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Does it make a difference if Tether lends out new USDt?

I recently tweeted something about the world's largest stablecoin, Tether. It gives me an opportunity to ask a broader question about money in general:

Tether issues USDt, which are U.S. dollar-denominated IOUs redeemable for actual dollars at $1. Unlike a PayPal IOU, a Tether IOU exists on a blockchain.

What the tweet (and linked-to article) is saying, in short, is that Tether has misadvertised itself. Tether says in its terms of service that it only creates new stablecoin tokens, USDt, in acceptance for money. That is, to get $1 worth of USDt from Tether, you need to send it $1 in actual U.S. dollars. But in reality, Tether does not seem to be waiting for deposits to roll in before issuing new USDt. As the FT's Kadhim Shubber reports, it is directly lending new USDt out, much like how a bank puts new dollar IOUs into circulation by lending them out.

I want to use Tether to ask a more general question about the economics of money creation. Granted, Tether is not issuing stablecoins according to its terms of service. But does it really make an economic difference whether Tether lends out new USDt stablecoins or if it only creates them when someone deposits U.S. dollars?

We could also ask the same about PayPal. PayPal only creates new PayPal dollars when someone transfers U.S. dollars to PayPal. But what if PayPal were to start creating new PayPal dollars by lending them into existence? Would the monetary economics of the PayPal change?

I'd argue that it doesn't. But I'd be interested in hearing the other side of the debate. I'll show why the method of issuing Tethers or PayPals doesn't really matter using two quick examples.

Let me quickly outline one assumption I'll be using. The market has a certain demand to hold USDt, and if that demand is exceeded by new issuance of USDt, the excess USDt will be quickly sent back to Tether for redemption at $1. That is, given the existence of a $1 peg, a stablecoin issuer can never exceed the market's demand for a stablecoin.

Say that Tether has $100 in USDt outstanding and also has $100 sitting in a bank account as backing. 

Under the first scenario, one that is consistent with Tether's terms of service, John arrives and deposits $10 with Tether and gets $10 USDt. Now there is $110 USDt outstanding. There is also $110 sitting in Tether's bank account. Next, Tether lends $10 of the $110 in its bank account to Sally at 6% per year. It asks for collateral to protect itself. That is, Tether requires Sally to pledge $15 worth of bitcoin as security.

Now for the second scenario, the one described in Kadhim Shubber's FT article. Tether prints $10 worth of new USDt out of nothing and lends it directly to Sally at 6%. Tether asks Sally to pledge $15 worth of bitcoin as collateral. There are now $110 USDt in circulation. If Tether were to overissue by lending more USDt than the market wants to hold, that amount would quickly reflux back to Tether for redemption at $1. (So if Tether lends Sally $15 USDt but the market only wants $10 USDt, then $5 USDt would quickly be brought back to Tether for redemption. Tether adjusts by reducing its exposure to Sally by $5.)

Under both methods of issuance, we end up at the exact same spot. There are $110 USDt in circulation. Backing that amount, Tether has $100 in cash in a bank account and $10 worth of a 6% loan secured by bitcoin.

So economically speaking, it doesn't matter whether Tether lends out new USDt or if it creates new USDt upon reception of actual dollars. Either way, $10 worth of new USDt will go into circulation. And either way, that issuance will be backed by a 6% loan to Sally collateralized by $15 worth of bitcoin.

The interesting thing is that even though there is no difference between the two scenarios, our language and law distinguishes between Tether 1 and Tether 2. In the first scenario, Tether is considered a fintech, a money services business, or a payments company, and thus subject to a certain set of laws. In the second scenario it is a bank, or a depository, and thus subject to an entirely different set of laws.

But if the two Tethers have the same economic function, why don't we the use the same language and set of laws & regulations for each?

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