This is such a silly argument. USDT is definitely backed by USD. To claim that it isn’t is just a lie. I think what you meant to imply is that it’s not backed 1:1. This isn’t only an issue with Tether. This is the case with any fractional reserve banking system.
There is a minor difference, though. On a typical fractional reserve bank the deposits are backed by assets worth more than what is the worth of the deposits.[1] Not only that, there are other liabilities that take the possible losses before the deposits are being hit.
On a typical stablecoin, there is a reason to suspect that the coins are backed by assets worth less than the market cap of the stablecoin.
The difference may seem subtle, but it is a difference of a legitimate business and a despicable scam.
[1] In case you are interested, you can go and check the balance sheet of any bank you want. The part where the value of excess assets to back the liabilites of the bank (deposits etc) is listed under "Equity"
Yes fractional reserve banking is a real thing, but real banks must publish audited financial statements so that outside observers can asses the banks financial position. From small local banks to national reserve banks, the financial statements are out in the open for depositors and borrowers to scrutinize. This isn't possible with Tether because the fiat side of their books are closed.
If everything is above board at Tether why not release the books? It's such an obvious PR win and would increase adoption of their currency.
They haven't done so because they know the books are cooked.
Its 2/3rd backed by dollars and 1/3rd a mixture of commercial paper, which we don't have further information about. Rumor mill always swirls about that paper, but its probably not that controversial and would only be 33% of Tether. Likely would result in a liquidity crisis if more than 70-80% of Tether's were redeemed at once. Although I wonder if that's even possible now given how much USDT is locked in DeFi apps and liquidity pools and burned.
(Projects often lock assets in a liquidity pool share and then destroy their access to that share, to ensure to their community that there is always the ability to trade)
So Tether will probably continue working for partially the dumbest reasons.
If anyone ever provably burns a tether, then the tether organisation will help 'recover' the tether to anyone holding keys to a previous address that held it, or just anyone with a reasonable story how they accidentally burned the tethers.
This is their policy since some big players accidentally sent tether to addresses on the wrong Blockchain...
This document [1] from the Bank of England (UK’s central bank) is the best description I know of about how those ideas (“fractional reserve”, banks lending out deposits, “money multiplier” etc.) are wrong.
1. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
I guess you could say “fractional reserve banks” do, because “fractional reserve” is a textbook model and not something that happens in the real world.
The problem is that deposits are a liability. Banks can only lever up assets to lend, so deposits are on the wrong side of the balance sheet to do that. What limits how much banks can lend is capital (and capital adequacy ratios), not deposits.
Banks create new deposits when they lend, as well as creating an equal amount of private debt. The loan is an asset of the bank, which creates a corresponding liability.
Customer deposits coming in as cash or transfers from other banks are useful as liquidity, but can never be lent.
Some details if you’re interested: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
When someone makes a deposit in a bank it goes on both sides of the __balance__ sheet. On one side the "deposit" is a liability for the bank - who owes money to the depositor - but on the other side it increases the bank's "reserve" account.
That is insured by GOVERNMENTS...