The common sense is that they would make a lot more money by doing fractional reserve (leaving them open to a bank run collapse) and there is nothing really to stop them from doing that.
As with most common sense, that’s completely wrong. Deceptively operating at a fractional reserve would eventually end with everyone involved losing everything and spending large portions of their remaining lives in prison.
Except we know of occasions they printed tether in return for collateral promises, rather than actually for cash. Not to mention filling a hole with Bitfinex stock when one of their processors got raided.
Now, it's just a question of degree: they're so profitable they can recover from being fractional rapidly. OTOH, why mess with a working formula?
Yes, the NY investigation was all about this: they patched up the loss and quietly changed their terms to being backed by cash or equivalents.
And they later detailed the $1bn Tether printed for Celcius in return for collateral (once Celcius collapsed and they claimed it was fully repaid).
Understand: for modern banks this kind of fractional behaviour is considered normal. It's only from the weird Bitcoin perspective that full reserve would be a requirement.
This is pretty hilarious coming from someone defending a company that refuses to produce a legitimate audit. (no, an "attestation" is not an audit)
If all they're doing is sitting on a giant big pile of cash and treasury bonds, it should be absolutely trivial to provide proof: here's where those assets are deposited.
If you can’t see the value in an attestation, you’re not familiar with the topic.
And I’m not “defending” anything other than the basic idea that when one has not proven something, one cannot claim it as true. Nobody has been able to prove Tether is a scam, so it isn’t.
You have to look at the system as a whole. They run Bitfinex, a centralized exchange. They can just change balances in a database, like FTX. There’s no need for fractional reserve.
Tether is simply shadow banking and brings liquidity into Bitfinex. It’s very simple:
1. Export finished goods from China for dollars.
2. Import inputs for step 1 from places like Turkey, Ukraine, and others and pay inflated invoices with dollars from step 1.
3. Receive Tether out-of-band for step 2.
4. Swap Tether for dollars on Bitfinex.
5. Buy property in Western countries in the names of your children who have US, Canadian, and UK passports.
Tether makes money from interest on the funds that they do actually have. Maximizing the amount of money that they hold would actually increase the amount of profit they make. They have no incentive (and a pretty strong disincentive) to be insolvent.
Common sense is rarely either.