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patio11's profile
Patrick McKenzie
Patrick McKenzie
Patrick McKenzie
@patio11

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Patrick McKenzie

@patio11

I work for the Internet, at @stripe, mostly on accelerating startups. Opinions here are my own.

東京都 Tokyo
kalzumeus.com
Joined February 2009

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    1. Patrick McKenzie‏ @patio11 14 Oct 2018
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      Tether, the cryptocurrency which is theoretically backed 1:1 by USD held in a bank account and available on demand, is currently in the early stages of a bank run.

      19 replies 112 retweets 350 likes
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    2. Patrick McKenzie‏ @patio11 14 Oct 2018
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      The early stages of a bank run reach the late stages of a bank run very, very quickly.

      3 replies 9 retweets 78 likes
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    3. Patrick McKenzie‏ @patio11 14 Oct 2018
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      Tether/Bitfinex’ explanation for this is banking troubles; their most recent bank found their most recent shell corporation and terminated the relationship. This has happened 4 times. Each time it happens, their depositors play roulette.

      2 replies 3 retweets 44 likes
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    4. Patrick McKenzie‏ @patio11 14 Oct 2018
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      Historically tether appears to have had a few live accounts. When one gets killed, the financial institution controlling it investigates (takes a few month), historically finds hijinx but not a sufficiently high level of hijinx to not return the money, and returns it.

      1 reply 0 retweets 27 likes
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    5. Patrick McKenzie‏ @patio11 14 Oct 2018
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      During that period, the tokens which participants treat as fully backed are fully backed*. It’s the classic liquidity risk problem that banks are familiar with: the balance sheet is good for the money but we can’t lay hands on more than X0% of it within a short period.

      1 reply 1 retweet 36 likes
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    6. Patrick McKenzie‏ @patio11 14 Oct 2018
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      (Assuming arguendo that Tether is not a straight up fraud and that its balance sheet is USD equivalents. I have maybe 60% confidence that both of those are true.)

      4 replies 2 retweets 37 likes
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    7. Patrick McKenzie‏ @patio11 14 Oct 2018
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      Anyhow, what the community under appreciates at the moment is that illiquidity is not the only consequence of losing a banking relationship. Banks do talk to each other (quite a bit) and it is difficult to keep billions of dollars under the radar indefinitely.

      1 reply 1 retweet 26 likes
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      Patrick McKenzie‏ @patio11 14 Oct 2018
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      Eventually, a bank or, more likely, a regulator is going to say “Actually this doesn’t look like a legit deposit that we’re uncomfortable with supporting due to AML/regulatory reasons. It looks an awful lot like proceeds of crime intermingled with grey money.”

      12:58 PM - 14 Oct 2018
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      • Covidiocracy hikikomorphism🏳️‍🌈🏝🛰️ David Gerard Alex Hall Nick Abouzeid CasPiancey POSIWID Laurie Voss Ceasar Bautista
      1 reply 0 retweets 27 likes
        1. New conversation
        2. Patrick McKenzie‏ @patio11 14 Oct 2018
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          And the terrifying outcome, from the cryptocurrency economy perspective, is the regulator doing what the USFH did with respect to Mutum Sigillum (Mt Gox’s US front): “OK, we’re going to give you two choices.”

          1 reply 0 retweets 20 likes
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        3. Patrick McKenzie‏ @patio11 14 Oct 2018
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          Door #1: Prove that it’s legal money. This should be trivial for you because KYC is the law and your compliance should be automatic. So have your lawyer suit up. BTW we expect this to take 3+ years. Door #2: We propose a 50% haircut.

          2 replies 3 retweets 33 likes
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        4. Patrick McKenzie‏ @patio11 14 Oct 2018
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          Gox’s bankruptcy administrator took the haircut. That was an eminently sensible call. I think there is a material risk that Tether absorbs a billion dollar hair cut.

          2 replies 5 retweets 31 likes
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        5. Patrick McKenzie‏ @patio11 14 Oct 2018
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          A historical precedent for this is the Reserve Fund meltdown in 2008. The Reserve Fund was a money market fund; those are not fully reserved but are expected to invariably be a) liquid as cash and b) maintain $1 par value. If it had a token and didn’t pay interest, that’s Tether

          2 replies 0 retweets 25 likes
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        6. Patrick McKenzie‏ @patio11 14 Oct 2018
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          The Reserve Fund “broke the buck” due to the poor decision to have several percentage points of their assets in commercial paper of an American financial institution with zero counterparts risk, Lehman Brothers.

          1 reply 0 retweets 21 likes
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        7. Patrick McKenzie‏ @patio11 14 Oct 2018
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          This caused such a large loss of confidence in money market funds as a class that the immediate capital outflow threatened to destabilize the global financial system.

          2 replies 0 retweets 16 likes
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        8. Patrick McKenzie‏ @patio11 14 Oct 2018
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          The cryptocurrency economy relies on Tether, specifically, far more than the global financial system relies on money market funds. It has convinced itself that they’re equivalent. That is wrong. It has always been wrong. It may soon be experimentally disproven catastrophically.

          1 reply 10 retweets 34 likes
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        9. Patrick McKenzie‏ @patio11 14 Oct 2018
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          Tether doesn’t have single digit percentage point exposure to a US financial institution who couldn’t pay them 100% and wouldn’t be able to settle for months. They probably have close to total exposure to a financial institution which will be offering much worse.

          1 reply 1 retweet 18 likes
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        10. Patrick McKenzie‏ @patio11 14 Oct 2018
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          (If you believe I am wrong you can call up your OTC desk of choice and offer to buy N million dollars of tether at a 3% discount to par. Hoover up that free money.)

          1 reply 0 retweets 22 likes
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        11. Patrick McKenzie‏ @patio11 14 Oct 2018
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          (You know why you can’t call up an OTC desk and offer to buy a deposit held in a US bank for a 3% discount to par, at a trade size of millions? And indeed financial professionals would laugh you out of the room for suggesting it? Yeah.)

          2 replies 2 retweets 28 likes
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        12. End of conversation

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