I admit I've kind of lost track of the argument you're making here. We're talking about why there is no premium on BTCUSD sold on BFX. If confidence in BFX hav

I admit I've kind of lost track of the argument you're making here. We're talking about why there is no premium on BTCUSD sold on BFX. If confidence in BFX having the reserves they claim to have drops, traders will want to get out, which in this case means buying cryptocurrency other than Tether. [1] Outright faking the ticker is, IMO, not realistic for an exchange with as many users as BFX has. The discrepancy would stick out like a sore thumb. They could raise BTC prices on their own exchange using USDT, which they control and can create at will. That's what this whole discussion is about, in the larger context. But that would, again, lead to a premium on BFX, which isn't there. They would therefore need to be suppressing the price, which they could do by cooking their own books, selling BTC they don't actually hold. This would be very foolish, as they'd be creating an exploitable market inefficiency. People would buy on BFX and sell elsewhere, and slowly (or very quickly) BFX's reserves would diminish until they would have to stop processing withdrawals of BTC. See mt. gox. [1]Of course, since other exchanges use USDT trading as well, it's possible this damps price premiums somewhat. But you'd still expect a premium on BFX et al. compared to, say, Bitstamp.