the most charitable explanation I've heard is that tether is backed by $2 billion in value of bitcoin.
What happened instead was that they printed more Tether (450MM) when the bitcoin price was collapsing.
This would be explicitly against their own T&Cs, even the new ones. If they’re going to lie, why bother backing it with anything?
As second guessing Bitfinex is now a popular sport, my totally unsubstantiated guess is that they do have fiat to cover external, primary purchasers. Specifically, if you go to the site and buy tether with real money, they may well keep the reserve.
Their T&Cs don’t actually say they’ll honour the secondary market, just account holders. So, as long as they can meet that demand, they can print as much as they like themselves because they’ll never try to redeem it.
Dodgy as fuck but quite clever. No idea if it’s correct of course.
The risk of holding a tether should be reflected in its price. If the underlying asset is bitcoin, the risk profile of a tether would be the same as bitcoin, and thus the price should tightly correlate with (or be tethered to bitcoin, rather than USD).
If Tether tells people the token is backed by USD when in fact it's backed by bitcoin, that's fraud.
Fractional Reserve Banks currency also usually exhibits natural demand on the account of being the currency required to pay taxes and accepted by stores/businesses in that country.
Yes, fractional reserve banking is bad. But at least the central banks have somewhat a clue how to control it and a legal framework to do so. Whereas for bitcoin exchanges, they just make it up along the way.
Some important differences:
- Your bank tells you it's fractional reserve, Tether tells you they're full-reserve (deception for financial gain is fraud)
- Bank accounts are protected from bank insolvency by FDIC insurance
- Bank risk appetite is modulated by the rates they pay for that FDIC insurance
- The Fed acts as a lender of last resort, guaranteeing the liquidity of your deposits, in order to prevent a bank run
The Fed has the muscle to keep fractional reserve banking propped up. Tether may be lying about being full-reserve, and don't have the muscle to stop a tether run, which could get ugly.