USDT is the foremost stablecoin in the crypto world. Pegged one for one to the US dollar, it is widely used as a vehicle for getting dollars in and out of crypto exchanges. Crypto enthusiasts will tell you that holding USDT (Tethers) is the same as holding dollars. But it turns out that Tether does not have 100% traditional currency backing for its reserves, writes Frances Coppola for Forbes.
After its claims were scrutinized, what Tether does have are “cash equivalents,” which are presumably other cryptocurrencies (like pegging to a volatile asset is such a good way of ensuring stability). And some of its “reserves” are held in the form of loans that it has made to other parties. Tether has become an unregulated fractional reserve bank, and a very risky one at that.
Loans that you can’t sell, can’t pledge for cash, and may or may not be able to call are not by any stretch of the imagination “reserves.” No regulator would let a licensed bank get away with this, even though licensed banks have Fed backing and FDIC insurance. Tether may regard one USDT as the same as one US dollar, but without either the reserves or the central bank backing to guarantee this, its words are empty. The Fed isn’t going to step in and bail it out.