Understanding the role of wildcat banking in the United States is an important portal into the modern role of Tether in crypto. Wildcat banks were banks that were not bound by federal regulations and thus these banks were often under-collateralized and were issuing their own currencies that could only be redeemed (often) by going through them.
Many of these wildcat banks were chartered in Michigan who had made it extraordinarily easy to become a bank, requiring only that the bank sell at least 50k in equity and they deposit mortgage notes with the Michigan state government to back their banknotes. Shocking one of my readers it eventually came out that many of these banks were fraudulent. One common tactic they would use is pass around the same bundle of cash from bank to bank, each time making sure it got there before regulators.
If you had a banknote from one of these banks and you hoped to instead receive cash they would have to return to that bank. In one case the Michigan Commisioner said that the reserves were actually just boxes of nails and glass with a thin layer of silver coins on top. (Astute readers are already seeing the analogy that I will be making)
The wildcat banking era ended when Federal regulators stepped in.
Tether is currently an institution that issues their own currency (tethers) that are meant to mimic the value of another note (the US dollar). Tether’s cash reserves for their own banknote, total to just barely better than nails, glass, and thin silver coins, holding only $0.03 for every Tether. Tether has previously taken the tack of passing around cash right before verifications to create the appearance that they were backed. Tether tries to avoid as many regulations as they possibly can. Tether is the modern incarnation of the wildcat bank.
Tether is not the only example of a modern day wildcat bank. Several years ago there was a company called Liberty Reserve. They were a Costa Rica based payment processor that allowed people to deposit money which was then transformed into ‘Liberty Reserve Dollars’. (Astute readers are already seeing the analogy that I will be making) Liberty Reserve in total processed approximately $8 billion in transactions.
Liberty Reserve was shut down by the United States Department of Justice for helping to facilitate money laundering.
So what? Tether, who looks a lot like Liberty Reserve and the older wildcat banks is under investigation by the Department of Justice.
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