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Why Tether's Collapse Would Be Bad For Cryptocurrencies (wired.com)
Yesterday, Bloomberg reported that the U.S. Commodity Futures Trading Commission sent subpoenas last week to virtual-currency venue Bitfinex and Tether, a company that issues a widely traded coin and claims it's pegged to the dollar. Wired's Sandra Upson explains why Tether's collapse would be bad for the entire cryptocurrency market: Unlike bitcoin and its many siblings, tether is what is called a stablecoin, an entity designed to not fluctuate in value. With most cryptocurrencies prone to wild swings, tether offers people who dabble in the market the option of buying a currency that its backers say is pegged to the U.S. dollar. The root of the controversy is whether the company behind it, also called Tether, is telling the truth when it claims that every unit in circulation is matched by a U.S. dollar it holds in reserve. If the company has a dollar for every tether, that means in theory any holder can sell tethers back to the company for an equal number of dollars at any time. This belief keeps the value of a tether pegged to a dollar.
If tethers are not backed by a matching number of dollars, then Tether can print an arbitrary amount of money. (Other cryptocurrencies, by contrast, create new tokens according to strictly prescribed, predictable rules.) Other problems ensue, including suspicions that Tether is timing the release of new tethers to coincide with drops in the price of bitcoin and then using those tethers to scoop up bitcoins. Some observers fear that these purchases are artificially inflating the price of bitcoin. If traders lose faith in tether, they could end up triggering the crypto version of a bank run. Tether helps stabilize cryptocurrency exchanges in various ways, so its collapse could also cause some exchanges to topple, wiping out billions of dollars of investments overnight and potentially undoing much of the public's growing interest in new technologies like bitcoin.
If tethers are not backed by a matching number of dollars, then Tether can print an arbitrary amount of money. (Other cryptocurrencies, by contrast, create new tokens according to strictly prescribed, predictable rules.) Other problems ensue, including suspicions that Tether is timing the release of new tethers to coincide with drops in the price of bitcoin and then using those tethers to scoop up bitcoins. Some observers fear that these purchases are artificially inflating the price of bitcoin. If traders lose faith in tether, they could end up triggering the crypto version of a bank run. Tether helps stabilize cryptocurrency exchanges in various ways, so its collapse could also cause some exchanges to topple, wiping out billions of dollars of investments overnight and potentially undoing much of the public's growing interest in new technologies like bitcoin.
Uhm... unless I am misreading you, you appear to be very incorrect... (large) US banks are only required to hold 10% in reserve at any one time... That is 10% of the account balances NOT the account balances + 10%.
"A depository institution's reserve requirements vary by the dollar amount of NTAs held by customers of that institution. Effective November 17, 2015, institutions with net transactions accounts:
Of less than $15.2 million have no minimum reserve requirement;
Between $15.2 million and $110.2 million must have a liquidity ratio of 3% of NTAs;
Exceeding $110.2 million must have a liquidity ratio of 10% of NTAs.[8]
"
Sources: https://en.wikipedia.org/wiki/Reserve_requirement#United_States
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Perhaps I misunderstand, but it sounds like you are missing the point of fractional reserve banking. That means the bank can loan out more than it receives in deposits, with only a fraction of the total outstanding actually in the vault. That's the reserve percentage mandated by the US government.
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This is not true at all. Banks can loan up to 10x what they have in reserve. Eg for every $1,000,000 of their customer's money they're holding onto, they can loan out $10,000,000. The system itself is called a fractional reserve. It works for the same reason insurance works - because most people, most of the time, don't need to be bailed out of a bad situation.
That's why a lot of banks offer incentives for people who leave large sums of money sitting around doing nothing (ie savings accounts, checking accounts, etc). They're not giving "free" checking accounts out of the goodness in their hearts, or because you're such a good person that you deserve a free checking account. They do it because giving a "free" checking account grabs customers, and the average customer will have $X sitting in their account. They can then loan out $(10 * X) which will accrue interest (perhaps 2% for car loans, 3-5% for home loans, etc).
That's also why Bank of America went back to their roots recently and are forcing customers to either pay a monthly fee or maintain a minimum balance for a checking account. This is how 100% of all checking accounts used to work, before they were all "free". It's just that things are changing, and the move back to the old way of doing it probably suggests their average customer wasn't good at keeping a minimum balance that allowed them to do the volume of loans they wanted to do.