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Do you know by what mechanism Tether gets CP for USDT? Would they be paying CP issuers with USDT directly? What would they do with it?

I believe you're right just curious about the mechanism.

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They would be paying CP issuers with USD out of a bank account (the same USD used for creation/redemption of USDT).

So in that theory they do get sufficient USD to cover USDT (as opposed to printing it out of thin air) but are using it to buy questionable CP.

I think many people believe they don't even have enough USD to start with, eg because some of their assets are loans collateralised by crypto (such as the Celsius 1B loan).

I believe both are true - Tether printed USDT against non-cash, and used some of the actual cash to buy dodgy assets for more yield.

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