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Why Tether's Collapse Would Be Bad For Cryptocurrencies (wired.com)
Yesterday, Bloomberg reported that the U.S. Commodity Futures Trading Commission sent subpoenas last week to virtual-currency venue Bitfinex and Tether, a company that issues a widely traded coin and claims it's pegged to the dollar. Wired's Sandra Upson explains why Tether's collapse would be bad for the entire cryptocurrency market: Unlike bitcoin and its many siblings, tether is what is called a stablecoin, an entity designed to not fluctuate in value. With most cryptocurrencies prone to wild swings, tether offers people who dabble in the market the option of buying a currency that its backers say is pegged to the U.S. dollar. The root of the controversy is whether the company behind it, also called Tether, is telling the truth when it claims that every unit in circulation is matched by a U.S. dollar it holds in reserve. If the company has a dollar for every tether, that means in theory any holder can sell tethers back to the company for an equal number of dollars at any time. This belief keeps the value of a tether pegged to a dollar.
If tethers are not backed by a matching number of dollars, then Tether can print an arbitrary amount of money. (Other cryptocurrencies, by contrast, create new tokens according to strictly prescribed, predictable rules.) Other problems ensue, including suspicions that Tether is timing the release of new tethers to coincide with drops in the price of bitcoin and then using those tethers to scoop up bitcoins. Some observers fear that these purchases are artificially inflating the price of bitcoin. If traders lose faith in tether, they could end up triggering the crypto version of a bank run. Tether helps stabilize cryptocurrency exchanges in various ways, so its collapse could also cause some exchanges to topple, wiping out billions of dollars of investments overnight and potentially undoing much of the public's growing interest in new technologies like bitcoin.
If tethers are not backed by a matching number of dollars, then Tether can print an arbitrary amount of money. (Other cryptocurrencies, by contrast, create new tokens according to strictly prescribed, predictable rules.) Other problems ensue, including suspicions that Tether is timing the release of new tethers to coincide with drops in the price of bitcoin and then using those tethers to scoop up bitcoins. Some observers fear that these purchases are artificially inflating the price of bitcoin. If traders lose faith in tether, they could end up triggering the crypto version of a bank run. Tether helps stabilize cryptocurrency exchanges in various ways, so its collapse could also cause some exchanges to topple, wiping out billions of dollars of investments overnight and potentially undoing much of the public's growing interest in new technologies like bitcoin.
Nope. Banks can trade with money they don't yet have.
...gis sdrawkcab (usually not responding to ACs; don't bother posting as AC)
Uhm... unless I am misreading you, you appear to be very incorrect... (large) US banks are only required to hold 10% in reserve at any one time... That is 10% of the account balances NOT the account balances + 10%.
"A depository institution's reserve requirements vary by the dollar amount of NTAs held by customers of that institution. Effective November 17, 2015, institutions with net transactions accounts:
Of less than $15.2 million have no minimum reserve requirement;
Between $15.2 million and $110.2 million must have a liquidity ratio of 3% of NTAs;
Exceeding $110.2 million must have a liquidity ratio of 10% of NTAs.[8]
"
Sources: https://en.wikipedia.org/wiki/Reserve_requirement#United_States
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Perhaps I misunderstand, but it sounds like you are missing the point of fractional reserve banking. That means the bank can loan out more than it receives in deposits, with only a fraction of the total outstanding actually in the vault. That's the reserve percentage mandated by the US government.
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This is not true at all. Banks can loan up to 10x what they have in reserve. Eg for every $1,000,000 of their customer's money they're holding onto, they can loan out $10,000,000. The system itself is called a fractional reserve. It works for the same reason insurance works - because most people, most of the time, don't need to be bailed out of a bad situation.
That's why a lot of banks offer incentives for people who leave large sums of money sitting around doing nothing (ie savings accounts, checking accounts, etc). They're not giving "free" checking accounts out of the goodness in their hearts, or because you're such a good person that you deserve a free checking account. They do it because giving a "free" checking account grabs customers, and the average customer will have $X sitting in their account. They can then loan out $(10 * X) which will accrue interest (perhaps 2% for car loans, 3-5% for home loans, etc).
