depends on one guy deciding how strong he wants the dollar to be ... I don't find this system particullary reasonable.
> Reasonably, the American people want control over the currency and money supply in their own country.
Sure and they can keep it, I just don't know why they need to control everyone else too. I'm on the other side of the planet and the only relevant politics is the US, whether or not I get to own a home in my lifetime depends on one guy deciding how strong he wants the dollar to be ... I don't find this system particullary reasonable.
Someone wants you to not use your power. Who benefits from that? Who will gain power?
> There are no democratic governments, we have republics which are just a bit better oligarchies.
That's what people who want a true republic or oligarchy will tell you - quit, give up, it's hopeless. We not only have democracy, they work well - but they are made of people. If you vote out the bad people, they leave. If we the people do a bad job, we'll have bad results. If you do a bad job, that's what you'll get. If you don't even show up, we will fail. It's straightforward. I'm counting on you.
> Of course in every system there is a possibility of corruption, but for crypto that's obvious and people are actually working on sloving this as a problem while in the real world that's a feature.
People are and have been working on that in real life for centuries, with great success. Democracies are far less corrupt than other systems of government, and until recently - until people started quitting and not supporting the work - they have been continually improving. What have you done to help?
> crypto
It's a sci-fi story; what you say is happening is a fiction (like many things on the Internet). We need to get serious about the real world and our real communities, now. We are losing ground every day.
> There are no democratic governments, we have republics which are just a bit better oligarchies.
That's what people who want a true republic or oligarchy will tell you - quit, give up, it's hopeless. We not only have democracy, they work well - but they are made of people. If you vote out the bad people, they leave. If we the people do a bad job, we'll have bad results. If you do a bad job, that's what you'll get. If you don't even show up, we will fail. It's straightforward. I'm counting on you.
> Of course in every system there is a possibility of corruption, but for crypto that's obvious and people are actually working on sloving this as a problem while in the real world that's a feature.
People are and have been working on that in real life for centuries, with great success. Democracies are far less corrupt than other systems of government, and until recently - until people started quitting and not supporting the work - they have been continually improving. What have you done to help?
> crypto
It's a sci-fi story; what you say is happening is a fiction (like many things on the Internet). We need to get serious about the real world and our real communities, now. We are losing ground every day.
We don't live in true democracies. Too many gullible people. Few politicians to vote for, the ones backed with hundreds of millions from rich people, who are the ones in charge at the end.
There's plenty of truth to your criticisms, but it seems to me that potentially they lead to nihilism (in the US that would produce arguments like "I don't vote, there's no difference between the two parties"). I prefer to think we can still influence the direction that policymaking takes, even if it's an uphill battle.
Unless by "true democracies" you meant "direct democracies" since that's absolutely true, almost no one does.
Unless by "true democracies" you meant "direct democracies" since that's absolutely true, almost no one does.
I understand your concern and respect your will to stand for Democracy. I was in that place until recently. But I've changed.
I see current self-claimed "democracies" as a mix of Oligarchy, Technocracy and Bureaucracy, with Democracy influencing a tiny fraction of actual results of government action in citizens' lives.
And I don't see a path to a truly democratic system without a major cultural change and, most importantly, change in the individual level.
I see current self-claimed "democracies" as a mix of Oligarchy, Technocracy and Bureaucracy, with Democracy influencing a tiny fraction of actual results of government action in citizens' lives.
And I don't see a path to a truly democratic system without a major cultural change and, most importantly, change in the individual level.
I don't think whether something leads to "nihilism" or what any of us "prefer" to think has any bearing.
Even as a representative democracy, the distribution of power is by Supreme Court decision not one-citizen, one-vote, one unit of power over the government.
The US Supreme Court ruled in Citizens United v. Federal Election Commission essentially that money was free speech and so its effects on elections could not be limited.
