Consider these sentiments about the effects of tether on the USD price of bitcoin between Mike Benz and Preston Pysh (https://x.com/MikeBenzCyber/status/1880619137124204972):
Benz: What would happen to the price of bitcoin if tether died tomorrow?
Preston Pysh: …in the short term if liquidity dries up bitcoin gets punished, we have seen this over and over again, but they can’t let that deflation rip through the economy or else everyone’s living in tent city.
In this writing we will consider The Paradox of Private Versus Monopolistic Perspectives with regard to the rules and framework that tether exists in and the effects such have on tether and the effects tether has, or might have, on the global financial system.
On The Comparability of Ruritania and FTX
Carolineu/carolinecapital u/cz_binance if you're looking to minimize the market impact on your FTT sales, Alameda will happily buy it all from you today at $22! ~https://x.com/carolinecapital/status/1589287457975304193
In my essay Hal Finney’s Theory of Bitcoin Backed Banks I describe the concept of “proto-digital banks” using crypto-exchanges as an example of such newly rising technology. This is a phenomenon comparable to how private currencies arise in Ruritania (a fictional device/realm used in George Selgin’s work the Theory of Free Banking) in order to facilitate efficiencies that the base layer currency cannot accommodate:
Under Ruritania’s pure commodity-money regime traders who frequently undertake large or distant exchanges find it convenient to keep some of their coin (and bullion) with foreign-exchange brokers who can then settle debts by means of less costly ledger-account transfers. Money-transfer services also develop in connection with deposits initially made, not for the purpose of trade, but for safekeeping. Wealthy Ruritanians who are not active in commerce begin placing temporarily idle sums of commodity money in the strongboxes of bill brokers, moneychangers, scriveners, goldsmiths, mintmasters, and other tradespeople accustomed to having and protecting valuable property and with a reputation for trustworthiness. Coin and bullion thus lodged for safekeeping must at first be physically withdrawn by its owners for making payments. These payments may sometimes result in the redeposit of coin in the same vault from which it was withdrawn. This is especially likely in exchanges involving money changers and bill brokers. Such being the case, it is possible for more payments to be arranged, without any actual withdrawal of money, at the sight of the vault, or better still by simply notifying the vault’s custodian to make a transfer in his books.
Because of the lack of a “coercive monopoly” (Ayn Rand Capitalism: The Unknown Ideal) on currency supply (ie a central bank) it is argued by Selgin (and referenced by Hal Finney in regard to the effects and evolution of bitcoin on our global financial system) that currency competition would ensue and force out mismanaged private currencies:
During that period, banks’ sought to bankrupt their rivals by “note dueling”-aggressively buying large amounts of their rival’s notes and presenting them for redemption all at once. For a bank to stay solvent during such raids it has to keep substantial reserves, so that its contribution to the process of fiduciary substitution is small.
This phenomenon is how FTX became insolvent:
Sam Bankman-Fried and Zixiao “Gary” Wang)[23] founded FTX in May 2019.[24] FTX began within Alameda Research, a trading firm founded by Bankman-Fried, Caroline Ellison, and other former employees of Jane Street in 2017, in Berkeley, California.[5][25][26] FTX is an abbreviation of “Futures Exchange”.[5] Changpeng Zhao of Binance purchased a 20% stake in FTX for approximately $100 million, six months after Bankman-Fried and Wang started the firm.[27]
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Several months after Bloomberg’s initial report on the relationship between the two firms, on November 2, 2022, CoinDesk reported that a significant portion of Alameda Research’s assets were held in FTT, the exchange token issued by FTX. It said that there were $5.1 billion worth of FTT tokens in circulation, and that Alameda’s balance sheet held $3.66 billion of “unlocked FTT”, $2.16 billion of “FTT collateral”, and $292 million of “locked FTT”.[17] In the weeks immediately preceding the publication of the story by CoinDesk, Bankman-Fried was characterized by anonymous sources cited by Bloomberg as “desperately” attempting to raise money for FTX.[55] Additionally, Bankman-Fried had been publicly “dueling” with Changpeng Zhao on Twitter in the months preceding the CoinDesk article, in part due to disagreements stemming from their differing views on the regulation of cryptocurrency.[56]
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Several days after the publication of the CoinDesk article, on November 6, Binance CEO Changpeng Zhao said on Twitter that his firm intended to sell all its holdings of FTT.[57] Binance had received FTT from FTX in 2021 during a transaction in which FTX bought back Binance’s equity stake in FTX.[58] Zhao cited “recent revelations that came to light” as the motivation for selling FTT.[58] Bloomberg and TechCrunch reported that any sale by Binance would likely have an outsized impact on FTT’s price, given the token’s low trading volume.[59][60] The announcement by Zhao of the pending sale and disputes between Zhao and Bankman-Fried on Twitter led to a decline in the price of FTT and other cryptocurrencies,[61] resulting in a three-day depositor sell-off, like a bank run, of an estimated $6 billion that sent FTX into crisis.[62] On November 8, Zhao announced that Binance had entered into a non-binding agreement to purchase FTX due to what he referred to as a “liquidity crisis” at FTX.[63][64] ~ wiki FTX
