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.
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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
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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.
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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.
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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.
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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.
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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.)
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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.)
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End of conversation
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Why happened to the money that the bank kept?
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The US Treasury appreciates their largesse.
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