So the wealthy, or any wealthy interests internationally that have national entities that can spend money, have a hugely disproportionate hold on elections due to their ability to frame the information and motives behind elections, often with large amounts of coordinated misinformation.
So both financially, and informationally, the US democracy is not only legally corrupt, but any corporation that needs to negotiate with the government at any level, is virtually forced into participating in that legal corruption or be at a severe disadvantage.
The non-wealthy also suffer from that severe disadvantage, but have no wealth to balance it. So in the zero sum game of power politics, they have lost considerable power relative to any formal democracy, representative or not.
The legal corruption is both self-perpetuating and a malignant motivator for new scales and means of further corruption. The people in government, and people with money, are both being selected and incentivized, with stick and carrot, to be, and to further enable via their levers on government, even worse systemic corruption.
The US is not a healthy representative democracy and it isn't unreasonable to wonder if it is on a runaway path to worse outcomes without a clear mechanism for a turnaround in sight.
Even as a representative democracy, the distribution of power is by Supreme Court decision not one-citizen, one-vote, one unit of power over the government.
The US Supreme Court ruled in Citizens United v. Federal Election Commission essentially that money was free speech and so its effects on elections could not be limited.
So the wealthy, or any wealthy interests internationally that have national entities that can spend money, have a hugely disproportionate hold on elections due to their ability to frame the information and motives behind elections, often with large amounts of coordinated misinformation.
So both financially, and informationally, the US democracy is not only legally corrupt, but any corporation that needs to negotiate with the government at any level, is virtually forced into participating in that legal corruption or be at a severe disadvantage.
The non-wealthy also suffer from that severe disadvantage, but have no wealth to balance it. So in the zero sum game of power politics, they have lost considerable power relative to any formal democracy, representative or not.
The legal corruption is both self-perpetuating and a malignant motivator for new scales and means of further corruption. The people in government, and people with money, are both being selected and incentivized, with stick and carrot, to be, and to further enable via their levers on government, even worse systemic corruption.
The US is not a healthy representative democracy and it isn't unreasonable to wonder if it is on a runaway path to worse outcomes without a clear mechanism for a turnaround in sight.
Precisely. Adding to all you said:
All assignments to the Supreme Court and its Circuits follow a Technocracy system, not a Democracy.
Citizens in their daily affairs are subject much more to a Bureaucracy system than to the results of a Democratic system of government.
The "intelligence community", for example, part of this Bureaucratic system of government, has extremely strong power.
This is true for the US and most - if not all - other self-claimed "democracies" nowadays.
I think Democracy accounts for <50% of what governments can influence in our lives. I'd personally say it's less than 10%, but being conservative. Anyway, it's certainly not the majority of it, so I wouldn't say we live in a Democracy. It's a mix of Technocracy/Bureaucracy, with a thin veil of Democracy.
All assignments to the Supreme Court and its Circuits follow a Technocracy system, not a Democracy.
Citizens in their daily affairs are subject much more to a Bureaucracy system than to the results of a Democratic system of government.
The "intelligence community", for example, part of this Bureaucratic system of government, has extremely strong power.
This is true for the US and most - if not all - other self-claimed "democracies" nowadays.
I think Democracy accounts for <50% of what governments can influence in our lives. I'd personally say it's less than 10%, but being conservative. Anyway, it's certainly not the majority of it, so I wouldn't say we live in a Democracy. It's a mix of Technocracy/Bureaucracy, with a thin veil of Democracy.
Yes, the Citizens United decision was a clear move towards plutocracy. And while congress could pass a law to correct it, it's unclear if they have any inclination to do so, and if the court would let it stand if they did. I agree the health of the US system is poor, but hope that we can still revive it.
Congress won't do it unless people push them to. If these people quit, they won't. Again, who gains from that? Who are the quitters serving, knowingly or not?
Those seem like empty, general claims. Do you have anything specific to claim that can be proven or disproven?
It's what the people who want to shift the power from democracy like to say (including the empty, general nature). We don't live in perfect democracies, of course, but we will never live in perfect anything - these are human institutions, and it's humans all the way down.
