Tether, and how the the lack of audited financials *could* be a systemic risk for most crypto assets.

A thread on the *potential* for systemic risk.
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Let’s get a few things out of the way.

1. I still have BTC price exposure
2. I have done extensive reading on the BTC and am familiar with most major works
3. You’re free to assume I have personal incentives because that’s a prudent assumption, even if I say I don’t
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My goal here is to have a conversation about risks. Further reading on the ecosystem has led me to understand a new risk dimension here that comes not from BTC itself, but from peripheral actors.

I was previously oblivious to this, having only examined BTC itself.
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Since this is a thread about risk, it’s probably not worth reading if risk discussion will cause you psychic pain.

I’m writing this because I’ve said some bullish things in the past and my views have evolved.

It seems responsible to disclose that.

Let’s begin.
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Many others have already written about this, and well.

Accordingly, we’ll just link to 2 pieces of previous work which elegantly describe the risk surface.

First, this piece by Patrick, whose writing (and mind) I’ve admired for years.
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https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/

Patrick’s piece above is very accessible and well-referenced. I consider it a must read insofar as understanding crypto-skepticism is concerned.

For a deeper dive with a more forensic approach, John Griffin’s piece is also very much worth reading:
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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3195066

It’s also worth noting that places much more reputable than me (say, Grant’s) have been poking around on this front and there’s a lot of great indy research out there on the matter.

Would thank everyone but… this appears to be a sensitive topic and don’t wanna blow up feeds
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So the thing to note in all of the above (which I had missed) is that the locus of risk has *nothing to do with Bitcoin.* The risk is introduced by ancillary players, and is systemic in nature.

Let’s dig in on 3 risk scenarios I found interesting.
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Risk 1: Model Invalidation

If (as Griffin’s work puts forth) major bull runs can be attributed (in part) to Tether prints, this would call all modeling which uses historical price as an input into question.

...which gets awkward pretty fast, if you think about it.
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Nearly all cyclical modeling purports to understand BTC’s price behavior in response to supply. If Tether impacts price, causal supply-side attribution becomes unreliable.

Put another way, a historical price manipulation would cloud understanding howC BTC behaves “in the wild.”

Supply considerations are no doubt a factor, but not knowing *how much* of a factor is problematic for price projections.

Griffin’s work is more forensic and worth reading. By my casual observation, well…

Tether make number go up:
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A cynical observer might even posit that price-centric historical modeling provides some pretty nice air cover for future price manipulation in an unregulated market.

Not suggesting this is the case, just observing that the reliance on these cyclical models is well-adopted.
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Risk 2: Cantillon attacks

There are also scenarios in which Tether is indeed “fully backed” by *something* but the details of that ‘something’ allow for price attacks against Bitcoin.

I have dubbed these “Cantillon attacks.”
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To understand the mechanics, we first have to note that the market-dominant “HODL behavior” significantly thins the available BTC supply.

This is a well documented fact, and is part of the traditional bull case - less supply snowballs on itself driving up price.
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Thin liquidity conditions are also an ideal environment for market manipulation. They allow whales to have larger price impact.

So an actor with lots of (notional) USD could perform a pump-cycling attack in the following manner, while being consistent about “full backing.”
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Cantillon Attack Procedure:

1. Buy A lot of BTC with tether when the liquidity thins
2. Wait for market to follow price jam
3. Sell back for USDT at a profit
4. Repeat

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Similar to how “printing money” allows for early recipients to benefit most (Cantillon effect), this repeated pump-cycling would be quite lucrative.

Knowing what assets Tether is backed by, on a continual basis, would help resolve whether this is affecting price.
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This Cantillon attack can happen *even if Tether is 100% backed by assets* and can only be remedied by requiring that those assets be actual, real, US Dollars.

The opacity of allowing ‘assets’ is what opens this attack vector. A USD-only reserve policy would remedy this.
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Risk 3: Liquidation contagion

Tether appears to be under some form of investigation by the NY AG. In the event that a big actor in the space should be deemed insolvent, this could lead to large scale forced selling of assets on hand.
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If you’re unclear how this stuff can play out, I’d encourage you to go watch the movie “The Big Short” - it’s a fun watch and does a good job of showing how a single player getting caught out can snowball into an existential problem for other players in the ecosystem.
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Again, I have no idea what Tether is backed by. But any scenario where it’s not USDs and that fact comes under scrutiny could lead to forced selling of those other things, which would of course affect their price.

Even standardizing to USD-centric backing could cause this.
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Please note, again, that I do not have positive evidence of this happening other than the circumstantial evidence linked in the thread.

But in the context of *hypothetical* risks which *could* exist, it seems fair to speculate.

At least until we get an audit.
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So what would I like to see happen here? I’d like to see Tether do recurring audits with a reputable auditor.

I’d like to see this because I’m a huge fan of the cryptoverse and believe it’s too important to have hypotheticals like this go unanswered.

Audits fix that.
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I still like Bitcoin, and remain firmly bullish on the notion of a decentralized, non-sovereign asset as a source of prime collateral.

I’m also becoming more cognizant of some of the risks that could be lurking out there when there are big market movers with little scrutiny.
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Thanks to everyone who has done work on this space (especially @ahcastor). It’s been really fascinating to read.

Come now, cyber-hornets.

I have purchased a beekeeper suit, donned it, and I believe it is mostly sealed.

I await your onslaught.
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