Understanding Stablecoins: The Risks of Tether and USDT

hello everyone um so it's been a bit of a delay with the english versions for the last two

videos apologize for it i was caught up in a lot of things and uh also new content preparation was taking time

so hopefully i'll finish off these two um episodes in the english version and then

continue with the new episodes um by this weekend so um let's get into today's video it's about

stablecoin especially about usd i had posted a tweet or posted you a warning a couple

of videos earlier about usdd specifically tether

why holding tether there is a bit of a problem and there are some issues with tether that i wanted to convey so we'll

be talking about that specifically and also a deep dive into what are stable coins and some of the warnings

associated with it so before that um obviously uh the disclaimer is that i'm not a financial

advisor or investment expert you know i just wanted to make it clear in every video so that this is clearer to people

also none of these um content is financial advice or investment advice i'm i'm i am learning

on a daily basis and and whatever personal experience that i'm gaining i'm trying to share the process with

people so that it's easier for people instead of them learning these things and whatever has taken me weeks or

months to some uh some of these concepts to understand and learn

and and uh you know get the knowledge i'm kind of trying to share the knowledge

with these videos that's what these videos are for and always do your make your own decisions based on your

own research so um what are the agenda for today i provide a time based uh

index in my description so if you want to skip to the particular agenda you can do that as well so

we'll talk about stable coin in general we've talked about in previous videos we will cover

uh what a stable coin is with a a few examples and then we'll dive deep into usd and

tether and usdd you know why we need to look at usdt and what are the issues with usd and

different protocols of usd and why we need to understand the different protocols of usd

and finally the issues and risks holding your money as usdt so obviously uh start with right stable

coin is a cryptocurrency uh whatever said and done it is a cryptocurrency

but the only big difference is that you know most of the cryptocurrencies the values keep going up and down the stable

coins are pegged or fixed to a real world currency like

us dollars or gbp so it is pegged to the real world currency and that pegging process

makes sure that the value of that stable coin doesn't go up or down and it always stays with the

corresponding world currency that it is associated with it so generally the reason why they are

pegged or the reason why it works is because they are backed by a 1 to 1 ratio of real world money in the

bank account so most common real currency is obviously usd which means that

if there is a cryptocurrency a stable coin cryptocurrency that is going to uh implement usd

uh stablecoin then they need to have the corresponding uh dollar amount in their bank accounts to

prove that they have the amount so that they can peg and release the cryptocurrency

how does it work so recently uh you know other countries uh currencies have also been

pegged and there are more and more um currencies that are coming out as cryptocurrencies or stable coins

so in general there is generally an organization that that stands behind it which is holding

these currencies in their bank account and then they are able to issue a corresponding

cryptocurrency for it so for example trust token is a huge organization and recently they've

launched uh stable coin cryptocurrencies in usd and

gbp in australian dollars and canadian dollars hong kong dollars it's launched like five or six

stable coin cryptocurrencies so it's called d usd t gbp and so on so trust often is gaining popularity these days

and these organizations they mint new cryptos when they are able to deposit real money

into their bank account and they can hold that real money as a collateral for example trust token uh

as of uh the time that i made the video 14th they had nearly 340 million dollars

in their bank account for issuing 338 000 million dollars worth of cryptocurrency into the

market so the proof of these funds the fact that they are able to hold these funds

right that is very important and what they do most of these organizations what they do

is they get a third party auditing from third party accounting firm to come and

audit their bank accounts saying that those bank accounts are frozen they are maintaining it on a

monthly basis the funds are always there in those bank accounts and is is

controlled and is audited and the audit audited records are tested by an accounting firm and the

attestation is shared with the people so for example um the the the trust token we spoke about the

attestations are available for anyone to easily verify in their website you can go and verify the

attestation that is by a third party auditing firm and the reputed auditing firm

so you obviously know that the the bank account validations are all correctly done so some of them these

days for example even russ token these days they are starting to use technologies like oracle's you know we