But lots of powerful people and institutions invest enormous amounts of resources in persuading the public - the entire world of news opinion (including, first among peers, most of Murdoch's news operations), massive disinformation operations, all the corporate PR spin, etc. etc. etc. Those are enormous investments for something that doesn't matter.
No person I've ever admired, current or historical, ever advised despair and quitting. It's a sure way to lose, and hand over your power to someone else. Who are you handing it to?
It's what the people who want to shift the power from democracy like to say (including the empty, general nature). We don't live in perfect democracies, of course, but we will never live in perfect anything - these are human institutions, and it's humans all the way down.
But lots of powerful people and institutions invest enormous amounts of resources in persuading the public - the entire world of news opinion (including, first among peers, most of Murdoch's news operations), massive disinformation operations, all the corporate PR spin, etc. etc. etc. Those are enormous investments for something that doesn't matter.
No person I've ever admired, current or historical, ever advised despair and quitting. It's a sure way to lose, and hand over your power to someone else. Who are you handing it to?
read the paper, the Federal Reserve knows this too and isn't advocating for FEDcoin in this paper.
They even know the word "composability" and have lended credibility to the term and context as morphed by the smart contract space.
> . On public blockchains, this also allows for 24-hours-a-day/7- days-a-week/365-days-a-year transactions.5 Second, stablecoins are typically built on DLT standards that are programmable and allow for the composability of services.6 In this context, “composability” means stablecoins can function as self-contained building blocks that interoperate with smart contracts (self-executing programmable contracts) to create payment and other financial services.7 These two key features underpin the current use cases of stablecoins and support innovation in both the financial and non-financial sectors.
> The public algorithmic stablecoin sector is highly innovative and difficult to categorize. However, one can generally think of the design of these stablecoins as based on two mechanisms: (1) the collateralized mechanism and (2) the algorithmic peg mechanism
They even know the word "composability" and have lended credibility to the term and context as morphed by the smart contract space.
> . On public blockchains, this also allows for 24-hours-a-day/7- days-a-week/365-days-a-year transactions.5 Second, stablecoins are typically built on DLT standards that are programmable and allow for the composability of services.6 In this context, “composability” means stablecoins can function as self-contained building blocks that interoperate with smart contracts (self-executing programmable contracts) to create payment and other financial services.7 These two key features underpin the current use cases of stablecoins and support innovation in both the financial and non-financial sectors.
> The public algorithmic stablecoin sector is highly innovative and difficult to categorize. However, one can generally think of the design of these stablecoins as based on two mechanisms: (1) the collateralized mechanism and (2) the algorithmic peg mechanism
This is not the focus of this paper, but they do mention consumer safety and KYC and AML issues, which if the ecosystem matures they will try to enforce for sure.
[deleted]
Growth? That's not good for stablecoins
Growth in terms of supply and usage, not the notional value of a unit.
Isn't it growth as in usage rather than value? I thought stablecoins were locked to a currency?
This is a great paper.
Its basically saying "wow DeFi is amazing".
at this point I'm not sure who else other people need to hear it from, but let's see.
Its basically saying "wow DeFi is amazing".
at this point I'm not sure who else other people need to hear it from, but let's see.
DeFi? This is for a CBDC.
The paper is not advocating for CBDC. The paper is spurred by the sentiment for CBDC and the groanings of representatives in Congress, but this is not the direction or conclusion the paper made. Its pretty well balanced.
If you think DeFi with USDT/USDC is decentralized then DeFi using FedCoin would be no worse. It might be better since with USDT you have to trust Tether and the Federal Reserve but with FedCoin you only have to trust one.
What I don’t get is if stable coins aren’t backed by dollars somewhere, and their market cap is billions of dollars, and those stable coins are exchanged for actual dollars,
did we not just print billions of extra dollars out of thin air…?
