Person A deposits $100.

Person B borrows $100, all the coins move on the ledger.

The ledger could facilitate the transfer while the bank maintains an "IOU" for person A's $100. The bank would be betting that not everyone will come withdrawing at once, just like a regular bank.

Regulation is the only thing that can prevent this from being done with any sort of crypto. The same IOU-based business model as happened with cash, gold, etc, could very easily be implemented using the technology. If you don't like fractional reserve banking crypto isn't a magic bullet that makes it impossible, especially since the general public probably wouldn't be sophisticated enough to know how to stick to "true" crypto vs "IOU-based fractional crypto facades."

But generally regulatory regimes have decided that the productivity advancements offered by the investment-through-loans of major portions of deposits are worth the risks. I don't think the GENIUS act allows this, though, so there's one regard where stablecoins are more-regulated. I worry about the edge cases, though - seems like requiring stablecoins to be paid off preferentially incentives using them for deposits, which could harm circulation if the reserves or followed, or which could screw over non-stablecoin deposit-holders if an institution doesn't comply and then goes under.

(This is closer to how regular banking works than the naive "banks create money by incrementing a number in your account." After all, banks are generally either (a) expecting those loans to be spent or directly giving the money to third parties like car dealerships or home sellers - which is likely to physically move the money to other banks, institutions, or cash, not just recordings in their internal tables.)

As far as I understand, the backing assets aren't on-chain. I give tether $100, they create and issue me 100 USDT on-chain. But they can take my $100 and lend it out. Now whoever Tether loaned the $100 to has $100 and I have 100 USDT so $100 has been added to the money supply, just like with a normal bank.

It depends on the stablecoin mechanism.

Algorithmic stablecoins[1] don't have a one-for-one backing in real world assets so can in theory create new coins "from thin air". The amount they can do this depends on the exact algorithm and the backing assets, and the practicalities of unstable crypto pricing make this difficult in practice.

For example the well-known DAI stablecoin[2] is backed by a mix of crypto assets, but is overcollateralized to avoid problems when one of the backing assets drops in value. The is sort of the opposite of "creating money out of thin air"...

Non-algorithmic stablecoins can do it by being backed by "high quality loan assets", in which case the conventional, non-crypto credit creation mechanism applies.

[1] https://www.kraken.com/learn/algorithmic-stablecoins

[2] https://en.wikipedia.org/wiki/Dai_(cryptocurrency)

theres no reason a bank couldn't take a stablecoin deposit and fractionally lend against it

thats effectively what already happens with their own internal ledgers anyways

There are defi loans for example. You take an asset like BTC and loan stablecoins against it.

The underlying asset can be rehypothecated, Celsius did this before going bust iirc.

Tether is also the underlying backer of crypto market cap, and has never done an audit of their assets. They've made loans to various crypto market participants.

In theory there are auto liquidation rules etc. In practice humans have not yet managed to create a financial system they can't make asset bubbles with

The same way it does in Excel.

You fire up Excel. Put some numbers in the boxes. Say those numbers are dollar bills you have under the bed.

Then you do SUM(A1:A10) to show your total funds. It has to be legit because Excel doesn’t lie right?

The reward function in the smart contract can be made to increase over time.