https://www.centre.io/hubfs/pdfs/attestation/grant-thorton_c...
"US Dollars held in custody accounts are the total balances in accounts held by the Company at federally insured US depository institutions and in approved investments on behalf of the USDC holders at the Report Date."
The notion of counter-party risk is understood by a tiny fraction of the folks who participate in finance.
To me, there are only a limited set of options:
1. the peg fails
2. the custody accounts are switched to riskier assets - with or without knowledge of USDC holders. This, of course, has implications to the "stablecoin" status. One could even argue that USDC becomes a de facto fractional reserve bank at this point.
If you ever thought govt-backed cryptos and centralized tokens like USDC were a good idea, ask yourself this:
Could a stack of greenbacks ever be "blacklisted" (I mean, people have certainly tried with various "tricks")?
One of the nice property of money as we've known it so far was fungibility.
With govt-backed (e-dollar) and/or centralized cryptos (USDC), much like the woolly mammoth the whole notion will soon be extinct.
Decentralized ZKP-powered coins FTW.
Yes. Bill counters at banks capture serial numbers and associate them with your account when you make a cash deposit. Each night the serials are sent to a MCP database where they are checked against a hotlist entered by law enforcement across the country. The bank won't reject the bills on the spot, but depositing too many of the wrong ones will earn you a visit.
If Hawaii fell, or a large stash of notes intended for overseas use were diverted, they could easily demonetize them.
The reason it's not done on a more precise level is probably a UX issue-- you can easily remember "The $10 notes with yellow seals are void" but roadcasting and getting understanding of thousands of "$10 note Series 2024 serial number QL34567846A is void" is infeasible.
Copying from an older comment of mine (https://news.ycombinator.com/item?id=26812598):
I saw something like this happen when I was younger (this was pre-web, in the 80s or 90s, so I unfortunately haven't been able to find any online references to it): there was a big bank heist, and the stolen banknotes were new notes which hadn't been put into circulation yet. The ranges of their serial numbers were widely distributed by the press, and for instance cashiers at supermarkets were supposed to verify whether the serial numbers of the banknotes they received matched any of these ranges (since the banknotes hadn't been put into circulation, they were treated similar to counterfeit money: they officially didn't have any value). The country's currency has changed since then (it was the hyperinflation times), so that whole banknote series is no longer valid nowadays.
Deposit a whole stack from a bank robbery and find out.
The way this works for the most obvious analogous product I can think of in the financial markets (index ETFs like SPY https://www.ssga.com/us/en/institutional/etfs/funds/spdr-sp-... for instance) is known as the ETF creation and redemption mechanism. For any given ETF there is a pool of participating brokers who are entitled to create or redeem units in the etf with the ETF administrator. So if the price of the ETF gets too high relative to the assets then these brokers can buy the assets in the market and hand them in to the ETF admin who will add those assets to the ETF and give them in return the new units that are created as a result. This has the effect of raising the prices of the constituents and reducing the price of the ETF units (when the broker then sells those new units), bringing the prices back into equilibrium.
Conversely if the ETF units are too cheap, the broker can buy the units in the market and redeem them for the correct proportion of underlying assets (ie exactly the reverse process) bringing the price into balance the opposite way.
It's incredibly important for this mechanism (and the public record of assets in the basket it relies on) to be built in to the process if the price is to be truly tethered. Otherwise the tether is just an illusion and in the ETF world, ETFs which didn't have this type of mechanism went completely haywire and became defunct.
Can't say this news comes out as a surprise. I'm actually surprised by the fact that there are any reserves at all.
What is really interesting about Bitfinex / Tether is to research the history of the people who started these entities, especially their history prior to Bitcoin's existence.
Here's a taste:
https://nicolaborzi.medium.com/the-lawless-rollercoaster-of-...
As much as I'm a proponent of crypto, some folks very early on intuitively realized that the friction-less nature of the new technology made it the perfect vessel for running scams:
https://steemkr.com/bitcoin/@binyamin/bitfinex-s-founder-see...
