Since most of the USDT is owned by big exchanges who need it to provide liquidity and have no interest in crashing the crypto market, I don’t think this is likely to happen.
These events ultimately lead to the creation of the Federal Reserve for banks to participate in a semi-cooperative system that didn't devolve into save-yourself during times of crises.
The story here is that "unless there is a massive run" is actually a fairly common event.
I'm not saying that Tether the company is not shady. They should definitely be more transparent about what assets they are holding and their collateralization, but I think the risks of total collapse are largely overblown.
As an exchange, if you keep some reserves in USDT and you think it might collapse soon, you might have an interest in dumping your positions before it completely loses value. Maybe exchanges would benefit from responding to such a situation collectively as you suggest, but I think it's likelier that they will just protect their own interests as individual entities.
At some point, total collapse of Tether’s pseudo-dollar will happen when the revenue generating exchanges feel they are support bad-money with good. All it takes is one player signaling a lack of support, and others stop supporting as well.
It’s a human psychological problem that’s a old as time. Think crypto can win over human rational to preserve self-interest? (side note: manipulation of self-interest is the goal of “weak hands” / “diamond hands”)
Tether is NOT a bank. They are not regulated and have no guarantee that depositors will be paid back. They promise a 1-1 backing and instead of people holding them to their promise their supporters desperately try to compare it to moderns banks.
No. Tether is not a bank. It is not doing fractional reserve banking. It is committing fraud. It’s that simple.
Tether is not a bank. Not in the US, not in the Cayman Islands, not anywhere. Everyone holding or trading Tether could be using a test network, and the monetary value of the token should be the same.
There isn't any real visibility into the balance sheet, but I'd guess most of the "collateral" boils down to margin loans issued at the exchanges, and since the house has the edge on those platforms, their ship stays afloat.
I think that at this point, these risks are priced in by the market (Tether is selling at a discount from USDC). If you disagree with the market, it is your speculation, and also an opportunity to get rich if you are right. For example, the FTX exchange offers Tether put options as well as the ability of shorting Tether, and there are many other similar products.
A FRB is a bank where deposits exceed liquid liabilities (cash), but do not exceed liquid plus illiquid liabilities (cash + investments).
When deposits exceed liquid and illiquid liabilities you can't operate as an FRB. Because you are insolvent.
But this is all irrelevant, because Tether isn't a bank. Your bank promises that you can withdraw your deposit. Tether does no such thing - it provides withdrawals as a courtesy. If Tether doesn't feel like letting you withdraw, it's not going to let you withdraw.
"So you have this Monopoly money backed with a real dollar?"
"Yes"
"Can I see the dollar?"
"No"
So if a well-capitalized arbitrageur can buy a million USDT at a price less than 0.999, they can redeem them for a profit, as long as Tether keeps honoring redemptions.