spoke about chain link link which is a an irrefutable pricing mechanism for blockchain so they

are using concepts like chain link and i know there's a

there is a collaboration that's done with chain link where they really don't need offline

attestations they can actually do live on-chain attestations where they can bring real-world pricing data which

means that through blockchain you can actually see that you know they have real-world money

in their bank account so that's the next step that they're going that they're even doing away with the

need to actually do those manual attestations by providing irrefutable proof that they

have the real-world currency in their bank accounts now another

common uh stable coin is usdc uh which is issued which was basically uh co-founded by

coinbase and there's another big organization called circle so they uh created this popular stable coin usdc

and uh this is also highly governed the funds are maintained uh you know they're maintained in licensed and

regulated financial institutions and before one dollar of usdc can be minted they need to make sure that the

real world dollar is kept in their in their financial institution and that is also

uh are tested on a regular basis as a report by grant thornton llp which is a very famous

accounting firm and every month you can actually see for the almost for the past two and a

half years every month you can see a month on month basis how much bank account balances are being maintained

it's completely transparent and you can go and see the full audit report from the

accounting firm uh they are they are also sometimes you know tested by different accounting services firm

the top five accounting firms are all coming and are testing these things so the amount of uh audit and governance

that these companies have for issuing these cryptocurrencies these stable coins is very very high

for usdc for trust token for most of these uh coins so um how does usdt compare to

these uh these other organizations right so usdt currently is the most widely used

stablecoin and it is issued by an organization called tether limited in fact tether limited were one of the

very first companies that invented this concept of or rather made this concept of

stable coins more popular and they've been uh doing it for a few years now so the amount of funds issued by uh the

stable coins register comparison will show you how much of dominance usdt has over the other cryptocurrencies

so for example usdt um the the amount of stable coins or the amount of funds issued is about

32 billion dollars today uh or rather it was about two weeks back rate but that that's

almost 2300 crores in indian rupees and usdc which comes next to it is only 7.3 billion dollars

even though there is number two in the world in terms of stable coin is only you know it's like less than uh

one-fifth of what usd has in terms of the world market so 53 000 crores um as compared to the

two lakh thirty two percent cross that usdt has uh in terms of indian rupees t usd which is the trust stock and the

best pokemon has roughly only 330 million dollars almost very very tiny as compared to

usd so usd is 100 times more than what uh trust token us dollar values are right now so that's

the kind of dominance that they have now that is market capital now if you look at the volume right the volume is

even more staggering even more wider in terms of the volume of transactions done

using usd so on a daily basis the comparable volume is nearly 118 billion dollars

of transactions happen using usd whereas only 1.9 billion dollars happen using usdc so that is quite

staggering in terms of the market that usd has captured clearly the dominance of

usdt or other stable currencies is huge right now you know it is one of the widely used pirates

uh in fact after uh bitcoin usdt is probably one of the most widely used pairs in terms of buying and selling

a cryptocoin that's almost comparable to ethereum i would say um so usdt is issued by either multiple

blockchains or multiple blockchain protocols and primarily usdt is issued in ethereum

network like all other erc20 tokens so usdt is predominantly a erc20 token

but these days usdb is also issued in tron uh blockchain the trc20 protocol or the

trc22 as a trc 20 token so and on top of it it is also issued in two more blockchains

com not very common but it is issued in omni layer and eos protocol as well and why is it

important what is the reason that you know you need to know this or why is it important because even though

erc20 is the most commonly used protocol widely used protocol for it um and it is supported by most exchanges

only the erc20 token for example version x only supports erc20 token there's a lot of advantages

with usdt on the other protocols especially like the trc20 protocols

we'll see with a live example now so the reason it is important is because of the fees between erc20 and the trc20 token

so i'm going to just try and show you using erc20 protocol you know try and transfer

the usd from binance to another supported exchange let's say peter or from bitro to binance so if i use erc20