Some of these are of course difficult to soit, as they tend to use numerous different names and identities, and have been in the scamming "game" for decades.
The takeaway from all of this is that one should absolutely do a quick research on founders and key figures when dealing with businesses that focus on crypto. People don't tend to change overnight, and especially not those that have been scamming people for decades before.
Just assume it's a scam from the off, it will save you a lot of work and money.
"On November 5, 2018, as an executive of Tether Mr Devasini lent 900 million dollars to Bitfinex and as an executive of Bitfinex, Mr Devasini signed the receipt to Tether."
That sounds totally legit and normal.
lol, maybe he has a twin brother :D
Balance breakdown: https://tether.to/tether-releases-breakdown-of-its-reserves/
I create a billion ScamStableCoins and claim they are worth $1 each.
I give a billion ScamStableCoins to ScamCryptoExchange. ScamCryptoExchange is run by me. ScamCryptoExchange writes an IOU for one billion US dollars and gives it ScamStableCrypto (my right hand gives something to my left hand).
I, as ScamStableCrypto, write down in my balance book that I have a billion dollars of Commercial Paper.
I announce that ScamStableCoin is fully backed.
Just imagine what's going to happen when there's a bank run on Tether.
I wonder for how long can they keep it going like that.
Before WW1 in Austro-Hungary a small game of cards takes place in a bar.
The stakes are tiny a few krona at the beginning.
By the end of the night people have mortgaged their properties, their belongings, their wives and have written IOUs for trillions of krona.
It ends with one of the players reporting to the police for illegal gambling hoping to collect a finder's fee on the total amount of IOUs...
2. Buy crypto with them and create a huge hype
3. Sell crypto for real money
4. Profit
5. Receive your Nobel prize in Economics
Stocks are overvalued, but are backed by real-world items with an actual value.
A stock's value is bounded below by its breakup value. So if people lost interest in IBM, at some point the stock would be worth buying just for its property and IP.
But there's nothing preventing any cryptocoin from going to zero, except sentiment.
I have a sense that a healthy maker analysis would show that the market does indeed care, but there’s to much fraud in the mix for it to be clear unless you dig out the details.
Yes. Bernie Madoff's scam lasted at least 16 years (1992-2008) and some suspect it could have started as far back as the 1970s.
Even the most religious zealot nun who has taken a blood oath of poverty would become corrupted in that situation and the money would trickle away.
Who is with me ?
I'm more interested in the other 25%. Does anyone know what it is?
Commercial paper makes up about 50% of Tether's balance book.
Tethers are essentially IOUs pegged to USD. While the Tether organization may have originally waited for the Tether purchaser to transfer the money into their accounts before issuing the Tether, by 2018 at the latest, this has to have changed when Tether was forced to cease dealing with US citizens. If not from the start, their model of trust must have allowed their large clients (the exchanges, etc.) to hold onto the USD and instead issue "Commerical Paper" to back the Tethers issued.
Tether obviously isn't going to reveal the exact arrangements here, and from the outset, their claims of having bank accounts with billions of dollars was suspect... but this revelation has been nothing new, and if anything, things look positive now. Tether doesn't appear to just be printing Tether with absolutely no backing.
https://www.nytimes.com/2008/09/20/business/20moneys.html
https://www.nytimes.com/2020/03/19/business/coronavirus-mone...
But more importantly, there's the 25% of their funds that bears absolutely no resemblance to anything a money market fund would do. The quote the FT article publishes from Martin Walker looks pretty reasonable to me:
> It is pretty clear looking at the makeup of the reserves — a tiny proportion of the reserves are cash on account at banks — that Tether is operating like a bank but with none of the normal disclosure.
> They are creating a dollar substitute and basically running a banking and payments business but without the oversight that anyone else doing a similar kind of business would have.
You could take that word-for-word from the debate that raged after Treasury bailed out the prime funds in 2008.
From Tether's chart, they literally have 2.9% in cash. So I guess the headline technically checks out.
