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This comes from the rumor that the commercial paper is from China.

What I find more believable is the commercial paper is actually from crypto hedge funds and exchanges incorporated in Hong Kong.[0]

[0] - https://protos.com/tether-papers-crypto-stablecoin-usdt-inve...



So tether could be theoretically backed by...bitcoin?


Possibly somewhat. There is typically a differentiation between commercial paper and asset backed commercial paper so who knows. It might depend on the individual lending USDT.

I believe that these exchanges/crypto funds are borrowing USDT with interest payable in USD and principle payable in USDT. This would incentivise borrowers to buy USDT when the peg breaks to the down side thus keeping USDT pegged to the dollar.

I think it would be more accurate to say that USDT is not backed by anything. The loans are backed by commercial paper but if the borrowers are not fulfilling these debts in USD in reality there is no backing.

I presume the incentives that stop the peg breaking to the down side will only hold as long as the exchanges/crypto funds stay liquid. If there is a sustained mass exodus out of USDT I predict things will get ugly.




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