Coppala on Stablecoins

Frances Coppola is an early candidate for the “Emperor Nakamoto’s New Clothes” Award.  : – )

Myself, I’m still trying to grok “stablecoins”, crypto tokens that are backed by US dollars or other conventional assets.  The idea, the “promise”, is that the crypto token is pegged to the other asset, so you can always exchange the crypto coin for the equivalent dollars or whatever.

I think I understand why I would want to operate a stablecoin (people will give me real assets in exchange for a piece of paper digital token).  But why would I want to use such tokens, except to launder money?

Frances Coppola writes this month about a key aspect of such “stablecoins”, the perception that they are the same as, and just as safe as, the assets they are pegged to [1].  This promise, after all, is the entire point.  But just how solid is the promised peg?

Coppola discusses the well known stablecoin, Tether, which promises a 1 to 1 peg to the US dollar. In fact, it’s tokens are tagged USDT, implying that they are “simply a variety of U. S. dollar”.

However, when you buy Tether, your (real) dollars go to Tether’s bank, Deltec, in the Bahamas.  This is, as Coppola says, “part of the shadow banking network.”  Unregulated and not insured by the US.  So, these deposits are what Coppola calls “faux dollars”.

Worse, pretty much the whole show is run out of that one bank in the Bahamas.  “[N]ot only Tether itself but the cryptocurrency exchanges that are its principal customers have U.S. dollar accounts at Deltec Bank.”

Basically, everything depends on the solvency of this small, lightly supervised Bahamian bank.

What could possibly go wrong?

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On that point, Coppola points out that this kind of arrangement is analogous to Money Market Funds, which also often use shadow banking.  She recalls the catastrophic 2008 failure of Reserve Primary MMF, which had its reserves stored in Lehman Brothers (“the shadow bank Lehman Brothers” per Coppola).  When Lehman failed, Reserve Primary could not keep it’s 1-to-1 “promise”, and this unthinkable possibility increased the global panic.

In the case of Reserve Primary, the Fed bailed it out to stabilize the situation.  But Tether and Deltec are small potatoes, so don’t count on a bailout.

Again, everything depends on the solvency of this small, lightly supervised Bahamian bank.

“Neither the Fed nor the FDIC has any reason to ensure crypto traders can get their U.S. dollars out of the stablecoins and exchanges in which they have deposited them. The credibility of the promises made by crypto shadow banks thus depends entirely on the adequacy of their reserves. Sadly, this seems to be enormously variable. So “caveat depositor,” we might say. Choose your stablecoin carefully.”

You are on your own.  Be careful.

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This article helped me grasp stablecoins a bit better.  I think this article must be another early candidate for the “Emperor Nakamoto’s New Clothes” Award, for speaking the plain truth about cryptocurrencies, blockchains, and related topics.

As with so many of the “innovations” in Nakamoto’s Empire, this is yet another old idea, Money Marker Funds, digitized.  And it is basically built on conventional shadow banking, which may be “disruptive” but surely isn’t “innovative”.

Of course, the entire notion of pegging cryptocurrency to hated “fiat” currency is blasphemy for strict fundamentalist Nakamotoism.

If Bitcoin is designed to be an alternative to fiat currency, Tether is a wrapper disguising shadow banking—the darkest and dirtiest and most destructive corner of the “fiat” banking system. Irony much?

Oh, and by the way, Facebook’s Diem (formerly Libra) is basically the same deal, except it seems to be based in Swiss banks—the same deal, only way more opaque than the Bahamas!

“Caveat depositor”, as Coppola says.  Good luck, I say.

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1. Frances Coppola (2021) Caveat Depositor. How Safe Is Your Stablecoin? Coindesk, https://www.coindesk.com/think-stablecoins-are-solid-remember-the-financial-crisis

 

Cryptocurrency Thursday