But Tether reported over 75% held in cash equivalents, the same type of liquid assets Apple reports when reporters say Apple is sitting on billions in 'cash'
I think maybe more interesting, Tether reports only 1.64% slice of pie has some crypto holdings. Which seems kind of interesting given the theories about some shady btc/usd/tether pumping cycle scam might be happening behind the scenes.
https://tether.to/wp-content/uploads/2021/05/tether-march-31...
"In September 2019, Facebook announced that the reserve basket would be made up of: 50% United States dollar, 18% Euro, 14% Japanese yen, 11% Pound sterling and 7% Singapore dollar." [0]
Diem has, at this stage, halted tethering like this. They have since retreated physically (to the US) and ideologically (backing 100% by USD instead of a basket).
It is my understanding that they intended to operate Diem as you mentioned in your second point.
The primary issue with doing this is that, if its successful, and you have indeed created a more stable currency system (which is the intention of tethering/stablecoins in the first place), you will eventually be the mass currency, which will kill demand for nation state currencies (at least the ones not in the basket) outside of taxes.
This is why the Diem plan was shot down by global (banking) regulators, and also why stablecoins/tethering have never really operated outside of the digital realm (and to be frank, have merely serviced the pump and dump that is crypto today).
I 100% agree that the public record of these currencies has to be very clear and built into the process. Tether has repeatedly been misleading (weren't they originally 1:1 USD:Tether?) and even still, with these reports its hard to tell how the money is truly organized.
0: https://en.wikipedia.org/wiki/Diem_(digital_currency)#Curren...
This is what's so surprising to me. Markets are efficient and rational, right? (;-))
Well, we just learned a great deal. And no matter how you optimistic or pessimistically you value the ~95% of assets backing USDT that aren't cash, we should all agree on one thing: you won't value them 1:1 to the dollar. So why hasn't the peg moved?
The only explanations I can think of: this risk was priced in, which seems a stretch... or that USDT:USD has never been priced based on fundamentals.
It's simple and easy to do this when one entity has control of both the currency minting and the market pricing mechanism.
In other words, USDT would be an ideal mechanism for perpetrating widespread fraud in the crypto marketplace, one that would likely never be tolerated in "regulated" markets.
Note that USDT is underpinning the entire crypto marketplace --- the majority of bitcoin and other crypto trades involve USDT.
Ding Ding Ding! We have a winner!
It could be what Tether does: they lost banking access early on and since then all new USDT seem to "appear" rather than being given to people wiring them dollars on the clear banking system, presumably from arb bots trading crypto vs USDT on the big exchanges to maintain the peg.
As long as they don't lose what the bots bought and the value of that basket is above cost basis (or fully hedged) it's unsinkable.
I think you just don't really understand the ScamStableCoin market. I know lots of people making money with ScamStableCoin.
Also, if you want to move money between exchanges or banks you'd have to use the regular transfer methods like ACH, SWIFT, SEPA, which oftentimes are not as fast and cheap as sending USDT between exchanges. That makes it much harder to exploit arbitrage opportunities and drives up the spread overall, for example.
For example, suppose there's a smart contract based lending marketplace on the network. In most cases, real world users(lendees) will want said loan to be in the context of their local currency. As a lender you will want to provide said loan but you only have non-local currency assets.
Stablecoins allow you to represent the value of said loan on the network in a way that smart contracts can easily understand. Additionally, the lending marketplace could automatically handle the conversion between whatever X asset the lender has and the fiat stablecoin the lendee wants and vice-versa.
The main value add outside of convenience is that the current value of the loan is the same in the context of the local currency both at the day of signing and on the repayment date. Without working in the local currency, people could find themselves with a 50% more or less valuable loan the day after they sign it or the day before they repay it given current market volatility. Stablecoins and wrapped currencies bypass that issue.
This basic concept applies to any service marketplace where one side wants to use one currency and the other wants to use another. For fiat the solution is called a stablecoin but for incompatible cryptocurrencies the solution is called a "wrapped" currency.