Surely that must have some impact on inflation or the world economy in some sense
did we not just print billions of extra dollars out of thin air…?
Surely that must have some impact on inflation or the world economy in some sense
Stablecoins only maintain their peg when they aren't being exchanged for actual dollars. When everyone runs for the exits during the inevitable crash, there will only be so many dollars to go round.
No real dollars are being created anywhere in any of this - it is all simply a astonishingly complicated mechanism for transferring wealth from the marks to the scammers (and to pay some enormous electricity bills).
For example, printing USDT out of thin air and buying BTC with it supports the BTC price, this BTC is then brought onto the Tether books to back the newly printed USDT. The scammers then sell their own BTC into this price rise, receiving USDT which they (as privileged USDT account holders) can turn back into real dollars. The real dollars of course are coming from the marks who see BTC rising and dump their life savings into it, needing to buy USDT in order to buy the BTC.
It is almost beautiful in a way - and absolutely should be shutdown real soon now.
No real dollars are being created anywhere in any of this - it is all simply a astonishingly complicated mechanism for transferring wealth from the marks to the scammers (and to pay some enormous electricity bills).
For example, printing USDT out of thin air and buying BTC with it supports the BTC price, this BTC is then brought onto the Tether books to back the newly printed USDT. The scammers then sell their own BTC into this price rise, receiving USDT which they (as privileged USDT account holders) can turn back into real dollars. The real dollars of course are coming from the marks who see BTC rising and dump their life savings into it, needing to buy USDT in order to buy the BTC.
It is almost beautiful in a way - and absolutely should be shutdown real soon now.
This paper would make those questions evaporate.
Purely algorithmic stablecoins are a joke so far, whereas algorithmic overcollateralized stablecoins are doing great. The other even bigger ones backed by dollars somewhere.
Purely algorithmic stablecoins are a joke so far, whereas algorithmic overcollateralized stablecoins are doing great. The other even bigger ones backed by dollars somewhere.
Terra UST is doing quite well in spite of being receiving some FUD recently, right?
Obviously, but people will cherry pick evidence to rationalize what they already believe to be true and conflate this process with some kind objective falsifiable experiment in their head.
It seems disingenuous to host papers on FederalReserve.gov on a topic that already undergoes a great deal of inauthentic marketing. It seems like the Fed lending credibility to private enterprises that may not have as altruistic of intentions as the Fed.
It's a paper analyzing the (potential) impact of stablecoins on the currency and institutions governed by the federal reserve, written by people working for the federal reserve, with the intention of providing facts as a basis for potential regulations to be written by the federal reserve. Where else would it be hosted?
Powell should just dump it onto 4chan
As with the traditional heat pump there is a working fluid - the coins. These coins have a price (in dollars) - this is their temperature.
The market is cycled just as a heat pump, with the working fluid being squeezed by buying pressure to raise the price, then released by selling to reduce the price and start the cycle again.
By controlling the cycle (e.g. by printing USDT out of thin air), the scammers ensure that the marks are buying in when the price is high, because they believe it will continue rising, and sell when the price is low, because they fear a further drop. Thus money is pumped from the marks to the scammers.
MOON->FOMO->HODL->DUMP->MOON->
MOON - scammers buy in to start raising the price. Early marks start entering and the scammers can reduce their buying as the price takes off.
FOMO - late marks come in wanting some of the action. Scammers are now shifting to selling, with max selling as the top is reached and marks buying power becomes exhausted.
HODL - price is dipping, scammers still are selling, but marks are holding expecting prices to recover.
DUMP - heavy price falls are now frightening the marks, who start closing their positions. Scammers are quietly hoovering up the excess, and gradually put a floor to the price.
Repeat.
Note that the scammers coin holdings are conserved across the whole cycle - but because of the price differential between their buying and selling phases, they make a profit over that cycle.
BTC has gone through 2 such cycles in the last year or two, maybe it is just entering the MOON phase again now?