The comedian Steven Wright used to tell a joke where he and a friend are walking down a street when they're confronted by a mugger who holds them up at gunpoint: "Gimmie all your money."
Wright complies, but instead of handing his money straight to the mugger, he first turns to his friend and says, "Fred, here's the $25 I owe you."
I imagine that must have always gotten an extra laugh from finance types, because it hints at something fundamental to the nature of credit and banking: In banking, everyone's asset is someone else's liability, and sometimes liabilities can be an asset, and sometimes assets can be a liability.
If that word salad didn't illuminate the deeper meaning of Wright's joke to you, we are fortunate to have a real-world example to clear it all up, compliments of crypto:
In 2018, stablecoin issuer Tether transferred $625 million from its bank account at Bahamas-based Deltec Bank & Trust to Bitfinex, Tether's closely affiliated crypto exchange, which also held an account at Deltec.
In return, Bitfinex transferred the same amount, $625 million, from its account at Crypto Capital Corp. to Tether's account at Crypto Capital Corp.
The joke, in this case, is that Crypto Capital was a fraudulent pseudo-bank that had no intention of returning any deposits to either Tether or Bitfinex — so Bitfinex borrowing money from Tether at Deltec and paying it back at Crypto Capital was exactly like Steven Wright borrowing from his friend Fred and then paying it back to him just as they were getting mugged.
From an accounting perspective, nothing had happened: The assets and liabilities of both Tether and Bitfinex were unchanged.
But from a reality perspective, something had indeed happened: Bitfinex then had 625 million real dollars and Tether had 625 million imaginary ones.
This is what makes crypto fun: Finance concepts that are otherwise best illustrated in a joke get played out in real life, with real money.
And it's not just me that finds it amusing: The aforementioned Deltec Bank, partner of choice for crypto stalwarts such as Tether, Bitfinex, FTX and Alameda, is led by colorful Chair Jean Chalopin, who made a late-life career change into banking for the express purpose of making finance more fun:
"We only have one life and it should be fun. I don't see why banking or insurance should be boring. It could be fun. It doesn't have to be hilarious fun. But it could be just pleasing."
Chalopin knows something about fun: He's the creator of my favorite childhood TV cartoon, Inspector Gadget. And in his expert opinion, the way to make banking more fun is to merge it with crypto.
I agree: Crypto banking is way more fun than regular banking.
But by becoming the primary conduit between crypto's two most notorious institutions, FTX and Tether, Chalopin may have overshot his mark and made crypto not just fun, but hilarious.
Show me the bank money
Tether FUD is the oldest, most venerable kind of FUD:
We've been waiting five full years for Tether to produce an audit (how hard can it be???); We only discovered the cross-ownership of Bitfinex and Tether because it was revealed in the Panama papers; Tether was banned from doing business in New York after being found to have lied about their reserves and hidden losses at Bitfinex; Tether is run by ghosts — a CEO and CFO who never speak to the press, appear at a conference, or even issue a written statement. (Very strange, especially for a business built entirely on trust.)
That of course is an incomplete list: There are more red flags involved with Tether than a government-approved rally in Tiananmen Square.
And yet, they remain something close to the last man standing in crypto.
In the wake of Luna's collapse, with Celsius, Voyager, and 3AC failing, Tether redeemed $16 billion of USDT without missing a beat.
And as FTX/Alameda — the biggest user of USDT! — was exposed as a fraud, Tether processed another $5 billion of redemptions, all at the promised $1 peg.
That's 21 billion real dollars they were able to produce on demand and against all expectations.
It's enough to make even the most devoted Tether Truther think that crypto's most-doubted institution may have somehow stumbled its way to legitimacy.
And it makes sense to me that it may have: Why bother doing anything sketchy when you can go legit and just clip coupons on $65 billion worth of 3-month T-bills yielding 4.2%?
That's more or less what they say they're doing, and I think they are more or less telling the truth.
But I'd nonetheless like to add one additional red flag to the Tether FUD: The 82% of reserves that Tether claims to hold in "cash and cash equivalents" is, I'm guessing, all "cash equivalents" and no cash.
There is no investigative journalism being done here, I'm just being semantic: I assume they don't hold any actual physical paper money — when they say "cash," what they mean is "bank deposits."
The two terms are generally interchangeable, so they're not lying to us.
But when your deposits are largely held with Bahamas-based Deltec Bank & Trust, the semantics matter.
Cash is state money and deposits are bank money — these are two different things.
What Tether holds is bank money: Not money issued by the US government, but IOUs issued by a bank. Mostly Deltec, in this case.
So when Tether says USDT is fully backed, they probably mean it. But by their own attestation, 4% of backing is in "other" stuff, 9% is in "secured loans," and 8% is in Deltec IOUs.
That last one might prove to be what finally gets them in trouble simply because bank runs always occur when what people think is money turns out not to be money.
The long-awaited Tether bank run might be most likely to happen when it unexpectedly finds itself short of cash to meet redemptions because what it thought was money (Deltec deposits) turns out not to be — holding $10 billion of reserves at Deltec Bank & Trust is not the same as holding $10 billion of reserves at JPMorgan.
This is not really Tether's fault: Even if they do ever get that long-promised audit done, I doubt they'll be welcome to bank at JPMorgan or any other too-big-to-fail bank.
And they for sure will not be welcome to a Fed master account anytime soon, so they'll continue to be dependent on bank-money IOUs from smaller banks.
This might mean that their attestations of "cash" are factually correct, but perhaps misleading.
Wouldn't it be funny if Tether was telling us the truth and it still turned out to be a Ponzi?
Beyond funny, I'd say.
Hilarious, even.
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