for transferring nearly 50 uh the fees is nearly about 10 and uh if i use trc 20 on the other hand

to transfer the same 50 the fees is near negligible it's almost 0.1 usdt which means that it is literally

zero that's the advantage so if if we are able to transfer it using usdt i mean

using a trc20 protocol or one of the other protocols the fees is really really

low and the speed of transfer is really really fast as well but obviously the support for erc20 is

the one that is widely available and not all exchanges currently support drc 20

which is one of the reasons why we continue to use erc20 protocol and which is why the fees

is more higher for transferring usdt so um if you are in india and you're using

cryptocurrency right one of the things that you have to keep in mind is that usdt is also a cryptocurrency like all

stable coins like all other cryptocurrencies usd is definitely a cryptocurrency

not a dollar so even though the exchange rate doesn't fall exchange rate obviously will have an

impact on usd to inr so when you are buying and selling cryptocurrencies um especially usd it will be directly

impacting because of the exchange rate but even otherwise sometimes the exchange rate of us dollar to inr will

remain same but you could see a drop in the usd value when you're buying it through

inr the reason is the panic or the uh the market conditions of india could be different for example when there was

an india credit crypto ban news that came out where the parliament was contemplating

it or considering it it immediately uh caused an impact for usd so um obviously you know holding your

crypto in stable coin protects you against movements and crypto prices but not the real world impact like the

india issue that we had with regards to the crypto ban itself but that's not the

main issue why you should not hold or you should not only do much of your cryptos as a usd tube

so what is the issue we spoken about all this spoken about the dominance what's the actual issue or the concern

by holding usd right so tether limited uh is the cooperation that we spoke about which

actually uh started this concept of stable coin with usdt

was founded in 2014 uh by executives who were at that time part of a famous exchange

or they were in senior leadership position in a famous crypto exchange called as

bitfenix that's bitfenix is still operating but in the early years tether limited uh

was was trying to be you know completely transparent and claimed that it is built to be fully transparent at

all times that was their motto at the beginning of the company when they launched the company

but today um compared to the other stablecoin groups like usdz and

you know trust token they don't independently do an audit of their uh

of their real world fund there is no third party accounting firm that is coming and auditing their uh

their real-world balances they are they in fact the last few months they have in fact

stopped publicly disclosing how much rear wall funds that they have which is a major concern

the last known published audit by a third party firm was done in 2018 when there was an

accounting firm called freight manager which came and did the audit like the other companies were doing right so

that was the last audit that happened and even then it was not a full disclosure

it was not a full audit because they had blacked out the names of the financial institution or the banks in

which the funds are being kept so the audit report was only saying that okay there are some

funds in these financial institutions it did not reveal the extent of which financial institutions or

which banks that these uh these funds were being kept like the audits of the other

organizations i mean other companies that are doing it right now on a monthly basis even this 2018 audit

wasn't you know full or wasn't a full disclosure and in fact immediately after this audit

tether disengaged or discontinued the service with accounting firm and uh the accounting firm can no longer

update or comment about you know what was the what was in that audit or any details about the audit so even the last

audit was that was done nearly two years back was not complete and recently there's a lot of scrutiny

that's going on 2019 there was actually an intense scrutiny from american legal bodies especially

the new york attorney general office and then after the scrutiny uh tether corporation was asked to was asked to

explain about the real world funds under oath and that's when they first time admitted that usdt is not

backed by 100 real world u.s currency as was thought at that point of time till 2019

people were at least thinking that there is a real-world us dollar currency behind it what it state is

what it stated instead was that it is collateralized by cash reserves and cash equivalent assets

now the catch is that it could include other cryptocurrencies it wasn't it didn't clarify

what cash equivalent assets meant and this was a shocking admission and that's put

more scrutiny on usdtn the ownership from tether itself okay so tether limited uh

has always maintained that it has no links with the crypto exchange with phoenix

after the initial creation where the executives have come from bitfenix right they've always maintained that okay that

