Very important to note - a stablecoin running a "fractional reserve" in the way that people talk about would just be fraudulent/insolvent.
Modern banks have actually never operated under the "fractional reserve" model as described in economics textbooks, but it's true that they only a fraction of their assets are held as bank reserves. Very importantly though, solvent banks always have more assets than liabilities (customer deposits are a liability to the bank). Usually a lot of those assets are loans, but they also hold bonds and other investments.
If Tether has issued a single token without an asset to back it that is worth at least US$1, then that's not operating like a bank does, it's just fraud.
How do they operate, if not under the fractional reserve model?
As I said, the confusion many people have is that it is correct that bank reserves are a fraction of the bank’s assets, so the name “fractional reserve” would intuitively seem correct.
This is a good description of how they actually work from the UK’s central bank: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
For a stablecoin to operate like a bank they would have to issue loans (loans are an asset to the bank to match the deposit created when they lend. A regulated bank also needs a certain percentage of owner's capital (paid up shares/retained profits) compared to how much they lend in case of delinquent loans).
A stablecoin just creating tokens with no backing would be fraud, same as if a bank just credited an account from nothing.
Then they'd just cash then in at coinbase, right?
Almost certainly not. They would trade at a premium or discount, depending on a number of factors.
Think of the stablecoin as an ETF. If people need to launder money or take advantage of a programmatic bug, that would raise the stablecoin price over $1.
By default, I'd imagine the reduced liquidity and counterparty risk (relative to dollars) would cause the stablecoin to trade at a discount to cash, particularly when auctioned by the government. (You have to spend resources monitoring the auction, closing the transaction, and cashing out to complete the arbitrage.)
* Your tokens can be tainted, for instance because they were once owned by a blacklisted address. The value of your tokens will be effectively 0.
* The issuer might run a fractional reserve (this is the accusation against Tether, the most popular stablecoin at the moment)
* The asset backing the stablecoin might not be backed by anything. It's not worth getting into FED policy here, but let's just say that a stablecoin denonminated in Venezuelan Boliviar is not attractive.
> Stablecoins seem like they would achieve most of the goals of the original cryptocurrencies such as Bitcoin
The original goals of cryptocurrencies (Bitcoin, to be precise) were exactly to avoid the problems that stablecoins have.