Comparing Tether to a Bank: Stop
It’s head-scratching to see people regularly compare Tether’s not-fully-backed dollar derivatives to how banks operate — not only because Tether and banks are very different, but because banks are relatively open and transparent about their reserves (or lack thereof).
Why Coiners Compare Tether to a Bank (Positively)
Cryptocurrency advocates, in general, tend to hate fiat currency and banking. If you’re a layman, like myself, this may leave you wondering, “Why?”
So, let’s do a quick breakdown of *why* coiners hate fiat and banking, but still defend Tether.
- Fiat currency is, generally, inflationary. Paper money is designed to be immediately used, not saved. There’s a reason for this: the government, corporations, and private businesses don’t want you to hold your cash as long as humanly possible — they want you to spend your money. That isn’t inherently bad. The goal with inflation is to force people to risk some of their cash on a slew of different assets: stocks, bonds, loans, commodities, education, property, and personal property (cars, desks, work-related goods). Hopefully, this provides you with a continuous source of income, making your money, “work for you,” while simultaneously hedging against a complete failure of a single sector of the market. But coiners prefer, “deflationary currency.” Deflationary currency limits the ability of holders to acquire loans, limits spending, and limits risk — this, also, isn’t inherently bad. Coiners tend to believe we live in a world of over-indulgent consumerism, with risks taken by banks (in loaning out inflationary currency) being too intense and too wide-reaching.
- There is a limited supply* of Bitcoins that will ever be mined. There is unlimited amount of dollars that can enter the market, because the Federal Reserve controls the printing press and decides when there’s enough dollars. This means that Bitcoin is “scarce,” while dollars are, “supply driven.” (* There is a limited supply of Bitcoin that will ever exist — 21 million — as of right now. Nothing is stopping this limit from one day being changed if there’s popular agreement.)
- Banks in the US were required, at least until recently, to hold 10% of their depositors cash in reserves. This is called, “Fractional Reserve Banking.” 10% isn’t much, but banks tend to follow through with this rule, and unless there’s some sort of catastrophe, it works. Tether promised 100% backing, then proclaimed it was 74% backed. This is still a 64% better ratio than banks.
4. While banks loan out their depositors’ cash on risky assets like mortgage backed securities and emerging markets, Tether, at least at first (supposedly), didn’t loan out Tethers at all.
Sounds Like Tether is a Bank Now, Bro
Maybe it sounds that way, considering they outright loaned 26% of their cash to themselves after $850 million dollars were seized by the Polish government. But please understand that that was never the promise made by Tether. As shown in the image above, Tether promised that for every USDT printed there would be $1 in a “full reserve” bank account. This was never the case.
At best, you could say, maybe (because there are zero audits or proper attestations), that Tether kept money in some normal bank accounts, some IFEs (international financial entities), and some cryptocurrencies. They were never fully backed. Ever (because dollars in a bank account are only 10% backed!).
What separates Tether from banks is two basic concepts:
- promises made
The Difference Between Tether and a Bank
Let’s compare what Tether initially promised versus what a bank promises you.
We’ll start with Tether:
- 100% backed by traditional currency
- all funds in a ““full reserve”” bank account
- frequent audits/attestations
- No insurance policies, all losses are your own
Now, a bank:
- 10% backed with currency
- only audited/attested (in a public manner) if publicly traded
- FDIC insured up to $250k
I hope that one is able to ascertain the huge difference between what Tether represents versus what a bank represents. They are not the same, no matter what Tether’s lawyers, cryptocurrency traders, or thot leaders on cryptocurrency Twitter proclaim.
Bored? Here’s the conclusion:
Tether isn’t a bank because it’s a private entity that made very explicit promises to its userbase. It has reneged on these promises. The promises made were 100% backing by traditional currencies (lie), funds held in full-reserve bank accounts (lie), and frequent audits (lie).
Banks promise 10% reserves in the US (generally true), funds up to $250k are insured by the FDIC (true), and no promises regarding audits (true).
Stop comparing them. And stay skeptical, friends.