is a separate company we are a separate company but all the reason investigations point

out that there is a parent organization that is sitting behind tether limited and bitfenix

even though tether has not fully admitted or disclosed it or agreed to it the main reason why this is relevant is

because in 2019 bitfenix was accused of losing nearly 850 850 million dollars worth of crypto with

the help of tether corporation and new york attorney general office was was accusing them of trying to cover it

up together and sweep it under the carpet and

that legal case was going on and it was settled recently but obviously that threw a lot of light into

you know what could potentially be behind the scenes between these corporations

started to become a bit shady after that point of time and in a swan affair had recently

admitted that the real world currency backing with u.s dollars in the bank accounts is only

about 74 or lesser which means that you know if they have 100 million dollars only 74

million dollars is banked by actual u.s dollar currency whereas

the original intent was that should have been backed by 100 million dollars of um u.s dollar currency so this creates a

a vicious circle and a false economy how and you know what why would it create a false economy because

they're still saying that it's backed by real world assets right so um let's just go back if you had seen my

episode one and you would remember there's a market capital story that we had explained using

fruits and village uh people basically so you know in a in a village of 100 people

if 50 people are are buying fruits and each of them spend only 20 pounds or 20 rupees

then the total money available is only thousand rupees which means that you know if there are four fruits um the

amount of money thousand is equally divided that determines based on the supply of each fruit how

much the cost of those fruits could be so that's theoretical maximum value of those

fruits so unless and until more money come in um you know you you cannot increase the

value of the fruits or the supply of the fruits need to reduce so with that supply of fruits with that

money you cannot increase the price of the food so to increase the market capital increase the price of the

fruits people should spend more money or people should have more money to spend in the

first place now imagine if they can borrow paper money from a bank like

for example um you know let's say a bank is saying that okay no i can't keep bringing real world money

to the branch because it's too far away in the village and then let me maintain the real world money in

a city branch and then instead of transporting it to the village let me print a paper equivalent in the

village because i can hold my money in the city branch and whatever equivalent money that i'm

holding the city branch i'm going to print it in the village so the village people accepted let's say

and then if they have 2000 rupees in the city branch as the real-world money then they can

lock it up in a locker and then they say i'll print paper money equivalent to issue it because i already have that

money so consider this as equivalent i will accept it and we will all accept it

and there's a consensus so now apart from the thousand pounds that they had now there's

two thousand pounds more paper money being issued which is you know in real world money because

they have real world parking for it now they have three thousand uh rupees or three thousand pounds to spend on

fruits and let's say they spent everything on the fruits now all of this 3000 pounds is backed by

real world money 1000 pounds belongs to the villages and 2000 monsters in the city branch as a real world money

now imagine that uh you know if everyone buys only apple with that two thousand people just as a theoretical example

right now the the apples cost nearly about 60 pounds each which means that

uh the apple value is 2400 pounds because of this extra money because there are 40 apples

because the earlier the apple value was total apple value was 400 now the total apple value is 2400

now um let's say the bank goes and buys or you know gets 20 apples or they have 20

apples now because they have 20 apples now they decide to issue paper money because they

have this asset which is nearly worth 2 200 pounds now it's not real money but it's a an

asset it's a uh it's a cashable asset that they have

and they don't have real money i mean apart from the 2000 they don't have any more real money in the city branch

but because they have this this thousand two hundred pounds worth of apples now those twenty

apples they decide to issue more paper money and they print

another thousand two hundred pounds worth of paper money in the village because they have these apples

and they say that okay i have two thousand in the in the bank and i have these apples which are 1200

let me print more paper money which is 1200 because of the apples now you have the

thousand original money with the village the 2000 pounds uh paper money that was backed by real

world currency and the new thousand two hundred pounds backed by apples now 4200 is available in the

village office 3000 is the real world money 1200 the newly printed paper money was just created out of this

apple ecosystem now what happens is let's say that you know you put a game that the people get these paper money

and they're putting the the money again into apples now let's say the apples the 40 apples right

so obviously the 1200 increase would mean that each apple is now 90 pounds each now the bank let's say goes

and buys another 10 apples or gets another 10 apples they decide now to issue

more paper money because now they have 900 pounds extra because of the 10 apples of their pot

now they still don't have real money in the city bunch the real money is only 2 000.

