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0 pointsjgautsch8y ago0 comments

That would be lucky, not smart. If a bank took my deposit to a casino and put it all on black, they'd go to jail whether they won or lost.

The risk of holding a tether should be reflected in its price. If the underlying asset is bitcoin, the risk profile of a tether would be the same as bitcoin, and thus the price should tightly correlate with (or be tethered to bitcoin, rather than USD).

If Tether tells people the token is backed by USD when in fact it's backed by bitcoin, that's fraud.

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bufferoverflow8y ago

You realize your bank does exactly that? It's called fractional reserve banking. If I remember correctly, banks are only required to hold ~10% of the deposits. The rest gets invested. That's why your checking account is free, the bank makes profits off of your money.

beberlei8y ago

Its different, because you need to get a banking license to be a bank and use fractional reserve and controlled by central bank, and then the reserve is in the governments money. Bitfinex has no "banking license" and is not overseen by another actor.

Fractional Reserve Banks currency also usually exhibits natural demand on the account of being the currency required to pay taxes and accepted by stores/businesses in that country.

Yes, fractional reserve banking is bad. But at least the central banks have somewhat a clue how to control it and a legal framework to do so. Whereas for bitcoin exchanges, they just make it up along the way.

jgautschOP8y ago

Whenever people compare Tether to fractional reserve banking it ignores important details.

Some important differences:

- Your bank tells you it's fractional reserve, Tether tells you they're full-reserve (deception for financial gain is fraud)

- Bank accounts are protected from bank insolvency by FDIC insurance

- Bank risk appetite is modulated by the rates they pay for that FDIC insurance

- The Fed acts as a lender of last resort, guaranteeing the liquidity of your deposits, in order to prevent a bank run

The Fed has the muscle to keep fractional reserve banking propped up. Tether may be lying about being full-reserve, and don't have the muscle to stop a tether run, which could get ugly.

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