ETFs as Shadow Banks With Regard to the Great Recession of 2008
Consider the “tide” of the “Great Recession” of 2008 as caused by the “subprime mortgage” crisis:
The crisis exacerbated the Great Recession, a global recession that began in mid-2007.[10][11][12][13][14] It was also followed by the euro area crisis, which began with the start of the Greek government-debt crisis in late 2009, and the 2008–2011 Icelandic financial crisis, which involved the bank failure of all three of the major banks in Iceland and, relative to the size of its economy, was the largest economic collapse suffered by any country in history.[15] It was among the five worst financial crises the world had experienced and led to a loss of more than $2 trillion from the global economy.[16][17]
Lack of investor confidence in bank solvency and declines in credit availability led to plummeting stock and commodity prices in late 2008 and early 2009.[26] The crisis rapidly spread into a global economic shock, resulting in several bank failures.[27] Economies worldwide slowed during this period since credit tightened and international trade declined.[28] ~ wiki 2008 financial crisis
Notice the key to this phenomenon is the lack of investor confidence in bank solvency which thus would also include the ability of the “grand pardoners” to bail such banks out.
Here want want to consider the role of ETFs as “shadow banks” with regard to the Great Recession as explained in Joseph Wang’s Central Banking 101:
An ETF is shadow bank because…while its shares can be sold any time the market is open, the assets the ETF holds may not be as liquid.
In principle, the redemption structure for ETFs make them less vulnerable to runs because a redemption of an ETF share yields a basket of securities, so the ETF itself is not subject to forced selling of its underlying assets.
However, should an institutional investor try to arbitrate the difference by redeeming its shares for securities and then selling the underlying securities, then that could lead to a cycle of larger downward price moves that could lead to more redemptions.
In the 2020 COVID-19 panic, investors sold ETF shares so aggressively that many ETFs were trading significantly below fund asset values.
Institutional investors were having trouble arbitraging the differences because market conditions were so poor that even if they could redeem their ETF shares for the underlying securities, they could not sell them: there were no buyers for the securities
And now consider Wang’s interpretation of the causes of the Great Recession:
The basic business model of a shadow bank is to use shorter-term loans to invest in longer-dated assets. This mismatch creates an opportunity for profit as longer-term interest rates are usually higher than shorter-interest rates. The shadow bank may also be earning a risk premium by investing in riskier assets. This bank-like business model also makes shadow banks vulnerable to bank runs when their investors refuse to renew their loans.
Without access to the Fed as lender of last resort, shadow banks may have to sell assets to meet investor withdrawals. During a panic, they would have to sell assets at large discounts, potentially incurring large losses.
The 2008 Financial Crisis and the 2020 COVID-19 panic were largely due to runs of the shadow banking system.
The KEY point here is that Wang ascribes SHADOW BANKS as being the underlying cause of the crisis AND BECAUSE they are out of reach of the “lender of last resort” aka the FED.
On the Comparability Between the Tether Phenomenon, the FTX Implosion, and the 2008 Global Financial Crisis
Benz: What would happen to the price of bitcoin if tether died tomorrow?
Here Benz speaks of a hypothetical where tether simply ceases to exist as if the monetary units disappear from the “M” supply of USD. This would be deflationary with regard to monetary inflation (and thus price inflation) causing the value of USD to INCREASE and the exchange price for bitcoin to DECREASE (ie causing the price of bitcoin in USD to decrease).
Prysh explains it in terms of short-term liquidity, “ …in the short term if liquidity dries up bitcoin gets punished, we have seen this over and over again, but they can’t let that deflation rip through the economy or else everyone’s living in tent city.”
But Prysh’s use of the word “deflation” here is in regard to credit contraction.
In what world or universe, however, could or would tether simply “disappear”?
Not ours.
HOWEVER it COULD be that the DEMAND for tether disappears overnight especially in the same regard that demand for FTT tokens disappeared in an instant (tweet!). And if tether serves the shadow banking market then we should (obviously) expect that they are linked to offshore credit creation markets (unchecked leverage!) that is also completely out of the regulatory purview of the “the grand pardoner” of those units (aka the fed).
In this scenario it wouldn’t be a credit contractionary event but a seemingly infinite velocity event of the USD and this would cause a hyper increase of the exchange price of bitcoin with regard to USD-seemingly the opposite of the Benzian prophecy.
All depending on who or what is at the other end of tether (demand).
