Their point is that if the money held in reserve are proceeds from criminal activity, it is possible for the assets to be seized or frozen by the feds (which would render them no longer backed 1-to-1 even if they were before then). The text of the law you quoted doesn't really change anything.
I see, I misread: that’s interesting. I would assume the issuer would still be liable to resolve the backing, but yeah I could see how that poses systemic risk.
I also don’t think such a risk could realistically remain hidden - this is still going to be heavily regulated and audited, and industry will wise up to the sorts of risk that emerge.