Like others have mentioned there are regulatory advantages however they also greatly simplify a lot of things on the network for both sides of a transaction in various service marketplaces.
THus I am perfectly fully backed.
The biggest problem with this whole thing is that Tether is essentially acting as a unregulated and unaudited bank. It has a whole bunch of depositors that have the right to demand their funds within 72 hours, meanwhile many of their assets cannot be converted into cash within that period.
Tether is highly susceptible to a bank run and isn't eligible for federal deposit insurance.
That got me curious about what their rules actually are. From their terms of service [1]:
> Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves.
Also, US citizens aren’t allowed to use their service at all.
This seems sort of like an unregulated ETF that keeps all profits from investments for themselves. Easy money if you get it. If they don’t get too greedy it seems like they could keep it going indefinitely?
https://amycastor.com/2021/05/13/tethers-first-breakdown-of-...
And quite a few exchanges are offering crazy interest rates (up to 10%) for USDT deposits, which strongly implies they're getting some for free:
https://cryptoprijzen.com/en/crypto-interest/compare-tether-...
I'd think the 10% is due to the high risk of default. (Someone else receives it, but usually only gives a crypto collateral, there's a fairly high chance of default since if the lender gets wiped there's a high chance the collateral won't be sufficient and it might snowball from there as all the lending platform try to liquidate at the same time)
It's comparable to investing in junk bonds (but since it's call "savings/interests" most users won't realize the default risk.
The pitch being a lie is EXACTLY the problem. Tether is supposed to be nothing more than the gateway between crypto and the rest of the financial system. There is no reason for them to hold anything other than deposits at insured institutions. There is no reason for them to be making loans. There is no reason for them to be paying above market interest rates to holders,
What if "crypto-exchanges" just means Bitfinex and no-one else.
You notice that they carefully said the secured loans were against non-partner entities. They said nothing of the sort about the commercial paper.
Not the elephant in the room either way, I agree.
Tether FAQ: "Unfortunately, Tether has decided to stop serving U.S. individual and corporate customers altogether. As of January 1, 2018, no issuance or redeeming services will be available to these users."[1]
If there's a significant net outflow from Tether to USD, there's a good chance the whole thing comes apart.
Remember, with Tether, there is no potential upside. If you're not using it for something within days, don't keep any money in it.
Many of us in the haze of an enlightenment narrative in the 90s thought the web would empower through a decentralised model, and while it’s done that of course, it has also created powerful new sources of centralised power, monopolies, and walled gardens, that have challenged (and often won against) existing legal, societal, and political structures and norms.
It starts feeling a bit Neal Stephenson or Max Barry if you imagine a world in which monetary policy underpinning Western (and other) economies is further removed from existing political (especially democratic) levers.
Weber’s argument that states draw their legitimacy from a monopoly on the legitimate use of force is largely supported in Western economies by a monopoly on the legitimate exchange of value as well.
What does international trade, yet alone your annual tax return, look like in a world in which “govcoin” is just one (and a lower preferred one at that) of many currencies used day-to-day?
That's already a reality for many companies doing international trade. Especially global special-purpose device producers from smaller countries. It's annoying with paperwork and dealing with "what price was actually paid at the time", but it's not new. They contract a team from X, do work in Y, source materials from Z, V, W, then pay local accounting and tax in their govcoin equivalent - which happens to be the local currency.
For day-to-day multiple local currencies check out the history of the Brazilian Real.
I mean seriously what the hell happened to Lady Justice??
Crimes are not simply about the monetary damages.
That being said, the comparison is not totally fair.
In the regular fiat banking system a bank run, the withdrawal of most deposits, destroys a bank because it fails to meet the reserves ratios mandated by the system.
In the case of Tether there no such requirement and the reserves are liquid enough to meet the withdrawal requests in about a month - at least 2 workdays days for cash-like reserves liquidations, 2 workdays days to wire to cash to exchanges. Non-cash-like reserves might take longer but 2 weeks should be enough. Since Tether reserves aren't that being on each asset class and overall market probably won't trigger their own reservers depreciation.
