> Second, 1USDT backed by less than 1USD in value is obviously worth less than 1USD no matter what happens to the USD.
That's obviously not how it works. For instance, US banks have capital requirements of ~8%, but the dollars they issue aren't worth $0.08, they're worth a full dollar (as long as no bank run happens). The same mechanics hold for Tether, whether they're regulated or not.
In fact, USDTs are often worth more than a real dollar because the demand for them trumps their risk discount.
Here is a perfect problem with crypto: people understand just enough tech or economics to be dangerous, and not enough to truly understand the system.
This is of course absolutely not how things work. The risk isn’t with the dollar holders in the banking scenario because a dollar isn’t backed - it doesn’t need to be backed. This is the essence of fiat currency.
The risk is with depositors (creditors), and as you say they do not value their deposits at 8 cents on the dollar just because that’s what capital reserve ratios are. We have tons of regulation and insurance and centuries of mistakes that have led to the current system. But your argument conflates one core thing: assets vs liabilities. The dollars that banks lend are real dollars, and the people who receive those dollars don’t care what the bank’s financial health is. That’s because the dollars they receive in a loan are liabilities, whereas when people receive Tether, it’s an asset. Let’s explore…
People don’t deposit dollars in banks, and receive a certificate of deposit and use that in lieu of dollars. This is what is happening with Tether. Tether doesn’t take USD deposits and turn around and issue USD loans, it takes USD deposits and issues USDT certificates of deposit, which the market trades at par with USD.
This difference is crucial though. Banks are fundamentally limited in the number of loans they can make versus the amount of deposits they hold. So they might be overlevered, but borrowers don’t worry about the dollars they receive being fake. And if the bank collapses, who cares, I’m a debtor, not a creditor. Reserve ratios matter to creditors, and don’t impact the legitimacy of any loans of they’ve made.
Tether on the other hand takes deposits and issues certificates of deposit that they call USDT and claim are redeemable for one USD. These then trade on the open market as fungible USD. The problem is that this makes USDT holders creditors, whereas in the bank example USD holders are debtors. So this means as a creditor the solvency of the issuing institution is of paramount importance. If Tether implodes, USDT are worthless, just like if a bank implodes, its certificates of deposit might be worthless (ignoring insurance). But in the bank scenario, the dollars that it loaned out aren’t worth any less.
On top of that, even though banks aren't required to keep more than 8% of deposits in reserve, they are subject to loads of regulation on their balance sheet to ensure that they are well capitalized. The FDIC exists to stop a run on any bank, but the regulations exist to ensure that if a bank needs to be taken into conservatorship, the assets to bank the deposits will eventually be recoverable.
>But in the bank scenario, the dollars that it loaned out aren’t worth any less.
Just a small point of clarification - I think - that helps to make your point a little clearer.
If the bank collapses - it's likely precisely because those loaned dollars ARE worth less. Commonly in bank collapses - those that borrowed from the bank can't repay for whatever reason. Creditors to the bank then get spooked and demand 'redemption' of their deposits.. etc
The difference is that whether or not a borrower from the bank still has that wealth is mostly independent of the actions of the bank (making other risky loans that lead to collapse etc). The value of the borrowed dollars depends entirely on the borrower. Whereas with tether - you might have locked it down in a hardware wallet encased in cast iron steel under your bed - doing nothing risky with it at all - but it could still go to zero in value. Tether's value depends on the actions of the issuer entirely.
Similarly - the owners of tether can't, through their risky use of tether endanger the prospects of the issuer; while borrowers can, through their risky use of loans, endanger the prospects of the banks.
> Just a small point of clarification - I think - that helps to make your point a little clearer.
> If the bank collapses - it's likely precisely because those loaned dollars ARE worth less.
I get what you mean, but it's not quite the same. The loan, as in the receivable, is worthless and thus might prompt/contribute to a bank run/collapse. But the only reason defaults are an issue (like in this scenario) is precisely because the loaned dollars do have value, and the bank (and its depositors/creditors) want them back.
That's obviously not how it works. For instance, US banks have capital requirements of ~8%, but the dollars they issue aren't worth $0.08, they're worth a full dollar (as long as no bank run happens). The same mechanics hold for Tether, whether they're regulated or not.
In fact, USDTs are often worth more than a real dollar because the demand for them trumps their risk discount.