Is Tether a payments company or a bank?

No one cares what's stored behind your back without a run

USDT, as the largest stable Coin in market capitalization, has a strong currency hardness in the Crypto world with its promise of 1:1 exchange of dollars.

However, Tether, the issuer of USDT, is controversial as the "central bank" in the Crypto world due to the opacity of its assets. In Tether' Hidden Tricks: How to Become a Crypto Central Bank That Never Fails, the Rhythm Institute discusses Tether's various unconventional operations and the hidden dangers they may bring.

It is understood that only 1 USD in a Tether account can be exchanged for 1 USDDT, so what happened to those Crypto lending companies USDT to Tether Mortgage? How does this affect the Crypto market?

This article is from Moneyness, where the author analyzes the economic impact of depositing USDT in U.S. dollars and lending USDT by collateral to the Crypto market. BlockBeats translated the original text:

I recently tweeted about Tether, the world's largest Stablecoin company, and I'd like to take the opportunity to ask a broader, money-related question:

UsdTs issued by Tether are settled in U.S. dollars, and a single USDT can be exchanged for an actual $1. But unlike PayPal dollars, Tether's USDT is issued on-chain.

In summary, the tweet (plus the article in the link) is roughly saying that Tether has a problem with its own publicity. Tether said in its terms of service that it will only issue new Stablecoin Coin USDT after everyone has deposited dollars. That said, to get $1 usdt from Tether, you'll need to pay it the actual $1 first. However, tether does not issue new USDTs after receiving the deposit. As Financial Times reporter Kadhim Shubber reports, Tether lends out new USDTs directly, no different from banks lending to the market.

I'd like to use Tether's example to explore a broader question, which is the question of the economic principles behind money creation. Admittedly, Tether is not issuing Stablecoin under its Terms of Service. However, from an economic point of view, is there really a difference between Tether lending USDT directly and people depositing USDT before issuing USDT?

We can ask the same question about PayPal. PayPal New PayPal dollars are created only after people top up the dollars. But what if PayPal also start issuing new PayPal dollars by direct lending? Will the monetary economy of PayPal change as a result?

In my opinion, this will not bring any changes, but I would also like to know what the other side thinks about the matter. I'll use two examples to illustrate how USDT or PayPal dollars are issued isn't really that important.

Let me start by quickly stating the assumption I'll use: there will be a certain amount of demand for holding USDTs, but if the number of newly issued USDTs exceeds that demand, the extra will be returned to Tether for $1. That said, given this anchoring relationship, it is theoretically impossible for Tether to issue USDT that exceeds the amount of market demand.

If Tether issues $100 USDT and there is $100 in the bank account as reserve funds at this point.

In the first case, according to Tether's terms of service, John deposits $10 in Tether to get $10 worth of USDT. If there is $110 USDT in circulation on the market today, then Tether should also have $110 in its bank account. Next, if Tether lent $10 of its $110 to Sally at an annual interest rate of 6%, it would also ask Sally to provide collateral to protect itself from loss. In this case, Tether would have Sally secure $15 worth of Bitcoin as collateral for the loan.

In the second case, as Kadhim Shubber reported, Tether printed $10 worth of USDT out of thin air and lent it directly to Sally for 6%. Similarly, Tether would ask Sally to secure $15 worth of Bitcoin. In this operation, there will be a total of $110 USDT in circulation in the market. Once Tether is over-issued, so that the borrowed USDT exceeds the market demand, the excess will immediately flow back to Tether at a price of $1. (So, if Tether lends Sally $15 USDT, but the market only needs $10 USDT, the extra $5 will be quickly redeemed to Tether, so Tether will lend Sally $5 less to adjust.) ）

The end result of both distribution models is the same – there will be $110 USDT in circulation in the market. To ensure that the reserves are sufficient to support this amount, Tether deposits $100 in cash in a bank account, with the remaining $10 in the form of a 6% loan, backed by Bitcoin.

So, from an economic point of view, it doesn't matter whether Tether lends USDT directly or issues USDT after receiving it. Because either way, $10 USDT will enter the market. In any case, the issued USDT will be loaned to Sally in the form of a loan, secured by $15 worth of Bitcoin.

Interestingly, although there is no difference in the results of the two cases, there are differences in terms of relevant terminology and applicable regulations. In the first case, Tether would be seen as a fintech company, a money services company, or a payment service provider, and would apply to a certain set of laws. In the second case, it would be seen as a bank, or a depository institution, so the law to which it would apply would be completely different.

However, if the USDT issued under both models has the same economic function, then why don't we apply the same terminology and law to both?

Link to the original article