That's also why Bank of America went back to their roots recently and are forcing customers to either pay a monthly fee or maintain a minimum balance for a checking account. This is how 100% of all checking accounts used to work, before they were all "free". It's just that things are changing, and the move back to the old way of doing it probably suggests their average customer wasn't good at keeping a minimum balance that allowed them to do the volume of loans they wanted to do.
Once to fall bad apple have been removed, you get the harder to fall bad apple. There is nearly always never good apple. By now "idealist" have long been removed from the cryptocurrency ecosystem, leaving only the pure capitalist. And as human mostly base our capitalist endeaviour on pure greed and have as much as possible. That means that without rules you have only bad apple managing to stay afloat, because their advantage over good apple is too great.
Heck you can see something similar with banks : remove rules and they try to do incredibly unethical but legal stuff. Sometimes they do it *even* with the rules on. So as long as there is no governmental rules on cryptocurrency, it will stay a wild west where ONLY bad apple & a lot of hacking and fraud occurs, comapred to traditional money processing.
C. Sagan : A demon haunted world:
http://www.amazon.com/gp/product/0345409469/
visit randi.org
Any purchase inflates the value (not price) of Bitcoin
Given bitcoin's value is arbitrary and moving closer to zero all the time you've got that exactly the wrong way around.
Yes, bitcoin is heavily overpriced right now.
Perhaps I misunderstand, but it sounds like you are missing the point of fractional reserve banking. That means the bank can loan out more than it receives in deposits, with only a fraction of the total outstanding actually in the vault. That's the reserve percentage mandated by the US government.
Fractional reserve means they only have to keep (reserve) a fraction of the deposits on hand. A bank still cannot print and loan money it doesn't have. The federal government and/or the federal reserve can but a normal bank can't.
The fractional reserve system is what allows banks to give interest to people who deposit money with them. The alternative to a fractional reserve system is where 100% of the money is always in the bank. Now days, that would be the equivalence of a safety deposit box. The money is yours and the bank isn't allowed to touch it just store it and keep it safe. Fractional reserve started out when some unethical safe operators realized that when multiple people all asked them to store their money for them that the chances of them all asking for it back at once was pretty much zero so they started skimming off the bottom. Today it is legal and that skimming is split and some of the interest is given to the depositor. And again, you can always opt out of the fractional reserve system by using a safety deposit box instead but regardless the bank still never loans out more than the total deposits.
And what do you think happens when that 90 cents is deposited into the bank? 81 cents of additional loans is created, for a total of $1.71 floating around with only $1 to back it. Then the 81 cents is deposited, and another 72 cents in loans is created. Now you have $2.43 floating around.
If you don't think banks create money out of thin air, you don't understand fractional reserve banking.
Lord Adair Turner, formerly the UK's chief financial regulator, said "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account".
Populus vult decipi, ergo decipiatur...
"Force shits upon Reason's back." - Poor Richard's Almanac
I've been holding off building a computer for my son because I can't get a hold of a video card. As such, I'm all for a cryptocurrency bank run. It is all a speculation bubble anyways.
I think nearly everyone who is excited about crytocurrency accepts that "hacking and fraud" will happen at the user level (i.e. people can be tricked into giving away their keys) and that this is the case for both cryptocurrencies any anything else that is accessed by computer. We're ok with things that can be compromised by computer compromises, because we think we protect our computers better than laymen do. If you wanna call that arrogance, fine, but I have a perfect track record since I got on the Internet in 1991, so far.
Second, it is (by now) very clear that the other aspect of hacking and fraud involves exchanges. If your use of cryptocurrency requires conversion to other currencies, then exchanges are a convenient approach, but apparently nearly every exchange has suffered "hacking and fraud" such that I cannot think of any exchange that I would be willing to use. But it's important to note that "The Vision" for using this stuff, involves extremely infrequent conversion. Maybe you have to use an exchange initially to get some of the currency, but as long as you're both spending and selling, you might never need to get dollars and euros involved. Just like how a dollar user can easily get through life without ever bothering with euros (and vice versa) if a cryptocurrency gets sufficiently popular, it could theoretically be used that way as well. (And honestly, that's pretty much the only use case that I think is interesting.)
