Speaking of banks, another question: which legacy bank would be able to redeem all money of all account holders? the answer is: none. The money you have on your account is "safe" only because there is no panic. Does that make traditional bank a huge scam?
They hold 10% in _cash_, and 90% in debt. That debt is liquid and can be traded for more cash easily in the case of a bank run (possibly even guaranteed by the fed?)
Tether _may_ be holding cash and assets covering 100% of its reserves, but 1) it's not sure, 2) it's not clear how liquid those assets are (e.g. dubious CP)
If Tether hold cash+assets covering 90% of issuance then it's a scam. If they hold 99% then it's a scam. It's not equivalent to fractional reserve banking
It's not a perfect system; see the subprime mortgage crisis for an example.
That answer is correct only in a very limited sense. All legacy banks have more assets than (non-equity) liabilities. In addition to that, banks have liabilities with lower seniority than deposits, which take losses before deposits. So yes, if a healthy bank faces a liquidity crisis, all deposits can't be paid out immediately. But they can be paid in full after the assets are liquidated. That's why banks are not huge scams. They are machines that create long term lending from short term borrowing, which actually is a useful thing. And yes, that contains many known risks, which is precisely why banks are regulated and audited. (I have yet to hear an understandable explanation how a mortgage or business loan works in crypto world - without fractional reserve banking, that is.)
What potentially makes stablecoins scams is if they do not have assets to cover their liabilities. And funny thing is, that would be extremely easy to show to be not the case by being open about the details of the reserves. So easy, in fact, that it is practically impossible to come up with any other reason for not being open about the reserves than them actually being scams.
That's exactly why traditional banks are subject to heavy oversight and regulations, and deposits are protected by govt guarantees. Tether on the other hand is operating completely in the dark and has been involved in a lot of shady activity that does nothing but undermine trust in their ability to do treasury operations in a responsible manner.
2) Historically, bank failures and bank runs were a major recurring problem. Our current financial regulations are written in the blood of those past failures.
3) Among the many safegaurds in place is the FDIC, which insures depositors against bank failures. The FDIC is backed by the US government.
There are two different failure modes for Teather
1) A liquididy problem (bank run). Teather pauses redemptions while until it is able to liquidate its other assests. Might cause a panic, but long term, your Teathers can still be redeamed for dollars. If their is trust in the market about this, 3rd parties can provide liquidity as a form of arbiteage (causing the value to dip below $1, but not crash)
2) A solvency problem. Tether runs out of money and the remaining holders get 0. Or, Tether knows they haveva problem and pay everyone pennies on the dollar.
People are concerned about failure (2)
I imagine you're bringing this up to say that crypto is no worse than traditional banks. I disagree strongly with that.
So it's not even that the bank can't pay out, it's just that it costs them a little extra.
One difference is that there are apparently strict rules that banks and central banks are supposed to follow (though the rules seem to change or bend expediently), and they are backed up by the government ('bailed out') if they screw up.
Also the Tether people themselves do not appear to be revered for their integrity.
b) Individual bank accounts (in the US) are backstopped by the federal government, via FDIC. It might still be a scam, but it's a scam whose validity is backed by the most expensive military on Earth.
Tether is "backed" by USD and they can't print USD, that's where the problem lies.