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I'm not entirely in agreement the crypto world will be shocked tether is insolvent. As long the the fiat gateways exist to exit the system with gains intact, most could care less about tether. It's musical chairs.
A memorable performance by Claude Rains
This sort of thing is pretty common in Bitcoin land. Mt. Gox was also totally fine, nothing wrong, how dare you accuse them of wrongdoing, right up until they declared bankruptcy and then suddenly everyone had known all along they were insolvent and only a fool would've put their money there.
What changes is which side you look at. Think of it like a Rorschach test: there is no truth, but there's a smattering of contradictory evidence that can be interpreted both ways. Your brain can't deal with the contradiction, and then picks a side based on the preponderance of evidence it sees. It can flip sides if strong new evidence comes out, but in general the brain discounts evidence that contradicts its initial hypothesis and amplifies evidence that confirms it.
Huh. Did I miss something? If they were never backed by reserves how could $800 million of their funds ended up seized?
It's very possible that I'm missing something, since this isn't something I've paid a lot of attention to (as it always seemed obvious that it would eventually end up in this state).
You take that $100, keep $20, and then lend the other $80 to a heroin-addled homeless person. He swears he'll give it back next year, plus interest. And gives you a receipt and everything.
Now, suppose that you are dragged up into a courtroom, over your mishandling of customer funds. You point out that no funds were mishandled - you have $20 in cash... and an $80 IOU from a junkie. You are fully capitalized! Solid as houses!
Reality: You're not. Any independent auditor with two brain cells to rub together will not value that $80 IOU at face value (The chap is highly unlikely to pay you back.) Your bank is actually insolvent.
Tether Reality: Bitfinex/The Tether Corporation played a shell game, such that they are '100% capitalized' if you add up their cash reserves + IOUs. The IOUs aren't worth the paper they are printed on.
It's possible that at some point in the distant past, they were 100% capitalized, but given their resistance to external audits, it's highly unlikely that it has been the case.
The most amazing thing about this entire adventure is that USDT/USD still trades at par. It seems like BitFinex could host a press conference, with the entire leadership team wearing T-Shirts that say "WE STOLE ALL YOUR MONEY", and it wouldn't move the market (The 'bitcoin enthusiasts' would obviously interpret it to be a sarcastic dig at all the bad publicity surrounding them.)
It appears to me that instead, their filings are strong evidence against the poster prior claims-- suggesting instead that they were at one point fully capitalized (and are not any longer, of course).
When you issue a full reserve currency, without any of the necessary oversight required to run one (Like... An independent auditor...) you're committed to operating in a manner indistinguishable from a scammer.
It's possible that they were fully capitalized for the first twenty minutes of Tether's launch. It is possible they were fully capitalized for the first twenty days. Or the first twenty months. Without any kind of proper bookkeeping - which was a deliberate decision on their part[1], we have no idea. And it doesn't matter. [3]
[1] The most charitable interpretation of why they made that decision was that their long-term plan for keeping Tether running would be under-the-table money laundering through Crypto Capital, or its ilk.[2]
[2] [3] Mind you, this means that the entire implementation of Tether is unsustainable! It doesn't matter that they are sitting on a multi-billion-dollar, 100% capitalized reserve if their customers can't ever redeem Tether for USD! Such a situation is indistinguishable from having a 0% capitalized 'reserve'.
Basically the entire article points out that this is in fact impossible, only the first ones to run will be able to do this. Much like a bank run, there is not enough cash to back a tether exodus.