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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.
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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And what do you think happens when that 90 cents is deposited into the bank? 81 cents of additional loans is created, for a total of $1.71 floating around with only $1 to back it. Then the 81 cents is deposited, and another 72 cents in loans is created. Now you have $2.43 floating around.
If you don't think banks create money out of thin air, you don't understand fractional reserve banking.