Imagine if Bitfinex shut down with no warning. All the USDT stored in Bitfinex would simply be lost so it wouldn't cause a bank run. But massive amounts of USDT would flow from Bittrex, Hitbtc, and Poloniex to Kraken where the price would drop to pennies due to lack of liquidity. Maybe then Kraken suspends trading "to calm the market" and never resumes.

I am reminded of the default of BTCST which I guess no one remembers.

> As I understand it, you could exchange USDT for real USD at any participating exchange. Not being able to convert USDT would mean not being able to withdraw from any of those exchanges

That's selling Tether, not withdrawing Tether from the pool.

The point is, since it was already effectively impossible to withdraw any Tethers from the pool, does it really matter that the fund that backs those tethers can only support withdrawing 74% of the available USDT?

Currencies doesn't have to be backed to have value. Ours used to be backed by gold, but then we figured out that doesn't necessarily matter as long as people have to use it and the supply of it matches demand consistently enough.

So the interesting question is, will they be able to keep the price pegged to USD by selling and buying USDT in sufficient quantities to keep the price stable.

This is rather the point this comment is making: https://news.ycombinator.com/item?id=19793326

The point of having the reserves in US Dollars is that Tether could theoretically buy back surplus USDT's from an exchange that trades in it. Otherwise an exchange could be left holding millions of worthless USDT with no means to move that back to US dollars.