That being said the actual exchange rate on the exchanges will this happen will drop because people will panic sell and not wait for Tether company to meet their sell orders at 1USD.
So yes, it does matter if we let financial institutions disregard risk in the pursuit of profit, when they are gambling with other people’s money.
In the case of Tether though, it’s not a traditional bank that issues interest yielding loans based on the lender’s credit profile.
Rather, the suspicion has been that they are simply issuing USDT coins to buy up crypto, which causes the latter to increase in value, but the money to buy these assets were never there in the first place, and that is why today, they can only show a fraction of the cash they claim to have received.
"As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."
I experienced time very differently the past year. I thought it was two years already. But I'm sure there was another announcement similar to that earlier.
Edit: another poster linked the actual Fed announcement and it is actually 1 year since the reserve requirement has been lifted.
Banks are still required to have reserves against risk-weighted assets (remember that deposits are a liability) and to cover liquidity and macroprudential risk. Here's the fed policy note https://www.federalreserve.gov/monetarypolicy/reservereq.htm and here's an explanation of the "ample reserves" system https://www.federalreserve.gov/econres/notes/feds-notes/impl...
Tether cannot fall back to a central bank, so the cases are completely incomparable.
If a bank has 0% reserves, the books say 0% reserves. Tether has no books.
Now something like 75% of the reserves are loans to ... well, who knows? My guess is other crypto-companies, but it’s impossible to tell.
(It’s also very weird to lump together “bonds” and “gold” in the same pot - these are completely different asset classes.)
If one were of a cynical turn of mind (and who wouldn’t be, given Tether’s history?) one might suspect that the commercial paper consisted of loans of freshly printed USDT to crypto companies & trading platforms who are using it to trade cryptocurrencies (because you can’t really use USDT for anything else at this scale). One might also suspect similar things about other entries in this breakdown.
Tether is a wildcat bank.
The top purchasers of USDT would be exchanges and "whales" (ranging from the extremely large crypto traders to the odd investment firms / hedge funds).
It wouldn't be surprising at all if the entities purchasing USDT are ultimately holding onto their USD but using the Tether issued to them and paying what essentially becomes just a transaction fee. As long as everyone can prove to Tether that they are good for what they purchase, the IOU trading scheme doesn't necessarily have to end in bloodshed / collapse either.
It's easy to imagine how issuing loans denominated in USDT would be attractive to Tether. And that debt can be converted into an asset on Tether's balance sheet. And voila the tether is backed.
Changing reserve requirements is part of conventional monetary policy, it is not QE.
Tracing cash bills is a complicated affair beyond a couple of transactional hops.
Am I the only one remembering them claiming to be fully backed by USD in some bank accounts?
Is there a difference between just printing them for the exchange you also own and just printing them for the exchange you also own in exchange for an IOU from that exchange that you call Commercial Paper?
Money market deposit accounts are a different story, and are highly regulated (and secured).
That being said, even if your comparison was accurate "hey, look at this similar business that caused harm and chaos during the last financial crisis" isn't exactly a glowing endorsement, is it?
What should the prison sentence be for that in your eyes? and what would a violent crime that gets a similar sentence be?
You say tether is "maintaining" the peg but that information comes... from them. They are not audited. They are unregulated. You don't even know who is behind it. You won't see that they are not even close to solvent until a bank run occurs. It is easy to suspend disbelief as long as nobody requests their fiat from tether in cash in large volumes. In those huge volumes, no fiat is changing hands, so they can very easily run with no cash at hand as long as people believe they have the money.
When I looked at it in more detail a few years ago, they even claimed you are not entitled to the fiat in exchange to the usdt you buy, is that still true? Is there even any way to get any fiat from them directly? Sure, you can convert your usdt to fiat using an exchange by buying another cryptocurrency first - in this chain everyone "believes" tether has the money to back it up and that's why it works. It could work even if tether had absolutely no usd because there is no reason to touch that usd.