100% of the "hacking and fraud" that has happened with exchanges, is already illegal and nobody has ever suggested or thought of a single regulation that might possible improve it. The oldest law of trade, "Caveat emptor" is still the best. If an exchange doesn't prove itself trustworthy (and AFAIK to-date not a insgle one has) then you know you're taking a risk. If you have an idea, let's hear it, but please first ask yourself "does this protect against something that's already illegal?"
As for "hacking and fraud" on the system itself, though, AFAIK the only problem I have heard about yet, is the 51% attack. And that sucks, but you can't fix that with laws. But make no mistake: the big vision is that cryptocurrencies can be designed where we think users can win. Bitcoin just might not be it. We'll see.
Regardless, I think that additional laws cannot possibly help this stuff in any way. All they can do is interfere with non-fraudulent uses, because the laws would almost certainly be intended not to protect against fraud, but to return control to governments in order to restrict trade, and denying this power to governments is a big part of the point, to many of us. I will happliy give up any fraud-protection laws (especially since nobody has any reason to suspect they would help prevent fraud anyway) to keep government from being able to prevent cryptocurrency transfers.
I think no government can ever possibly become as trustworthy as a well-vetted design. You people are still trying to learn how to make a trustworthy government after thousands of years of trying, and you've never exceeded "laughably horrible." Cryptocurrencies are only about ten years old and they've nearly caught up. Twenty years from now, I think I know which approach will have been proven superior.
Just you wait until you see the Linux Desktop running on a Quantum Computer - it is almost usable!
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I personally am betting on ASIC-resistant, mineable coins.
There is no such thing as an "ASIC-resistant" coin or algorithm.
Coins like Ethereum are not mined on ASICs only because all mining ASIC development goes to Bitcoin, since it is by far the largest and most stable (yeah, let that sink in) coin. Ethereum's algorithm just requires a lot more memory / memory bandwidth because of the giant DAG.
Some chicken shit outfit could easily shit out an ASIC with a ton of memory and memory bandwidth, but they'd never recoup their investment in time for it to make sense. AMD and nVidia already make nearly perfect hardware for mining Ethereum since they put gobs of memory (8/16 GB) on board with tons of bandwidth (HBM2, 8 fucking channels of GDDR5X, etc.). AMD and nVidia do this in such volume (with big discounts on memory prices) and release new products so frequently that any computational advantage an ASIC would have would be leapfrogged quickly, while people are still crying out for their ASIC orders to ship.
All the outfits who went through this bullshit years ago with Bitcoin are content to keep pumping out Bitcoin ASICs. Back then, only a couple of companies out of the dozen+ that promised ASICs actually delivered. Most delayed, lied about specs, delayed more, and delivered only a handful of actual units (if they delivered any at all). The same chaos would repeat itself with Ethereum unless an established player - someone creating Bitcoin ASICs - got involved. There's no need for them to take that risk when they can keep pumping out Bitcoin ASICs.
Further, long-term Ethereum is a dead coin. I firmly believe the switch to "Proof of Stake" instead of "Proof of Work" will kill mining, and thus the coin itself.
We've been told that "fiat currencies" are bad because a government can print more money whenever they want, deflating the money people already hold. You can't trust it to keep its value. The solution is cryptocurrency! The supply is strictly controlled by an algorithm, so you can trust it to hold its value.
And what happens in practice? Cryptocurrencies are incredibly volatile. You can't rely on them at all. So instead someone creates a "stablecoin" that really does hold its value. And the way they do that is... by tying it to a fiat currency.
The irony is just incredible.
"I'm too busy to research this and form an educated opinion, but I do have time to tell everyone my uninformed opinion."
> And the bank writing it off destroys money.
It does not., it only destroys the debt.
Think about it: the loaned dollars could be in cash form, converted to liquid commodities or simply deposited in another bank.