Correction in episode - I say CDO I mean MBS. Mortgage backed securities.
After episode I went to Paypal terms of service and discovered I was indeed correct about Paypal balances.
https://www.paypal.com/us/webapps/mpp/ua/pp-balance-tnc
"Any balance in your Balance Account represents an unsecured claim against PayPal."
PayPal isn't creating dollars and lending them out. Stablecoins issuers aren't either. But they are creating tokens and lending them out...
Paypal is not creating new dollars. In exchange for their service, you send them dollars they create an iou for you - this is shown as a balance, but shouldn't be thought of as one. You can transfer this iou to someone in the Paypal network that accepts the iou. Dollars aren't created still, even if Paypal invests the dollars 'backing' these ious. The dollars have just been transferred. When someone wants to get these real dollars and turn in the iou they make a withdrawal to their bank and Paypal sells assets to raise dollars.
Paypal didn't create a product like a stablecoin. They just created ious which aren’t dollars either- ious are a promise. Banks can create new dollars, paypal can’t. Both banks and Paypal make promises.
Is a stablecoin an iou? Well if they are then why can the issuer just create these tokens unrestricted? Remember new tether is created but not assigned - that is their famous phrase. So, no, stablecoins are just tokens, which can be created without any iou associated with it. Stablecoins might also take on the additional role of an iou that can be traded, but it doesn't matter that they trade often at a dollar, they still are not dollars, they are a crypto token.
Tether has 49% of its reserves in commercial paper according to a CoinDesk article.
Commercial paper is defined as an unsecured promissory note. Unsecured lending is considered highly risky because it doesn’t require collateral.
Why would Tether and USDC be doing this with dollars they actually collect first? My question for the companies getting these unsecured loans would be are the loans being paid out in the stablecoins or in real US dollars. We could learn a lot with the answer to this question.
I would like proof they are making these loans in real US dollars.
If they are giving these loans out in their own stablecoin then that would mean that they are going into the market and buying their own stablecoin with dollars that they have first and then lending out the stablecoin. Because when they issue a stablecoin they have the dollars, not the tokens. Or they aren’t going into the market to buy back their own stablecoin with real dollars, instead they are creating new stablecoins and giving them to the borrower in exchange for a note. They can still say these notes back their token, because a new token was traded for a note.
