[repomies68]

People trust banks, even when the fiat in banks isn't fully backed. Usually the reserve ration is backed to something like 10%.

To my understanding tether is just like a bank, except the accounts are kept on Blockchain instead of private database. So, it is rational to use them if you think they habe enough reserves to keep them liquid. Full backing is not needed, as it isn't needed with banks as well.

[Scoundreller]

Banks generally have full backing, verified by frequent auditing, it just may not be all cash or cash-like assets.

But then again, not all of bank’s liabilities are cash either. E.g.: CDs.

Things get hairy when their long-term assets go down in value and/or there’s a sudden demand for withdrawals triggering a mismatch between short-term liabilities and long-term assets.

We have strikingly little audits from this stablecoin. Do assets match liabilities or not? For a bank, they always will or else they get shutdown before losses become too great.

[btilly]

Actually they don't quite get shut down. At least not in the USA. Instead they get taken over by a more stable bank, which receives some money to make the transaction make sense. People with deposits in the bank do not lose their money.

This is how FDIC insurance actually works in practice.

However there is a systemic risk if the entire system cannot absorb the bad banks. According to multiple people involved, in 2008 we came within a few hours of the whole banking system having to be shut down with no idea how much chaos that would cause. This is why TARP got passed.

[jerguismi]

Yeah they are loans, like apartment loans. The loan might be for something like 20 years and might default.

In my opinion having assets like house loans is pretty far away from being "backed". If enough customers want their money out, bank can go bust. If they have lent the money to wrong people, they also can go bust. Banks go bust now and then.

[notahacker]

Banks' deposits are backed with outstanding loans, and they have a guaranteed right to borrow temporary shortfalls at lower interest rates to make up the difference if people want to cash out their savings quicker than their loans can be repaid.

This isn't at all similar to an organization claiming to back an asset with dollars and actually backing it with their imagination.

[jdietrich]

One of the primary arguments in favour of cryptocurrency is avoiding the fragility of fractional reserve banking. Building a cryptocurrency with a fractional reserve is basically building an unlicensed and uninsured bank. That's not a particularly attractive prospect for depositors, so naturally Tether were incredibly dishonest about it.

[jpmattia]

> One of the primary arguments in favour of cryptocurrency is avoiding the fragility of fractional reserve banking.

Only by people that don't understand fractional reserve lending. For example, the exchanges are loaning BTC for the purpose of shorting. This is exactly fractional reserve lending, just like the banks.