Tether and other stablecoins effectively print dollars. In a sense, it is inevitable that stablecoin issuers will increase the dollar money supply and become shadow central banks. The real central banks will hardly tolerate that.
To be honest, I have no doubts about two things regarding the stablecoin Tether (USDT): first, I am convinced that Tether will remain liquid, and second, that the US will hunt and hunt down Tether.
Why?
The reason is simple: Tether committed the taboo breach that no stablecoin issuer should commit. The company started printing dollars. In doing so, the company, whose headquarters are in the middle of nowhere on the web, is competing with the US Federal Reserve. It dares to bring new dollars into the world without being asked, and it does so in a largely unregulated, wild way.
Tether and other stablecoins decentralise central banks. This is not necessarily because Tether is particularly perfidious or brazen. Because the same fate threatens every issuer of stablecoins. It lies at the core of their business model.
The transcript of the Tether trial at the New York District Court is revealing. It was actually about something completely different, but the investigations and testimonies revealed the following: Tether partially minted dollar tokens that were not backed by dollars or dollar-like assets, which, as the court correctly states, was fraud to the point of deliberate customer deception. But that’s not so much the point.
More important is the following event, and mainly because it seems so inconspicuous: Tether also put dollar tokens on the market because the company assumed it would receive a payment in the future that would cover these tokens. Tether thus created USDT on credit, or on the basis of a liability. And with this very move, Tether began to become a dollar creator.
TETHER PRINTER
Just printed $1,000,000 USDT!Total Supply: $74,357,845,272
– Stablecoin Printer (@usdcoinprinter) November 7, 2021
When a company inadvertently creates dollars
For this, one must remember how banks create money: A client presents a business plan and presents collateral, such as real estate. The bank then gives him a loan and credits the amount to his account. The bank did not have the amount before. It only has an equity reserve in central bank money. By granting a loan that is not covered by central bank money, the bank is creating unsecured money. The euros that the bank lends you did not exist before.
Tether has now done the same thing in itself. In normal operation, it freezes dollars in a bank account and represents them with dollar tokens. As long as all this is noted, the “active money supply” remains the same: the tokens correspond to the dollars in the bank account.
But what happens when Tether generates tokens before a payment is received? Even if it is only a few minutes before?
In that case, Tether does not generate tokens, but creates dollars. The active dollar money supply increases. It returns to normal when the anticipated payment is received and frozen in the bank account. But for a brief moment it has been increased.
This kind of money creation is inevitable when a stablecoin issues tokens on credit. At the end of the day, this is exactly what happens with DAI dollars: These dollars are issued by the Maker DAO as a loan backed by Ether and other assets. At some point, the borrower pays them back, returning the money supply to normal. But until then, the DAI dollars effectively increase the dollar money supply.
Basically, EVERY decentralised stablecoin generates dollars. They are fundamentally different from centralised issuers like Tether (USDT) or Center (USDC). These just inadvertently become central banks. However, Decentralised Autonomous Organisation (DAOs) that issue a stablecoin like Maker are a central bank by every vein of their design.
Just like a bank …
But with Tether, it may go even further. Because Tether also covers the USDT through so-called commercial papers. These are a kind of corporate bonds that yield low interest. The business model is in itself ingenious: Tether holds dollars and earns from the interest. Some have already described Tether as a “hedge fund with stablecoin”. That, too, is a brilliant business model. One wonders why each hedge fund doesn’t issue its own stablecoin.
As long as Tether receives dollars through a bank transfer, creates Tether dollars in return, and then exchanges the bank dollars for commercial paper, all is well with the world. The money supply itself remains the same.
But what if Tether creates the tokens in exchange not for dollars but for commercial paper, which a company has created specifically for this purpose?
In this case, Tether does not map real dollars on the blockchain – but creates new ones. In principle, Tether could have accepted commercial papers from dozens of exchanges in the Bitcoin ecosystem to flood the ecosystem with newly created dollars. There is – unconfirmed – evidence that Tether has “invested” around half a billion dollars in the tradig platform FTX – and “invest” in this context could mean that Tether has simply created tokens to lend to FTX under certain conditions.
Tether, if true, is doing EXACTLY the same thing as a bank when it creates money.
The genie is already out of the bottle
This kind of money creation by stablecoin issuers is almost inevitable. It is a product of a stablecoin issuer making money in an entrepreneurially creative way. And that does not (necessarily) mean that criminal energies are involved.
Stablecoin money creation can be prevented, perhaps, by extremely strict regulation and supervision. Supervisors must meticulously ensure that a stablecoin is fully backed by dollars in the bank account at all times. There must not be a second in which this basic rule is violated.
This coverage by “real dollars” has no influence on the liquidity of the stablecoin. It does not affect the ability of the stablecoin issuer to exchange the stablecoin for dollars. As long as the fiat money system functions with a minimum reserve of about one per cent without a bank run, there is no reason to assume that a stablecoin with non-full coverage will fall victim to one. Why shouldn’t what works in the fiat system work with tokens?
Dollar cover in the bank account has nothing to do with consumer protection. It protects the central bank. It protects the dollar from free enterprises creating money in the nowhere of the net.
However, this genie has already escaped its bottle. Tether, Maker and presumably other providers have effectively started printing dollars and inflating the dollar money supply. They are acting like central banks.
As yet, dollar inflation is unlikely to be affected by this. Perhaps, marginally, in the crypto markets, which are being boosted by the dollars created by shadow central banks in much the same way that the stock markets are being boosted by the money that central banks are flooding the markets with.
It is, as I said, largely the same process. The difference being that money printing on a blockchain is much more efficient. If no one stops them, the stablecoin issuers will ensure that the inflation of the dollar that the crypto scene likes to warn about will occur. Not even out of perfidious intent, but rather out of negligence.
And I am sure that the real central banks will never tolerate that. What I am not sure of, however, is that they will have the power to stop the process that has already begun.
