Also all the people at Tether can plan to print themselves some new coins --> BTC and then go on a shopping spree :P (for the humour impaired, this bit is a joke)
There is plenty of circumstantial evidence that the tether supply is strongly correlated to BTC (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3195066), and at this point you have to take it as a point of faith that all the tether in circulation truly comes from fiat deposits. On the regulatory side, crypto currencies are very much like going back to the days of Wild West finance, random hold-ups included.
By the way, Tether supply should be correlated to BTC, whether or not they are doing a fractional reserve.
Would you say there's a minimum amount? Thought it was quite clear in the courts that it was at least 90% fiat backing with anything else being hard too account for which I'm guessing is doublespeak for "it's ours and you can't touch it".
Virtually all of the people who actually hold tether are exchanges, mostly in the US. Everyday people are rarely exposing themselves to risk here.
Just for comparison, the reserve ratio required by US banks is now effectively 0%.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
On the KYC front, actors like Paypal (and Square, Braintree and so on) are in a very good position, as they are already payment processors and fully compliant with those regulations. That is something smaller upstarts struggle with, not the established ones. It can even benefit them as a moat.
That means they will need to hedge the risk of a change in exchange rate between buying and settlement (for example paypal offers to settle payment 14 days after payment as a service). Now they can do that, but it'll take some effort.
On KYC I'd agree they're in a better position, but it seems like they'll still need to beef up their processes, as regulators are quite interested in proving where cryptocurrencies came from. They'll not want to be caught with a load of coins that came from the latest ransomware incident.
Perhaps PayPal will only allow people to pay with cryptocurrency they have bought from PayPal in the first instance. So there wouldn't be any incoming our outgoing movements of cryptocurrency at all.