Having spoken with a number of industry participants, it’s clear to me that the large traders do not expect USDT to depeg.  They tend to believe Tether Inc has more than enough assets to cover its liabilities, though there may be a duration mismatch – ie some of Tether’s assets may not be readily convertible into cash (I’ll use the word “cash” to mean bank account money in regular demand deposit accounts), so if all of Tether’s clients wanted to redeem their USDT for bank account dollars right now, there wouldn’t be enough to go around, and some folks would have to wait. To compare, retail banks typically cannot cope with customers wanting to withdraw more than 10% of their aggregate deposits electronically, and even less physically!

This piece isn’t about if USDT is fully backed or not, or what might make up the composition of its assets, it’s about what might happen if for some reason it did lose its peg.

Continue reading “What if USDT Tether depegged?” →

I was just reading an excellent recent post on the New York Fed’s blog Liberty Street Economics, entitled “Token- or Account-Based? A Digital Currency Can Be Both” by Rod Garratt, Michael Lee, Brendan Malone, and Antoine Martin.

The post is right, of course (except for a paragraph right at the end). The “tokens vs accounts” distinction no longer works in the world of blockchains. In some ways it’s a helpful distinction, in other ways it creates confusion.

Crypto tokens, especially those on Ethereum shouldn’t have a claim on the word “token”.

Ready?

Continue reading “Tokens vs Accounts: A love letter to the NY Fed (and a quibble)” →

I’ve been following along the CBDC narrative for a number of years. It has been fun watching how the talking points have rapidly evolved. CBDCs seem to be getting closer to reality, driven by central banks (rather than customer demand). But there are some harder questions that are still not (in my view) adequately explored.

Continue reading “CBDCs – Asking the Hard Questions” →

Note: This article was first published on 19 Aug 2020 on the OpenNodes blog, republished here with permission.

The greatest trick played on modern society is calling a whole bunch of different instruments with different credit ratings and characteristics “money”, and conflating them.  It is a neat trick, and very useful in some situations, for instance when businesses invoice each other and make payments.

It is much more convenient to say “Please send me money” than to say “Can you tell your bank to reduce its debt to you, such that my bank increases its debt to me?”  But by using these more accurate words, we can already get a sense that no asset, or instrument, moves all the way from end to end, but rather there are some coordinated accounting adjustments that make the appearance of an asset moving.

Conflating these different instruments and bundling them into one called “money” has enormous positive effects – it has reduced friction and created a common language which is used across the world to enhance trade.

Yet, calling everything “money” can sometimes be unhelpful when we start thinking more deeply about money.  So in these cases, it is helpful to think about two things:

1. The asset itself
2. The medium of record

Continue reading “Money, Programmable Money and Central Bank Digital Currencies (CBDC)” →