What are the potential pitfalls for reserve-backed stablecoin issuers like Tether?

It sounds super profitable just grab U.S. Treasury bills, collect the interest, and users don’t see a dime. Actually, in the US, the law explicitly stops issuers from giving users any kind of yield. So why aren't there more players in this game? What risks am I not seeing?

Tether is having over $180 billion is marketcap. That is not a small in valuation at all and the way the marketcap is rising is more than how it was before. I even still think that it is possible that one day, USDT may be the next after bitcoin. The only problem with such tokens (stable coins) is that they are pegged to fiat price, there is still a chance that the tokens can depeg.

Risk of frozen PSA: Most Stablecoins Can Be Frozen, Even in Your Own Wallets . Another risk is the stablecoin not backed by insurance company, many people consider this before they want to invest. Personally I think the risk of investing in USDT is high and the reward is low if we compare with Bitcoin, Bitcoin offer better.

I don't think this is a reason why more people don't do it. People invest with banks and other financial organisations even though their accounts can be frozen overnight by the government. One reason why more people don't invest in T-bills is because of the low profit. It's less than 5% profit. It is low risk, but the profit is not worth it to a lot of people. Another reason is awareness. Not a lot of people know about Treasury bills or even understand them. Many people don't even know there are tokenised treasury bills. Some of the people who know about them invest, while some feel it's not worth it. They want better returns.

Creating a reserve backed stablecoin like Tether may not seem like a difficult task &  may be seen as an easy way to make money, just buy Treasuries, profit on the side, but there are some serious risks behind it. The point is that if many users come together and want to withdraw their investments, the issuer must be forced to sell all the Treasuries, thus jeopardizing the stability of the peg.. It is important to remember that simply holding Treasuries is not enough, the type, quality &   ability to convert them into cash are also very important. In the case of Tether, there is not enough attention to other important issues besides reserve audits &  cash On the other hand, the US GENIUS Act &  European regulations aim to reduce the offering yields of stablecoin issuers &  limit their ability to hold risky assets. This can hinder their yield arbitrage strategy so, at first glance, this may seem appealing but a closer look reveals that the risks are not far fetched. The big players are not just chasing profits, they are also subject to fluctuations in cash, the impact of regulatory changes &  the risk of losing public trust. If any of these go wrong, it could spell trouble for both parties, the issuer &  the users

Both of you're on point, the custodial service of the regulating values such as the usdt is a burden to investors. The fact people do buys public shares and investing in the bank assets where possibly users accounts can be frozen could be distress on custodial breaches. Normally, While there's less interest of investors on the federal reserve is due to the low volatility that only returns low incomes overtime. So looking at how inflations also hits the economy markets, stocks and bonds can be affected due to stability.

The biggest risk has always been a possibility of a depeg. Small stablecoins are often attacked because the people know their weakness is lack of liquidity. Then there's a risk of centralization. You have a coin that's regulated, can be frozen, blocked, doesn't exist if they seize your accounts, servers, whatever. Your assets get frozen, you risk the depeg and larger panic among holders. There's a CEO, someone running the company that can be targetted and in case of traditional companies investors panic, but you can always freeze trading of the stock until you're able to clarify things, address the issues, but coins trade 24/7 so any problem gets escalated and can run the company into the ground. Then there's a risk of not being backed, or not being backed enough to make the company able to cover all liabilities. Stablecoin companies often operate on debt and overleverage themselves.

It’s their reserved to backed the value 1:1 of their USDT is the biggest concern for this stablecoin in the past because they rarely submit an official audit report with their fiat reserved on the bank to match with the total token they already issued on the market. I’m not following anymore how the Tether solved this reserve issue since I barely use stablecoins for my long term holdings. Fiat Reserve is always the crucial part for all the stablecoin, they can collapse immediately if their token supply is not backed 100%.

If I got the idea right, then it's not absurd. The user receives a token, uses it as he needs, and this token can be exchanged for a dollar. It's just a cryptocurrency form of the dollar. These are the conditions. The choice of the form of security capital is the issuer's prerogative. The issuer can put bundles of paper dollars in a safe, and this will be a security capital without income. The fact that the issuer chose the Treasury for security does not mean that the user immediately acquired the rights to income. I remember a curious case. The landlady rents out the apartment, which is mortgaged, and pays the mortgage at the expense of the rent she receives. The tenant of the apartment, having accidentally found out about this, began to demand the right to a share in the apartment on the basis that the mortgage is paid out of the money she pays for rent. It's exactly the same logic. Well, or in another way. A stablecoin must be a share in order for the issuer to pay income from Treasuries to its owner. So there is no absurdity.

There are actually more companies doing it, USDT, USDC, USDG, PYUSD, CUSDO, etc. There are tons of them but USDT got the spot light as always. I don't personally think there are risks. You just back the stablecoin with t-bills and partially cash for redeem nothing more. But whether you have the capital to do it or not and can manage stablecoin perfectly with redeem, etc is another story.

yeah it sounds easy on paper, but the risks are real. If the reserves aren’t fully transparent, users could panic and try to redeem en masse, causing a “run” like a bank. Also, regulatory crackdowns are always looming—Tether has faced subpoenas and audits before. DYOR before thinking it’s just free money.

Tether works because they got there first, and survived long enough for everyone just to accept it. That's the moat. Not the T-bills. The trust infrastructure. And trust infrastructure in crypto is weirdly fragile - it works until the moment when everyone asks questions at once. The regulatory thing is real. The second you pay yield in the US, you're a security and now you're dealing with SEC registration, compliance costs and lawyers who bill $800/hour. Tether avoids this by being out of the US. Most companies won't or can't make that choice. Also: redemption risk. Your entire model is based on people not all wanting their money back at the same time. But stablecoins get stress-tested at the same time the markets go into a panic. If you're sitting on $100B in T-bills and $105B in redemptions come in a week, you're a forced seller and everybody knows that.

I'm curious about the yield these issuer companies earn, 5% or 10%? Are their margins really worth it? I mean, I'm sure some parties are demanding a share of what I consider "operational" costs. The most obvious is the auditor. Other factors might include political lobbying and insurance.