Credible and trustworthy? Of course not! Slightly more credible than a napkin with “100% cash” written on it? Of course.
> You say tether is "maintaining" the peg but that information comes... from them
That information comes from the exchanges where tether is traded.
>You won't see that they are not even close to solvent until a bank run occurs
Nobody is disputing this
https://tether.to/wp-content/uploads/2021/04/tether-assuranc...
IOW, "They have the total amount of CP, loans, and bonds they say they have. Whether or not the issuers of those IOUs is Bitfinex or some shell company connected to the owners of Tether we have no opinion on"
There have been precisely 0 (zero, none) completed audits of Tether's holdings
So the answer to your question is it would happen in crypto where there is no regulator and people trust ‘audits’ which verify nothing.
What do you think it means for the stability of nation states, either domestically or on an international scale, in such a world though?
It’s the increasing practicality of doing this (buy your breakfast in StarbucksCoin, your lunch in McCoin, and your groceries in WalCoin) that makes it more possible as a reality.
But how does a government have credibility and get taken seriously domestically if the currency they control is increasingly irrelevant day to day? How does the US continue to maintain leverage over energy costs? Etc.
> But how does a government have credibility and get taken seriously domestically if the currency they control is increasingly irrelevant day to day?
The monopoly use of force is still a thing that demands respect.
We've also tried restricted foreign currency shops: https://en.wikipedia.org/wiki/Pewex
This is the biggest reason, really: the moment you touch USD you have to comply with know your customer laws, review OFAC sanctions lists, etc. And this doesn't just apply to US-based companies, if you are sending money through the US financial system or handling dollars, this applies.
I'd recommend reading https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/ (Tether: The Story So Far; by Patrick McKenzie aka patio11)
Basically, the US requires money-transmitting entities to know who they're working with (https://en.wikipedia.org/wiki/Know_your_customer). When you open a bank account, the bank has to validate your ID. Even if you're opening it online, they have systems that ask you questions to validate your ID.
If you're trying to create a non-tracked/anonymous system, you ultimately lose access to the US banking system (and probably the banking systems of a lot of other rich countries).
I'd say that it's not just "heavier regulation". That makes it sound like it's just hoops to jump through or delays in the processing. A big part of it is that banks/money transmitters/fintech need to know who their customers are in a lot of countries. It's not just random stuff like, "they need to fill out these forms, file these reports each week, etc." If you're trying to run an anonymous exchange and possibly profit off money laundering, anonymously transmitting payments for prohibited activities, etc. you don't want a system that requires you to know your customers. You just want to be, "it's crypto - things come in, things go out and it's all anonymous!"
There are companies like Coinbase which are licensed in the US, but Coinbase probably isn't where you'd want to go if you were looking to launder money. If you're looking to launder money, you don't want to go with a company that has been working with regulators. It would be relatively easy for Coinbase to give you USD, but Coinbase also knows who you are and would comply with warrants.
If you're a crypto company that doesn't want to comply with authorities, know your customers, etc. then it might be hard for you to give someone USD. However, it's really easy to give someone USDT - you just put it in your ledger. I can keep a sheet of paper and say "I owe X 100 MyDollars" and say "Every my dollar is backed by a USD in some form". Even if I'm 100% telling the truth, it doesn't mean that I can give you the USD I have in my pocked if you give me a MyDollar. Maybe you don't live near me so I can't give it to you. If I'm cut off from the banking system, I can't just send it to you electronically.
I think the point of "they're fully backed" is the idea that someone who does have access to the banking system will give you 1 USD (or close to it) for 1 USDT even if Bitfinex can't. One could imagine a market where someone would give you $0.90 for 1 USDT and then that person would go to Bitfinex and get the actual USD that backed it (assuming it was actually fully backed). The idea being that Bitfinex might not be able to give you an ACH or wire transfer of your USD, but if you showed up at a bank in Country X with a suitcase, you could get cash.