now more paper money is printed 900 pounds is printed now um if you look at it so this there's

three thousand pounds of real money thousand pounds original money two thousand pounds the the bank

branch um in the city has got uh real money and then there's two thousand hundred

pounds you know originally thousand two hundred and now nine hundred so there's about you know literally uh

more money that is being printed five thousand hundred pounds printed but only three thousand is backed by real

money two thousand hundred was just created because of a circular ecosystem that

these guys are creating because they are able to print the paper money using these apples

which was inflated in price because of the paper money in the original scenario now this is just a theory right so

it may or may not happen because they've not disclosed what their financial assets are

but what it means is that it's creating a circular ecosystem which means it is inflating the prices of the apple

in a circular page it's just going on and on and on so there's no way to confirm this theory

fully and every few days billions and billions of dollars of tether

are being minted at an alarmingly higher and higher rate so if you compare the uh the veil alerts

that are coming for tether being printed or minted it is considerably becoming higher

which could theoretically mean that real world organizations are giving them real world dollar money to buy

usd from them potentially possible but it could be a circular ecosystem as well now if

tether gets accused by the sec securities exchange commission or the new or

attorney general or any other legal body of fraud uh by off of doing this the the example

that i gave um could be you know proven in court as a fraud or

as a uh unacceptable practice for uh monetary uh issue right so if that gets proven in code that they are

creating a circular asset-backed cryptosystem that could theoretically make the usdp

fail you know this is this could cause a short-term collapse because as people will realize that

there's really no real world money the real world money in that example was only three thousand

everything else was created out of thin air because of the circular ecosystem that could trigger a collapse you know

that could in the short term that could trigger collapse but again you know it instead of panicking let's

just look at it just to make sure that you know we are we are uh thinking about

it and just be prepared for it so in summary right i made a small mistake in my thumbnail video when i made this so

in summary crypto market capital when i made the video was like 1.5 trillion dollars

of which usdd's market capital is only about 32 billion dollars which means roughly about you know three

four percent maximum crypto market capital is made up of usd and so even if usd goes to zero the

market capital only go down by four percent and cryptos probably could lose around

four to five percent but it could be disproportionate right because in reality usd may not go down to zero

because 74 percent is backed by real world funds we know that right so even even though the the circular

inflation created by usd repeatedly used over and again be harder to compute and understand if it happens

to be true right um it could cause a bit of panic or it could cause a bit of

loss of faith i would say in the in the stable coin concept during that point of time which could cause a bit of an issue

but for now uh the reason why i made this video is because information is wealth

rate so be aware of this fact that usdt or tether has a

checkered history and has got a bit of concern with regards to the transparency in which they are they are showing the

data the transference in which they maintaining the real world funds whatever transparency it was there

has vanished about two years back and right now no one is able to 100 certify that

the usdd tether value is is justified with real world funds or with real world assets or not

so be aware of this and don't hold too much of your crypto in usd you can always trade with usd to people

that ask me in our videos but i do trade with usdt but i don't maintain

most of my balances i mean not more than five percent of my crypto balance at any point of time

is held in usd because now i'm just just want to be risk um aware of of having it so

for overall stable coins if confidence is lost the value gets lost that's the reason

so again just a few um bits of information that i wanted to share and you know this is something

that i had because we had introduced the concept of usgd and stablecoin in episode 15

specifically right i wanted to kind of explain about this for uh for a while and and

just just made sure that you know i put all the information in relevant context so that you are aware of all of this so

hopefully this was useful until next time thank you bye you