[PeterisP]

Fraction reserve lending doesn't mean "for every 1 dollar deposited inside, bank can give away 5 dollars worth of credits to other people" - it means that if people deposit 5 dollars, you can give away 4 dollars of them as loans and only keep 1 dollar in reserves (as opposed to keeping all 5). It still has to have more assets than liabilities, except that some of those assets can be not available on demand, but loans to other people.

It does mean that a short-term run (e.g. if all depositors request all of those 5 dollars back) can be a problem, but it's a problem of liquidity (you have enough assets to pay all of them back, but they aren't available right now), not one of missing assets. Tether, on the other hand, has not properly shown that they have enough assets to buy back 100% of tethers to USD at a 1-to-1 rate; we don't expect them to hold 800m dollars in large bags of cash, but we'd expect them (just like a "real physical currency bank") to show that they hold 800m of assets backing this.

[wampwamp]

The banking system can expand an initial deposit of $100 into a maximum of $1,000 at a 10% reserve ratio when subsequent loans are re-deposited. ($100+$90+81+$72.90+...=$1,000). This all gets counted as M1 money.

[PeterisP]

Yes, the total supply of funds in circulation is increased by making it circulate; however, this question was about solvency. We're not expecting Tether to hold 800m in liquid reserves, but we definitely are requiring Tether to have 800m in assets (as they claim to do) and to demonstrate that it really is so.

The claims others have on you must be balanced by claims you have on others, otherwise you're defrauding your depositors; and if you want to accept money from the public, your words can't be taken at face value but need to be verified (and publicly supported) by trusted, independent external auditors.

[lucaspiller]

Just for reference, M1 of the US Federal Reserve is $3 trillion. Compare this to the US national debt of $14 trillion or the GDP of $19 trillion.