I'd recommend the post from patio11 more than this comment. I guess the tl;dr is that it's not just heavier regulation, but that the US and many other governments don't allow anonymous money transfers. Banks and fintech need to know their customers so places like Bitfinex get cut off from the system. USDT is an attempt to offer people a way to turn something into a dollar-like thing without having access to the banking system.
> Circle may also invest these fiat funds in highly-liquid, AAA-rated fixed income securities.
I wrote about this here: https://omarabid.com/usd-stable-coins
Only Gemini USD is fully backed by US treasuries. Everyone else is using this money to play roulette.
In reality, it comes down to market makers and market adoption/liquidity. That's why Tether could keep the beg at 1:1 despite having very little liquid cash. Liquidity will come from investors, and actually the more the better. Smaller fish like GUSD will not have that much interest from market makers.
The Federal Reserve didn't approve them to do that, because they were worried that it could "destabilize the financial system."
> The Fed raises three main objections. 3 The first is macroeconomic: The Fed worries that narrow banks could mess with the implementation of monetary policy, because if they succeed they will keep a lot of money at the Fed, increasing the size of its balance sheet...
> Second, it worries that narrow banks will take funding away from regular banks, making it harder for those banks to trade stocks and bonds (a business largely funded by repo), and maybe even making it harder to make loans...
> Third, the Fed worries that having too safe a bank would be bad for financial stability: In times of stress, everyone will flee from the regular banks to the super-safe narrow banks, which will have the effect of bringing down the regular banks
https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
The deposit rate that customers expect is higher than the rate they would get for storing liquidity with the fed so their spread is already negative. That means there already isn't anything for them to "take a few basis points for themselves" out of.
The Fed pays 10bps IOER or IORR rates https://www.federalreserve.gov/monetarypolicy/reqresbalances...
CDs are paying about 45bps eg https://www.salliemae.com/banking/certificates-of-deposit/?d...
So on a gross basis this plan already loses them 35bps before any costs they have themselves. If they actually planned to do this and the fed didn't approve the plan, it's because it's not economically viable not because it somehow posed a threat to the system.
If the money just sits there in a bank account and rots for all eternity you get unemployment and deflation.
The solution to this problem has been to loan out money so that someone else invests the money on your behalf. Inflation exists as an incentive to invest your money and since future incomes are greater (thanks to inflation) it is not very difficult for the borrower to pay the loan back plus some.
Investing doesn't make sense if you have deflation. You can just sit on the money and get rich by on the backs of others. A growing unemployment rate is unavoidable. To maintain stability you would somehow have to get rid of all the useless people or make them work for goods instead of money.
Also, what do you mean "cash"? Printed bills? Deposits in commercial banks' checking accounts? Would savings accounts count too (they can be frozen for some amount of days)? Deposits in Fed accounts?
And it's not going to get any better.
What sad times we live in.
The basic scheme is:
* Issue crypto pegged to the dollar
* Hold interest-generating reserves
* Collect interest
I externalize risk, but it's a relatively low risk. That's different from a pyramid scheme.
Low risk isn't the same as unimportant risk. The whole point of crypto is to mitigate very similar sorts of systemic risks. Cash works pretty well most of the time.
Early banks issued IOUs for deposits. At some point, traders started swapping bank IOUs in lieu of moving gold, since slips of papers were easier-to-handle and equivalent.
At some point after that, bankers noticed they could lend out the gold for a profit.
Fast-forward a few hundred years, and the central bank issues IOUs in the form of dollar bills, and no one else is legally permitted to mint currency. As of a half-century ago, those are no longer backed by gold. Banks, in turn, handle deposits as bits on a computer (which are even more convenient than paper), backed by worthless slips of US-issued paper. Only the US doesn't even bother printing much of the paper anymore, since it's "deposits at the fed."
I wonder if we're heading for a similar path? Government bans the use of non-sanctioned cryptocurrency, like it once did with bank-issued bank notes, and issues it's own cryptocurrency? It kinda makes sense, since it wants to be able to adjust money supply in the public (or political) good.